<PAGE>
 
================================================================================

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                               ----------------

                                   FORM 10-K
(Mark One)
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
 
                  For the fiscal year ended November 1, 1998
 
                                      OR
 
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934
 
                 For the transition period from       to
                        Commission File Number 1-11752
 
                             ST. JOHN KNITS, INC.
            (Exact name of registrant as specified in its charter)

               California                       95-2245070
      (State or other jurisdiction           (I.R.S. Employer
     of incorporation or organization)     Identification Number)
 
            17422 Derian Avenue
            Irvine, California                     92614
 (Address of principal executive offices)        (Zip Code)
 
      Registrant's telephone number, including area code: (949) 863-1171
 
          Securities registered pursuant to Section 12(b) of the Act:
 
                                                        Name of each exchange
      Title of each class                                on which registered
      -------------------                               ---------------------
      Common Stock                                     New York Stock Exchange
 
       Securities registered pursuant to Section 12(g) of the Act: None
 
  Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
 
  The aggregate market value of Registrant's Common Stock held by
nonaffiliates as of January 26, 1999 was $414,811,098 based on 15,363,374
shares outstanding on such date and the closing sales price for the Common
Stock on such date of $27.00 as reported on the New York Stock Exchange.
 
  As of January 26, 1999, the Registrant had 16,581,482 shares of Common Stock
outstanding.
 
  PART III incorporates information by reference from the Registrant's
definitive Proxy Statement for its 1999 Annual Meeting of Shareholders to be
filed with the Commission within 120 days of November 1, 1998.
 
================================================================================
<PAGE>
 
                                    PART I
 
Item 1. BUSINESS
 
  St. John Knits, Inc. (the "Company") is a leading designer, manufacturer and
marketer of women's clothing and accessories, principally under the St. John
trade name. For over thirty five years, the St. John name has been associated
with high quality and a specific look in knitwear characterized by vibrant
colors and classic, timeless styling. The St. John "look," combined with
limited production runs and selective distribution, has created an exclusive
image, engendering consumer loyalty. The Company was formed in 1962 under the
laws of the State of California.
 
Products
 
  The Company's products are organized primarily into eight separate product
lines: Knitwear, Accessories, Sport, Griffith & Gray, Shoes, Coat Collection,
SJK and Fragrance.
 
  Knitwear The Company organizes its St. John knitwear collection into four
  --------
groups. The breadth of each group enables the Company to compete in most
segments of women's designer clothing. The Company's knitwear products are
sold as a collection of lifestyle clothing suitable for women's business,
evening and casual needs. St. John knitwear is a year-round product, not
confined to a single season or climate, due to its all-purpose weight. The
Company designs knitwear collections to encourage consumers to coordinate
outfits, resulting in multiple product purchases within a collection. Each
group is sufficiently comprehensive to stand alone, which allows for
flexibility in marketing and presentation.
 
    Collection:
 
    The Collection line consists of elegant ready-to-wear styles for which
  the Company is best known. This line of daytime knit fashions includes
  sophisticated dresses and suits that focus on a tailored look and are aimed
  at active women engaged in all kinds of lifestyles. The Collection line
  also includes jacket, pant, skirt, coat and sweater styles. All items in
  the line are sold as separates, including two-piece suit styles.
 
    Dressy:
 
    The Dressy line consists of dresses, theater suits and dressy separates.
  The basic look of the Dressy line is one of understated elegance enhanced
  by innovative, often luxurious touches, such as layers of transparent
  paillettes and sequins, embroidered sleeves or glittery collars and cuffs.
 
    Basics:
 
    The Basics line is comprised of the Company's seasonless products, such
  as classic jackets, skirts and pants that are an integral part of women's
  wardrobes, all in solid black, white or navy. The designs are so basic that
  they can be combined with any number of styles from any of the Company's
  product lines worn for daytime or dressed up for evening. Basic items are
  made available for sale by the Company throughout the year. Since Basics
  items are seasonless, they do not have fixed selling periods and retailers'
  inventories of Basics products tend to be maintained throughout the year
  and reordered as necessary.
 
    Couture:
 
    The Couture line is comprised of both a day and evening group. The day
  group includes dresses and two-piece suits which are designed with elegant
  embroidery and beautiful lining. The evening group consists of two-piece
  suits and long gowns. Both groups are designed using colored paillettes and
  sequins and are very exclusive with limited production quantities.
 
