<PAGE>

                                                                    EXHIBIT 10.2

 
                            JOINT VENTURE AGREEMENT



                                    BETWEEN



                              ST. JOHN KNITS, INC.



                                      AND



                        COMMERCIAL DEVELOPMENT CO., LTD.



                                 JULY 17, 1997
<PAGE>
 
                                     INDEX
                                     -----
<TABLE>
 
<S>                                              <C>
SECTION 1.  DEFINITIONS.......................    1
 
SECTION 2.  REPORTS TO THE JAPANESE GOVERNMENT    3
 
SECTION 3.  FORMATION OF NEWCO................    4
 
SECTION 4.  CORPORATE PURPOSES OF NEWCO.......    6
 
SECTION 5.  ASSOCIATED AGREEMENTS.............    6
 
SECTION 6.  SHAREHOLDERS......................    7
 
SECTION 7.  MANAGEMENT OF NEWCO...............    8
 
SECTION 8.  FINANCING.........................   12
 
SECTION 9.  TRANSFERS OF SHARES...............   14
 
SECTION 10. PERFORMANCE OF THIS AGREEMENT AND
            ASSOCIATED AGREEMENTS.............   14
 
SECTION 11. DIVIDENDS.........................   15
 
SECTION 12. TAXES.............................   15
 
SECTION 13. CONFIDENTIALITY OF INFORMATION....   15
 
SECTION 14. TERM AND TERMINATION..............   17
 
SECTION 15. JURISDICTION; ATTORNEY'S FEES.....   19
 
SECTION 16. INTERPRETATION....................   20
 
SECTION 17. MISCELLANEOUS.....................   21
</TABLE>

Exhibit I      Articles of Incorporation of NEWCO
Exhibit II     License and Distribution Agreement
Exhibit III    Transition Services Agreement
Exhibit IV     CDC License Agreement
Exhibit V      CDC Distribution Agreement
Exhibit VI     Trademark Transfer Agreement

                                       i
<PAGE>
 
                            JOINT VENTURE AGREEMENT
                            -----------------------


     THIS AGREEMENT entered into this 17th day of July, 1997 by and between ST.
JOHN KNITS, INC., a corporation organized and existing under the laws of the
State of California, United States of America, with its head office at 17422
Derian Avenue, Irvine, California, 92614, United States of America (hereinafter
referred to as "ST. JOHN"), and COMMERCIAL DEVELOPMENT CO., LTD., a company
organized and existing under the laws of Japan, with its head office at Imperial
Tower 9F, 1-1-1 Uchisaiwai-cho, Chiyoda-ku, Tokyo 100 Japan (hereinafter
referred to as "CDC").

                              W I T N E S S E T H:
                              - - - - - - - - - - 

     WHEREAS ST. JOHN and its Affiliates (as defined below) manufacture,
distribute and sell fashion apparel, accessories, footwear and fragrances;

     WHEREAS CDC, through its business division known as Best International, is
engaged in the distribution and sale of fashion apparel and accessories,
including the distribution and sale of certain ST. JOHN products in Japan;

     WHEREAS ST. JOHN and CDC wish to establish a Japanese limited liability
stock company, to be called St. John Kabushiki Kaisha, and in English
translation St. John Co., Ltd. (hereinafter referred to as "NEWCO"), to engage
in the importing, marketing, selling and distributing of certain ST. JOHN
products in Japan in the manner set forth and as limited hereinbelow;

     WHEREAS CDC and ST. JOHN have agreed upon a budget and business plan for
NEWCO for the initial period of its operation; and

     WHEREAS the parties hereto wish to participate in the ownership and
operation of NEWCO in accordance with the terms and conditions of this
Agreement.

     NOW THEREFORE, CDC and ST. JOHN hereby set forth their agreement as
follows:


SECTION 1.  DEFINITIONS

     For the purposes of this Agreement, the following words and expressions
shall, unless the context requires otherwise, have the meanings set out below:

     1.1  "Affiliate"
           --------- 

     Any Person which, directly or indirectly, owns, is owned by, or is under
the common ownership with any other Person to the extent of greater than fifty
percent
<PAGE>
 
(50%) of the stock or other equity interest or securities entitled to vote
(regardless of whether or not conversion or any other act is necessary) or
otherwise directs the affairs of such Person.  For the purpose of this
definition, ownership shall refer to either legal or beneficial ownership.

     1.2  "Affiliate Group Member"
           ---------------------- 

     Any Person who, during the term hereof, (i) wholly owns or is wholly owned
by, directly or indirectly, ST. JOHN or CDC, or (ii) succeeds, by merger or
other transaction, to all or substantially all of the assets of ST. JOHN or CDC.

     1.3  "Associated Agreements"
           --------------------- 

     Those agreements related to this Agreement which are to be entered into
between any two or more of NEWCO, CDC or ST. JOHN, as more fully described in
Section 5 hereof.

     1.4  "Board of Directors"
           ------------------ 

     The board of directors of NEWCO.

     1.5  "Change of Control"
           ----------------- 

     The acquisition of a majority of the voting securities or assets of a Party
by a Person (other than the Parties) or group of such Persons joined together
for the purpose of such acquisition.

     1.6  "Effective Date"
           -------------- 

     The date upon which this Agreement is executed.

     1.7  "License and Distribution Agreement"
           ---------------------------------- 

     That license and distribution agreement between NEWCO and ST. JOHN as more
specifically defined in Section 5.1(a) hereof.

     1.8  "NEWCO"
           ----- 

     The limited liability stock company (kabushiki kaisha) to be incorporated
                                          ----------------                    
under the laws of Japan by the Parties in the manner provided in Section 3
hereof and to be named "St. John Kabushiki Kaisha," and in English translation
"St. John Co., Ltd.," upon formation.

                                       2
<PAGE>
 
     1.9  "NEWCO Products"
           -------------- 

     NEWCO Products shall be those products defined in Section 1.3 of the
License and Distribution Agreement.

     1.10  "Ownership Percentage"
            -------------------- 

     For each Party, the percentage of all Shares which are owned by that Party
as of a particular date.

     1.11  "Party"
            ----- 

     As used singly or plurally shall mean either or both of the parties to this
Agreement, as the context may require, including any successors and assigns.

     1.12 "Person"
           ------ 

     Any corporation, other juridical entity, partnership or other business
enterprise, including, without limitation, CDC, ST. JOHN and their Affiliates.

     1.13 "Shares"
           ------ 

     Those shares of Common Stock which are to be issued by NEWCO to the Parties
in exchange for their respective contributions which are to be made pursuant to
Section 3 hereof, as well as any additional shares of the capital stock of NEWCO
which may be issued from time to time.


SECTION 2.  REPORTS TO THE JAPANESE GOVERNMENT

     2.1  Report on the Acquisition of Shares by ST. JOHN
          -----------------------------------------------

     Within fifteen (15) days after its acquisition of Shares, ST. JOHN shall,
if so required, file with the appropriate authorities of the government of Japan
a report under the Foreign Exchange and Foreign Trade Control Law (Law No. 228
of 1949, as amended) on the acquisition by ST. JOHN of Shares, or take such
other actions as may be required under such law.

     2.2  "AML" Report
          ------------

     CDC shall, if so required, file a report pertaining to this Agreement with
the Fair Trade Commission of Japan under the Law Concerning the Prohibition of
Private Monopoly and the Preservation of Fair Trade (Law No. 54 of 1947, as
amended).

                                       3
<PAGE>
 
SECTION 3.  FORMATION OF NEWCO

     3.1  Organization and Registration
          -----------------------------

     CDC and ST. JOHN shall cause NEWCO to be organized and registered under the
laws of Japan, and the date upon which NEWCO shall actually be registered and
become legally incorporated shall hereinafter be referred to as the
"Incorporation Date."  The registered head office of NEWCO shall be located in
Tokyo, Japan.  The Parties shall closely cooperate and consult with each other
with respect to the procedures and particulars of the organization and
registration of NEWCO, with CDC actually carrying out the necessary procedures.

     3.2  Initial Articles of Incorporation of NEWCO
          ------------------------------------------

     The Parties shall cause NEWCO to adopt Articles of Incorporation
(hereinafter referred to as the "Articles of Incorporation") under the
applicable laws of Japan substantially in the form annexed hereto and marked
Exhibit I.

     3.3  Certain Actions in Connection with the Formation of NEWCO
          ---------------------------------------------------------

     ST. JOHN shall designate the date upon which NEWCO will commence business
(the "Commencement Date"), which date shall be as soon as practicable following
the Incorporation Date.  ST. JOHN and CDC agree to consummate the following
transactions in order to facilitate the formation of NEWCO:

     (a)  CDC shall use its best efforts to assist St. John to effect the
          registration in Japan of the Marie Gray trademark listed in Schedule A
          to the License and Distribution Agreement prior to, or as soon as
          practicable following, the Commencement Date, for the benefit of and
          in the name of ST. JOHN, and ST. JOHN and CDC shall bear equally any
          costs and expenses related thereto.

     (b)  On the Commencement Date, CDC shall transfer to NEWCO all unsold
          inventory in CDC's possession consisting of ST. JOHN products on
          consignment to department store concession boutiques.  The Parties
          agree that (i) Arthur Andersen & Co. shall perform an audit of such
          inventory, or (ii) such other method of verification of such inventory
          as is acceptable to ST. JOHN shall be conducted, in either case as
          soon as practicable following the Commencement Date.  Upon completion
          of such audit or other method of verification, NEWCO shall pay to CDC
          as the purchase price for such inventory fifty percent (50%) of CDC's
          original purchase price thereof, as determined by said audit or other
          method of verification.  The Parties acknowledge that this Section
          3.3(b) does not apply to any ST. JOHN products held in or for CDC's
          retail stores in the Imperial Hotel

                                       4
<PAGE>
 
          and the Hotel New Otani in Tokyo (the "CDC Stores"), and that CDC
          shall be free to sell such products for its own account following the
          Commencement Date.  The Parties agree that the cost of such audit or
          other method of verification shall be borne be NEWCO.

     (c)  On the Commencement Date, the Parties agree to cause NEWCO to purchase
          from ST. JOHN its initial inventory under the terms of the License and
          Distribution Agreement.

     (d)  CDC shall transfer to NEWCO certain incidental office equipment as
          shall be mutually agreed to by the Parties.

     3.4  Initial Total Paid-In Capital of NEWCO
          --------------------------------------

     At the time of the organization and registration of NEWCO pursuant to
Section 3.1 hereof, NEWCO shall have an initial paid-in capital of one hundred
fifteen million Japanese Yen ((Yen)115,000,000) represented by two thousand
three hundred (2,300) common voting shares with a par value of fifty thousand
Japanese Yen ((Yen)50,000) each ("Common Stock").

     3.5  Capital Contributions by CDC and ST. JOHN
          -----------------------------------------

     (a)  Of the initial paid-in capital of NEWCO, CDC shall contribute in cash
          the sum of fifty-six million three hundred fifty thousand Japanese Yen
          ((Yen)56,350,000) in exchange for the issuance by NEWCO of one
          thousand one hundred twenty-seven (1,127) Shares of Common Stock of
          NEWCO.

     (b)  Of the initial paid-in capital of NEWCO, ST. JOHN shall contribute in
          cash the sum of fifty-eight million six hundred fifty thousand
          Japanese Yen ((Yen)58,650,000) in exchange for the issuance by NEWCO
          of one thousand one hundred seventy-three (1,173) Shares of Common
          Stock of NEWCO.

     (c)  The Ownership Percentage of each Party as of the Incorporation Date
          shall be as follows:

          CDC:      49.0%
          ST. JOHN: 51.0%

     (d) The Shares shall bear the following legend:

          "The transfer of these shares shall be subject to the approval of the
          Board of Directors of the Company."

                                       5
<PAGE>
 
     3.6  Formation Costs and Business Preparation Expenses
          -------------------------------------------------

     All costs and expenses of the formation of NEWCO shall, to the extent the
same are not incurred or assumed by NEWCO, be borne by ST. JOHN and CDC in
proportion to each Party's respective Ownership Percentage, provided, however,
that all attorney's fees incurred by either Party with respect to their
respective counsel pursuant to such formation shall be borne by such Party.

     3.7  No Other Assets/Liabilities
          ---------------------------

     (a)  Except as specifically provided herein, NEWCO shall not acquire,
          assume or succeed to any assets (including accounts receivable),
          liabilities, obligations or commitments of CDC arising in connection
          with the distribution by CDC of ST. JOHN products in the Territory
          prior to the Commencement Date;

     (b)  ST. JOHN shall have no rights with respect to the accounts receivable
          described in (a) above; and

     (c)  CDC shall indemnify and hold NEWCO and ST. JOHN harmless from and
          against any and all liabilities, obligations and commitments described
          in (a) above.


SECTION 4.  CORPORATE PURPOSES OF NEWCO

     The corporate purposes of NEWCO shall be substantially (i) to import,
market, sell and distribute the NEWCO Products, subject to the License and
Distribution Agreement, and (ii) to carry out such other business listed in
Article 2 (Corporate Purposes) of the Articles of Incorporation.


SECTION 5.  ASSOCIATED AGREEMENTS

     5.1  Associated Agreements
          ---------------------

     On the Commencement Date, the Parties shall execute, and shall cause NEWCO
to execute, the following agreements:

     (a)  a license and distribution agreement between ST. JOHN and NEWCO (the
          "License and Distribution Agreement"), substantially in the form of
          Exhibit II hereto.

                                       6
<PAGE>
 
     (b)  a transition services agreement among NEWCO, ST. JOHN and CDC (the
          "Transition Services Agreement"), substantially in the form of Exhibit
          III hereto.

     (c)  a license agreement among NEWCO, ST. JOHN and CDC, substantially in
          the form of Exhibit IV hereto.

     (d)  a distribution agreement between NEWCO and CDC (the "CDC Distribution
          Agreement"), substantially in the form of Exhibit V hereto.

     (e)  a trademark transfer agreement between ST. JOHN and CDC substantially
          in the form of Exhibit VI hereto.


SECTION 6.  SHAREHOLDERS

     6.1  Meetings of the Shareholders
          ----------------------------

     General meetings of shareholders of NEWCO shall be convened in accordance
with the Articles of Incorporation.

     6.2  Voting
          ------

     Each shareholder shall be entitled to one vote for each share in NEWCO held
by such shareholder.  Unless otherwise provided for by law or the Articles of
Incorporation, all decisions of the shareholders shall require the majority vote
of the shares cast at a duly called meeting at which a quorum is present.

     6.3  Minutes of Shareholders Meetings
          --------------------------------

     The minutes of the shareholders meetings shall be recorded and administered
as provided in the Articles of Incorporation.

     6.4  Actions to be Determined by ST. JOHN
          ------------------------------------

     CDC agrees to vote its Shares in concurrence with the vote of ST. JOHN
concerning any matter for which a resolution of the shareholders of NEWCO is
required and for which applicable law requires that such resolution be adopted
by more than a simple majority vote; provided, however, that

     (i) in the event of the dissolution of, or the sale of all or substantially
     all of the business of NEWCO, ST. JOHN shall enter into appropriate
     distribution and licensing arrangements with CDC to permit CDC to continue
     to purchase ST. JOHN products for sale under the "Marie Gray" name at the
     CDC Stores at the Distributor Price (as defined in Section 1.3 of the CDC
     Distribution Agreement)

                                       7
<PAGE>
 
     and otherwise on substantially the same terms and conditions as may be in
     effect on the date of such dissolution or sale, for a period of two years
     from the date of such dissolution or sale;

     (ii) in the event of the dissolution of NEWCO, notwithstanding anything to
     the contrary contained herein or in the Associated Agreements, the assets
     of NEWCO at the time of dissolution shall reflect the fair market value of
     NEWCO's rights under the Associated Agreements for the remainder of the
     terms thereof, assuming no renewals; and

     (iii) ST. JOHN shall obtain CDC's consent, which consent shall not be
     unreasonably withheld, with respect to any vote to approve (x) the
     indemnification by NEWCO of any of its directors or officers; (y) the
     issuance by NEWCO of any equity securities at less than fair market value;
     and (z) any decrease of the capital (shihonkin) of NEWCO.

     6.5  Affiliate Transactions
          ----------------------

     ST. JOHN and CDC shall discuss in good faith the contemplated execution or
amendment of any contract, agreement or arrangement between NEWCO and either
Party, any Affiliate of a Party, or any director, officer or employee thereof.
Such execution or amendment shall be with the consent of both Parties, such
consent not to be unreasonably withheld.


SECTION 7.  MANAGEMENT OF NEWCO

     7.1  The Board of Directors of NEWCO
          -------------------------------

     Except as otherwise required by mandatory provisions of law or as provided
for in the Articles of Incorporation,  responsibility for the management,
direction and control of NEWCO shall be vested in the Board of Directors.  The
Articles of Incorporation shall provide initially for the election of seven (7)
directors of NEWCO.

     7.2  Election of Directors
          ---------------------

     (a)  The following individuals shall be elected as the initial Directors of
          NEWCO: Katsuyuki Masuda, Shin-ichi Masuda, Kiyoshi Yamashita, Robert
          E. Gray, Roger G. Ruppert, David Frankel and Christopher Scharff.

     (b)  The initial Board of Directors of NEWCO shall consist of seven (7)
          members.  So long as each Party's respective Ownership Percentage
          remains the same as that stipulated in Section 3.5 hereof, ST. JOHN
          shall nominate four (4) directors and CDC shall nominate three (3)
          directors from time to time pursuant to the Articles of Incorporation,
          and the Parties

                                       8
<PAGE>
 
          covenant and agree to vote their shares of NEWCO to effectuate such
          purpose; provided, however, that should the Ownership Percentage of
          one or both Parties change from that listed in Section 3.5 hereto,
          including the case of a sale pursuant to Section 14.2, the number of
          members of the Board of Directors to be nominated by each Party, to
          the extent practicable, shall be decided in proportion to each Party's
          then existing Ownership Percentage, observing normal rules of rounding
          for any fraction thereof.

     (c)  In the case of the death, resignation, or other removal of a director
          prior to the end of his term, then, as soon as is practicable, an
          extraordinary general meeting of shareholders shall be held for the
          purpose of filling such vacancy.  The Party who appointed such
          director as was removed by reason of death, resignation, or otherwise,
          shall have the right to nominate the successor of such removed
          director, and the Parties covenant and agree to vote their respective
          Shares for and cause to be elected any director so nominated.

     7.3  Representative Directors
          ------------------------

     NEWCO shall have two (2) representative directors, one of whom shall be a
director nominated by CDC and the other whom shall be a director nominated by
ST. JOHN.  At least one (1) representative director shall be a resident of
Japan.  The initial representative directors shall be Katsuyuki Masuda and David
Frankel.  The Parties agree to, and agree to cause NEWCO to, require that the
representative directors of NEWCO act jointly in authorizing any contract,
agreement, obligation, commitment or any other matter by which NEWCO would be
bound either directly or indirectly, and the Parties shall ensure that notice of
such restriction is included in the Commercial Registry for NEWCO.

     7.4  Statutory Auditors
          ------------------

     NEWCO shall have two (2) statutory auditors (kansayaku), one each of whom
                                                  ---------                   
shall be nominated by CDC and ST. JOHN respectively.  The initial statutory
auditors shall be Chikara Yoshida and Randy Thompson.

     7.5  Meetings of the Board of Directors of NEWCO
          -------------------------------------------

     Meetings of the Board of Directors shall be convened and conducted in the
manner provided in the Articles of Incorporation; provided, however, that each
of the Parties agrees to cause the President of NEWCO or such other director as
may be designated by the Board of Directors as aforesaid to convene a Board of
Directors meeting at any time that ST. JOHN or CDC indicates that, in its
opinion, there is an important reason for holding such a meeting.

                                       9
<PAGE>
 
     7.6  Resolutions of Meeting of Board of Directors
          --------------------------------------------

     Resolutions of the Board of Directors shall be adopted in accordance with
the provisions of the Articles of Incorporation, and NEWCO shall undertake no
business or undertaking other than in the ordinary course of business without a
resolution of the Board of Directors authorizing such action.  Notwithstanding
the foregoing, in addition to those actions for which approval of the Board of
Directors is required by law, the Parties agree that the following actions shall
be subject to approval of the Board, and that such action shall be so specified
in the Regulations of the Board of Directors:

     (a)  termination, amendment or failure to renew any insurance coverage;

     (b)  any action to sell, transfer, mortgage, encumber or otherwise dispose
          of any assets or any liabilities of NEWCO, except (i) for dispositions
          of property (other than inventory) not greater than ten thousand U.S.
          Dollars ($10,000) in the aggregate,  (ii) in the ordinary course of
          business, or (iii) in connection with a Change of Control of NEWCO;

     (c)  termination or failure to renew or preserve any government permits;

     (d)  the formulation from time to time of the budget and/or business plan
          for NEWCO, or any material deviation from or amendment or modification
          to such budget and/or business plan;

     (e)  incurrence or agreement to incur any bank debt or other obligation or
          liability (absolute or contingent), other than letters of credit
          opened in favor of ST. JOHN, that individually calls for payment by
          NEWCO of more than ten thousand U.S. Dollars ($10,000) in any specific
          case or twenty thousand U.S. Dollars ($20,000) in the aggregate;

     (f)  any hiring of, or any change in the compensation of any employee;

     (g)  any capital investment that individually calls for payment by NEWCO of
          more than ten thousand U.S. Dollars ($10,000) in any specific case or
          twenty thousand U.S. Dollars ($20,000) in the aggregate;

     (h)  any loan, guaranty or other extension of credit, or any commitment to
          make any loan, guaranty or other extension of credit, other than
          accounts receivable in the ordinary course of business;

     (i)  special or extraordinary payments to any Person outside of the
          ordinary course of business;

     (j)  the filing of any lawsuit or taking of any other action in connection
          with any legal proceeding; or

                                      10
<PAGE>
 
     (k) any tax election or any change in any method or period of accounting or
in any accounting policy, practice or significant procedure.

     7.7  Remuneration to Directors and Auditors of NEWCO
          -----------------------------------------------

     Remuneration to directors and statutory auditors of NEWCO shall be
determined by resolution of the general meeting of its shareholders.  Unless
otherwise determined by the Board of Directors, NEWCO shall maintain directors'
and officers' liability insurance with a major Japanese insurance company to the
extent permitted by applicable law.

     7.8  President
          ---------

     The President shall serve as the chief executive of NEWCO and, subject to
the authority of the Board of Directors, shall carry out the daily business of
NEWCO and shall preside at meetings of the Board of Directors.  The Parties
agree to cause Katsuyuki Masuda to be appointed as the initial President of
NEWCO.

     7.9  Expenses
          --------

     All expenses incurred by the directors and auditors in attending meetings
of the Board of Directors shall be borne by NEWCO.

     7.10 Accounting Period
          -----------------

     The accounting period of NEWCO shall commence on November 1 of each year
and end on October 31 of the following year; provided, however, that the first
accounting period of NEWCO shall commence as of the Incorporation Date and end
on the next following October 31.

     7.11 Books of Account; Independent Public Accountants
          ------------------------------------------------

     The Parties shall cause Newco to keep accurate books of account and
financial and related records in accordance with generally accepted accounting
principles applied at the time in Japan.  The books of account and records of
NEWCO shall be audited, at the expense of NEWCO, by an independent firm of
certified public accountants of international reputation designated by ST. JOHN.
Such firm of independent public accountants shall prepare and supply to CDC and
ST. JOHN certified financial reports suitable for use by each of the Parties in
connection with their respective financial and tax reports, and in the case of
such reports supplied to ST. JOHN, prepared in accordance with generally
accepted accounting principles applied at the time in the United States.

                                      11
<PAGE>
 
     7.12 Reporting and Inspection of NEWCO Records
          -----------------------------------------

     Within twenty (20) days after the close of each month, the Parties shall
cause NEWCO to submit to each of the Parties in the Japanese and English
languages appropriate financial statements of NEWCO in respect of such period
(the contents of which will be discussed in good faith by the Parties);
provided, however, that the Parties shall cause NEWCO to furnish to ST. JOHN and
CDC at their request at other times such financial, tax and related records as
the Parties require to conform with their respective accounting requirements.
Further, the Parties shall cause NEWCO to make available at its principal place
of business to each of the Parties, or to the designated representative(s) of
each of the Parties, its books of account and record, and shall transmit to each
Party written summaries thereof, in English and Japanese as appropriate, if and
when either Party shall so request.

     7.13 Budget and Business Plan
          ------------------------

     ST. JOHN shall submit to NEWCO from time to time, but in any case no more
frequently than on a monthly basis, an operating budget and business plan for
the operation of NEWCO for the subsequent period of such budget and business
plan.  The Parties agree to cause NEWCO to operate in conformity with and to
otherwise comply with all terms and conditions of any such budget and business
plan for the period thereof.

     7.14 Employees
          ---------

     The Parties shall cause NEWCO to extend employment offers to certain of
CDC's current employees on such terms and conditions, and to such employees, as
to be determined by ST. JOHN in its sole discretion.  CDC shall bear sole
responsibility for any obligations to such employees, including retirement
benefits, applicable to any periods of employment prior to the Commencement
Date.  As of the Commencement Date, NEWCO shall hire such employees provided
that such employees have (i) agreed to be employed by NEWCO and (ii) executed
letters acknowledging that NEWCO shall bear no obligations for any retirement
benefits applicable to any periods of employment prior to the Commencement Date.


SECTION 8.  FINANCING

     8.1  Working Capital
          ---------------

     It is the intention of the Parties that NEWCO will obtain its working
capital needs in excess of its initial share capital primarily from ST. JOHN, or
by commercial borrowing in Japan or such other manner agreed upon by the
Parties.  Where required, ST. JOHN agrees to consider in good faith providing
guarantees of the obligations of NEWCO in order to assist NEWCO in obtaining
appropriate financing.

                                      12
<PAGE>
 
     8.2  Manner of Providing Additional Equity Capital
          ---------------------------------------------

     (a)  Subject to subsections (b) and (c) below, in the event it is
          determined that additional equity capital is required, and additional
          Shares or securities redeemable into Shares in NEWCO such as
          convertible bonds or bonds with warrants are to be issued, (i) each of
          CDC and ST. JOHN shall have the right to acquire that number of such
          additional Shares or securities in proportion to such Party's
          Ownership Percentage, and (ii) in the event that either Party elects
          not to exercise such right, the other Party shall have the right to
          purchase all Shares or securities so offered.

     (b)  Notwithstanding the foregoing, the Parties shall ensure that NEWCO
          shall not seek additional equity capital (i) in excess of four million
          U.S. Dollars ($4,000,000) in the aggregate during the initial three
          years following the Commencement Date, or (ii) in excess of six
          million U.S. Dollars ($6,000,000) in the aggregate during the fourth,
          fifth and sixth years following the Commencement Date, without the
          consent of CDC, which consent shall not be unreasonably withheld.

     (c)  The Parties acknowledge that under applicable laws or regulations in
          force at the time, ST. JOHN may not be able to provide additional
          equity capital without governmental validations, authorizations,
          licenses or other approvals.  Should ST. JOHN fail to obtain such
          approvals and therefore be unable to provide additional equity
          capital, CDC shall not have the right to provide any additional equity
          capital without the express written consent of ST. JOHN.

     8.3  No Legal Obligation
          -------------------

     Nothing herein shall be construed to require ST. JOHN to provide any
guarantee, loan or additional equity capital, or otherwise continue to provide
financing for NEWCO.

     8.4  Bank Account
          ------------

     Any bank account established and maintained by or for NEWCO shall require
the signatures or seals of at least two representatives of NEWCO for any check,
transfer or other withdrawal from such account in each instance in excess of two
hundred thousand Japanese Yen ((Yen)200,000).  Said representatives shall be
appointed from time to time by St. John in its sole discretion.

                                      13
<PAGE>
 
SECTION 9.  TRANSFERS OF SHARES

     9.1  General Restriction on Transfers
          --------------------------------

     Except as set forth in Section 9.2, CDC and ST. JOHN mutually covenant and
agree not to sell, assign (by operation of law or otherwise), pledge, encumber,
or otherwise transfer title or rights to, any of the Shares, preemptive rights
to new Shares or securities redeemable into Shares held by or allotted to them
(any of such events referred to herein as a "Transfer"), or to take any action
leading to or likely to result in any such Transfer; provided, that this shall
not be construed as prohibiting a general charge or pledge created upon the
whole or the major portion of the assets of CDC or ST. JOHN.

     9.2  Permitted Transfers
          -------------------

     (a)  Section 9.1 shall not apply to any Transfer by either Party
          ("Transferor") to any Affiliate Group Members provided that (i) the
          Transferor obtains the prior approval of the non-transferring Party,
          which approval shall not be unreasonably withheld, (ii) any such
          Affiliate Group Members shall submit to the Parties a signed
          confirmation in form and substance satisfactory to each Party, whereby
          such Affiliate Group Members acknowledge and agree to be bound by the
          provisions of the Agreement, and (iii) the Transferor shall require
          the Affiliate Group Members to convey such shares back to the
          Transferor if, for any reason, the Affiliate Group Members no longer
          fall within the definition of that term.

     (b)  Neither Section 9.1 nor Section 9.2(a) shall apply to any Transfer by
          ST. JOHN in connection with a Change of Control of ST. JOHN.


SECTION 10.    PERFORMANCE OF THIS AGREEMENT AND ASSOCIATED AGREEMENTS

     The Parties shall do or cause to be done any and all acts and things
necessary or desirable for the implementation of the undertakings of the Parties
set forth herein, including but not limited to casting their votes as
shareholders of NEWCO and causing their nominees to the Board of Directors to
implement such undertakings.  The Parties also agree to exercise their
reasonable efforts to cause the full, timely, and faithful performance by NEWCO,
its directors and employees of all the terms and conditions of this Agreement,
where applicable, and of the Associated Agreements and any amendments to any of
them.

                                      14
<PAGE>
 
SECTION 11.    DIVIDENDS

     11.1 General Rule
          ------------

     Dividends may be paid to the shareholders and pledgees of record as of the
last day of each business year of NEWCO for which dividends are declared
(subject to the resolution of the shareholders at the general meeting of
shareholders of NEWCO) within the scope of such sum as is legally permitted
under applicable laws.

     11.2 Interim Dividends
          -----------------

     NEWCO may, by a resolution of its Board of Directors, declare an interim
dividend under Article 293-5 of the Commercial Code of Japan to the shareholders
and pledgees of record as of the 30th day of April of each year.


SECTION 12.    TAXES

     12.1 Tax Receipts
          ------------

     To the extent not otherwise accounted for in the Associated Agreements for
payments to ST. JOHN thereunder, the Parties agree to cause NEWCO to furnish to
ST. JOHN official tax receipts or other evidence issued by the Japanese tax
authorities sufficient to enable ST. JOHN to support a claim for United States
income tax credit in respect of any sum required under Japanese tax laws to be
withheld by NEWCO for the account of ST. JOHN or paid by NEWCO for its own
account.

     12.2 Tax Returns
          -----------

     NEWCO shall, or shall cause its designated representatives, to prepare and
timely file all tax returns and informational reporting and to pay when due all
taxes required under Japanese laws and regulations.


SECTION 13.    CONFIDENTIALITY OF INFORMATION

     13.1 Duty of Secrecy and Confidentiality
          -----------------------------------

     Except to the extent that disclosures to NEWCO may be permitted by any of
the Associated Agreements, each Party agrees to keep strictly secret and
confidential all information obtained from the other Party or NEWCO which is
considered to be confidential by said other Party or NEWCO, as the case may be,
whether marked confidential or otherwise (the "Confidential Information");
provided, however, that confidential information disclosed orally which is not
identified as such shall be deemed Confidential Information only if the nature
or content of the information is set forth in a

                                      15
<PAGE>
 
written notice identifying the same as Confidential Information sent to the non-
disclosing Party within ten (10) business days after disclosure thereof.

     13.2 Restriction on Use
          ------------------

     The Parties agree that they shall not use any Confidential Information for
any purpose whatsoever except in the manner expressly provided for, and subject
to the limitations and conditions set forth herein and in the Associated
Agreements.

     13.3 Limitations and Survival of Obligations
          ---------------------------------------

     The obligations undertaken by the Parties pursuant to this Section 13 shall
not apply to any information:

     (a)  obtained from the other Party or from NEWCO which is or becomes
          through no fault of the obtaining Party generally available to the
          public, or

     (b)  obtained independently from other sources, other than as a consequence
          of the willful or negligent act or omission of either of the Parties
          or NEWCO or any of their or its employees, or

     (c)  which is, at the time of disclosure, in the possession of the Party to
          which such information is furnished, as evidenced by its written
          records, or

     (d)  which is required to be disclosed by ST. JOHN under applicable
          securities laws, or

     (e)  which is required to be disclosed by any other law or governmental
          agency, provided prior written notice is given to the appropriate
          Party for any such disclosure, or

     (f)  which is required to be disclosed in connection with the enforcement
          of this Agreement.

Either Party may disclose Confidential Information to any Affiliate Group
Members provided the same agree to be bound by the terms of this Section 13 and
such Confidential Information shall be used by said Affiliate Group Members only
for the purpose to advance the business of NEWCO.  The obligations set forth in
this Section 13, as so limited, shall survive termination of this Agreement and
shall remain in effect and be binding on the Parties.

                                      16
<PAGE>
 
SECTION 14.    TERM AND TERMINATION

     14.1 Term
          ----

     The term of this Agreement shall run concurrently with the term of the
License and Distribution Agreement, including any extension or renewal thereof,
and shall terminate upon termination of the License and Distribution Agreement
for any reason, unless this Agreement is sooner terminated pursuant to the
provisions of this Section 14.

     (a)  Mutual Agreement of the Parties.  This Agreement may be terminated
          -------------------------------                                   
          upon the mutual agreement of the Parties.

     (b)  Incorporation Date Has Not Occurred Before August 15, 1997.  If the
          ----------------------------------------------------------         
          Incorporation Date has not occurred on or before August 15, 1997,
          then, at the written election of either Party, this Agreement shall
          terminate.  If this Agreement is so terminated, then the Parties shall
          determine the aggregate expenditures made by each in undertaking the
          negotiations and preparatory work to establish and commence the
          operations of NEWCO.  The Parties agree that each Party shall be
          obligated to pay only that portion of said aggregate expenses
          proportional to their respective Ownership Percentage, and the Parties
          further agree that they shall make payments between themselves to
          effect this purpose.

     (c)  Bankruptcy, Etc., of a Party or NEWCO.  Either Party (the "First
          -------------------------------------                           
          Party") may terminate this Agreement by written notice to the other
          Party (the "Second Party") and this Agreement shall terminate as of
          the date of such written notice, in the event that the Second Party
          shall:

          (i)  be declared insolvent or bankrupt, or make an assignment or other
               arrangement for the benefit of its creditors;

          (ii) have all or any substantial portion of its capital stock or
               assets expropriated by any government; or

          (iii)  be dissolved or liquidated, except in consequence of a merger,
               amalgamation or other corporate reorganization to which it may be
               a party;

          If any of the events in subparagraphs (i) through (iii) shall occur,
          the Second Party shall notify the First Party of the occurrence of
          such event.  Either Party may terminate this Agreement by written
          notice to the other if any of the events mentioned in subparagraphs
          (i) through (iii) hereof are applicable to NEWCO.

                                      17
<PAGE>
 
     (d)  Breach.  In the event of a material breach of this Agreement, this
          ------                                                            
          Agreement shall terminate immediately if and at such time as, within
          thirty (30) days after written notice is given by the non-breaching
          Party to the breaching Party complaining of such breach, the breach as
          aforesaid shall not have been corrected.  During said thirty (30) day
          period the Parties shall negotiate in good faith in an attempt to
          reach mutual agreement on a method to avoid such termination.  The
          said notice shall specifically state the breach which the Party giving
          the notice believes is material.

     14.2  Mandatory Sale of Shares
           ------------------------

     (a)  ST. JOHN, upon the delivery of written notice to CDC, shall have the
          right, at any time after the occurrence of (i) a Change of Control of
          CDC, (ii) an event described in Section 14.1(c), or (iii) a material
          breach by CDC described in Section 14.1(d), to require CDC to sell all
          of CDC's Shares to ST. JOHN at a price equal to the fair market value
          of such Shares, as valued at the time of such sale in good faith by
          written agreement of the Parties.  CDC, upon the delivery of written
          notice to ST. JOHN, shall have the right, at any time after the
          occurrence of a material breach by ST. JOHN described in Section
          14.1(d), to require ST. JOHN to sell all of ST. JOHN's Shares to CDC
          at a price equal to the fair market value of such Shares as valued at
          the time of such sale in good faith by written agreement.  For
          purposes of this Section 14.2, the Party exercising its right to cause
          the sale of such Shares shall be referred to as the "Purchasing
          Party", the selling shareholder shall be referred to as the "Selling
          Party", the Shares being sold are referred to as the "Sale Shares",
          and the price of such Sale Shares in referred to as the "Sale Price."

          Should the Parties fail to mutually agree upon the Sale Price within
          thirty (30) days of the receipt of such written notice by the Selling
          Party, then the Sale Price shall be the average of the two lowest
          figures to be calculated by three independent third-party appraisers,
          one appraiser to be selected by ST. JOHN, one appraiser to be selected
          by CDC and the third appraiser to be selected by mutual agreement of
          the first two appraisers.  All appraisers shall be selected from
          internationally known and reputable investment banks or accounting
          firms.  The Parties shall take all action as may be necessary and
          shall use their best efforts to complete such appraisal within sixty
          (60) days after the receipt of such aforesaid initial written notice
          by the Selling Party.  For purposes of this Section 14.2, if the
          Associated Agreements have not been terminated at the time of
          valuation, fair market value shall include all rights, obligations and
          commitments under the Associated Agreements for the remainder of the
          current terms thereof, assuming no renewals.  The Selling Party shall
          consummate the sale to the Purchasing Party of the Sale Shares at the
          Sale Price within thirty (30) days from the date of final
          determination of the Sale Price, and this Agreement

                                      18
<PAGE>
 
          shall terminate, pursuant to Section 14.2(b), upon the consummation of
          such sale.

     (b)  In the event of a sale of Shares in accordance with Section 14.2(a)
          above, this Agreement shall be terminated, and:

          (i)  upon the written request of the Purchasing Party, the Selling
               Party shall cause all officers and directors of NEWCO nominated
               by the Selling Party or a nominee of the Selling Party and named
               in such written request to resign their respective positions with
               NEWCO within thirty (30) days of the Selling Party's receipt of
               such written request; and

          (ii) the Parties shall take any and all actions necessary to terminate
               the Transition Services Agreement between them and NEWCO within
               thirty (30) days of consummation of a sale pursuant to Section
               14.2(a), and shall use their best efforts to amicably settle any
               accounts, including any debts or other obligations, which may
               exist between the Parties.

     (c)  The Purchasing Party's rights under this Section 14.2 shall be in
          addition to any other rights or remedies that the Purchasing Party may
          have under applicable laws in the event of a breach by the Selling
          Party of any of its representations, covenants or obligations
          contained herein.

     14.3 Survival of Rights, Duties and Obligations
          ------------------------------------------

     Termination of this Agreement for any reason shall not release any Party
from any liability that at the time of termination has already accrued to the
other Party or which thereafter may accrue in respect of any act or omission
prior to such termination, nor shall any such termination hereof affect in any
way the survival of any right, duty, or obligation of any Party which is
expressly stated elsewhere in this Agreement to survive termination hereof.


SECTION 15.    JURISDICTION; ATTORNEY'S FEES.

     (a)  The sole jurisdiction and venue for any court action or proceeding
          arising out of or relating to this Agreement shall be an appropriate
          federal or state court in Orange County, California.  Each of ST. JOHN
          and CDC hereby irrevocably submits to the jurisdiction of any of said
          courts in any court action and hereby waives any claim or defense of
          inconvenient forum.  Each of ST. JOHN and CDC represents and warrants
          that it is not entitled to immunity from judicial proceedings and
          agrees that, should the other

                                      19
<PAGE>
 
          bring any court action, it will not claim any immunity from such
          proceedings for itself or with respect to its property.

     (b)  In the event that a court in Orange County, California refuses to
          exercise jurisdiction in connection with a dispute arising out of or
          relating to this Agreement, the Parties agree that such dispute shall
          be determined by arbitration in accordance with the Rules of the
          American Arbitration Association.  The place of arbitration shall be
          Orange County, California, and the language of the arbitration shall
          be English.  The arbitral tribunal shall consist of three arbitrators,
          one selected by CDC, one selected by ST. JOHN, and the third selected
          by the two arbitrators selected by the Parties.  Judgment upon the
          award of the arbitrators may be entered in any court having
          jurisdiction thereof.

     (c)  In the event of any action for the breach of this Agreement or other
          cause by any Party under subsections (a) or (b) above, the prevailing
          Party shall be entitled to reasonable attorney's fees, costs and
          expenses incurred in such action.


SECTION 16.    INTERPRETATION

     16.1 Applicable Law
          --------------

     The validity, construction and performance of this Agreement shall be
governed by and interpreted in accordance with the laws of Japan.

     16.2 Governing Language
          ------------------

     This Agreement is executed in the English language which shall be the
controlling language and no translation or restatement of the terms and
conditions hereof in any other language will have any effect in the
interpretation or application thereof.

     16.3 Effect of Headings
          ------------------

     The headings to Sections of this Agreement, excepting those in Section 1
hereof, are to facilitate reference only, do not form a part of this Agreement,
and shall not in any way affect the interpretation hereof.

     16.4 Non-Waiver
          ----------

     The waiver, express or implied, by any of the Parties of any right
hereunder or of any failure to perform or breach hereof by the other Party(s)
hereto shall not constitute or be deemed a waiver of any other right hereunder
or of any other failure to perform or breach hereof by such other Party(s),
whether of a similar or dissimilar nature thereto.

                                      20
<PAGE>
 
SECTION 17.    MISCELLANEOUS

     17.1 Assignment
          ----------

     (a) This Agreement, and all rights and obligations hereunder, shall not be
assigned by either of the Parties to any third party, by operation of law or
otherwise, without the prior written consent thereto by the other Party except
in connection with a Transfer permitted under Section 9.2 hereof.

     (b) Any permitted assignment shall be subject to and conditioned on the
issuance of any governmental validations, authorizations, licenses or rulings
then required under applicable law in connection with such assignment.

     17.2 Notices
          -------

     Except as otherwise provided in this Agreement, all notices required or
permitted to be given hereunder shall be in writing and shall be valid and
sufficient if dispatched by registered airmail, postage prepaid, in any post
office in the United States of America or in Japan, as the case may be, or by
facsimile transmission, as follows:

If to ST. JOHN:  ST. JOHN KNITS, INC.

                    17422 Derian Avenue
                    Irvine, California 92614
                    U.S.A.
                    Attention: Mr. Roger G. Ruppert
                    Facsimile No.: 1-714-223-3390

If to CDC:     COMMERCIAL DEVELOPMENT CO., LTD

                    Imperial Tower 9F
                    1-1-1 Uchisaiwai-cho
                    Chiyoda-ku, Tokyo 100 Japan
                    Attention:  Mr. Katsuyuki Masuda
                    Facsimile No.:  81-3-3503-1390


     Any Party may change its address by a notice given to the other Party in
the manner set forth above.  Notices given as herein provided shall be
considered to have been given fifteen (15) days after the mailing thereof, or if
by facsimile transmission, the next business day of the country in which the
recipient is located.

                                      21
<PAGE>
 
     17.3 Relationship of Parties
          -----------------------

     Nothing herein shall constitute an agency relationship or partnership
between ST. JOHN and CDC.  No Party shall have any authority to bind or commit
the other in any manner whatsoever.

     17.4 Modification Etc. of Agreement
          ------------------------------

     This Agreement embodies the entire agreement of the Parties with respect to
the subject matter hereof as of the date of execution hereof and supersedes and
cancels any and all prior understandings or agreements, verbal or otherwise, in
relation hereto, which may exist between the Parties. No oral explanation or
oral information by either of the Parties shall alter the meaning or
interpretation of this Agreement.  No amendment or change hereof or addition
hereto shall be effective or binding on any of the Parties unless reduced to
writing and executed by the respective duly authorized representatives of each
of the Parties.


                                 * * * * * * *

                                      22
<PAGE>
 
IN WITNESS WHEREOF, and having been approved by the board of directors of each
of the Parties, the Parties have caused this Agreement to be executed by their
duly authorized representatives on the day and year first set forth above.

                              ST. JOHN KNITS, INC.


                              By:    /s/ Bob Gray
                                  -------------------------------------------
                                    Bob Gray, Chairman
 



                              COMMERCIAL DEVELOPMENT CO., LTD.


                              By:    /s/ Katsuyuki Masuda
                                  ----------------------------------------
                                    Katsuyuki Masuda
                              Title:

                                      23
<PAGE>
 
                                   EXHIBIT I

                           ARTICLES OF INCORPORATION
                                       OF
                               ST. JOHN CO., LTD.


                                   CHAPTER I.
                               GENERAL PROVISIONS

Article 1.  (Corporate Name)
----------                  

     The name of the company shall be St John Kabushiki Kaisha, and in English
translation, St. John Co., Ltd.

Article 2.  (Purpose)
----------           

     The purpose of the company shall be to engage in the following business:

     a.   Import and sale of women's outerwear, knit wear and other apparel;

     b.   Import and sale of footwear, leather products, jewelry and other
          women's accessories; and

     c.   All matters related to the conduct of the business stated in the
          preceding items.

Article 3.  (Location of Head Office)
----------                           

     The head office of the company shall be located in Chiyoda-ku, Tokyo.

Article 4.  (Method by which Public Notice is made)
----------                                         

     Public notices of the company shall be displayed in the Official Gazette.


                                  CHAPTER II.

Article 5.  (Total Number of Shares)
----------                          

     The total number of shares authorized to be issued by the company shall be
nine thousand two hundred (9,200) shares.

                                      I-1
<PAGE>
 
Article 6.  (Par Value Shares)
----------                    

     The par value of each par value share issued by the company shall be fifty
thousand yen ((Yen)50,000).

Article 7.  (Preemptive Rights to New Shares)
----------                                   
     The shareholders of the company shall have preemptive rights to subscribe
to new shares and convertible debentures.

Article 8.  (Approval of Board of Directors for Transfer of Shares)
----------                                                         

     In order for a shareholder to transfer shares of the company, the approval
of the board of directors must be obtained.

Article 9.  (Notification by Shareholders, et al., of Name, Residence, and Seal
----------                                                                     
          Impression)

     Each shareholder and registered pledgee shall provide the company with
his/her name, residential address and seal impression in the form prescribed by
the company.

     A foreigner who is accustomed to signing his/her name may submit a specimen
of his/her signature in lieu of the seal impression referred to in the preceding
paragraph.

     A shareholder or registered pledgee having no residence in Japan may
designate a temporary residence or attorney in Japan and so notify the company.

     In case of any change in matters covered by the preceding three (3)
paragraphs, the company shall be notified.

     The company shall send all required notices to all shareholders and
registered pledgees at their residences as notified in accordance with the first
paragraph above.


                                  CHAPTER III.
                            MEETINGS OF SHAREHOLDERS

Article 10.  (Holding of Meetings)
-----------                       

     An ordinary meeting of shareholders shall be called within three (3) months
from the day immediately following the last day of each fiscal period, and
extraordinary meetings of shareholders may be called whenever necessary.

     A meeting of shareholders shall be held at the location provided in Article
3 or in an area adjacent thereto, or at a place agreed upon for the holding of
the meeting by all the shareholders holding voting rights at the meeting.

                                      I-2
<PAGE>
 
Article 11.  (Calling of Meetings)
-----------                       

     Meetings of shareholders shall be called by one of the representative
directors in accordance with a resolution of the board of directors.

     When the representative directors are unable to act, one of the other
directors who shall be designated in accordance with an order determined
beforehand by the board of directors shall call the meeting.

Article 12.  (Chain of Meetings)
-----------                     

     One of the representative directors shall act as chairman at meetings of
shareholders.

     When the representative directors are unable to act, one of the other
directors who shall be designated in accordance with an order determined
beforehand by the board of directors or any other person who is nominated by a
majority vote of the shareholders present shall act as chairman.

Article 13.  (Resolutions)
-----------               

     Unless otherwise provided by law or by these Articles of Incorporation, all
resolutions of a meeting of shareholders shall be adopted by a majority vote of
shareholders present at the meeting at which shareholders present hold shares
representing in the aggregate more than one-half (1/2) of the total number of
the issued and outstanding shares.

     Each shareholder shall have one (1) vote for each share.

Article 14.  (Voting by Proxy)
-----------                   

     A shareholder may exercise his/her vote through a proxy. In such case, the
proxy must file with the company a document evidencing his/her authority.

Article 15.  (Minutes of Meetings)
-----------                       

     The substance of proceedings at a meeting of shareholders and the results
thereof shall be recorded in the minutes of the meeting which shall bear the
signatures or the names and seals of the chairman and of the directors present
at the meeting and shall be preserved by the company.