  Accessories The Accessories line is comprised of fine fashion jewelry, silk
  -----------
scarves, suede belts and handbags. All accessories are color coordinated with
the various fashion collections, yet are designed to work equally well on
their own. Four collections of upscale jewelry are produced each year, from
gold earrings and chunky chokers to bracelets, chain necklaces and chain
belts.
 
                                       1
<PAGE>
 
  Sport St. John Sport consists of a line of activewear which includes
  -----
jackets, skirts, pants, tops and jeans. The line is primarily manufactured in
the Company's production facilities using woven fabrics purchased in Italy.
 
  Griffith & Gray The Griffith & Gray line includes suits, coats, dresses,
  ---------------
separates and eveningwear. Nearly one-half of the line is manufactured in the
Company's production facilities, including various knit styles. The balance of
the line is manufactured by outside contractors located in Italy using high
quality European woven fabrics.
 
  Shoes The St. John Shoe line consists of pumps, sling backs, loafers and
  -----
boots, manufactured in Italy using the finest Italian leather. During fiscal
1997, the Company began distribution of the Shoe line to most of its major
customers in the United States.
 
  Coat Collection The St. John Coat Collection consists primarily of faux fur
  ---------------
coats in various styles and colors, manufactured in the Company's factories,
using fabric imported from Europe.
 
  SJK The SJK line consists of dresses, skirts, pants, jackets and sweaters
  ---
which are simpler and priced from 30% to 50% lower than the Company's knitwear
product line. The line began shipping during the fourth quarter of fiscal
1997. During fiscal 1998, SJK was distributed through the Company's major
customers. Subsequent to the end of fiscal 1998, the Company discontinued the
SJK line.
 
  Fragrance The Fragrance line includes perfume, eau de parfum, perfumed body
  ---------
mist, body cream, lotion, body powder and bath products. The signature
fragrance is marketed as an accessory to the St. John apparel line through
most of the Company's major customers and the Company's own retail stores.
During fiscal 1997, the Company signed a distribution agreement to allow
another company the rights to distribute the fragrance in the United States.
During fiscal 1998 the Company launched a second scent, White Camellia. The
new scent is currently marketed along with the Company's signature scent.
 
  The following table details the approximate range of suggested retail prices
by product line. The suggested retail prices are indicative of individual item
prices.
 
<TABLE>
<CAPTION>
                                                            Range of Suggested
      Product Line             Selected Products              Retail Prices
      --------------- -----------------------------------   ------------------
      <C>             <S>                                   <C>
      Knitwear
       Collection     Dresses, 2-Piece Suits, 3-Piece          $350-$1,400
                      Suits, Jackets, Pants, Skirts,
                      Coats, Sweaters, Separates
       Dressy         Dresses, Theater Suits, Dressy           $650-$2,000
                      Separates
       Basics         Skirts, Jackets, Pants                   $160-$  690
       Couture        Dresses, Gowns, Two-Piece Suits          $900-$3,800
      Accessories     Jewelry, Scarves, Belts, Handbags        $ 60-$  525
      Sport           Jackets, Skirts, Pants, Tops, Jeans      $ 95-$1,100
      Griffith & Gray Suits, Coats, Dresses, Separates,        $200-$1,800
                      Eveningwear
      Shoes           Pumps, Sling Backs, Loafers, Boots       $210-$  375
      Coat Collection Faux Fur Coats                           $750-$1,100
      Fragrance       Perfume, Bath Products                   $ 25-$  250
</TABLE>
 
                                       2
<PAGE>
 
Sales by Division
 
  The following is a comparison of the net sales by division for the past
three fiscal years:
 