                                      I-3
<PAGE>
 
                                 CHAPTER IV.
                        DIRECTORS AND STATUTORY AUDITORS

Article 16.  (Number of Directors and Statutory Auditors)
-----------                                              

          There shall be three (3) or more directors of the company and there
shall be one (1) or more statutory auditors.

Article 17.  (Election)
-----------            

          Directors and statutory auditors shall be elected at a meeting of
shareholders; provided, however, that cumulative voting shall not be used for
the election of directors.

Article 18.  (Terms of Office)
-----------                   

          The terms of office of directors shall expire at the conclusion of the
ordinary meeting of shareholders held to settle accounts for the fiscal period
last ending within two (2) years from their assumption of office.

          The terms of office of statutory auditors shall expire at the
conclusion of the ordinary meeting of shareholders held to settle accounts for
the fiscal period last ending within three (3) years from their assumption of
office.

          The term of office of any director or statutory auditor elected to
fill a vacancy shall be the same as the remainder of the term of office of
his/her predecessor.  The term of office of any director elected because of an
increase in number shall be the same as the remainder of the term of office of
the other directors then serving.

Article 19.  (Election of Representative Directors and Directors with Specific
-----------                                                                   
Powers)

     The board of directors shall select one (1) or more directors from among
its members to be representative directors of the company.

     Representative directors shall severally represent the company.

     The board of directors may select from among its members one (1) president
and one (1) or more vice presidents, senior managing directors (senmu) and
managing directors (jomu).

Article 20.  (Remuneration and Retirement Allowances)
-----------                                          

     The remuneration and retirement allowances for directors and statutory
auditors shall be separately determined by resolution of a meeting of
shareholders.

                                      I-4
<PAGE>
 
                                 CHAPTER V. 
                              BOARD OF DIRECTORS


Article 21.  (Calling of Meetings)
-----------                       

          Meetings of the board of directors shall be called by one of the
representative directors.

          When the representative directors are unable to act, one of the other
directors who shall be designated in accordance with an order determined
beforehand by the board of directors shall call the meeting.

Article 22.  (Notice of Meetings)
-----------                      

          Notice of a meeting of the board of directors shall be given to each
director and statutory auditor at least one (1) week prior to the date set for
such meeting; provided, that, in case of urgency, the above period may be
shortened.

          No notice shall be required for the convocation of a meeting at which
all the directors and statutory auditors are present at the meeting or for which
all the directors and statutory auditors have waived notice.

Article 23.  (Chairman)
-----------            

          One of the representative directors shall act as chairman at meetings
of the board of directors.

          When the representative directors are unable to act, one of the other
directors who shall be designated in accordance with an order determined
beforehand by the board of directors shall act as chairman.

Article 24.  (Resolutions)
-----------               

          Resolutions at a meeting of the board of directors shall be adopted by
an affirmative vote of a majority of the directors present which directors
present shall constitute a majority of all directors.

Article 25.  (Minutes of Meetings)
-----------                       

          The substance of proceedings at a meeting of the board of directors
and the results thereof shall be recorded in the minutes of the meeting, which
shall bear the signatures or the names and seals of the directors and statutory
auditors present at the meeting, and shall be preserved by the company.

                                      I-5
<PAGE>
 
                                  CHAPTER VI.
                                   ACCOUNTS

Article 26.  (Fiscal Period)
-----------                 

          The fiscal period of the company shall commence on the first day of
November and end on the 31st day of October of the following year, and the
accounts of the company shall be closed on the 31st day of October each year.

Article 27.  (Dividends and Cash Distributions)
-----------                                    

          Dividends shall be paid to the shareholders or registered pledgees
appearing on the register of shareholders as of the closing of accounts for each
fiscal period.

          A cash distribution may be made to shareholders or registered pledgees
appearing on the register of shareholders as of the 30th day of April each year
by resolution of the board of directors in accordance with the provisions of
Article 293-5 of the Commercial Code.

          Dividends and cash distributions to shareholders shall bear no
interest.

          The company shall be exempted from the obligation to pay dividends and
cash distributions after three (3) years have elapsed from the date on which the
dividends or cash distributions were tendered for payment.


                                 CHAPTER VII.
                           SUPPLEMENTARY PROVISIONS

Article 28.  (Shares Issued at the Time of Incorporation)
-----------                                              

          The number of shares issued by the company at the time of
incorporation shall be two thousand three hundred (2,300) par value shares of
common stock and the issuing price shall be fifty thousand yen ((Yen)50,000) per
share.

Article 29.  (Number and Terms of Office of the First Directors and Statutory
-----------                                                                  
Auditors)

     The number of the first directors shall be seven (7), and the number of the
first statutory auditors shall be two (2).

     Notwithstanding the provisions of the first and second paragraphs of
Article 18, the terms of office of the first directors and statutory auditors
shall expire at the conclusion of the ordinary meeting of shareholders held to
settle accounts for the fiscal period last ending within one (1) year from their
assumption of office.

                                      I-6
<PAGE>
 
Article 30.  (First Fiscal Period)
-----------                       

     The first fiscal period of the company shall be from the day of its
incorporation until the 31st day of October 1997.

Article 31.  (Name and Address of Promoter, and Number of Shares subscribed for
-----------                                                                    
by the Promoter)

     The name and address of the promoter, and the number of shares he/she has
subscribed for are as follows:

          Number of Shares        Name and Address of Promoter
          ----------------        ----------------------------

          1,121 par value shares  Commercial Development Co., Ltd.
          of common stock         1-1, 1-Chome, Uchisaiwaicho,
                                  Chiyoda-ku, Tokyo

     The promoter for the purpose of incorporation of St. John Kabushiki Kaisha
has made these Articles of Incorporation in accordance with the provisions of
the Commercial Code and has hereunto affixed his name and seal, and his address,
this day of July 16, 1997.


                         Promoter:  Katsuyuki Masuda   (seal)
                                    Representative Director
                                    Commercial Development Co., Ltd.
                                    1-1, 1-Chome, Uchisaiwaicho,
                                    Chiyoda-ku, Tokyo

                                      I-7
<PAGE>
 
                                   EXHIBIT II
                                   ----------



                       LICENSE AND DISTRIBUTION AGREEMENT
                       ----------------------------------



                           dated as of July ___, 1997



                                    between



                              ST. JOHN KNITS, INC.



                                      and



                               ST. JOHN CO., LTD.
<PAGE>
 
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                    Page
                                                                    ----
<S>                                                                 <C>


                                   ARTICLE 1
                                 DEFINITIONS.........................  1
     1.1   Distributor List Price....................................  1
           -------------------------
     1.2   Licensed Trademarks.......................................  2
     1.3   Products..................................................  2
     1.4   SJ JAPAN Information......................................  2
     1.5   ST. JOHN Information......................................  2
     1.6   Territory.................................................  2
                                   ARTICLE 2
                                 APPOINTMENT.........................  2
     2.1   Scope.....................................................  2
     2.2   Subdistributors...........................................  3
     2.3   Sales Outside the Territory...............................  3
     2.4   Third-Party Importation...................................  3

                                   ARTICLE 3
                       GENERAL OBLIGATIONS OF SJ JAPAN...............  3
     3.1   Marketing.................................................  3
     3.2   Use of Licensed Trademarks................................  4
     3.3   Manufacture or Distribution of Competitive Goods..........  5
     3.4   Customer Complaints.......................................  5
     3.5   Quality Control...........................................  5
     3.6   Design Services...........................................  6
     3.7   Expenses..................................................  6

                                   ARTICLE 4
                     INDEMNITY; INFRINGEMENT; INSURANCE..............  7
     4.1   SJ JAPAN Indemnity........................................  7
     4.2   ST. JOHN Indemnity........................................  7
     4.4   Infringement Claims of Third Parties......................  8
     4.5   Insurance.................................................  8

                                   ARTICLE 5
                             ORDERS FOR PRODUCTS.....................  8
     5.1   Master Purchase Orders....................................  8
     5.2   Other Purchase Orders.....................................  8
     5.3   Terms of Purchase Orders..................................  9
     5.4   Acceptance of Orders......................................  9
     5.5   Modification of Orders....................................  9
</TABLE>

                                       i
<PAGE>
 
<TABLE>
<S>                                                                 <C>
     5.6   Delivery Terms...........................................   9
     5.7   Product Changes..........................................  10
                                   ARTICLE 6
                             PRICES AND PAYMENT.....................  10
     6.1   Prices...................................................  10
     6.2   Price Increases, Decreases...............................  11
     6.3   Payment Terms............................................  11
     6.4   Resale Prices............................................  11
     6.5   Overdue Payments.........................................  11
                                   ARTICLE 7
                           ACCEPTANCE AND WARRANTY..................  12
     7.1   Acceptance of Products...................................  12
     7.2   Product Warranty.........................................  12
     7.3   Excluded Claims..........................................  12
     7.4   Limited Warranty.........................................  13
                                   ARTICLE 8
                           LIMITATION OF REMEDIES...................  13
     8.1   Delay....................................................  13
     8.2   Sole Remedies............................................  13
     8.3   Consequential Damages....................................  13
                                   ARTICLE 9
                               CONFIDENTIALITY......................  14

                                   ARTICLE 10
                            TRADEMARKS; COPYRIGHT...................  14
     10.1  Exploitation of Rights...................................  14
     10.2  Disputes Among Licensees.................................  14
     10.3  Exclusive License........................................  15
     10.4  Ownership................................................  15
     10.5  Use of Name..............................................  15
     10.6  Compliance With Law; Markings............................  16
     10.7  Copyright................................................  16
                                   ARTICLE 11
                          TAXES; IMPORT OF PRODUCTS.................  16
     11.1  Taxes....................................................  16
     11.2  Import Documentation.....................................  16

                                   ARTICLE 12
                            TERM AND TERMINATION....................  17
     12.1  Term.....................................................  17
</TABLE>

                                      ii
<PAGE>
 
<TABLE>
<S>                                                       <C>
     12.2   Termination.................................. 17
     12.3   Rights and Obligations on Termination........ 17
     12.4   No Compensation.............................. 18
     12.5   Injunctive Relief............................ 18
     12.6   Reversion of Rights; Return of Materials..... 19

                                   ARTICLE 13
                                FORCE MAJEURE............ 19
     13.1   Definition................................... 19
     13.2   Notice....................................... 19
     13.3   Confirmation................................. 20
     13.4   Suspension of Performance.................... 20
     13.5   Termination.................................. 20

                                  ARTICLE 14
                       REPRESENTATIONS AND WARRANTIES.... 20
     14.1   ST. JOHN..................................... 20
     14.2   SJ JAPAN..................................... 20

                                  ARTICLE 15
                        JURISDICTION; INTERPRETATION..... 20
     15.1   Disputes..................................... 20
     15.2   Governing Law................................ 21
     15.3   Governing Language........................... 21
     15.4   Effect of Headings........................... 21
     15.5   Non-Waiver................................... 21

                                  ARTICLE 16
                                MISCELLANEOUS............ 22
     16.1   Assignment................................... 22
     16.2   Relationship................................. 22
     16.3   Notices...................................... 22
     16.4   ENTIRE AGREEMENT............................. 22
     16.5   Amendment.................................... 23
     16.6   Publicity.................................... 23
     16.7   Severability................................. 23
     16.8   Counterparts................................. 23
</TABLE>

     Schedule A  Licensed Trademarks
     Schedule B  U.S. Wholesale Price List

                                      iii
<PAGE>
 
                                   EXHIBIT II
                       License and Distribution Agreement
                       ----------------------------------


          THIS AGREEMENT, made this ___th day of July, 1997 by and between ST.
JOHN KNITS, INC., a corporation duly organized under the laws of the State of
California and having its principal place of business at 17422 Derian Avenue,
Irvine, California 92614 (hereinafter "ST. JOHN"), and ST. JOHN CO., LTD., a
corporation duly organized and existing under the laws of Japan and having its
principal place of business at Imperial Tower 9F, 1-1-1 Uchisaiwai-cho, Chiyoda-
ku, Tokyo 100 Japan (hereinafter "SJ JAPAN").

          WHEREAS, ST. JOHN manufactures and markets certain products and
desires to increase the sales of such products;

          WHEREAS, ST. JOHN is the owner of certain valuable trademarks under
which such products are sold;

          WHEREAS, SJ JAPAN has represented that it possesses the necessary
expertise and marketing organization to promote and sell such products in the
territory defined herein; and

          WHEREAS, ST. JOHN is willing to appoint SJ JAPAN as distributor of ST.
JOHN's products, with the right and license to use certain ST. JOHN trademarks,
in the territory, and SJ JAPAN is willing to accept such appointment;

          NOW, THEREFORE, in consideration of the mutual premises and covenants
hereinafter set forth, the parties agree as follows:


                                   ARTICLE 1
                                   ---------
                                  DEFINITIONS
                                  -----------

          For purposes of this Agreement, the following words, terms and
phrases, where written with an initial capital letter, shall have the meanings
assigned to them in this Article 1 unless the context otherwise requires:

          1.1  Distributor List Price.  "Distributor List Price" shall mean ST.
               ----------------------                                          
JOHN's published United States wholesale price for a given Product in effect at
the time of acceptance by ST. JOHN of SJ JAPAN's order, less eighteen percent
(18%); provided, that for accessories (which shall specifically exclude any
knitwear and other textile products), the Distributor List Price shall mean ST.
JOHN's published United States wholesale price for a given Product in effect at
the time of acceptance by ST. JOHN of SJ JAPAN's order, less twenty percent
(20%).  A copy of ST. JOHN's current published United States wholesale price
list is attached hereto as Schedule B.  ST. JOHN reserves
                           ----------                    

                                     II-1
<PAGE>
 
the right to change its United States wholesale list prices at any time and from
time to time after execution of this Agreement.

          1.2  Licensed Trademarks.  "Licensed Trademarks" shall mean the
               -------------------                                       
trademarks set forth in Schedule A hereto and all related logos, emblems and
                        ----------                                          
symbols, and all combinations, form and derivations thereof as are currently or
hereafter used by ST. JOHN in connection with the Products (as defined below).

          1.3  Products.  "Products" shall mean all women's apparel and women's
               --------                                                        
accessories which are both manufactured and distributed by ST. JOHN for retail
sale in the United States of America.

          1.4  SJ JAPAN Information.  "SJ JAPAN Information" shall mean all
               --------------------                                        
information, other than information in publicly-available published form or
expressly designated by SJ JAPAN as non-confidential, which is directly or
indirectly disclosed to ST. JOHN, regardless of the form in which it is
disclosed, relating in any way to SJ JAPAN's markets, customers, products,
patents, inventions, procedures, methods, designs, strategies, plans, assets,
liabilities, costs, revenues, profits, organization, employees, agents,
subdistributors, sublicensees or business in general.

          1.5  ST. JOHN Information.  "ST. JOHN Information" shall mean all
               --------------------                                        
information, other than information in publicly-available published form or
expressly designated by ST. JOHN as non-confidential, which is directly or
indirectly disclosed to SJ JAPAN or embodied in Products provided hereunder,
regardless of the form in which it is disclosed, relating in any way to ST.
JOHN's markets, customers, products, patents, inventions, procedures, methods,
designs, strategies, plans, assets, liabilities, costs, revenues, profits,
organization, employees, agents, distributors, licensees or business in general.

          1.6  Territory.  "Territory" shall mean Japan.
               ---------                                


                                   ARTICLE 2
                                   ---------
                          APPOINTMENT; GRANT OF RIGHT
                          ---------------------------

          2.1  Scope of Appointment and License.  ST. JOHN hereby (i) appoints
               --------------------------------                               
SJ JAPAN, and SJ JAPAN hereby accepts appointment, as ST. JOHN's exclusive
distributor during the term of this Agreement of the Products in the Territory,
and (ii) grants SJ JAPAN a non-transferable license for the term of this
Agreement to use the Licensed Trademarks solely in connection with the
distribution and sale of the Products within the Territory to the extent
permitted herein, in any case subject to all terms and conditions of this
Agreement.

          2.2  Subdistributors.  SJ JAPAN shall not, without the prior written
               ---------------                                                
approval of ST. JOHN, which approval shall not be unreasonably withheld, (i)
appoint

                                     II-2
<PAGE>
 
any subdistributors or agents to promote and/or distribute Products in the
Territory, or (ii) sublicense any of its rights hereunder to use the Licensed
Trademarks.  Further, notwithstanding any such appointment or sublicense, or ST.
JOHN's approval thereof, SJ JAPAN shall at all times remain fully liable for the
performance of its subdistributors, sublicensees and/or agents and SJ JAPAN
hereby agrees to indemnify and hold harmless ST. JOHN from all damages, losses,
costs or expenses arising in any manner from any act or omission on the part of
its subdistributors, sublicensees or agents.  The parties acknowledge that ST.
JOHN has approved the sublicense to Commercial Development Co., Ltd. pursuant to
that certain CDC License Agreement, dated as of July ___, 1997, between SJ JAPAN
and Commercial Development Co., Ltd.

          2.3  Sales Outside the Territory.  SJ JAPAN shall not advertise,
               ---------------------------                                
promote, solicit customers for, sell or distribute Products outside the
Territory nor establish any office through which orders are solicited or any
depot at which inventories of Products are stored outside the Territory.

          2.4  Third-Party Importation.  In no event shall ST. JOHN bear any
               -----------------------              
liability to SJ JAPAN for the importation of Products into the Territory by
third parties without the approval or authorization of ST. JOHN.


                                   ARTICLE 3
                                   ---------
                        GENERAL OBLIGATIONS OF SJ JAPAN
                        -------------------------------

          3.1  Marketing.  SJ JAPAN shall have the following obligations with
               ---------                                                     
respect to the marketing and distribution of the Products:

     (a)  To use its best efforts to further the promotion, marketing, sale and
          other distribution of Products in the Territory;

     (b)  To maintain an adequate and balanced inventory of Products;

     (c)  To promptly respond to all inquiries from customers, including
          complaints, process all orders, and effect all shipments of Products;

     (d)  To diligently investigate all leads with respect to potential
          customers referred to it by ST. JOHN;

     (e)  To permit ST. JOHN, upon reasonable notice, to visit SJ JAPAN's
          customers and to visit SJ JAPAN's place of business and inspect its
          inventories, records, and other relevant documents;

     (f)  To maintain throughout the Territory an adequate sales force dedicated
          on both a full and part-time basis, as the case may be, to the sale of
          Products; and

                                     II-3
<PAGE>
 
     (g)  To participate, at its own expense, in sales or merchandising programs
          prepared by ST. JOHN, in all shows, fairs and exhibitions in the
          Territory where such participation will, in the reasonable judgment of
          ST. JOHN, promote the Products, and develop and implement sales
          programs for the promotion of the Products.

          3.2  Use of Licensed Trademarks.  SJ JAPAN shall have the following
               --------------------------                                    
obligations in its use of the Licensed Trademarks:

     (a)  SJ JAPAN shall diligently undertake to advertise the Products in the
          Territory.  ST. JOHN shall furnish SJ JAPAN with a reasonable quantity
          of ST. JOHN's brochures and other appropriate advertising materials,
          in the English language, for use by SJ JAPAN in preparing its own
          advertising materials.  SJ JAPAN shall submit to ST. JOHN copies of
          all proposed advertising or promotional materials prepared by or for
          SJ JAPAN utilizing the Licensed Trademarks prior to the use of such
          materials.  ST. JOHN may approve or disapprove any and all advertising
          and promotional materials submitted as aforesaid and shall discuss
          with SJ JAPAN any modifications or alterations thereof.  SJ JAPAN
          shall not use any such advertising or promotional materials without
          first obtaining the prior express written consent of ST. JOHN.  All
          expenses incurred by SJ JAPAN with respect to creating advertising
          materials and advertising the Products shall be borne by SJ JAPAN.

     (b)  SJ JAPAN shall submit to ST. JOHN all proposed tags, labels, packaging
          and other similar materials from which ST. JOHN may select those, if
          any, which ST. JOHN approves for use in connection with Products.  ST.
          JOHN may approve or disapprove the tags, labels, packaging and other
          similar materials submitted as aforesaid and shall discuss with SJ
          JAPAN any modifications or alterations thereof.  SJ JAPAN shall not
          use any such tags, labels, packaging or other similar materials
          without first obtaining the prior express written consent of ST. JOHN.

     (c)  SJ JAPAN shall submit to ST. JOHN samples of all proposed business
          cards, invoices, order forms, stationery and other similar printed
          materials from which ST. JOHN may select those, if any, which ST. JOHN
          approves for use in connection with Products.  ST. JOHN may approve or
          disapprove the business cards, invoices, order forms, stationery and
          other similar printed materials submitted as aforesaid and shall
          discuss with SJ JAPAN any modifications or alterations thereof.  SJ
          JAPAN shall not use any such business cards, invoices, order forms,
          stationery or other similar printed materials without first obtaining
          the prior express written consent of ST. JOHN.

                                     II-4
<PAGE>
 
     (d)  It is specifically understood and agreed that ST. JOHN's approval
          pursuant to subsections (a), (b) and (c) above shall not be
          unreasonably withheld.  Any sample, copy, artwork or other material
          submitted to ST. JOHN for its approval which is not disapproved within
          twenty (20) business days after ST. JOHN's receipt thereof shall be
          deemed approved for use hereunder, but only for the use for which
          approval was sought.  After any sample, copy, artwork or other
          material has been approved, SJ JAPAN shall not depart therefrom in any
          substantial respect without the prior written ap proval of ST. JOHN.
          If  ST. JOHN should disapprove any material pursuant to this Section
          3.2, SJ JAPAN shall neither use nor permit the same to be used in any
          manner.

     (e)  Insofar as any packaging and advertising material to be used in
          connection with the Products or otherwise utilizing the Licensed
          Trademarks is created for SJ JAPAN by a third party, SJ JAPAN shall
          execute such assignments of copyright as ST. JOHN shall require.
          Notwithstanding the foregoing sentence, SJ JAPAN's existing
          copyrights, trademarks and other proprietary rights incorporated into
          such artwork shall remain the property of SJ JAPAN and shall not be
          assigned to ST. JOHN and shall not be subject to ST. JOHN's use,
          without SJ JAPAN's prior written consent.

          3.3  Manufacture or Distribution of Competitive Goods.  SJ JAPAN shall
               ------------------------------------------------                 
not manufacture or distribute any products which are directly or indirectly
competitive with the Products.

          3.4  Customer Complaints.  SJ JAPAN agrees to cooperate with ST. JOHN
               -------------------                                             
in dealing with any customer complaints concerning the Products and to take any
action requested by ST. JOHN to resolve such complaints.

          3.5  Quality Control.  In order to protect the goodwill and reputation
               ---------------                                                  
associated with the Licensed Trademarks, SJ JAPAN covenants and agrees as
follows:

     (a)  The Products shall be distributed and sold with packaging and sales
          promo tion materials appropriate for highest quality Products and
          shall meet all specifications and standards therefor which ST. JOHN
          may provide to SJ JAPAN from time to time.

     (b)  In order to maintain the reputation, image and prestige of the
          Licensed Trademarks, SJ JAPAN's distribution patterns shall consist of
          those retail outlets whose location, merchandising and overall
          operations are consistent with the high quality of Products and the
          reputation, image and prestige of the Licensed Trademarks.

     (c)  SJ JAPAN may not use a personality or celebrity to endorse or promote
          any Products unless and until ST. JOHN has given SJ JAPAN its specific

                                     II-5
<PAGE>
 
          written approval for such personality or celebrity to endorse or
          promote such Products.

     (d)  SJ JAPAN's policy of sale, distribution and exploitation of the
          Products shall be of high standard and shall in no manner reflect
          adversely upon the good name of ST. JOHN or its other licensees or
          upon the goodwill and reputation associated with the Licensed
          Trademarks.

          3.6  Design Services.  From time to time, ST. JOHN may prepare and
               ---------------                                              
deliver to SJ JAPAN ideas, sketches and other materials utilizing the Licensed
Trademarks for use in connection with the Products ("ST. JOHN Ideas").  ST. JOHN
Ideas shall be used by SJ JAPAN on a non-exclusive basis, solely in connection
with the distribution and sale of Products pursuant to this Agreement.  If SJ
JAPAN chooses not to use such ST. JOHN Ideas within thirty (30) days of SJ
JAPAN's receipt thereof, SJ JAPAN shall return them to ST. JOHN, at SJ JAPAN's
expense, and may not use them or permit their use thereafter.  Whether or not SJ
JAPAN chooses to use any ST. JOHN Ideas, ST. JOHN may use and permit others to
use them in any manner it desires.  ST. JOHN shall at all times retain ownership
of any and all intellectual property rights related to ST. JOHN Ideas and SJ
JAPAN shall keep all information related to the ST. JOHN Ideas confidential and
shall not disclose such information to any party without the prior written
consent of ST. JOHN in each instance; provided, that nothing herein shall
prevent SJ JAPAN from using, disclosing or authorizing the disclosure of any
such information which is disclosed orally and is not identified as confidential
information either at the time of disclosure or by written notice sent to SJ
JAPAN within ten (10) business days after disclosure thereof.