<TABLE>
<CAPTION>
                                                1998      1997          1996
                                              --------  --------      --------
                                                    (in thousands)
     <S>                                      <C>       <C>           <C>
     Knitwear................................ $198,458  $173,550      $149,297
     Company Owned Retail Stores.............   74,330    64,154        51,334
     Sport...................................    9,912     8,545         9,457
     SJK.....................................    9,011     1,980(1)        --
     Jewelry & Accessories...................    8,750     9,328        10,105
     Shoes...................................    6,439     3,441           --
     Amen Wardy Home.........................    6,260       293(1)        --
     Griffith & Gray.........................    5,952     5,605         3,585
     St. John Company, Ltd...................    4,415     1,781(1)        --
     Fragrance...............................    2,263     1,725         2,762
     Coat Collection.........................    1,446     2,440         1,982
     Sales Elimination.......................  (45,275)  (30,741)      (25,571)
                                              --------  --------      --------
     Total Net Sales......................... $281,961  $242,101      $202,951
                                              ========  ========      ========
</TABLE>
--------
(1) The SJK line began shipping during the fourth quarter of fiscal 1997. Amen
    Wardy Home began operations during the fourth quarter of fiscal 1997 with
    the opening of its first two stores. St. John Company, Ltd. also began
    operations during the fourth quarter of fiscal 1997.
 
License Agreements
 
  The Company has entered into license agreements to manufacture and sell both
eyewear and watches under the St. John name. The eyewear line was launched
during fiscal 1998 while the watch line was launched subsequent to the end of
fiscal 1998.
 
Design
 
  Marie St. John Gray is the Company's Chief Designer and provides leadership
and direction for all aspects of the design process. In 1991, Kelly Gray
assumed the responsibilities of Creative Director, and she was appointed
President of the Company in April 1996. She currently shares with Marie Gray
the responsibility of providing leadership and direction for the design staff.
Each product line of the Company has its own design team which reports to
either Marie or Kelly Gray.
 
Marketing
 
  The Company's products are distributed primarily through a select group of
specialty retailers and the Company's own retail boutiques. The Company
distributes its products to approximately 630 locations in the United States
and abroad. Three national specialty retailers, Saks Fifth Avenue, Neiman
Marcus and Nordstrom, each accounted for more than 10.0% of the Company's net
sales in fiscal 1998 (approximately 45% collectively), and have been customers
of the Company for approximately 25, 20 and 15 years, respectively. These
retailers generally purchase knitwear styles in each collection and carry a
representative display of every product line. Since the mid 1980s, the Company
has worked with these and certain other retailers to create in-store
boutiques, which are designated areas devoted exclusively to the Company's
products. Other significant customers of the Company include Jacobson's,
Macy's West, Lord & Taylor, Marshall Field's and Dayton Hudson.
 
  During fiscal years 1998 and 1997, foreign sales accounted for approximately
7.5% and 7.6% of the Company's net sales, respectively. The Company
distributes its products directly in Canada, Europe and parts of
 
                                       3
<PAGE>
 
Asia. In Europe and parts of Asia, the Company uses independent sales
representatives. During fiscal 1997, the Company formed a majority owned
subsidiary in Japan, St. John Company, Ltd., to distribute its products within
Japan. Prior to the formation of this new entity, the Company used a
distributor for its sales into Japan.
 
  The Company believes that most major retailers are continuing to consolidate
their women's apparel buying among a narrowing group of established brand name
vendors such as the Company. Further, the Company is viewed by most of its
major accounts as a core resource. This means that the Company's collection is
one of the top products in the store in terms of sales volume and is the focus
of management's attention and an important component to their profit
structure. A core resource is valued for its growth potential and ability to
make money for the store. As a core resource, the Company also receives
priority in display, advertising, promotion and high traffic locations for its
products.
 
  The Company markets its Collection, Dressy and Couture lines along with its
Sport and Griffith & Gray lines twice a year, during the fall and
cruise/spring seasons. The Shoe line is marketed four times per year, while
the Coat Collection is marketed only once a year. The Company markets its
Basics, Accessories and Fragrance lines throughout the year. The Company's
product lines are sold in its Irvine, New York, Dallas and Dusseldorf
showrooms. The Company also markets its products in other foreign countries
using its outside sales representatives to show the lines at various times
throughout the year. Major accounts make their purchases in the Irvine
showroom so that members of the Company's senior management team can work
closely with these retailers to achieve the appropriate mix of merchandise.
Members of the senior management team are also present in New York, Dallas and
Dusseldorf to oversee sales during peak periods. Showings for the Knitwear
product line for the fall season generally occur in January with delivery
between May and October, and showings for the cruise/spring season generally
occur in August with delivery between November and April. Orders for each of
these six-month delivery periods normally are received within five weeks of
showings, and the goods are then made to order, thereby minimizing inventory
risk.
 