          3.7  Expenses.  Except as specifically stated otherwise, SJ JAPAN
               --------                                                    
assumes full responsibility for all costs and expenses which it incurs in
carrying out its obligations under this Agreement, including but not limited to
all rentals, salaries, commissions, advertising, demonstration, travel and
accommodation expenses without the right to reimbursement for any portion
thereof from ST. JOHN.

                                   ARTICLE 4
                                   ---------
                       INDEMNITY; INFRINGEMENT; INSURANCE
                       ----------------------------------

          4.1  SJ JAPAN Indemnity.  SJ JAPAN hereby indemnifies, saves and holds
               ------------------                                               
ST. JOHN harmless from and against any and all liabilities, losses, damages and
expenses (including reasonable attorneys' fees and expenses) arising out of or
resulting from: (i) any act or omission that may be committed or suffered by SJ
JAPAN or any of its servants, agents or employees in connection with SJ JAPAN's
performance of this Agreement, (ii) any actual or alleged infringement or
violation of any patents, copyrights, trademarks or other rights, including
trade secrets and rights of privacy and publicity, in

                                     II-6
<PAGE>
 
connection with the distribution, sale, use, advertisement or promotion of any
of the Products (other than those arising from the design or manufacture of
Products or other similar matters not within the control of SJ JAPAN or from the
use by SJ JAPAN of the Licensed Trademarks as permitted hereunder), (iii) SJ
JAPAN's false or misleading advertising in connection with any of the Products,
(iv) any violation of any applicable law or regulation in connection with the
marketing, distribution, sale, advertisement or promotion of any of the
Products, (v) any use of any of the Licensed Trademarks in a manner not
authorized by this Agreement, or (vi) any breach of this Agreement by SJ JAPAN.
SJ JAPAN shall promptly notify ST. JOHN of any claim which may be made against
SJ JAPAN arising out of SJ JAPAN's use of the Licensed Trademarks.  The
provisions of this Section 4.1 and SJ JAPAN's indemnity obligations hereunder
shall sur vive the expiration or termination of this Agreement.

          4.2  ST. JOHN Indemnity.  ST. JOHN hereby indemnifies, saves and holds
               ------------------                                               
SJ JAPAN harmless from and against any and all liabilities, losses, damages and
expenses (including reasonable attorneys' fees and expenses) arising out of or
resulting from any infringement suit or claim of the nature specified in
Sections 4.3 and 4.4 below to the extent, and only to the extent, that SJ JAPAN
has complied with the provisions of such sections.

          4.3  Third Party Infringement.  In the event that SJ JAPAN learns of
               ------------------------                                       
any infringement, act of unfair competition by third parties or imitation of the
Licensed Trademarks or of any use by any person of a trademark similar to any
Licensed Trademark, it shall promptly notify ST. JOHN thereof.  ST. JOHN
thereupon may take such action as it deems advisable for the protection of its
rights in and to the Licensed Trademarks and, if requested to do so by ST. JOHN,
SJ JAPAN shall cooperate with ST. JOHN in all respects at ST. JOHN's sole
expense, including without limitation by being a plaintiff or co-plaintiff and
by causing its officers to execute pleadings and other necessary documents and
to causing its officers and employees to devote appropriate time to litigation
and/or disposition of all matters within the purview of this Section 4.3; it is
understood that SJ JAPAN's officers and employees will not be compensated for
their time and effort.  In no event, however, shall ST. JOHN be required to take
any action if it deems it inadvisable to do so and SJ JAPAN shall have no right
to take any action with respect to the Licensed Trademarks without ST. JOHN's
prior written approval.  ST. JOHN shall have full control over any action taken,
including without limitation, the right to select counsel, to settle on any
terms it deems advisable in its discretion, to appeal any adverse decision
rendered in any court, to discontinue any action taken by it, and otherwise to
make any decision in respect thereto as it in its discretion deems advisable.
If SJ JAPAN desires to retain its own counsel, it shall do so at its own
expense.  Any recovery as a result of such action shall belong solely to ST.
JOHN.

          4.4  Infringement Claims of Third Parties.  In the event that any
               ------------------------------------                        
infringement suit or any claim of infringement involving the Licensed Trademarks
in connection with the sale or distribution of the Products in the Territory
pursuant to and

                                     II-7
<PAGE>
 
in accordance with the terms of this Agreement is instituted by a third party
against SJ JAPAN, SJ JAPAN shall give immediate notice of such suit or claim to
ST. JOHN and ST. JOHN shall defend or settle such suit or claim at its own
expense and SJ JAPAN shall offer reasonable cooperation to ST. JOHN in all
aspects of any such suit or claim.  ST. JOHN reserves the right to control the
defense of any such suit or claim, including, without limitation, the right to
choose counsel and to settle and dispose of any such suit or claim as it deems
appropriate in its sole discretion.

          4.5  Insurance.  Before selling or shipping any Products, SJ JAPAN
               ---------                                                    
shall procure and maintain at its own expense in full force and effect at all
times during which Products are being sold, with a reputable insurance carrier
acceptable to ST. JOHN, a liability insurance policy sufficient in the opinion
of ST. JOHN to protect and insure ST. JOHN and SJ JAPAN against any claims or
liabilities with which it or they may be charged because of personal or property
damage or injuries suffered by any person or entity, resulting from the Products
or the use or sale thereof, whether during the term of this Agreement or
thereafter including, without limitation, product liability coverage with
respect to Products.


                                   ARTICLE 5
                                   ---------
                              ORDERS FOR PRODUCTS
                              -------------------

          5.1  Master Purchase Orders.  SJ JAPAN shall submit master purchase
               ----------------------                                        
orders for Products to ST. JOHN twice each calendar year, prior to the Fall
Season and prior to the Spring Cruise Season.  SJ JAPAN shall ensure that its
master purchase orders are received by ST. JOHN no later than thirty (30) days
after SJ JAPAN's receipt from ST. JOHN of samples of Products for such Fall
Season or Spring Cruise Season, as the case may be.

          5.2  Other Purchase Orders.  SJ JAPAN may also submit individual
               ---------------------                                      
purchase orders for Products to ST. JOHN from time to time.  SJ JAPAN shall
ensure that such individual purchase orders are received by ST. JOHN at least
sixty (60) days prior to the delivery dates requested in the order.

          5.3  Terms of Purchase Orders.  Each purchase order submitted by SJ
               ------------------------                                      
JAPAN under Sections 5.1 and 5.2 above shall be in writing sent by mail,
facsimile, telex, telegram or cable, which shall set forth the information
specified below, as well as such other information as ST. JOHN may reasonably
request in the format specified by ST. JOHN from time to time:

     (a)  An identification of the Products ordered, including line name and
          product numbers,

     (b)  Quantity,

                                     II-8
<PAGE>
 
     (c)  Delivery schedule, identifying desired delivery dates, and

     (d)  Shipping instructions and shipping addresses.

          5.4  Acceptance of Orders.  All purchase orders are subject to
               --------------------                                     
acceptance in writing by ST. JOHN at its principal offices in Irvine,
California, which acceptance shall be delivered by mail to a regularly
established post office, by facsimile, or by telex, telegram or cable through a
regularly established agency of a commercial telex, telegram or cable company.
Each such purchase order shall be deemed to be an offer by SJ JAPAN to purchase
the Products pursuant to the terms of this Agreement and, when accepted by ST.
JOHN as hereinabove provided, shall give rise to a contract under the terms set
forth herein to the exclusion of any additional or contrary terms set forth in
such purchase order.  ST. JOHN shall deliver to SJ JAPAN its acceptance, if
forthcoming, of any purchase order within two (2) weeks of ST. JOHN's receipt of
such purchase order.

          5.5  Modification of Orders.  No accepted purchase order shall be
               ----------------------                                      
modified or cancelled except upon the written agreement of both parties.  SJ
JAPAN's purchase orders or mutually agreed change orders shall be subject to all
provisions of this Agreement, whether or not the purchase order or change order
so states.

          5.6  Delivery Terms.  (a)  All deliveries of the Products shall be
               --------------                                               
Free Carrier at or near ST. JOHN's manufacturing or warehouse facility.  Unless
otherwise provided in this Agreement, "Free Carrier" shall be construed in
accordance with INCOTERMS 1990 of the International Chamber of Commerce.  All
risk of damage to or loss or delay of the Products shall pass to SJ JAPAN upon
their delivery at the Free Carrier delivery point to (a) a common carrier or (b)
an agent or any other person specified by SJ JAPAN acting on behalf of SJ JAPAN.

          (b)  SJ JAPAN shall insure each shipment of Products with a reputable
insurer for the full invoice of such shipment.  Such insurance shall provide for
full coverage from the time the Products are delivered at the Free Carrier point
until SJ JAPAN shall have paid ST. JOHN for such Products in full.  ST. JOHN
reserves all rights with respect to delivered Products permitted by law
including, without limitation, the rights of rescission, repossession, resale,
and stoppage in transit until the full amount due from SJ JAPAN in respect of
all delivered Products has been paid.

          (c)  ST. JOHN shall use reasonable commercial efforts to deliver
accepted orders in accordance with requested delivery dates.

          5.7  Product Changes.  ST. JOHN reserves the right, in its sole
               ---------------                                           
discretion and without incurring any liability to SJ JAPAN, to:

          (a)  Alter any Product;

                                     II-9
<PAGE>
 
          (b)  Discontinue or cancel the manufacture of any Product, whether or
               not such Product has been announced publicly; or

          (c)  Commence the development, manufacture, marketing or sale of new
               products having features which make any Product wholly or
               partially obsolete.

Notwithstanding the above, ST. JOHN shall use its best efforts to provide SJ
JAPAN with prompt written notice of such decisions and shall use reasonable
commercial efforts to fill all accepted purchase orders from SJ JAPAN for any
altered or discontinued Products of which manufacturing and commercial
deliveries have commenced.


                                   ARTICLE 6
                                   ---------
                              PRICES AND PAYMENTS
                              -------------------

          6.1  Prices.  The prices to be paid by SJ JAPAN for Products purchased
               ------                                                           
pursuant to this Agreement shall be the Distributor List Prices in effect at the
time of acceptance of the relevant purchase order submitted by SJ JAPAN, except
as provided in Section 6.2 below.  The difference between the Distributor List
Prices and the prices SJ JAPAN sells Products to its customers shall be SJ
JAPAN's sole remuneration for distribution of the Products.  All Distributor
List Prices are Free Carrier ST. JOHN's manufacturing or warehouse facility and
include packing in accordance with ST. JOHN's standard commercial export
practices in effect at the time of shipment.  Special packing or handling shall
be at the sole expense of SJ JAPAN.

          6.2  Price Increases, Decreases.  ST. JOHN may, at any time during the
               --------------------------                                       
term of this Agreement, increase its prices for the Products by providing SJ
JAPAN with at least sixty (60) days prior written notice.  Increased prices for
all Products shall not apply to purchase orders accepted prior to the effective
date of the price increase unless such orders provide for delivery, and delivery
is in fact made, more than one-hundred and eighty (180) days after the date of
acceptance of the order.  Price decreases with respect to all Products shall be
effective immediately upon written notice to SJ JAPAN on all such Products not
yet delivered.

          6.3  Payment Terms.  All payments hereunder shall be due net ninety
               -------------                                                 
(90) days from the date of shipment of the Products, payable to the bank or
banks specified by ST. JOHN in writing from time to time.  All payments
hereunder shall be made in U.S. dollars or such other currency as may be
mutually agreed upon.  ST. JOHN shall not be obligated to ship Products against
accepted orders in the event ST. JOHN's outstanding accounts receivable from SJ
JAPAN then exceed or would after any such shipment exceed two million dollars
($2,000,000) or such other amount as may be mutually agreed upon from time to
time by ST. JOHN and SJ JAPAN.  In the event of any dispute arising over any
part of an invoice or the total amount due under an invoice, all undisputed
amounts shall be promptly paid by SJ JAPAN in accordance with this

                                     II-10
<PAGE>
 
Section 6.3.  ST. JOHN shall have the right at any time to require SJ JAPAN to
make any payments hereunder by irrevocable, transferrable and divisible letter
of credit opened at SJ JAPAN's expense, issued or confirmed by a bank specified
by, or acceptable to, ST. JOHN, cash in advance, or such other method of secured
payment as ST. JOHN shall prescribe.

          6.4  Resale Prices.  SJ JAPAN may resell Products at such prices as SJ
               -------------                                                    
JAPAN, in its sole discretion, shall determine.  For purposes of providing ST.
JOHN with relevant market information, SJ JAPAN shall provide ST. JOHN with a
list of its initial sales prices for the Products to be charged to its customers
and SJ JAPAN shall keep ST. JOHN fully informed by providing ST. JOHN with any
new list sales prices within ten (10) days of any change in such sales prices.
Nothing in this Agreement shall be deemed to obligate SJ JAPAN to control and SJ
JAPAN shall not undertake to control the price at which its customers may sell
the Products.

          6.5  Overdue Payments.  If and for so long as any payment from SJ
               ----------------                                            
JAPAN to ST. JOHN under this Agreement shall be overdue, interest shall accrue
on such payment at the rate equal to the lesser of: (i) the prime rate being
charged in Los Angeles, California by Bank of America National Trust & Savings
Association as of the close of business on the date the payment first becomes
due plus one and one-half percent (1.5%), or (ii) the maximum rate permitted by
applicable law.


                                   ARTICLE 7
                                   ---------
                            ACCEPTANCE AND WARRANTY
                            -----------------------

          7.1  Acceptance of Products.  In the event of any shortage, damage or
               ----------------------                                          
discrepancy in or to a shipment of Products, SJ JAPAN shall promptly report the
same to ST. JOHN and furnish such written evidence or other documentation as ST.
JOHN may deem appropriate.  ST. JOHN shall not be liable for any such shortage,
damage or discrepancy unless ST. JOHN has received notice and substantiating
evidence thereof from SJ JAPAN within thirty (30) days of arrival of the
Products at SJ JAPAN's shipping address in the Territory.  If the substantiating
evidence delivered by SJ JAPAN demonstrates to ST. JOHN's satisfaction that ST.
JOHN is responsible for such shortage, damage or discrepancy, ST. JOHN shall
promptly deliver additional or substitute Products or parts of Products, as ST.
JOHN may deem sufficient, to SJ JAPAN in accordance with the delivery procedures
set forth herein, and ST. JOHN shall bear any reasonable shipping costs incurred
in the return of any such Products as ST. JOHN directs SJ JAPAN to return and in
ST. JOHN's shipment of such additional or substitute Products; provided that in
no event shall ST. JOHN be liable for any additional costs, expenses or damages
incurred by SJ JAPAN directly or indirectly as a result of such shortage, damage
or discrepancy in or to a shipment.

          7.2  Product Warranty.  ST. JOHN warrants for a period of sixty (60)
               ----------------                                               
days after the date of delivery in accordance with Section 5.6 hereof that the
Products

                                     II-11
<PAGE>
 
shall be free from defects in material and workmanship.  SJ JAPAN and ST. JOHN
shall discuss in good faith whether any defective Products should be repaired
for resale in the Territory, and any related costs of repair shall be borne by
ST. JOHN.  ST. JOHN's sole obligation in the event of a breach of such warranty
shall be to provide at no charge to SJ JAPAN replacement Products for those
defective Products, and only those defective Products, which the parties
mutually agree shall not be repaired.  All costs of shipment of the replacement
Products to SJ JAPAN shall be borne by ST. JOHN.  SJ JAPAN shall retain all
replaced Products subject to the foregoing warranty for ST. JOHN's inspection
for a period of six (6) months after their replacement.  All such replaced
Products shall become the property of ST. JOHN upon their replacement and SJ
JAPAN shall (i) if so directed by ST. JOHN and upon the terms dictated by ST.
JOHN in its sole discretion, sell all or any portion of such replaced Products
in the Territory as "second" or as "irregular" items, and (ii) return or destroy
any such replaced Products as ST. JOHN shall so request, provided, that ST. JOHN
shall bear any related shipping costs for the return of such Products.  In any
event, SJ JAPAN shall not affix any Licensed Trademark to any Product if it is
to be sold as a "second" or as an "irregular" and shall remove the Licensed
Trademarks from any Product to be sold as a "second" or as an "irregular."

          7.3  Excluded Claims.  ST. JOHN shall have no obligation under Section
               ---------------                                                  
7.2 above in the event that replacement of Products shall have been necessitated
in whole or in part by Force Majeure as defined in Section 13.1 hereof, or by
the fault or negligence of SJ JAPAN.

          7.4  Limited Warranty.  THE WARRANTIES SET FORTH IN THIS ARTICLE 7 ARE
               ----------------                                                 
INTENDED SOLELY FOR THE BENEFIT OF SJ JAPAN.  ALL CLAIMS HEREUNDER SHALL BE MADE
BY SJ JAPAN AND MAY NOT BE MADE BY SJ JAPAN'S CUSTOMERS.  THE WARRANTIES SET
FORTH ABOVE ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WHICH ARE
HEREBY DISCLAIMED AND EXCLUDED BY ST. JOHN, INCLUDING WITHOUT LIMITATION ANY
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE AND ALL
OBLIGATIONS OR LIABILITIES ON THE PART OF ST. JOHN FOR DAMAGES ARISING OUT OF OR
IN CONNECTION WITH THE USE OF THE PRODUCTS.


                                   ARTICLE 8
                                   ---------
                             LIMITATION OF REMEDIES
                             ----------------------

SJ JAPAN UNDERSTANDS AND AGREES AS FOLLOWS:

          8.1  Delay.  ST. JOHN SHALL NOT BE LIABLE FOR ANY LOSS OR DAMAGE
               -----                                                      
CAUSED BY DELAY IN FURNISHING PRODUCTS AND SERVICES OR ANY OTHER PERFORMANCE
UNDER OR PURSUANT TO THIS AGREEMENT.

                                     II-12
<PAGE>
 
          8.2  Sole Remedies.  EXCEPT AS SPECIFICALLY STATED OTHERWISE HEREIN,
               -------------                                                  
THE SOLE AND EXCLUSIVE REMEDIES FOR BREACH OF ANY AND ALL WARRANTIES AND THE
SOLE REMEDIES FOR ST. JOHN's LIABILITY OF ANY KIND (INCLUDING LIABILITY FOR
NEGLIGENCE) WITH RESPECT TO THE PRODUCTS AND SERVICES COVERED BY THIS AGREEMENT
AND ALL OTHER PERFORMANCE BY ST. JOHN UNDER OR PURSUANT TO THIS AGREEMENT SHALL
BE LIMITED TO THE REMEDIES PROVIDED IN SECTION 7.2, PRODUCT WARRANTY.

          8.3  Consequential Damages.  IN NO EVENT SHALL ST. JOHN's LIABILITY OF
               ---------------------                                            
ANY KIND INCLUDE ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSSES OR
DAMAGES, EVEN IF ST. JOHN SHALL HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH
POTENTIAL LOSS OR DAMAGE.


                                   ARTICLE 9
                                   ---------
                                CONFIDENTIALITY
                                ---------------

          SJ JAPAN acknowledges and agrees that all ST. JOHN Information is
confidential and proprietary to ST. JOHN.  SJ JAPAN agrees not to use any of
such ST. JOHN Information during the term of this Agreement and for a period of
five (5) years thereafter for any purpose other than as permitted or required
for performance by SJ JAPAN hereunder.  SJ JAPAN further agrees not to disclose
or provide any of such ST. JOHN Information to any third party and to take all
necessary measures to prevent any such disclosure by its employees, agents,
contractors or consultants during the term hereof and for a period of five (5)
years thereafter.  Nothing herein shall prevent SJ JAPAN from using, disclosing
or authorizing the disclosure of any ST. JOHN Information which (i) is, or
hereafter becomes, through no fault of SJ JAPAN, part of the public domain, (ii)
is disclosed orally and is not identified as confidential information either at
the time of disclosure or by written notice sent to SJ JAPAN within ten (10)
business days after disclosure thereof, or (iii) is required to be disclosed by
any governmental authority or otherwise under applicable law.

          ST. JOHN acknowledges and agrees that all SJ JAPAN Information is
confidential and proprietary to SJ JAPAN.  ST. JOHN agrees not to use any of
such SJ JAPAN Information during the term of this Agreement for any purpose
other than as permitted or required for performance by ST. JOHN hereunder.  ST.
JOHN further agrees not to disclose or provide any of such SJ JAPAN Information
to any third party and to take all necessary measures to prevent any such
disclosure by its employees, agents, contractors or consultants during the term
hereof.  Nothing herein shall prevent ST. JOHN from using, disclosing or
authorizing the disclosure of any SJ JAPAN Information which (i) is, or
hereafter becomes, through no fault of ST. JOHN, part of the public domain, (ii)
is disclosed orally and is not identified as confidential information either at
the time of disclosure or by written notice sent to ST. JOHN within ten (10)

                                     II-13
<PAGE>
 
business days after disclosure thereof, or (iii) is required to be disclosed by
any governmental authority or otherwise under applicable law.


                                   ARTICLE 10
                                   ----------
                             TRADEMARKS; COPYRIGHT
                             ---------------------

          10.1 Exploitation of Rights.  SJ JAPAN shall use its best efforts to
               ----------------------                                         
exploit the rights herein granted throughout the Territory consistent with the
high standards and prestige represented by the Licensed Trademarks.

          10.2 Disputes Among Licensees.  Any dispute between SJ JAPAN and any
               ------------------------                                       
other licensee of ST. JOHN with respect to the scope of the license rights
covered by their respective license agreements shall be resolved by ST. JOHN and
ST. JOHN's resolution of such dispute shall be final and binding.

          10.3 Exclusive License.  ST. JOHN hereby covenants not to grant to any
               -----------------                                                
person or entity other than SJ JAPAN a license to use the Licensed Trademarks in
the Territory in connection with the distribution and sale of women's apparel or
women's accessories which are both manufactured and distributed by ST. JOHN for
retail sale in the United States of America.  ST. JOHN shall indemnify, save and
hold harmless SJ JAPAN for any losses or damages incurred by SJ JAPAN (including
reasonable attorney's fees) as a result of such breach; provided, that in no
event shall ST. JOHN bear any liability to SJ JAPAN for the use of the Licensed
Trademarks in connection with the importation of Products into the Territory by
third parties without the approval or authorization of ST. JOHN.

          10.4 Ownership.  SJ JAPAN acknowledges and agrees that SJ JAPAN shall
               ---------                                                       
acquire no ownership rights to any of the Licensed Trademarks by virtue of this
Agreement or otherwise and that all uses by SJ JAPAN of the Licensed Trademarks
and any and all goodwill related thereto shall inure to the benefit of ST. JOHN.
SJ JAPAN shall not, at any time, do or suffer to be done any act or thing which
may in any way adversely affect the validity of any Licensed Trademark, any
rights of ST. JOHN in and to any Licensed Trademark or any registrations thereof
or which, directly or indirectly, may reduce the value of the Licensed Trademark
or detract from its reputation.  SJ JAPAN shall not, during the term of this
Agreement or at any time thereafter, directly or indirectly, contest or aid
others in contesting the ownership of the Licensed Trademarks or the validity of
said trademarks, including registering or applying to register any of the
Licensed Trademarks or any trademarks or logos similar thereto anywhere in the
world.  At ST. JOHN's request during the term or thereafter, SJ JAPAN shall
execute any and all documents reasonably required by ST. JOHN to confirm ST.
JOHN's ownership of all rights in and to the Licensed Trademarks and the
respective rights of ST. JOHN and SJ JAPAN pursuant to this Agreement.  SJ JAPAN
shall cooperate with ST. JOHN in connection with the filing and prosecution by
ST. JOHN of applications in ST. JOHN's name to register the Licensed Trademarks
for Products and

                                     II-14
<PAGE>
 
the maintenance and renewal of such registrations as may issue.  SJ JAPAN hereby
irrevocably appoints ST. JOHN as its attorney-in-fact for the purpose of
executing any and all such documents referred to in this Section 10.4.

          10.5 Use of Name.  Except as otherwise permitted by ST. JOHN, SJ JAPAN
               -----------                                                      
shall not use the Licensed Trademarks, in whole or in part, as a corporate name
or trade name. Except as otherwise permitted by ST. JOHN, SJ JAPAN shall not
join any name or names with the Licensed Trademarks so as to form a new mark or
for any other purpose or use.  SJ JAPAN shall not use any name or names in
connection with the Licensed Trademarks in advertising, publicity, labeling,
packaging or printed matter of any kind utilized by SJ JAPAN in connection with
Products, unless and until ST. JOHN consents thereto in writing.

          10.6 Compliance With Law; Markings.  SJ JAPAN shall use the Licensed
               -----------------------------                                  
Trademarks in the Territory strictly in compliance with the legal requirements
obtaining therein and shall use such markings in connection therewith as may be
required by applicable legal provisions.  SJ JAPAN shall use and display the
Licensed Trademarks only in such form and manner as are specifically approved in
writing by ST. JOHN.  SJ JAPAN shall cause to appear such legends, markings and
notices as ST. JOHN may request, including, without limitation, the appropriate
trademark or service mark notice, either "TM", "SM", or (R) as may be reasonably
necessary in order to give appropriate notice of any trademark, service mark or
other rights therein or pertaining thereto.

          10.7 Copyright.  Any copyright which may be created in any materials
               ---------                                                      
provided by ST. JOHN hereunder including, without limitation, any sketch,
design, packaging, label, tag or the like designed or approved by ST. JOHN shall
be the property of ST. JOHN.  SJ JAPAN shall not, at any time, do or suffer to
be done any act or thing which may adversely affect any rights of ST. JOHN in
such sketches, designs, packaging, labels, tags and the like, including, without
limitation, disclosing such information or filing any application in SJ JAPAN's
name to record any claims to copyrights in Products, and SJ JAPAN shall do all
things reasonably required by ST. JOHN to preserve and protect said rights,
including, without limitation, placing the copyright notice on all Products and
the packaging, labels and tags therefor.



                                   ARTICLE 11
                                   ----------
                           TAXES; IMPORT OF PRODUCTS
                           -------------------------

          11.1 Taxes.  All payments to be made by SJ JAPAN to ST. JOHN pursuant
               -----                                                           
to this Agreement represent net amounts ST. JOHN is entitled to receive, shall
not be subject to any deductions for any reason whatsoever, and are net of taxes
(including Japanese withholding tax) and customs duties.  In the event any of
said payments become subject to taxes (including without limitation, sales,
Japanese withholding, value-added and similar taxes), duties, assessments or
fees of whatever kind

                                     II-15
<PAGE>
 
or nature levied outside the United States, said payments shall be increased to
such an extent as to allow ST. JOHN to receive the net amounts due under this
Agreement.

          11.2 Import Documentation.  SJ JAPAN shall be responsible for
               --------------------                                    
obtaining all licenses and permits and for satisfying all formalities as may be
required to import Products into the Territory in accordance with then
prevailing law or regulations.


                                   ARTICLE 12
                                   ----------
                              TERM AND TERMINATION
                              --------------------

          12.1 Term.  This Agreement shall take effect as of the date first
               ----                                                        
above written and shall continue in force for a period of ten (10) years.
Thereafter, this Agreement shall terminate unless renewed by mutual agreement of
the parties hereto.

          12.2 Termination.  Notwithstanding the provisions of Section 12.1
               -----------                                                 
above, this Agreement may be terminated in accordance with the following
provisions:

     (a)  Either party hereto may terminate this Agreement at any time by giving
          notice in writing to the other party, which notice shall be effective
          upon dispatch, should the other party file a petition of any type as
          to its bankruptcy, be declared bankrupt, become insolvent, make an
          assignment or other arrangement for the benefit of its creditors, have
          all or a substantial portion of its capital stock or assets
          expropriated by any government, be dissolved or liquidated, except in
          consequence of a merger, amalgamation or other corporate
          reorganization to which it may be a party.

     (b)  Either party may terminate this Agreement by giving notice in writing
          to the other party should an event of Force Majeure continue for more
          than ninety (90) days as provided in Section 13.5 below.

     (c)  Either party may terminate this Agreement by giving notice in writing
          to the other party in the event the other party is in material breach
          of this Agreement and shall have failed to cure such breach within
          thirty (30) days of receipt of written notice thereof from the first
          party.  During said thirty (30) day period, the parties shall
          negotiate in good faith in an attempt to reach mutual agreement on a
          method to avoid such termination.  The said notice shall specifically
          state the breach which the party giving the notice believes is
          material.

     (d)  Either party may terminate this Agreement upon giving notice in
          writing to the other party in the event of termination of that certain
          Joint Venture Agreement, dated July 17, 1997, between ST. JOHN and
          Commercial Development Co., Ltd.

                                     II-16
<PAGE>
 
          12.3  Rights and Obligations on Termination.  In the event of
                -------------------------------------                  
termination of this Agreement for any reason, the parties shall have the
following rights and obligations;

     (a)  Termination of this Agreement shall not release either party from the
          obligation to make payment of all amounts then or thereafter due and
          payable.

     (b)  ST. JOHN shall have the right, at its option, to (i) cancel any
          accepted purchase order which provides for delivery after the
          effective date of termination, and/or (ii) repurchase all or any part
          of SJ JAPAN's inventory of Products in SJ JAPAN's possession as of the
          termination date at ST. JOHN's invoiced price to SJ JAPAN for such
          Products, less depreciation calculated on a thirty-six (36) month,
          straight-line basis and less any appropriate amount for excessive wear
          and tear, plus freight to the original Free Carrier shipping point.
          ST. JOHN shall exercise its option under this subsection by notifying
          SJ JAPAN in writing no later than thirty (30) days after the effective
          termination date.

     (c)  SJ JAPAN's obligations pursuant to Article 9 hereof shall survive
          termination of this Agreement.

     (d)  Within thirty (30) days of the effective date of termination of this
          Agreement, SJ JAPAN shall furnish ST. JOHN with a list of all SJ
          JAPAN's customers and the place of destination of all Products sold
          which are still covered by a ST. JOHN warranty.  In addition, SJ JAPAN
          agrees to furnish ST. JOHN with complete information as to calls or
          the status of any negotiations for the sale of the Products.

          12.4 No Compensation.  In the event either party terminates this
               ---------------                                            
Agreement for any reason in accordance with the terms hereof, the parties hereby
agree that, subject to the provisions of Section 12.3(a) hereof and without
prejudice to any other remedies which either party may have in respect of any
breach of this Agreement, neither party shall be entitled to any compensation or
like payment from the other as a result of such termination.

          12.5 Injunctive Relief.  Notwithstanding any expiration or termination
               -----------------                                                
in accordance with Sections 12.1 or 12.2 above, ST. JOHN shall have and hereby
reserves all rights and remedies which it has, or which are granted to it by
operation of law or in equity, to enjoin the unlawful or unauthorized use of the
Licensed Trademarks (any of which injunctive relief may be sought in the courts,
and also may be sought, prior to or in lieu of termination) and to be
compensated for damages for breach of this Agreement.  In addition, nothing
herein shall be deemed to prevent a party from bringing an action for damages
either prior to or in lieu of termination if a default in performance by the
other party occurs and is not cured timely in accordance with the provisions of
Section

                                     II-17
<PAGE>
 
12.2 above.  The parties acknowledge that SJ JAPAN's unauthorized use of the
Licensed Trademarks will give rise to irreparable injury to ST. JOHN,
inadequately compensable in damages.  Accordingly, in addition to any other
remedies which may be available to ST. JOHN at law or in equity, ST. JOHN shall
be entitled to preliminary and permanent injunctive relief against such breach
or threatened breach without the necessity of proving actual damages or that
monetary damages would be inadequate.

          12.6 Reversion of Rights; Return of Materials.  On the expiration or
               ----------------------------------------                       
termination of this Agreement, all of the rights of SJ JAPAN under this
Agreement shall terminate forthwith and shall revert immediately to ST. JOHN and
SJ JAPAN shall discontinue forthwith all use of the Licensed Trademarks, no
longer shall have the right to use the Licensed Trademarks or any variation or
simulation thereof and promptly shall transfer to ST. JOHN, free of charge, all
registrations, filings and rights with regard to the Licensed Trademarks which
it may have possessed at any time.  In addition, SJ JAPAN thereupon shall
deliver to ST. JOHN, free of charge, all sketches and other material in its
possession which were designed or approved by ST. JOHN or any other materials or
copies of materials obtained by SJ JAPAN from ST. JOHN and all labels, tags and
other material in its possession with any Licensed Trademark thereon.  After the
expiration or termination of this Agreement, SJ JAPAN shall not use or permit
others to use any of said sketches and other material, or any variations or
simulations thereof, in connection with Products or any other merchandise.


                                   ARTICLE 13
                                   ----------
                                 FORCE MAJEURE
                                 -------------

          13.1 Definition.  Force Majeure shall mean any event or condition, not
               ----------                                                       
existing as of the date of signature of this Agreement, not reasonably
foreseeable as of such date and not reasonably within the control of either
party, which prevents in whole or in material part the performance by one of the
parties of its obligations hereunder or which renders the performance of such
obligations so difficult or costly as to make such performance commercially
unreasonable.  Without limiting the foregoing, the following shall constitute
events or conditions of Force Majeure:  acts of State or governmental action,
riots, disturbance, war, strikes, lockouts, slowdowns, prolonged shortage of
energy suppliers, epidemics, fire, flood, hurricane, typhoon, earthquake,
lightning and explosion.  It is in particular expressly agreed that any refusal
or failure of any governmental authority to grant any export license legally
required for the fulfillment by ST. JOHN of its obligations hereunder shall
constitute an event of Force Majeure.

          13.2 Notice.  Upon giving notice to the other party, a party affected
               ------                                                          
by an event of Force Majeure shall be released without any liability on its part
from the performance of its obligations under this Agreement, except for the
obligation to pay any amounts due and owing hereunder, but only to the extent
and only for the period that its performance of such obligations is prevented by
the event of Force Majeure.  Such notice shall include a description of the
nature of the event of Force Majeure, and its

                                     II-18
<PAGE>
 
cause and possible consequences.  The party claiming Force Majeure shall
promptly notify the other party of the termination of such event.

          13.3 Confirmation.  The party invoking Force Majeure shall provide to
               ------------                                                    
the other party confirmation of the existence of the circumstances constituting
Force Majeure.  Such evidence may consist of a statement or certificate of an
appropriate governmental department or agency where available, or a statement
describing in detail the facts claimed to constitute Force Majeure.

          13.4 Suspension of Performance.  During the period that the
               -------------------------                             
performance by one of the parties of its obligations under this Agreement has
been suspended by reason of an event of Force Majeure, the other party may
likewise suspend the performance of all or part of its obligations hereunder to
the extent that such suspension is commercially reasonable.

          13.5 Termination.  Should the period of Force Majeure continue for
               -----------                                                  
more than ninety (90) consecutive days, either party may terminate this
Agreement without liability to the other party, except for payments due to such
date, upon giving written notice to the other party.

                                   ARTICLE 14
                                   ----------
                         REPRESENTATIONS AND WARRANTIES
                         ------------------------------

          14.1 ST. JOHN.  ST. JOHN represents and warrants (i) that it has full
               --------                                                        
right, power and authority to enter into this Agreement and to perform all of
its obligations hereunder, and (ii) that to its knowledge utilization of the
Licensed Trademarks pursuant to and consistent with the terms of this Agreement
will not constitute an infringement of the rights of any third party.  The
foregoing warranty and Section 7.2 constitute the entire warranty of ST. JOHN
and ST. JOHN makes no other warranty of any kind, either express or implied.

          14.2 SJ JAPAN.  SJ JAPAN represents and warrants that it has full
               --------                                                    
right, power and authority to enter into this Agreement and to perform all of
its obligations hereunder.


                                   ARTICLE 15
                                   ----------
                          JURISDICTION; INTERPRETATION
                          ----------------------------

          15.1 Disputes.  The sole jurisdiction and venue for any court action
               --------                                                       
arising out of this Agreement shall be an appropriate federal or state court in
Orange County, California.  Each of ST. JOHN and SJ JAPAN hereby irrevocably
submits to the jurisdiction of any of said courts in any court action and hereby
waives any claim or defense of inconvenient forum.  Each of ST. JOHN and SJ
JAPAN represents and warrants that it is not entitled to immunity from judicial
proceedings and agrees that,

                                     II-19
<PAGE>
 
should the other bring any court action, it will not claim any immunity from
such proceedings for itself or with respect to its property.  Notwithstanding
the foregoing, the parties acknowledge and agree that ST. JOHN shall have the
right, at any time, to seek injunctive relief in any court in the Territory to
enjoin any unlawful or unauthorized use of the Licensed Trademarks by SJ JAPAN.

     In the event of any action for the breach of this Agreement or other cause
by any Party, the prevailing Party shall be entitled to reasonable attorney's
fees, costs and expenses incurred in such action.

          15.2 Governing Law.  The validity, construction and performance of
               -------------                                                
this Agreement shall be governed by and interpreted in accordance with the laws
of California, excluding its choice of law provisions.

          15.3 Governing Language.  This Agreement is executed in the English
               ------------------                                            
language which shall be the controlling language and no translation or
restatement of the terms and conditions hereof in any other language will have
any effect in the interpretation or application thereof.  In case of any
conflict between the English version and any translated version of this
Agreement, the English version shall govern.

          15.4 Effect of Headings.  The headings to Articles and Sections of
               ------------------                                           
this Agreement, excepting those in Article 1 hereof, are to facilitate reference
only, do not form a part of this Agreement, and shall not in any way affect the
interpretation hereof.

          15.5 Non-Waiver.  The waiver, express or implied, by any of the
               ----------                                                
parties hereto of any right hereunder or of any failure to perform or breach
hereof by the other party shall not constitute or be deemed a waiver of any
other right hereunder or of any other failure to perform or breach hereof by
such other party(s), whether of a similar or dissimilar nature thereto.

                                     II-20
<PAGE>
 
                                   ARTICLE 16
                                   ----------
                                 MISCELLANEOUS
                                 -------------


          16.1  Assignment.  Subject to Section 2.2 above, neither party shall
                ----------                                                    
have the right to assign or otherwise transfer its rights and obligations under
this Agreement, except with the prior written consent of the other party;
provided, however, ST. JOHN shall be entitled to assign any or all of its rights
and obligations hereunder to any of its subsidiaries, provided that ST. JOHN
shall remain fully liable for the performance of all its obligations hereunder;
provided further, that a successor in interest by merger, by operation of law,
assignment, purchase or otherwise of the entire business of either party shall
acquire all rights and obligations of such party hereunder.  Any prohibited
assignment shall be null and void.  Any permitted assignment shall be subject to
and conditioned on the issuance of any governmental validations, authorizations,
licenses or rulings then required under applicable law in connection with such
assignment.

          16.2  Relationship.  This Agreement does not make either party the
                ------------                                                
employee, agent or legal representative of the other for any purpose whatsoever.
Neither party is granted any right or authority to assume or to create any
obligation or responsibility, express or implied, on behalf of or in the name of
the other party.  In fulfilling its obligations pursuant to this Agreement each
party shall be acting as an independent contractor.

          16.3  Notices.  All reports, approvals, requests, demands and notices
                -------                                                        
required or permitted by this Agreement to be given to a party shall be valid
and sufficient if dispatched by registered mail, postage prepaid, in any post
office in the United States or Japan, as the case may be, or by facsimile
transmission, to the addresses first above written or such other addresses or
facsimile numbers as the respective parties may designate by like notice from
time to time.  Any notice given as herein provided shall be considered to have
been received fifteen (15) days after the mailing thereof, or if by facsimile
transmission, the next business day of the country in which the recipient is
located.

          16.4  ENTIRE AGREEMENT.  THIS AGREEMENT, INCLUDING THE SCHEDULES
                ----------------                                          
HERETO AND INCORPORATED AS AN INTEGRAL PART OF THIS AGREEMENT, CONSTITUTES THE
ENTIRE AGREEMENT OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND
SUPERSEDES ALL PREVIOUS LICENSE AND/OR DISTRIBUTORSHIP AGREEMENTS BY AND BETWEEN
ST. JOHN AND SJ JAPAN AS WELL AS ALL PROPOSALS, ORAL OR WRITTEN, AND ALL
NEGOTIATIONS, CONVERSATIONS OR DISCUSSIONS HERETOFORE HAD BETWEEN THE PARTIES
RELATED TO THIS AGREEMENT.  SJ JAPAN ACKNOWLEDGES THAT IT HAS NOT BEEN INDUCED
TO ENTER INTO THIS AGREEMENT BY ANY REPRESENTATIONS OR STATEMENTS, ORAL OR
WRITTEN, NOT EXPRESSLY CONTAINED HEREIN.

                                     II-21
<PAGE>
 
          16.5  Amendment.  This Agreement shall not be deemed or construed to
                ---------                                                     
be modified, amended, rescinded, cancelled or waived, in whole or in part,
except by written amendment signed by the parties hereto.

          16.6  Publicity.  This Agreement is confidential and no party shall
                ---------                                                    
issue press releases or engage in other types of publicity of any nature dealing
with the commercial and legal details of this Agreement without the other
party's prior written approval, which approval shall not be unreasonably
withheld.  However, approval of such disclosure shall be deemed to be given to
the extent such disclosure is required to comply with governmental rules,
regulations or other governmental requirements.  In such event, the publishing
party shall furnish a copy of such disclosure to the other party.

          16.7  Severability.  In the event that any of the terms of this
                ------------                                             
Agreement are in conflict with any rule of law or statutory provision or are
otherwise unenforceable under the laws or regulations of any government or
subdivision thereof, such terms shall be deemed stricken from this Agreement,
but such invalidity or unenforceability shall not invalidate any of the other
terms of this Agreement and this Agreement shall continue in force, unless the
invalidity or unenforceability of any such provisions hereof does substantial
violence to, or where the invalid or unenforceable provisions comprise an
integral part of, or are otherwise inseparable from, the remainder of this
Agreement.

          16.8  Counterparts.  This Agreement may be executed in counterparts,
                ------------                                                  
each of which shall be deemed an original, but both of which together shall
constitute one and the same instrument.

                                 * * * * * * *

                                     II-22
<PAGE>
 
   IN WITNESS WHEREOF, The parties have caused this Agreement to be executed on
                         the date first above written.


ST. JOHN KNITS, INC.                ST. JOHN CO., LTD.


By:________________________         By:________________________
Name:                               Name:
Title:                              Title:

                                     II-23
<PAGE>
 
                                   SCHEDULE A
                                   ----------


                              LICENSED TRADEMARKS


     Marie Gray(R) and Marie Gray by St. John(R), each a registered trademark of
     St. John Knits, Inc.

                                      A-1
<PAGE>
 
                                   SCHEDULE B
                                   ----------


                           U.S. WHOLESALE PRICE LIST

                                      B-1
<PAGE>
 
                                  EXHIBIT III
                                  -----------


                         TRANSITION SERVICES AGREEMENT

          THIS TRANSITION SERVICES AGREEMENT, dated as of July ___, 1997, is by
and among COMMERCIAL DEVELOPMENT CO., LTD., a corporation organized and existing
under the laws of Japan ("CDC"), ST. JOHN CO., LTD., a corporation organized and
existing under the laws of Japan ("SJ Japan"), and ST. JOHN KNITS, INC., a
California corporation ("ST. JOHN").

                                   BACKGROUND
                                   ----------

          (a) CDC and ST. JOHN have entered into a Joint Venture Agreement dated
as of July 17, 1997 (the "Joint Venture Agreement") pursuant to which, among
other matters, ST. JOHN and CDC agreed to jointly form SJ Japan.

          (b) Pursuant to the Joint Venture Agreement, ST. JOHN and SJ Japan
have entered into that certain License and Distribution Agreement, dated as of
July ___, 1997 (the "License and Distribution Agreement"), whereby ST. JOHN has
licensed and appointed SJ Japan to distribute and sell certain Products (as
defined in the License and Distribution Agreement) of ST. JOHN in the Territory
(as defined in the License and Distribution Agreement).

          (c) Prior to the formation of SJ Japan, CDC was engaged in the
distribution and sale of certain ST. JOHN products in Japan, and CDC, SJ Japan
and ST. JOHN recognize that it is advisable for CDC to provide certain
administrative and other services to SJ Japan for a transitional period,
including the uniform transfer of certain sales accounts to SJ Japan and the
sharing of certain property and services.

          (d) The execution of this Agreement is a condition to the consummation
of the transactions contemplated by the Joint Venture Agreement.


                                   AGREEMENT
                                   ---------


          In consideration of the mutual covenants contained herein, and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:

          1.   Services.  During the term of this Agreement, CDC shall provide
               --------                                                       
SJ Japan with certain services of the nature generally described in Schedule A
                                                                    ----------
hereto.  Services that CDC is required to provide to SJ Japan pursuant to this
Agreement are referred to herein as "Services."

                                     III-1
<PAGE>
 
          2.  Product Services.  (a)  As part of the Services, during the term
              ----------------                                                
of this Agreement CDC shall provide the following Services (as more particularly
referred to herein as the "Product Services") to SJ Japan, in each case provided
that the provision of such Product Services is legal under all applicable laws
and regulations:  (i) at SJ Japan's request, import Products for SJ Japan's
account and generally prepare the necessary statutory documents required for the
importation and storage of the Products; (ii) use reasonable efforts to maintain
the facilities and qualified personnel needed to ensure the performance of the
Product Services in full compliance with applicable laws and regulations, (iii)
at SJ Japan's request, use reasonable efforts to secure additional sales
accounts and in-store concessions for the Products for SJ Japan's account; (iv)
at SJ Japan's request, ship the Products to customers in accordance with SJ
Japan's instructions; (v) assist SJ Japan to obtain any licenses, permits or
approvals necessary for SJ Japan to import, sell or distribute Products; and
(vi) provide any other similar services as SJ Japan may reasonably request.

          (b) In consideration of CDC's provision of the Product Services, SJ
Japan agrees to:  (i) take all necessary steps to assume, within the shortest
practicable time, responsibility for providing the Product Services (including
obtaining licenses necessary to import, store and distribute Products and to
establish sales accounts and in-store concessions for Products, in each case, in
SJ Japan's own name and for its own account); (ii) be fully responsible for the
sale of the Products, including to the extent appropriate the determination of
resale prices and terms of payment; (iii) be fully responsible for the
collection of accounts receivable for the sale of Products; and (iv) order
Products from suppliers (including without limitation ST. JOHN).

          (c) CDC and SJ Japan agree to cooperate and use all reasonable efforts
to assign from CDC to SJ Japan those sales accounts and in-store concessions
listed in Schedule B hereto (collectively the "Accounts," and each individual
          ----------                                                         
listing therein an "Account"), and to take all necessary steps and sign all
necessary documents to insure the effective assignment of the Accounts under
applicable laws and regulations.  Such cooperation shall include, without
limitation, conducting joint visits with other parties to the Accounts to insure
the effective assignment thereof and the sharing of any and all customer files
related to the Accounts in the possession of CDC.  Until each Account is
effectively assigned to SJ Japan, SJ Japan and CDC shall use all reasonable
efforts to ensure that the Accounts continue to be performed.

          3.   Term of Services.  (a)  With respect to Services other than
               ----------------                                           
Product Services, CDC shall provide each of the Services for a term commencing
on the date hereof and ending no later than the second anniversary of the date
hereof or, if earlier, (i) thirty (30) days after SJ Japan notifies CDC that it
no longer wishes to receive such Service, or (ii) the termination of this
Agreement as set forth in Section 6 hereof.

          (b) The obligations of the parties contained in Sections 2(a) and (b)
shall continue until the earlier to occur of (i) the termination of this
Agreement pursuant to Section 6 hereof, (ii) the second anniversary of the date
hereof, and (iii) the date on

                                     III-2
<PAGE>
 
which SJ Japan is legally able to assume full responsibility for providing the
Product Services; provided that in the case of clause (iii) above, CDC shall not
                  -------- ----                                                 
unreasonably refuse to extend such term for an additional ninety (90) days if
requested to do so by SJ Japan.  The obligations of the parties contained in
Section 2(c) shall continue until the earlier to occur of (x) the termination of
this Agreement pursuant to Section 6 hereof, (y) the second anniversary of the
date hereof, and (z) the date on which all Accounts covered thereby have been
effectively assigned to SJ Japan or expired in accordance with their terms.

          (c) CDC and its affiliates may suspend the performance of any one or
more of the Services in accordance with Section 4(b).  Upon the termination of a
Service for which the consideration is not separately specified in Schedule A
                                                                   ----------
hereto, CDC and SJ Japan shall in good faith negotiate the consideration to be
paid for the remaining Services on the basis set forth in Section 4 hereto.

          4.   Payment for Services.  (a)  As compensation for the provision of
               --------------------                                            
the Services identified in Schedule A hereto, SJ Japan shall pay to CDC the
                           ----------                                      
costs specified or determined in accordance with Schedule A, subject to the
                                                 ----------                
limitations contained in Section 4(c).  The parties agree that the sole
consideration for CDC's agreement to provide the Product Services under this
Agreement shall be the consideration described in Section 2(b) of this
Agreement.

          (b) CDC shall periodically, but not more frequently than monthly,
submit to SJ Japan for payment statements of amounts due under this Agreement.
The statements shall specify the nature of the Services provided hereto, the
section of such Schedule A pursuant to which such Service was provided, and
                ----------                                                 
shall contain or be followed by such other supporting detail as SJ Japan may
from time to time reasonably request.  Payment of any such statements in whole
or in part shall be conditioned upon the prior approval of ST. JOHN (the
"Approved Amounts" or "Disapproved Amounts," as the case may be), which approval
shall not be unreasonably withheld.  SJ Japan shall pay all Approved Amounts due
pursuant to this Agreement within thirty (30) days after receipt of each such
statement hereunder.  If any Approved Amounts due have not been received by CDC
within such thirty day period, such overdue Approved Amounts shall bear interest
from the date of issuance of such statement until the date paid at the rate of
1.5% over the rate publicly announced by The Sakura Bank, Limited from time to
time in Tokyo, Japan as its "base" or "prime" rate.  In addition to any other
rights available to it at law or in equity, CDC may suspend the provision of any
Services for which any Approved Amounts have not been satisfied within ninety
(90) days of its issuance until such statement has been satisfied.  The parties
hereto agree to negotiate the payment, if any, of any Disapproved Amounts in
good faith and in a timely manner.

          (c) Upon no less than five (5) business days advance written notice
from SJ Japan, CDC shall make its books and records showing amounts charged for
Services available to any firm of certified public accountants selected by SJ
Japan for the purpose of verifying the fees charged by CDC for Services provided
to SJ Japan, it being

                                     III-3
<PAGE>
 
understood and agreed that CDC and SJ Japan shall each instruct such firm of
certified public accountants that it is not authorized to reveal any information
learned in such audit to SJ Japan or ST. JOHN or any affiliates thereof other
than the amount it believes SJ Japan should have been charged for any Service
for which such accounting firm believes SJ Japan was overcharged in accordance
with this Section 4.

          5.   Confidentiality  (a)  Each of CDC and SJ Japan shall use
               ---------------                                         
reasonable efforts, consistent with its standard policies with respect to the
preservation and disclosure of confidential information concerning itself and
its affiliates, to keep confidential and, without the prior written consent of
the party to whom the information relates, not to disclose to any person, nor
exploit commercially for its own purposes, any information obtained relating to
the subject matter or performance of this Agreement; provided, however, that CDC
                                                     --------  -------          
and SJ Japan may each disclose such information (i) to their affiliates for any
purpose reasonably incidental to the purposes of this Agreement and (ii) as is
required to be disclosed by law, legal process or requirements of any stock
exchange.

          (b) Anything to the contrary contained in the foregoing
notwithstanding, the provisions of Section 5(a) shall not apply to information:

               (i)  acquired from a third party who is not bound by an
                    obligation of confidentiality with the disclosing party;

               (ii) which, prior to or after the date of this Agreement, CDC and
                    SJ Japan jointly decide to disclose; or

               (iii)  which is or comes within the public domain otherwise than
                    through the fault of the recipient party.

          (c) The obligations of the parties hereto pursuant to this Section 5
shall survive termination or expiration of this Agreement.


          6.   Duration and Termination. This Agreement shall become effective
               ------------------------                                       
as of the date first above written and shall continue until terminated in
accordance with this Section 6 or until the provision of all Services hereunder
has been terminated pursuant to Section 3 hereto.

          (a)  Any party hereto may terminate this Agreement at any time by
giving notice in writing to the other parties, which notice shall be effective
upon dispatch, should another party file a petition of any type as to its
bankruptcy, be declared bankrupt, become insolvent, make an assignment or other
arrangement for the benefit of its creditors, have all or a substantial portion
of its capital stock or assets expropriated by any government, be dissolved or
liquidated, except in consequence of a merger, amalgamation or other corporate
reorganization to which it may be a party.

                                     III-4
<PAGE>
 
          (b)  Any party hereto may terminate this Agreement by giving notice in
writing to the other parties in the event another party is in material breach of
this Agreement and shall have failed to cure such breach within thirty (30) days
of receipt of written notice thereof from the first party.  During said thirty
day period, the parties shall negotiate in good faith in an attempt to reach
mutual agreement on a method to avoid such termination.  The said notice shall
specifically state the breach which the party giving the notice believes is
material.

          (c)  Any party may terminate this Agreement upon giving notice in
writing to the other parties in the event of (i) termination of the Joint
Venture Agreement or (ii) termination of the License and Distribution Agreement.

Upon such termination, CDC shall cease to have any obligation to provide any
Services, and each party shall promptly deliver to each other party all data,
programs, software materials, and other properties (including any copies
thereof) owned by the other and held by it in connection with the performance of
this Agreement.  Each party shall assist the other at such other party's request
and expense in effecting an orderly termination of this Agreement.

          7.   Non-Exclusivity.  Nothing in this Agreement shall preclude SJ
               ---------------                                              
Japan or any affiliate thereof from obtaining the Services, in whole or in part,
from sources other than CDC at any time.

          8.   Assignment.  This Agreement, and all rights and obligations
               ----------                                                 
hereunder, shall not be assigned by any of the parties hereto to any third
party, by operation of law or otherwise, without the prior written consent
thereto by the other parties hereto.  Any permitted assignment shall be subject
to and conditioned on the issuance of any governmental validations,
authorizations, licenses or rulings then required under applicable law in
connection with such assignment.

          9.   Notices.  All notices required or permitted by this Agreement to
               -------                                                         
be given to a party shall be valid and sufficient if dispatched in person to an
officer or director of the other party, or by registered mail, postage prepaid,
in any post office in Japan or by facsimile transmission to such address or
facsimile number as each respective party may designate by like notice from time
to time.  Any notice given as herein provided shall be considered to have been
received fifteen (15) days after the mailing thereof, or if by facsimile
transmission or personal delivery thereof, the next business day.

          10.  Miscellaneous. (a)   This Agreement, including the exhibits
               -------------                                              
hereto and incorporated as an integral part of this agreement, constitutes the
entire agreement of the parties with respect to the subject matter hereof, and
supersedes all previous agreements by and between CDC and SJ Japan as well as
all proposals, oral or

                                     III-5
<PAGE>
 
written, and all negotiations, conversations or discussions heretofore had
between the parties related to this Agreement.

          (b) The validity, construction and performance of this Agreement shall
be governed by and interpreted in accordance with the laws of Japan, without
regard to principles of conflict of laws.

          (c) This Agreement is executed in the English language which shall be
the controlling language and no translation or restatement of the terms and
conditions hereof in any other language shall have any effect in the
interpretation or application thereof.  In case of any conflict between the
English version and any translated version of this Agreement, the English
version shall govern.

          (d) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, cancelled or waived, in whole or in part, except by written
amendment signed by the parties hereto.

          (e) The waiver, express or implied, by any of the parties hereto of
any right hereunder or of any failure to perform or breach hereof by the other
party shall not constitute or be deemed a waiver of any other right hereunder or
of any other failure to perform or breach hereof by such other party(s), whether
of a similar or dissimilar nature thereto.

          (f) The headings to sections of this Agreement are to facilitate
reference only, do not form a part of this Agreement, and shall not in any way
affect the interpretation hereof.

          (g) This Agreement does not make any party the employee, agent or
legal representative of the other for any purpose whatsoever.  No party hereto
is granted any right or authority to assume or to create any obligation or
responsibility, express or implied, on behalf of or in the name any other party.
In fulfilling its obligations pursuant to this Agreement each party shall be
acting as an independent contractor.

          (h) In the event that any of the terms of this Agreement are in
conflict with any rule of law or statutory provision or are otherwise
unenforceable under the laws or regulations of any government or subdivision
thereof, such terms shall be deemed stricken from this Agreement, but such
invalidity or unenforceability shall not invalidate any of the other terms of
this Agreement and this Agreement shall continue in force, unless the invalidity
or unenforceability of any such provisions hereof does substantial violence to,
or where the invalid or unenforceable provisions comprise an integral part of,
or are otherwise inseparable from, the remainder of this Agreement.

          (i) This Agreement may be executed in counterparts, each of which
shall be deemed an original, but which together shall constitute one and the
same instrument.

                                     III-6
<PAGE>
 
          IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.

                         COMMERCIAL DEVELOPMENT CO., LTD.


                         By: ________________________________
                         Name:
                         Title:



                         ST. JOHN CO., LTD.


                         By:_________________________________
                         Name:
                         Title:



                         ST. JOHN KNITS, INC.


                         By:_________________________________
                         Name:
                         Title:

                                     III-7
<PAGE>
 
                                   SCHEDULE A
                                   ----------


                                    SERVICES


1.   Office Spaces
     -------------

     a.   TOKYO OFFICE.  CDC shall make available for use by SJ Japan 50% of
          CDC's office space located at Imperial Tower 9F, 1-1-1 Uchisaiwai-cho,
          Chiyoda-ku, Tokyo 100 Japan, including but not limited to the existing
          phone system, copy machines and related office services, equipment and
          utilities.

     b.   OSAKA OFFICE.  CDC shall make available for use by SJ Japan 50% of
          CDC's office space located at Fukaki Kawaramachi Building 4F, 3-4-9
          Kawara-machi, Chuo-ku, Osaka 541 Japan, including but not limited to
          the existing phone system, copy machines and related office services,
          equipment and utilities.

     c.   COST.  SJ Japan shall reimburse CDC for half of all documented
          reasonable rents, taxes and utility and other service charges incurred
          in conjunction with the continuing use and operation of the office
          spaces; provided, that SJ Japan shall provide its own insurance, if
          any, as SJ Japan deems appropriate.

2.   Computer System
     ---------------

     a.   EQUIPMENT/SERVICES.  CDC shall make available to SJ Japan the use of
          all of CDC's computer hardware and software located in the office
          spaces described above, as well as allow SJ Japan access to any and
          all related services.

     b.   COST.  SJ Japan shall pay to CDC an all-inclusive fee for the use of
          such computer hardware and software at a rate of forty-six thousand
          dollars ($46,000) per year (to be pro rated for any partial annual
          period), which fee the parties agree to be sufficient to cover any
          costs and expenses related to the use, maintenance and support of the
          computer hardware and software, including the cost of technical
          services, maintenance and incidental supplies.  SJ Japan shall bear no
          obligation to reimburse CDC for any material purchases of additional
          hardware or software without its prior written consent to such
          purchase.

                                    III-A-1
<PAGE>
 
                                   SCHEDULE B
                                   ----------


                                    ACCOUNTS


[Account Listing from Business Plan]

                                    III-B-1
<PAGE>
 
                                   EXHIBIT IV
                                   ----------



                             CDC LICENSE AGREEMENT
                             ---------------------

                                     among

                       COMMERCIAL DEVELOPMENT CO., LTD.,



                               ST. JOHN CO., LTD.

                                      and

                              ST. JOHN KNITS, INC.
<PAGE>
 
                             CDC LICENSE AGREEMENT
                             ---------------------

                               TABLE OF CONTENTS
                               -----------------
<TABLE>
<CAPTION>

Section                                         Page No
-------                                         -------
<S>                                                 <C>

1.   Grant of License................................ 1
     ----------------

2.   Term and Term Renewal........................... 1
     ---------------------

3.   General Obligations of Licensee................. 2
     -------------------------------

4.   Inspection...................................... 2
     ----------

5.   Store Design.................................... 2
     ------------

6.   Quality Control................................. 2
     ---------------

7.   Use of Licensed Trademarks...................... 3
     --------------------------

8.   Approvals....................................... 3
     ---------

9.   The Licensed Trademarks......................... 3
     -----------------------

10.  Copyright....................................... 5
     ---------

11.  Indemnity; Insurance............................ 6
     --------------------

12.  Default and Termination......................... 6
     -----------------------

13.  Rights on Expiration or Termination............. 7
     -----------------------------------

14.  Representations and Warranties.................. 7
     ------------------------------

15.  Assignability; Binding Effect................... 8
     -----------------------------

16.  Jurisdiction; Attorney's Fees................... 8
     -----------------------------

17.  Miscellaneous................................... 9
     -------------
</TABLE>

Schedule A

                                       i
<PAGE>
 
     This CDC LICENSE AGREEMENT ("Agreement") made as of the ___th day of July,
1997, by and among ST. JOHN CO., LTD., a corporation duly organized and existing
under the laws of Japan and having its principal place of business at Imperial
Tower 9F, 1-1-1 Uchisaiwai-cho, Chiyoda-ku, Tokyo 100 Japan (hereinafter "SJ
Japan"), COMMERCIAL DEVELOPMENT CO., LTD., a corporation duly organized and
existing under the laws of Japan and having its principal place of business at
Imperial Tower 9F, 1-1-1 Uchisaiwai-cho, Chiyoda-ku, Tokyo 100 Japan
(hereinafter "Licensee"), and ST. JOHN KNITS, INC., a corporation duly organized
and existing under the laws of the State of California, U.S.A. and having its
principal place of business at  17422 Derian Avenue, Irvine, California 92614
U.S.A. (hereinafter "St. John").

                                  WITNESSETH:

     In consideration of the mutual covenants hereinafter set forth, St. John,
SJ Japan and Licensee do hereby respectively grant, covenant and agree as
follows:

3.   Grant of License
     ----------------

     3.1  Subject to the terms and conditions set forth in this Agreement, SJ
Japan hereby grants to Licensee, and Licensee hereby accepts, a non-transferable
license for the Term (as defined below) to use Licensed Trademarks (as defined
below) solely in connection with the operation of Licensee's retail stores in
the Imperial Hotel Tokyo and the Hotel New Otani Tokyo (collectively, the
"Stores"), which operation specifically includes the distribution and sale of
the Products (as defined in that certain CDC Distribution Agreement, dated as of
July ___, 1997, between SJ Japan and Licensee (the "CDC Distribution
Agreement")).  "Licensed Trademarks" means the trademarks set forth in Schedule
A hereto and all related logos, emblems and symbols, and all combinations, form
and derivations thereof as are currently or hereafter used by SJ Japan in
connection with the Products.

     3.2  Licensee shall use its best efforts to exploit the rights herein
granted  in its operation of the Stores consistent with the high standards and
prestige represented by the Licensed Trademarks.
 
4.   Term and Term Renewal
     ---------------------

     The term ("Term") of this Agreement shall run from the effective date
hereof and terminate upon the expiration or termination of that certain License
and Distribution Agreement, dated as of July ___, 1997, between St. John and SJ
Japan (the "License and Distribution Agreement"), including any renewal thereof,
unless this Agreement is sooner terminated pursuant to the provisions of Section
12 hereof.

                                     IV-1
<PAGE>
 
5.   General Obligations of Licensee
     -------------------------------

     In consideration of the license granted by SJ Japan hereunder, and as a
condition to the use of the Licensed Trademarks, in addition to Licensee's
obligations in Section 5 below, Licensee shall not sell in the Stores any
products other than Products after January 14, 1998.

6.   Inspection
     ----------

     Licensee hereby agrees to permit representatives of SJ Japan to visit the
Stores and other places of business and inspect Licensee's inventories, records,
and other relevant documents during normal business hours; provided, that
Licensee shall be given reasonable advance notice of any such intended visit or
inspection.

7.   Store Design
     ------------

     7.1  Licensee hereby agrees to remodel its store in the Imperial Hotel
Tokyo by January 31, 1998 in accordance with specifications to be determined and
submitted to Licensee by St. John in St. John's sole discretion.  Any and all
costs and expenses of such remodeling shall be borne by Licensee.

     7.2  By January 31, 1998, Licensee shall alter or replace its signs and any
other fixed displays both inside and outside of the Hotel New Otani Tokyo store
in accordance with specifications to be determined and submitted to Licensee by
St. John in St. John's sole discretion.  Licensee agrees, and shall confer with
St. John to ensure, that any such signs and other displays shall at all times be
consistent with the high standards and prestige represented by the Licensed
Trademarks and that such signs and other displays comply with any applicable
restrictions or limitations contained in said store's retail space lease.  Any
and all costs and expenses of such alterations and/or replacements shall be
borne by Licensee.

8.   Quality Control
     ---------------

     In order to protect the goodwill and reputation associated with the
Licensed Trademarks, Licensee covenants and agrees as follows:

     8.1  All packaging and sales promotion materials used in connection with
the Stores shall meet all specifications and standards therefor which SJ Japan
may provide Licensee from time to time.

     8.2  Licensee may not use a personality or celebrity to endorse or promote
any Products or otherwise in connection with the Stores unless and until SJ
Japan has given Licensee its specific written approval for such celebrity's
endorsement or promotion.

     8.3  Licensee's policy of sale, distribution and exploitation of the
Products and other operations of the Stores shall be of high standard and shall
in no manner reflect

                                     IV-2
<PAGE>
 
adversely upon the good name of St. John or SJ Japan or upon the goodwill and
reputation associated with the Licensed Trademarks.
 
9.   Use of Licensed Trademarks
     --------------------------

     9.1  Licensee shall submit to SJ Japan copies of all proposed advertising
or promotional materials prepared by or for Licensee utilizing the Licensed
Trademarks prior to the use of such materials.  SJ Japan may approve or
disapprove any and all advertising and promotional materials submitted as
aforesaid and shall discuss with Licensee any modifications or alterations
thereof.  Licensee shall not use any such advertising or promotional materials
without first obtaining the prior express written consent of SJ Japan.

     9.2  Licensee shall submit to SJ Japan all proposed tags, labels, packaging
and other similar materials from which SJ Japan may select those, if any, which
SJ Japan approves for use in connection with Stores.  SJ Japan may approve or
disapprove the tags, labels, packaging and other similar materials submitted as
aforesaid and shall discuss with Licensee any modifications or alterations
thereof.  Licensee shall not use any such tags, labels, packaging or other
similar materials without first obtaining the prior express written consent of
SJ Japan.

     9.3  Licensee shall submit to SJ Japan samples of all proposed business
cards, invoices, order forms, stationery and other similar printed materials
from which SJ Japan may select those, if any, which SJ Japan approves for use in
connection with Stores.  SJ Japan may approve or disapprove the business cards,
invoices, order forms, stationery and other similar printed materials submitted
as aforesaid and shall discuss with Licensee any modifications or alterations
thereof.  Licensee shall not use any such business cards, invoices, order forms,
stationery or other similar printed materials without first obtaining the prior
express written consent of SJ Japan.

10.  Approvals
     ---------

     It is specifically understood and agreed that SJ Japan's approval pursuant
to Section 7 of this Agreement shall not be unreasonably withheld.  Any sample,
copy, artwork or other material submitted to SJ Japan for its approval which is
not disapproved within twenty (20) business days after SJ Japan's receipt
thereof shall be deemed approved for use hereunder, but only for the use for
which approval was sought.  After any sample, copy, artwork or other material
has been approved, Licensee shall not depart therefrom in any substantial
respect without the prior written approval of SJ Japan.  If  SJ Japan should
disapprove any material pursuant to Section 7, Licensee shall neither use nor
permit the same to be used in any manner.

11.  The Licensed Trademarks
     -----------------------

     11.1 Licensee acknowledges and agrees that Licensee shall acquire no
ownership rights to any of the Licensed Trademarks by virtue of this Agreement
or otherwise and that

                                     IV-3
<PAGE>
 
all uses by Licensee of the Licensed Trademarks and any and all goodwill related
thereto shall, subject to the rights of St. John thereto, inure to the benefit
of SJ Japan.  Licensee shall not, at any time, do or suffer to be done any act
or thing which may in any way adversely affect the validity of any Licensed
Trademark, any rights of SJ Japan or St. John in and to any Licensed Trademark
or any registrations thereof or which, directly or indirectly, may reduce the
value of the Licensed Trademark or detract from its reputation.

     11.2 Except as otherwise permitted by SJ Japan, Licensee shall not use the
Licensed Trademarks, in whole or in part, as a corporate name or trade name.
Further, except as otherwise permitted by SJ Japan, Licensee shall not join any
name or names with the Licensed Trademarks so as to form a new mark or for any
other purpose or use.  Licensee shall not use any name or names in connection
with the Licensed Trademarks in advertising, publicity, labeling, packaging or
printed matter of any kind utilized by Licensee in connection with Stores,
unless and until SJ Japan consents thereto in writing.

     11.3 At SJ Japan's request, Licensee shall execute any and all documents
reasonably required by SJ Japan to confirm St. John's or SJ Japan's rights in
and to the Licensed Trademarks and the respective rights of St. John, SJ Japan
and Licensee pursuant to this Agreement.

     11.4 Licensee shall use the Licensed Trademarks strictly in compliance with
the legal requirements obtaining therein and shall use such markings in
connection therewith as may be required by applicable legal provisions.
Licensee shall use and display the Licensed Trademarks only in such form and
manner as are specifically approved in writing by SJ Japan.  Licensee shall
cause to appear such legends, markings and notices as SJ Japan may request,
including, without limitation, the appropriate trademark or service mark notice,
either "TM", "SM", or (R) as may be reasonably necessary in order to give
appropriate notice of any trademark, service mark or other rights therein or
pertaining thereto.

     11.5 Licensee shall not, during the Term or at any time thereafter,
directly or indirectly, contest or aid others in contesting St. John's or SJ
Japan's ownership of or rights in and to the Licensed Trademarks or the validity
of said trademarks.

     11.6 In the event that Licensee learns of any infringement, act of unfair
competition by third parties or imitation of the Licensed Trademarks or of any
use by any person of a trademark similar to any Licensed Trademark, it shall
promptly notify SJ Japan thereof.  St. John, or SJ Japan upon the direction of
St. John, thereupon may take such action as St. John deems advisable for the
protection of St. John's and SJ Japan's respective rights in and to the Licensed
Trademarks and, if requested to do so by St. John, or SJ Japan at the direction
of St. John, Licensee shall cooperate with St. John and SJ Japan in all respects
at St. John's sole expense, including without limitation by being a plaintiff or
co-plaintiff and by causing its officers to execute pleadings and other
necessary documents and to causing its officers and employees to devote
appropriate time to litigation and/or disposition of all matters within the
purview of this Section 9.6; it is understood that Licensee's officers and
employees will not be compensated for their time and effort.  In no event,
however, shall

                                     IV-4
<PAGE>
 
St. John or SJ Japan be required to take any action if either deems it
inadvisable to do so and Licensee shall have no right to take any action with
respect to the Licensed Trademarks without either St. John's or SJ Japan's prior
written approval.  Licensee hereby waives any right to control any action taken,
including without limitation, the right to select counsel, to settle on any
terms, to appeal any adverse decision rendered in any court, to discontinue any
action taken, or otherwise to make any decision in respect thereto.  If Licensee
desires to retain its own counsel, it shall do so at its own expense.  Licensee
agrees that any recovery as a result of such action shall belong solely to St.
John.

     11.7 In the event that any infringement suit or any claim of infringement
involving the Licensed Trademarks in connection with the operation of the Stores
pursuant to and in accordance with the terms of this Agreement and the CDC
Distribution Agreement is instituted by a third party against Licensee, Licensee
shall give immediate notice of such suit or claim to SJ Japan.  Licensee hereby
waives all right to control the defense of any such suit or claim, including,
without limitation, the right to choose counsel and to settle and dispose of any
such suit or claim, and Licensee shall offer reasonable cooperation to St. John
and SJ Japan in all aspects of any such suit or claim.

     11.8 Licensee agrees that it shall not, during the Term or thereafter,
register or apply to register any of the Licensed Trademarks or any trademarks
or logos similar thereto anywhere in the world.  Without limiting the foregoing,
upon and after the expiration or termination of this Agreement, Licensee, upon
St. John's or SJ Japan's request, shall execute such documents as may be
necessary to further confirm St. John's and SJ Japan's rights in the Licensed
Trademarks.  Licensee hereby irrevocably appoints each of St. John and SJ Japan
as its attorney-in-fact for the purpose of executing such documents.

     11.9 Insofar as any packaging and advertising material to be used in
connection with the Stores utilizing the Licensed Trademarks is created for
Licensee by a third party, Licensee shall execute such assignments of copyright
as SJ Japan shall require.  Notwithstanding the foregoing sentence, Licensee's
existing copyrights, trademarks and other proprietary rights incorporated into
such artwork shall remain the property of Licensee and shall not be assigned to
SJ Japan and shall not be subject to SJ Japan's use without Licensee's prior
written consent.
 
12.  Copyright
     ---------

     Any copyright which may be created in any materials provided by SJ Japan
hereunder, including, without limitation, any sketch, design, packaging, label,
tag or the like designed or approved by SJ Japan shall, as between SJ Japan and
Licensee, be the property of SJ Japan.  Licensee shall not, at any time, do or
suffer to be done any act or thing which may adversely affect any rights of SJ
Japan in such sketches, designs, packaging, labels, tags and the like,
including, without limitation, disclosing such information or filing any
application in Licensee's name to record any claims to copyrights in such
materials, and Licensee shall do all things reasonably required by SJ Japan to
preserve and protect said

                                     IV-5
<PAGE>
 
rights, including, without limitation, placing the copyright notice on all
advertisements, displays and other materials used in connection with the Stores.


13.  Indemnity; Insurance
     --------------------

     13.1 Licensee hereby indemnifies, saves and holds St. John and SJ Japan
harmless from and against any and all liabilities, losses, damages and expenses
(including reasonable attorneys' fees and expenses) arising out of or resulting
from: (i) any act or omission that may be committed or suffered by Licensee or
any of its servants, agents or employees in connection with Licensee's
performance of this Agreement, (ii) any actual or alleged infringement or
violation of any patents, copyrights, trademarks or other rights, including
trade secrets and rights of privacy and publicity, in connection with the
operation of the Stores (other than those arising from the design or manufacture
of Products or other similar matters not within the control of Licensee or from
the use by Licensee of the Licensed Trademarks as otherwise permitted
hereunder), (iii) Licensee's false or misleading advertising in connection with
any of the Stores, (iv) any violation of any applicable law or regulation in
connection with the Stores, (v) any use of any of the Licensed Trademarks in a
manner not authorized by this Agreement, or (vi) any breach of this Agreement by
Licensee.  Licensee shall promptly notify St. John or SJ Japan of any claim
which may be made against Licensee arising out of Licensee's use of the Licensed
Trademarks.  The provisions of this Section 11.1 and Licensee's indemnity
obligations hereunder shall survive the expiration or termination of this
Agreement.

     13.2 SJ Japan hereby indemnifies, saves and holds Licensee harmless from
and against any and all liabilities, losses, damages and expenses (including
reasonable attorneys' fees and expenses) arising out of or resulting from any
infringement suit or claim of the nature specified in Section 9.7 to the extent,
and only to the extent, that Licensee has complied with the provisions of
Section 9.7.

     13.3 Licensee shall procure and maintain at its own expense, in full force
and effect at all times during which Stores are operated pursuant to this
Agreement, with a reputable insurance carrier acceptable to SJ Japan, liability
insurance of such types and amounts as are customary for similar retail stores
in Tokyo and subject at all times to the approval of SJ Japan, which approval
shall not be unreasonably withheld.

14.  Default and Termination
     -----------------------

     14.1 Any party hereto may terminate this Agreement at any time by giving
notice in writing to the other parties, which notice shall be effective upon
dispatch, should any other party hereto file a petition of any type as to its
bankruptcy, be declared bankrupt, become insolvent, make an assignment for the
benefit of creditors, or go into liquidation or receivership.

                                     IV-6
<PAGE>
 
     14.2 Any party hereto may terminate this Agreement by giving notice in
writing to the other parties in the event any other party hereto is in material
breach of this Agreement and shall have failed to cure such breach within thirty
(30) days of receipt of written notice thereof from the first party.

     14.3 Any party hereto may terminate this Agreement upon giving notice in
writing to the other parties in the event of termination of the CDC Distribution
Agreement.

 
15.  Rights on Expiration or Termination
     -----------------------------------

     15.1 Notwithstanding any expiration or termination in accordance with
Sections 2 or 12 above, each of St. John and SJ Japan shall have and hereby
reserves all rights and remedies which it has, or which are granted to it by
operation of law or in equity, to enjoin the unlawful or unauthorized use of the
Licensed Trademarks (any of which injunctive relief may be sought in the courts,
and also may be sought, prior to or in lieu of termination) and to be
compensated for damages for breach of this Agreement.  In addition, nothing
herein shall be deemed to prevent a party from bringing an action for damages
either prior to or in lieu of termination if a default in performance by the
other party occurs and is not cured timely in accordance with the provisions of
Section 12 above.  The parties acknowledge that Licensee's unauthorized use of
the Licensed Trademarks will give rise to irreparable injury to both St. John
and SJ Japan, inadequately compensable in damages.  Accordingly, in addition to
any other remedies which may be available to St. John or SJ Japan at law or in
equity, each shall be entitled to preliminary and permanent injunctive relief
against such breach or threatened breach without the necessity of proving actual
damages or that monetary damages would be inadequate.

     15.2 On the expiration or termination of this Agreement, all of the rights
of Licensee under this Agreement shall terminate forthwith and shall revert
immediately to SJ Japan and Licensee shall discontinue forthwith all use of the
Licensed Trademarks, no longer shall have the right to use the Licensed
Trademarks or any variation or simulation thereof and promptly shall transfer to
SJ Japan, free of charge, all registrations, filings and rights with regard to
the Licensed Trademarks which it may have possessed at any time.  In addition,
Licensee thereupon shall deliver to SJ Japan, free of charge, all sketches and
other material in its possession which were designed or approved by SJ Japan or
any other materials or copies of materials obtained by Licensee from SJ Japan
and all labels, tags and other material in its possession with any Licensed
Trademark thereon.  After the expiration or termination of this Agreement,
Licensee shall not use or permit others to use any of said sketches and other
material, or any variations or simulations thereof for any purpose whatsoever.
 
16.  Representations and Warranties
     ------------------------------

     16.1 SJ Japan represents and warrants (i) that it has full right, power and
authority to enter into this Agreement and to perform all of its obligations
hereunder, and (ii) that

                                     IV-7
<PAGE>
 
to its knowledge utilization of the Licensed Trademarks pursuant to and
consistent with the terms of this Agreement will not constitute an infringement
of the rights of any third party.  The foregoing warranty is the entire warranty
of SJ Japan and SJ Japan makes no other warranty of any kind, either express or
implied.

     16.2 Licensee represents and warrants that it has full right, power and
authority to enter into this Agreement and to perform all of its obligations
hereunder.

     16.3 St. John represents and warrants that it has full right, power and
authority to enter into this Agreement and to perform all of its obligations
hereunder.

17.  Assignability; Binding Effect
     -----------------------------

     17.1 No party shall have the right to assign or otherwise transfer its
rights and obligations under this Agreement, except with the prior written
consent of the other parties hereto; provided, however, St. John and SJ Japan
shall each be entitled to assign any or all of its rights and obligations
hereunder to any of its subsidiaries provided that it shall remain fully liable
for the performance of all its obligations hereunder; provided further, that a
successor in interest by merger, by operation of law, assignment, purchase or
otherwise of the entire business of either St. John or SJ Japan shall acquire
all rights and obligations of such party hereunder.  Any prohibited assignment
shall be null and void.

     17.2 Any permitted assignment shall be subject to and conditioned on the
issuance of any governmental validations, authorizations, licenses or rulings
then required under applicable law in connection with such assignment.

18.  Jurisdiction; Attorney's Fees
     -----------------------------
 
     18.1 Except as specifically provided in subsection (c) below, the sole
jurisdiction and venue for any court action arising out of this Agreement shall
be an appropriate federal or state court in Orange County, California, U.S.A.
Each of St. John, SJ Japan and Licensee hereby irrevocably submits to the
jurisdiction of any of said courts in any court action and hereby waives any
claim or defense of inconvenient forum.

          (a) Each of St. John, SJ Japan and Licensee represents and warrants
that it is not entitled to immunity from judicial proceedings and agrees that,
should another party hereto bring any court action, it will not claim any
immunity from such proceedings for itself or with respect to its property.

          (b) Notwithstanding the foregoing, the parties acknowledge and agree
that St. John and SJ Japan shall each have the right, at any time, to seek
injunctive relief in any court in the Territory to enjoin any unlawful or
unauthorized use of the Licensed Trademarks by Licensee.

                                     IV-8 
<PAGE>
 
     18.2 In the event of any action for the breach of this Agreement or other
cause by any party hereto, the prevailing party shall be entitled to reasonable
attorney's fees, costs and expenses incurred in such action.

19.  Miscellaneous
     -------------

     19.1 The validity, construction and performance of this Agreement shall be
construed and interpreted in accordance with the laws of the State of
California, U.S.A., without regard to principles of conflicts of laws.

     19.2 This Agreement is executed in the English language which shall be the
controlling language and no translation or restatement of the terms and
conditions hereof in any other language will have any effect in the
interpretation or application thereof.  In case of any conflict between the
English version and any translated version of this Agreement, the English
version shall govern.

     19.3 This Agreement along with Schedule A attached hereto, which is
incorporated herein by this reference, contain the entire understanding and
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior oral or written understandings and agreements relating
thereto and no provision hereof may be waived, modified, discharged or
terminated, except in a writing executed by a duly authorized officer of both
parties.

     19.4 Nothing herein contained shall be construed to constitute the parties
hereto as partners or as joint venturers, or any as agent of the others, and
Licensee shall have no power to obligate or bind St. John or SJ Japan in any
manner whatsoever.

     19.5 A failure of any party hereto to exercise any right provided for
herein shall not be deemed to be a waiver of any right hereunder.  No waiver by
any party hereto, whether express or implied, of any provision of this
Agreement, or of any breach or default thereof, shall constitute a continuing
waiver of such provision or of any other provision of this Agreement.
Acceptance of payments by SJ Japan shall not be deemed a waiver by SJ Japan of
any violation of or default under any of the provisions of this Agreement by
Licensee.

     19.6 If any provision or any portion of any provision of this Agreement
shall be held to be void or unenforceable, the remaining provisions of this
Agreement and the remaining portion of any provision held void or unenforceable
in part shall continue in full force and effect.

     19.7 All reports, approvals, requests, demands and notices required or
permitted by this Agreement to be given to a party shall be valid and sufficient
if dispatched by registered mail, postage prepaid, in any post office, or by
facsimile transmission, to the addresses first above written or such other
addresses or facsimile numbers as the respective parties may designate by like
notice from time to time.  Any notice given as herein provided

                                     IV-9
<PAGE>
 
shall be considered to have been received fifteen (4) days after the mailing
thereof, or if by facsimile transmission, the next business day.

     19.8 This Agreement shall be construed without regard to any presumption or
other rule requiring construction against the party causing this Agreement to be
drafted.  If any words or phrases in this Agreement shall have been stricken out
or otherwise eliminated, whether or not any other words or phrases have been
added, this Agreement shall be con strued as if those words or phrases were
never included in this Agreement, and no implication or inference shall be drawn
from the fact that the words or phrases were so stricken out or otherwise
eliminated.

     19.9 UNDER NO CIRCUMSTANCES SHALL ST. JOHN, SJ JAPAN, OR THEIR EMPLOYEES,
AFFILIATES OR AGENTS BE LIABLE FOR ANY DAMAGES, INCLUDING ANY DIRECT, INDIRECT,
INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES THAT RESULT FROM LICENSEE'S USE OF
OR INABILITY TO USE THE LICENSED TRADEMARKS, AND LICENSEE HEREBY WAIVES ANY
CLAIMS WITH RESPECT THERETO, WHETHER BASED ON CONTRACT, TORT OR OTHER GROUNDS,
EVEN IF ST. JOHN AND/OR SJ JAPAN HAVE BEEN ADVISED OF THE POSSIBILITY OF
DAMAGES.
 
     19.10  This Agreement may be executed in any number of counterparts, each
of which shall be an original and all of which shall constitute one and the same
instrument.  This Agreement may be executed and delivered via facsimile and such
execution and delivery by facsimile shall have the same force and effect as a
hand delivered executed original.

 
                                 * * * * * * *

                                     IV-10
<PAGE>
 
     IN WITNESS WHEREOF, the parties hereto each acting under due and proper
authority, have duly executed this Agreement as of the day and year first above
written.



ST. JOHN CO., LTD.            COMMERCIAL DEVELOPMENT CO., LTD.

---------------------------   --------------------------------------------
By:                           By:   
   ------------------------      -----------------------------------------
Its:                          Its: 
    -----------------------       ----------------------------------------

ST. JOHN KNITS, INC.

---------------------------
By:  
    -----------------------
Its:  
     ----------------------

                                     IV-11
<PAGE>
 
                                   Schedule A
                                   ----------


     Licensed Trademarks:
     ------------------- 

     Marie Gray(R) and Marie Gray by St. John(R), each a registered trademark of
     St. John Knits, Inc. under license to St. John Co., Ltd.


                                  Appendix A
                                    Page 1
<PAGE>
 
                                   EXHIBIT V
                                   ---------



                           CDC DISTRIBUTION AGREEMENT
                           --------------------------



                           dated as of July ___, 1997



                                    between



                        COMMERCIAL DEVELOPMENT CO., LTD.



                                      and



                               ST. JOHN CO., LTD.
<PAGE>
 
                               TABLE OF CONTENTS
<TABLE> 
<CAPTION> 
                                                                     Page
                                                                     ----
<S>                                                                  <C> 

                                   ARTICLE 1
                                  DEFINITIONS......................    1

     1.1       Products............................................    1
               --------
     1.2       Stores..............................................    1
               ------
     1.3       Distributor Price...................................    1
               -----------------
     1.4       CDC Information.....................................    1
               ---------------
     1.5       SJ JAPAN Information................................    2
               --------------------

                                   ARTICLE 2
                                  APPOINTMENT......................    2
     2.1       Scope...............................................    2
               -----
     2.2       Subdistributors.....................................    2
               ---------------
     2.3       Sales Outside the Territory.........................    2
               ---------------------------

                                   ARTICLE 3
                           GENERAL OBLIGATIONS OF CDC..............    2
     3.1       Marketing...........................................    2
               ---------
     3.2       Sale or Distribution of Other Goods.................    3
               -----------------------------------
     3.3       Customer Complaints.................................    3
               -------------------
     3.4       Expenses............................................    3
               --------
     3.5       Indemnity...........................................    3
               ---------

                                   ARTICLE 4
                              ORDERS FOR PRODUCTS..................    3
     4.1       Master Purchase Orders..............................    3
               ----------------------
     4.2       Other Purchase Orders...............................    3
               ---------------------
     4.3       Terms of Purchase Orders............................    4
               ------------------------
     4.4       Acceptance of Orders................................    4
               --------------------
     4.5       Modification of Orders..............................    4
               ----------------------
     4.6       Delivery Terms......................................    4
               --------------

                                   ARTICLE 5
                              PRICES AND PAYMENT...................    4
     5.1       Prices..............................................    4
               ------
     5.2       Price Increases, Decreases..........................    5
               --------------------------
     5.3       Payment Terms.......................................    5
               -------------
     5.4       Retail Prices.......................................    6
               -------------
     5.5       Overdue Payments....................................    6
               ----------------
</TABLE>

                                       i
<PAGE>
 
<TABLE>
<S>                                                                  <C>
                                   ARTICLE 6
                            ACCEPTANCE AND WARRANTY................    6
     6.1       Acceptance of Products..............................    6
               ----------------------
     6.2       Product Warranty....................................    6
               ----------------
     6.3       Excluded Claims.....................................    7
               ---------------
     6.4       Limited Warranty....................................    7
               ----------------

                                   ARTICLE 7
                            LIMITATION OF REMEDIES.................    7
     7.1       Delay...............................................    7
               -----
     7.2       Sole Remedies.......................................    7
               -------------
     7.3       Consequential Damages...............................    7
               ---------------------

                                   ARTICLE 8
                                CONFIDENTIALITY....................    8

                                   ARTICLE 9
                                   TRADEMARKS......................    8

                                  ARTICLE 10
                                    TAXES..........................    9

                                  ARTICLE 11
                              TERM AND TERMINATION.................    9
     11.1      Term................................................    9
               ----
     11.2      Termination.........................................    9
               -----------
     11.3      Rights and Obligations on Termination...............    9
               -------------------------------------
     11.4      No Compensation.....................................   10
               ---------------
     11.5      Attorneys' Fees.....................................   10
               ---------------

                                  ARTICLE 12
                                FORCE MAJEURE......................   10
     12.1      Definition..........................................   10
               ----------
     12.2      Notice..............................................   10
               ------
     12.3      Confirmation........................................   11
               ------------
     12.4      Suspension of Performance...........................   11
               -------------------------
     12.5      Termination.........................................   11
               -----------

                                  ARTICLE 13
                          DISPUTES; INTERPRETATION.................   11
     13.1      Disputes............................................   11
               --------
     13.2      Governing Law.......................................   11
               -------------
     13.3      Governing Language..................................   12
               ------------------
     13.4      Effect of Headings..................................   12
               ------------------
     13.5      Non-Waiver..........................................   12
               ----------
</TABLE>

                                      ii
<PAGE>
 
<TABLE>
<S>                                                                  <C>
                                  ARTICLE 14
                                MISCELLANEOUS......................   12
     14.1      Relationship........................................   12
               ------------
     14.2      Assignment..........................................   12
               ----------
     14.3      Notices.............................................   12
               -------
     14.4      ENTIRE AGREEMENT....................................   13
               ----------------
     14.5      Amendment...........................................   13
               ---------
     14.6      Severability........................................   13
               ------------
     14.7      Counterparts........................................   13
               ------------
     14.8      Waiver..............................................   13
               ------
</TABLE>

                                      iii
<PAGE>
 
                           CDC Distribution Agreement
                           --------------------------


          THIS AGREEMENT, made this ___th day of July, 1997 by and between ST.
JOHN CO., LTD., a corporation duly organized and existing under the laws of
Japan and having its principal place of business at Imperial Tower 9F, 1-1-1
Uchisaiwai-cho, Chiyoda-ku, Tokyo 100 Japan (hereinafter "SJ JAPAN"), and
COMMERCIAL DEVELOPMENT CO., LTD., a corporation duly organized and existing
under the laws of Japan and having its principal place of business at Imperial
Tower 9F, 1-1-1 Uchisaiwai-cho, Chiyoda-ku, Tokyo 100 Japan (hereinafter "CDC").

          WHEREAS, SJ JAPAN markets certain products of St. John Knits, Inc.
("ST. JOHN") pursuant to that certain License and Distribution Agreement, dated
as of July ___, 1997, between ST. JOHN and SJ JAPAN (the "License and
Distribution Agreement"), and SJ JAPAN desires to increase the sales of such
products; and

          WHEREAS, CDC desires to sell such products in its retail stores in the
Hotel New Otani and the Imperial Hotel in Tokyo, Japan.

          NOW, THEREFORE, in consideration of the mutual premises and covenants
hereinafter set forth, the parties agree as follows:


                                   ARTICLE 1
                                   ---------
                                  DEFINITIONS
                                  -----------

          For purposes of this Agreement, the following words, terms and
phrases, where written with an initial capital letter, shall have the meanings
assigned to them in this Article 1 unless the context otherwise requires:

          1.1       Products.  "Products" shall mean those products as defined
                    --------                                                  
in Section 1.3 of the License and Distribution Agreement.

          1.2       Stores.  "Stores" shall mean two retail stores operated by
                    ------                                                    
CDC, one in the Imperial Hotel, Tokyo, Japan and the other in the Hotel New
Otani, Tokyo, Japan.

          1.3       Distributor Price.  "Distributor Price" shall mean SJ
                    -----------------                                    
JAPAN's published suggested retail price for a given Product in effect at the
time of acceptance by SJ JAPAN of CDC's order, less fifty-five (55%).

          1.4       CDC Information.  "CDC Information" shall mean all
                    ---------------                                   
information, other than information in publicly-available published form or
expressly designated by CDC as non-confidential, which is directly or indirectly
disclosed to SJ

                                      V-1
<PAGE>
 
JAPAN, regardless of the form in which it is disclosed, relating in any way to
CDC's markets, customers, products, patents, inventions, procedures, methods,
designs, strategies, plans, assets, liabilities, costs, revenues, profits,
organization, employees, agents, distributors or business in general.

          1.5       SJ JAPAN Information.  "SJ JAPAN Information" shall mean all
                    --------------------                                        
information, other than information in publicly-available published form or
expressly designated by SJ JAPAN as non-confidential, which is directly or
indirectly disclosed to CDC or embodied in Products provided hereunder,
regardless of the form in which it is disclosed, relating in any way to SJ
JAPAN's markets, customers, products, patents, inventions, procedures, methods,
designs, strategies, plans, assets, liabilities, costs, revenues, profits,
organization, employees, agents, subdistributors or business in general.


                                   ARTICLE 2
                                   ---------
                                  APPOINTMENT
                                  -----------

          2.1       Scope.  SJ JAPAN hereby appoints CDC, and CDC hereby accepts
                    -----                                                       
appointment, as SJ JAPAN's distributor during the term of this Agreement with
the non-exclusive right to sell or otherwise distribute Products solely in the
Stores.

              2.2   Subdistributors.  CDC shall not appoint any subdistributors
                    ---------------                                            
or agents with respect to the Products.

          2.3       Sales Outside the Territory.  CDC shall not sell or
                    ---------------------------                        
distribute Products outside the Stores without the express prior written consent
of SJ JAPAN.


                                   ARTICLE 3
                                   ---------
                           GENERAL OBLIGATIONS OF CDC
                           --------------------------

              3.1   Marketing.  CDC shall have the following obligations with
                    ---------                                                
respect to the marketing of SJ JAPAN Products:

     (a)      To use its best efforts to further the promotion, marketing and
              sale of Products in the Stores;

     (b)      To maintain an adequate and balanced inventory of Products;

     (c)      To promptly respond to all inquiries from customers, including
              complaints, process all orders, and effect all sales of Products;

     (d)      To diligently investigate all leads with respect to potential
              customers referred to it by SJ JAPAN;


                                      V-2
<PAGE>
 
     (e)      To permit SJ JAPAN to visit the Stores and other places of
              business and inspect its inventories, records, and other relevant
              documents, upon reasonable advance notice; and

     (f)      To maintain an adequate sales force dedicated on both a full and
              part-time basis, as the case may be, to the sale of Products;

          3.2       Sale or Distribution of Other Goods.  From and after January
                    -----------------------------------                         
7, 1998, CDC shall not sell or distribute any products in the Stores other than
the Products.

          3.3       Customer Complaints.  CDC agrees to cooperate with SJ JAPAN
                    -------------------                                        
in dealing with any customer complaints concerning the Products and to take any
action requested by SJ JAPAN to resolve such complaints.

          3.4       Expenses.  CDC assumes full responsibility for all costs and
                    --------                                                    
expenses which it incurs in carrying out its obligations under this Agreement,
including but not limited to all rentals, salaries, commissions, advertising,
demonstration, travel and accommodation expenses without the right to
reimbursement for any portion thereof from SJ JAPAN.

          3.5       Indemnity.  CDC hereby indemnifies, saves and holds SJ JAPAN
                    ---------                                                   
harmless from and against any and all liabilities, losses, damages and expenses
(including reasonable attorneys' fees and expenses) arising out of or resulting
from: (i) any act or omission that may be committed or suffered by CDC or any of
its servants, agents or employees in connection with CDC's performance of this
Agreement, (ii) any violation of any applicable law or regulation in connection
with the marketing, distribution, sale, advertisement or promotion of any of the
Products, or (iii) any breach of this Agreement by CDC.  The provisions of this
Section 3.5 and CDC's obligations hereunder shall survive the expiration or
termination of this Agreement.


                                   ARTICLE 4
                                   ---------
                              ORDERS FOR PRODUCTS
                              -------------------

          4.1       Master Purchase Orders.  CDC shall submit master purchase
                    ----------------------                                   
orders for Products to SJ JAPAN twice each calendar year, prior to the Fall
Season and prior to the Spring Cruise Season.  CDC shall ensure that its master
purchase orders are received by SJ JAPAN no later than ninety (90) days prior to
the commencement of such Fall Season or Spring Cruise Season, as the case may
be.

          4.2       Other Purchase Orders.  CDC may also submit individual
                    ---------------------                                 
purchase orders for Products to SJ JAPAN from time to time.  CDC shall ensure
that such individual purchase orders are received by SJ JAPAN at least sixty
(60) days prior to the delivery dates requested in the order.

                                      V-3
<PAGE>
 
          4.3 Terms of Purchase Orders.  Each purchase order submitted by CDC
              ------------------------                                       
under Sections 4.1 and 4.2 above shall be in writing sent by mail, facsimile,
telex, telegram or cable, which shall set forth the information specified below,
as well as such other information as SJ JAPAN may reasonably request in the
format specified by SJ JAPAN from time to time:

     (a)      An identification of the Products ordered, including line name and
              product numbers,

     (b)      Quantity,

     (c)      Delivery schedule, identifying desired delivery dates, and

     (d)      Delivery instructions and addresses.

          4.4       Acceptance of Orders.  All purchase orders are subject to
                    --------------------                                     
acceptance in writing by SJ JAPAN at its principal offices in Tokyo.  Each such
purchase order shall be deemed to be an offer by CDC to purchase the Products
pursuant to the terms of this Agreement and, when accepted by SJ JAPAN as
hereinabove provided, shall give rise to a contract under the terms set forth
herein to the exclusion of any additional or contrary terms set forth in such
purchase order.  SJ JAPAN shall deliver to CDC its acceptance, if forthcoming,
of any purchase order within two (2) weeks of SJ JAPAN's receipt of such
purchase order.

          4.5       Modification of Orders.  No accepted purchase order shall be
                    ----------------------                                      
modified or cancelled except upon the written agreement of both parties.  CDC's
purchase orders or mutually agreed change orders shall be subject to all
provisions of this Agreement, whether or not the purchase order or change order
so states.

          4.6       Delivery Terms.  (a)  All risk of damage to or loss or delay
                    --------------                                              
of the Products shall pass to CDC upon delivery to a common carrier or an agent
or any other person specified by CDC acting on behalf of CDC.

          (b)  SJ JAPAN shall use reasonable commercial efforts to deliver
accepted orders in accordance with requested delivery dates.


                                   ARTICLE 5
                                   ---------
                              PRICES AND PAYMENTS
                              -------------------

          5.1       Prices.  The prices to be paid by CDC for Products purchased
                    ------                                                      
pursuant to this Agreement shall be the Distributor Prices in effect at the time
of acceptance of the relevant purchase order submitted by CDC, except as
provided in Section 5.2 below.  The difference between the Distributor Prices
and the prices CDC sells Products to its customers shall be CDC's sole
remuneration for distribution of the

                                      V-4
<PAGE>
 
Products.  All Distributor Prices include packing in accordance with SJ JAPAN's
standard commercial shipping practices in effect at the time of shipment.
Special packing or handling shall be at the sole expense of CDC.

          5.2       Price Increases, Decreases.  SJ JAPAN may, at any time
                    --------------------------                            
during the term of this Agreement, increase its prices for the Products by
providing CDC with at least forty-five (45) days prior written notice.
Increased prices for all Products shall not apply to purchase orders accepted
prior to the effective date of the price increase unless such orders provide for
delivery, and delivery is in fact made, more than one-hundred and twenty (120)
days after the date of acceptance of the order.  Price decreases with respect to
all Products shall be effective immediately upon written notice to the CDC on
all such Products not yet delivered.

              5.3   Payment Terms.  All payments hereunder shall be made
                    -------------                                       
pursuant to the following terms and conditions:

     (a)      to the extent that CDC has executed and maintains in effect a
              standby letter of credit in favor of SJ JAPAN for the then current
              Fall Season or Spring Cruise Season, as the case may be, in an
              amount at least equal to two-thirds (2/3) of the aggregate
              purchase price of SJ JAPAN's master purchase order and any
              individual purchase orders for such season and upon such other
              terms and conditions reasonably acceptable to SJ JAPAN, payments
              for shipments under such purchase orders shall be due net one
              hundred twenty (120) days from the date of shipment of the
              Products, or from the date of invoice for such charges as taxes,
              duties, interest or like special charges, payable to the bank or
              banks specified by SJ JAPAN in writing from time to time; and

     (b)      to the extent that no such letter of credit has been maintained,
              shipments shall be subject to payment by CDC prior to the
              scheduled delivery date for the Products, either (i) in cash to
              the bank or banks specified by SJ JAPAN in writing from time to
              time, or (ii) if and only to such extent as permitted by ST. JOHN,
              by use of a 120-day promissory note (yakusoku tegata) or other
              form of security for payment acceptable to ST. JOHN in its sole
              discretion; it being understood that SJ JAPAN shall not deliver
              shipments of Products subject to this subsection (b) for which SJ
              JAPAN has not received either full payment or acceptable security
              in advance.

All letters of credits and all payments hereunder shall be in Japanese Yen or
such other currency as may be mutually agreed upon.  In the event of any dispute
arising over any part of an invoice or the total amount due under an invoice
pursuant to subsection (a) above, all undisputed amounts shall be promptly paid
by CDC in accordance with this Section 5.3.

                                      V-5
<PAGE>
 
          5.4 Retail Prices.  CDC may sell Products at such prices as CDC, in
              -------------                                                  
its sole discretion, shall determine.  CDC shall, however, provide SJ JAPAN with
a list of its initial retail prices for the Products to be charged to its
customers and shall keep SJ JAPAN fully informed by providing SJ JAPAN with any
new list retail prices within ten (10) days of any change in such retail prices.

              5.5   Overdue Payments.  If and for so long as any payment from
                    ----------------                                         
CDC to SJ JAPAN under this Agreement shall be overdue:

     (a)      Interest at the rate equal to the lesser of: (i) the prime rate
              being charged in Tokyo by The Sakura Bank, Limited as of the close
              of business on the date the payment first becomes due plus one and
              one-half percent (1.5%), or (ii) the maximum rate permitted by
              applicable law; and

     (b)      SJ JAPAN shall have the right, in its sole discretion, to require
              payment for additional shipments of Products either by cash in
              advance or by an irrevocable, transferrable, divisible letter of
              credit confirmed by a bank specified by SJ JAPAN, instead of by
              open account as provided above.


                                   ARTICLE 6
                                   ---------
                            ACCEPTANCE AND WARRANTY
                            -----------------------

          6.1       Acceptance of Products.  In the event of any shortage,
                    ----------------------                                
damage or discrepancy in or to a shipment of Products, CDC shall promptly report
the same to SJ JAPAN and furnish such written evidence or other documentation as
SJ JAPAN may deem appropriate.  SJ JAPAN shall not be liable for any such
shortage, damage or discrepancy unless SJ JAPAN has received notice and
substantiating evidence thereof from CDC within thirty (30) days of arrival of
the Products at CDC's shipping address.  If the substantiating evidence
delivered by CDC demonstrates to SJ JAPAN's satisfaction that SJ JAPAN is
responsible for such shortage, damage or discrepancy, SJ JAPAN shall promptly
deliver additional or substitute Products or parts of Products, as SJ JAPAN may
deem sufficient, to CDC in accordance with the delivery procedures set forth
herein; provided, that in no event shall SJ JAPAN be liable for any additional
costs, expenses or damages incurred by CDC directly or indirectly as a result of
such shortage, damage or discrepancy in or to a shipment.

          6.2       Product Warranty.  SJ JAPAN warrants for a period of forty-
                    ----------------                                          
five (45) days after the date of delivery in accordance with Section 4.4 hereof
that the Products shall be free from defects in material and workmanship.  SJ
JAPAN's sole obligation in the event of a breach of such warranty shall be to
provide at no charge to CDC replacement Products for all defective Products.  In
no event shall SJ JAPAN have any responsibility or bear any liability for the
cost of labor for the repair of any defective

                                      V-6
<PAGE>
 
Products.  All costs of shipment of the replacement Products to CDC shall be
borne by CDC.  CDC shall retain all replaced Products subject to the foregoing
warranty for SJ JAPAN's inspection for a period of three (3) months after their
replacement.  All such replaced Products shall become the property of SJ JAPAN
upon their replacement and CDC shall return or destroy any such replaced
Products as SJ JAPAN shall so request, provided, that SJ JAPAN shall bear any
related shipping costs for the return of such Products.

          6.3       Excluded Claims.  SJ JAPAN shall have no obligation under
                    ---------------                                          
Section 6.2 above in the event that replacement of Products shall have been
necessitated in whole or in part by force majeure as defined in Section 12.1
hereof, or by the fault or negligence of CDC.

          6.4       Limited Warranty.  THE WARRANTIES SET FORTH IN THIS ARTICLE
                    ----------------                                           
6 ARE INTENDED SOLELY FOR THE BENEFIT OF CDC.  ALL CLAIMS HEREUNDER SHALL BE
MADE BY CDC AND MAY NOT BE MADE BY CDC'S CUSTOMERS.  THE WARRANTIES SET FORTH
ABOVE ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WHICH ARE HEREBY
DISCLAIMED AND EXCLUDED BY SJ JAPAN, INCLUDING WITHOUT LIMITATION ANY WARRANTY
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE AND ALL
OBLIGATIONS OR LIABILITIES ON THE PART OF SJ JAPAN FOR DAMAGES ARISING OUT OF OR
IN CONNECTION WITH THE USE OF THE PRODUCTS.


                                   ARTICLE 7
                                   ---------
                             LIMITATION OF REMEDIES
                             ----------------------

CDC UNDERSTANDS AND AGREES AS FOLLOWS:

          7.1       Delay.  SJ JAPAN SHALL NOT BE LIABLE FOR ANY LOSS OR DAMAGE
                    -----                                                      
CAUSED BY DELAY IN FURNISHING PRODUCTS AND SERVICES OR ANY OTHER PERFORMANCE
UNDER OR PURSUANT TO THIS AGREEMENT.

          7.2       Sole Remedies.  THE SOLE AND EXCLUSIVE REMEDIES FOR BREACH
                    -------------                                             
OF ANY AND ALL WARRANTIES AND THE SOLE REMEDIES FOR SJ JAPAN's LIABILITY OF ANY
KIND (INCLUDING LIABILITY FOR NEGLIGENCE) WITH RESPECT TO THE PRODUCTS AND
SERVICES COVERED BY THIS AGREEMENT AND ALL OTHER PERFORMANCE BY SJ JAPAN UNDER
OR PURSUANT TO THIS AGREEMENT SHALL BE LIMITED TO THE REMEDIES PROVIDED IN
SECTION 6.2, PRODUCT WARRANTY.

          7.3       Consequential Damages.  IN NO EVENT SHALL SJ JAPAN's
                    ---------------------                               
LIABILITY OF ANY KIND INCLUDE ANY SPECIAL, INDIRECT,

                                      V-7
<PAGE>
 
INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES, EVEN IF SJ JAPAN SHALL HAVE BEEN
ADVISED OF THE POSSIBILITY OF SUCH POTENTIAL LOSS OR DAMAGE.


                                   ARTICLE 8
                                   ---------
                                CONFIDENTIALITY
                                ---------------

          CDC acknowledges and agrees that all SJ JAPAN Information is
confidential and proprietary to SJ JAPAN.  CDC agrees not to use any of such SJ
JAPAN Information during the term of this Agreement and for a period of five (5)
years thereafter for any purpose other than as permitted or required for
performance by CDC hereunder.  CDC further agrees not to disclose or provide any
of such SJ JAPAN Information to any third party and to take all necessary
measures to prevent any such disclosure by its employees, agents, contractors or
consultants during the term hereof and for a period of five (5) years
thereafter.  Nothing herein shall prevent CDC from using, disclosing or
authorizing the disclosure of any SJ JAPAN Information which (i) is, or
hereafter becomes, through no fault of CDC, part of the public domain, (ii) is
disclosed orally and is not identified as confidential information either at the
time of disclosure or by written notice sent to CDC within ten (10) business
days after disclosure thereof, or (iii) is required to be disclosed by any
governmental authority or otherwise under applicable law.

          SJ JAPAN acknowledges and agrees that all CDC Information is
confidential and proprietary to CDC.  SJ JAPAN agrees not to use any of such CDC
Information during the term of this Agreement for any purpose other than as
permitted or required for performance by SJ JAPAN hereunder.  SJ JAPAN further
agrees not to disclose or provide any of such CDC Information to any third party
and to take all necessary measures to prevent any such disclosure by its
employees, agents, contractors or consultants during the term hereof.  Nothing
herein shall prevent SJ JAPAN from using, disclosing or authorizing the
disclosure of any CDC Information which (i) is, or hereafter becomes, through no
fault of SJ JAPAN, part of the public domain, (ii) is disclosed orally and is
not identified as confidential information either at the time of disclosure or
by written notice sent to SJ JAPAN within ten (10) business days after
disclosure thereof, or (iii) is required to be disclosed by any governmental
authority or otherwise under applicable law.


                                   ARTICLE 9
                                   ---------
                                   TRADEMARKS
                                   ----------

          SJ JAPAN has granted to CDC a right and license to use the trademarks
specified in the CDC License Agreement, and the nature and terms of such right
and license shall be as set forth in the CDC License Agreement.

                                      V-8
<PAGE>
 
                                  ARTICLE 10
                                  ----------
                                     TAXES
                                     -----

          All payments to be made by CDC to SJ JAPAN pursuant to this Agreement
represent net amounts SJ JAPAN is entitled to receive, shall not be subject to
any deductions for any reason whatsoever, and are net of taxes.  In the event
any of said payments become subject to taxes (including without limitation,
sales, value-added and similar taxes), duties, assessments or fees of whatever
kind or nature, said payments shall be increased to such an extent as to allow
SJ JAPAN to receive the net amounts due under this Agreement.


                                   ARTICLE 11
                                   ----------
                              TERM AND TERMINATION
                              --------------------

          11.1      Term.  The term ("Term") of this Agreement shall run from
                    ----                                                     
the effective date hereof and terminate upon the termination of the License and
Distribution Agreement, including any renewal thereof, unless this Agreement is
sooner terminated pursuant to the provisions of Section 11.2 hereof.

          11.2      Termination.  Notwithstanding the provisions of Section 11.1
                    -----------                                                 
above, this Agreement may be terminated in accordance with the following
provisions:

     (a)      Either party hereto may terminate this Agreement at any time by
              giving notice in writing to the other party, which notice shall be
              effective upon dispatch, should the other party file a petition of
              any type as to its bankruptcy, be declared bankrupt, become
              insolvent, make an assignment for the benefit of creditors, or go
              into liquidation or receivership.

     (b)      Either party may terminate this Agreement by giving notice in
              writing to the other party should an event of Force Majeure
              continue for more than ninety (90) days as provided in Section
              12.5 below.

     (c)      Either party may terminate this Agreement by giving notice in
              writing to the other party in the event the other party is in
              material breach of this Agreement and shall have failed to cure
              such breach within thirty (30) days of receipt of written notice
              thereof from the first party.

     (d)      Either party may terminate this Agreement upon giving notice in
              writing to the other party in the event of early termination of
              the CDC License Agreement.

                                      V-9
<PAGE>
 
          11.3  Rights and Obligations on Termination.  In the event of
                -------------------------------------                  
expiration or termination of this Agreement for any reason, the parties shall
have the following rights and obligations;

     (a)      Termination of this Agreement shall not release either party from
              the obligation to make payment of all amounts then or thereafter
              due and payable;

     (b)      SJ JAPAN shall have the right, at its option, to (i) cancel any or
              all accepted purchase orders which provide for delivery after the
              effective date of termination, and/or (ii) repurchase all or any
              part of CDC's inventory of Products in CDC's possession as of the
              termination date at SJ JAPAN's invoiced price to CDC for such
              products, less depreciation calculated on a thirty-six (36) month,
              straight-line basis and less any appropriate amount for excessive
              wear and tear, plus freight to the original Free Carrier shipping
              point.  SJ JAPAN shall exercise its option under this subsection
              by notifying CDC in writing no later than thirty (30) days after
              the effective termination date.

     (c)      CDC's obligations pursuant to Article 8 shall survive termination
              of this Agreement.

          11.4      No Compensation.  In the event either party terminates this
                    ---------------                                            
Agreement for any reason in accordance with the terms hereof, the parties hereby
agree that, subject to the provisions of Section 11.3(a) hereof and without
prejudice to any other remedies which either party may have in respect of any
breach of this Agreement, neither party shall be entitled to any compensation or
like payment from the other as a result of such termination.

          11.5      Attorneys' Fees.  In the event of any action for the breach
                    ---------------                                            
of this Agreement or other cause by any party hereto, the prevailing party shall
be entitled to reasonable attorneys' fees, costs and expenses incurred in such
action.


                                   ARTICLE 12
                                   ----------
                                 FORCE MAJEURE
                                 -------------

          12.1      Definition.  Force Majeure shall mean any event or
                    ----------                                        
condition, not existing as of the date of signature of this Agreement, not
reasonably foreseeable as of such date and not reasonably within the control of
either party, which prevents in whole or in material part the performance by one
of the parties of its obligations hereunder or which renders the performance of
such obligations so difficult or costly as to make such performance commercially
unreasonable.  Without limiting the foregoing, the following shall constitute
events or conditions of Force Majeure:  acts of

                                     V-10
<PAGE>
 
State or governmental action, riots, disturbance, war, strikes, lockouts,
slowdowns, prolonged shortage of energy suppliers, epidemics, fire, flood,
hurricane, typhoon, earthquake, lightning and explosion.

          12.2      Notice.  Upon giving notice to the other party, a party
                    ------                                                 
affected by an event of Force Majeure shall be released without any liability on
its part from the performance of its obligations under this Agreement, except
for the obligation to pay any amounts due and owing hereunder, but only to the
extent and only for the period that its performance of such obligations is
prevented by the event of Force Majeure.  Such notice shall include a
description of the nature of the event of Force Majeure, and its cause and
possible consequences.  The party claiming Force Majeure shall promptly notify
the other party of the termination of such event.

          12.3      Confirmation.  The party invoking Force Majeure shall
                    ------------                                         
provide to the other party confirmation of the existence of the circumstances
constituting Force Majeure.  Such evidence may consist of a statement or
certificate of an appropriate governmental department or agency where available,
or a statement describing in detail the facts claimed to constitute Force
Majeure.

          12.4      Suspension of Performance.  During the period that the
                    -------------------------                             
performance by one of the parties of its obligations under this Agreement has
been suspended by reason of an event of Force Majeure, the other party may
likewise suspend the performance of all or part of its obligations hereunder to
the extent that such suspension is commercially reasonable.

          12.5      Termination.  Should the period of Force Majeure continue
                    -----------                                              
for more than ninety (90) consecutive days, either party may terminate this
Agreement without liability to the other party, except for payments due to such
date, upon giving written notice to the other party.


                                   ARTICLE 13
                                   ----------
                            DISPUTES; INTERPRETATION
                            ------------------------

          13.1      Disputes.  The sole jurisdiction and venue for any court
                    --------                                                
action arising out of this Agreement shall be an appropriate federal or state
court in Orange County, California, U.S.A.  Each of SJ JAPAN and CDC hereby
irrevocably submits to the jurisdiction of any of said courts in any court
action and hereby waives any claim or defense of inconvenient forum.  Each of SJ
JAPAN and CDC represents and warrants that it is not entitled to immunity from
judicial proceedings and agrees that, should the other bring any court action,
it will not claim any immunity from such proceedings for itself or with respect
to its property.

     In the event of any action for the breach of this Agreement or other cause
by any Party, the prevailing Party shall be entitled to reasonable attorney's
fees, costs and expenses incurred in such action.

                                     V-11
<PAGE>
 
          13.2  Governing Law.  The validity, construction and performance of
                -------------                                                
this Agreement shall be governed by and interpreted in accordance with the laws
of the State of California, U.S.A., excluding its choice of law provisions.

          13.3      Governing Language.  This Agreement is executed in the
                    ------------------                                    
English language which shall be the controlling language and no translation or
restatement of the terms and conditions hereof in any other language will have
any effect in the interpretation or application thereof.

          13.4      Effect of Headings.  The headings to Sections of this
                    ------------------                                   
Agreement, excepting those in Section 1 hereof, are to facilitate reference
only, do not form a part of this Agreement, and shall not in any way affect the
interpretation hereof.

          13.5      Non-Waiver.  The waiver, express or implied, by any of the
                    ----------                                                
parties hereto of any right hereunder or of any failure to perform or breach
hereof by the other party shall not constitute or be deemed a waiver of any
other right hereunder or of any other failure to perform or breach hereof by
such other party(s), whether of a similar or dissimilar nature thereto.
Acceptance of payments by SJ JAPAN shall not be deemed a waiver by SJ JAPAN of
any violation of or default under any of the provisions of this Agreement by
CDC.


                                   ARTICLE 14
                                   ----------
                                 MISCELLANEOUS
                                 -------------

          14.1      Relationship.  This Agreement does not make either party the
                    ------------                                                
employee, agent or legal representative of the other for any purpose whatsoever.
Neither party is granted any right or authority to assume or to create any
obligation or responsibility, express or implied, on behalf of or in the name of
the other party.  In fulfilling its obligations pursuant to this Agreement each
party shall be acting as an independent contractor.

          14.2      Assignment.  (a)  Neither party shall have the right to
                    ----------                                             
assign or otherwise transfer its rights and obligations under this Agreement
except with the prior written consent of the other party; provided, however, SJ
JAPAN shall be entitled to assign any or all of its rights and obligations
hereunder to any affiliate of SJ JAPAN, provided that SJ JAPAN shall remain
fully liable for the performance of all its obligations hereunder; provided
further, that a successor in interest by merger, by operation of law,
assignment, purchase or otherwise of the entire business of either party shall
acquire all rights and obligations of such party hereunder.  Any prohibited
assignment shall be null and void.

          (b) Any permitted assignment shall be subject to and conditioned on
the issuance of any governmental validations, authorizations, licenses or
rulings then required under applicable law in connection with such assignment.

                                     V-12
<PAGE>
 
          14.3  Notices.  Notices permitted or required to be given hereunder
                -------                                                      
shall be deemed sufficient if dispatched by registered mail, postage prepaid, in
any post office, by facsimile transmission, or by personal delivery to the
addresses first above written or such other addresses or facsimile numbers as
the respective parties may designate by like notice from time to time.  Any
notice given as herein provided shall be considered to have been received
immediately upon personal delivery thereof, four (4) days after the mailing
thereof, or if by facsimile transmission the next business day.

          14.4      ENTIRE AGREEMENT.  THIS AGREEMENT CONSTITUTES THE ENTIRE
                    ----------------                                        
AGREEMENT OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND
SUPERSEDES ALL PREVIOUS DISTRIBUTORSHIP AGREEMENTS BY AND BETWEEN SJ JAPAN AND
CDC AS WELL AS ALL PROPOSALS, ORAL OR WRITTEN, AND ALL NEGOTIATIONS,
CONVERSATIONS OR DISCUSSIONS HERETOFORE HAD BETWEEN THE PARTIES RELATED TO THIS
AGREEMENT.  CDC ACKNOWLEDGES THAT IT HAS NOT BEEN INDUCED TO ENTER INTO THIS
AGREEMENT BY ANY REPRESENTATIONS OR STATEMENTS, ORAL OR WRITTEN, NOT EXPRESSLY
CONTAINED HEREIN.

          14.5      Amendment.  This Agreement shall not be deemed or construed
                    ---------                                                  
to be modified, amended, rescinded, cancelled or waived, in whole or in part,
except by written amendment signed by the parties hereto.

          14.6      Severability.  In the event that any of the terms of this
                    ------------                                             
Agreement are in conflict with any rule of law or statutory provision or are
otherwise unenforceable under the laws or regulations of any government or
subdivision thereof, such terms shall be deemed stricken from this Agreement,
but such invalidity or unenforceability shall not invalidate any of the other
terms of this Agreement and this Agreement shall continue in force, unless the
invalidity or unenforceability of any such provisions hereof does substantial
violence to, or where the invalid or unenforceable provisions comprise an
integral part of, or are otherwise inseparable from, the remainder of this
Agreement.

          14.7      Counterparts.  This Agreement may be executed in any number
                    ------------                                               
of counterparts, each of which shall be an original and all of which shall
constitute one and the same instrument.  This Agreement may be executed and
delivered via facsimile and such execution and delivery by facsimile shall have
the same force and effect as a hand delivered executed original.

          14.8      Waiver.  No failure by either party to take any action or
                    ------                                                   
assert any right hereunder shall be deemed to be a waiver of such right in the
event of the continuation or repetition of the circumstances giving rise to such
right.


                                 * * * * * * *

                                     V-13
<PAGE>
 
              IN WITNESS WHEREOF, The parties have caused this Agreement to be
executed on the date first above written.



COMMERCIAL DEVELOPMENT CO., LTD.    ST. JOHN CO., LTD.


By:________________________              By:________________________
Name:                                    Name:
Title:                                   Title:



Acknowledged and approved:

ST. JOHN KNITS, INC.


By:________________________
Name:
Title:

                                     V-14