  Detailed marketing plans are prepared on a yearly basis and are coordinated
with senior management of major retail customers. Plans are based on
purchases, expected sales growth and profitability, and consist of a blend of
advertising, promotion, in-store presentation and training of sales personnel.
The strategy of the Company is to not only sell its products at wholesale, but
to follow the sale through to the ultimate consumer. The Company believes that
this approach ensures steady, consistent growth by building its consumer base.
The retail account sales force consists of an outside sales team, showroom
personnel and customer service representatives. The outside sales team is
comprised of 41 field representatives employed by the Company who live and
work in key retail cities. They are experienced individuals with strong retail
or wholesale backgrounds, and they are directly accountable for the
performance of their assigned retail stores. The function of the outside sales
team is to establish and maintain in-store boutique presentations, to develop
close working relationships with store management, to develop key sales people
into St. John specialists and to be skilled and knowledgeable trainers in
fashion, style and fit. The Company also has showroom personnel positioned at
its showrooms in Irvine, New York and Dallas who present the collection to
retail accounts. The Company's customer service representatives who are also
located at the showrooms maintain computerized shipping and order records and
keep daily or weekly information on each store's retail sales and styles sold.
 
  The Company also believes it is necessary to have top sales people employed
by its retail customers' stores as designated St. John specialists. The
Company has developed programs through which the stores and the Company
sponsor the training of sales people at the Company's headquarters and
establish incentive goals for each sales person. Information from the
Company's sales force and communication with these specialists give the
Company firsthand knowledge of consumer reaction to style, fit and fashion.
The specialist programs vary and are tailored to the individual retail store.
The Company is involved in the hiring and the supervision of the specialists.
The St. John specialist position is viewed as highly desirable for its
management attention and rewards.
 
  In keeping with its exclusive upscale image, the Company advertises in both
national and international fashion magazines. Management believes that this
advertising approach enhances the Company's image. The
 
                                       4
<PAGE>
 
Company's advertising features Kelly Gray as its Signature Model. The Company
designs and produces seasonal exclusive St. John catalogs, which are
distributed at the discretion of individual specialty retailers. Distribution
is usually limited to target repeat purchasers or those who meet the Company's
consumer profile.
 
Company Owned Stores
 
  In order to diversify its product distribution and enhance name recognition,
the Company began opening its own retail boutiques in 1989 and currently
operates seventeen such boutiques. During fiscal 1998 the Company relocated
its Las Vegas boutique to a new, larger facility and opened a new boutique
location in Scottsdale, Arizona. In addition, the Company closed its boutique
located in Aspen, Colorado and converted a boutique located in San Antonio,
Texas to an outlet store. Subsequent to the end of fiscal 1998, the Company
relocated its boutique at South Coast Plaza in Costa Mesa, California, to a
larger location within the mall. The Company also operates nine outlet stores.
In fiscal years 1998 and 1997, Company owned retail boutiques and outlet
stores represented 26.4% and 26.5% of net sales, respectively. The Company
believes its retail boutiques do not adversely affect the sales of its
products by specialty retailers.
 
  During fiscal 1997, the Company formed Amen Wardy Home Stores, LLC, an
entity which is 51 percent owned. The new entity was established to operate
home furnishing boutiques under the name of Amen Wardy Home. The Amen Wardy
Home boutiques sell upscale home furnishing and gift items. There were five
boutiques open at the end of fiscal 1998. Subsequent to the end of fiscal
1998, a sixth location was opened at South Coast Plaza in Costa Mesa,
California.
 
Manufacturing
 
  The Company has developed a vertically integrated manufacturing process
which it believes is critical to its success. This process assures greater
quality control, enhances manufacturing flexibility and reduces the lead time
of the manufacturing cycle. The Company twists, dyes and knits its yarn, as
well as constructs, presses and finishes its knitwear products, in its six
facilities located in Southern California. The Company manufactures its
knitwear using the computer aided manufacturing capabilities of its electronic
knitting machines and a skilled labor force. The Company also manufactures its
own jewelry and hardware for its products. Since the Company manufactures
products primarily based on orders received from retailers, the Company
maintains limited inventories of finished goods. During fiscal 1998,
approximately 93% of the Company's products were manufactured at the Company's
own facilities, while the remaining 7% of the Company's products, consisting
principally of the Griffith & Gray and shoe product lines, as well as
handbags, scarves, belts and fragrance, were manufactured by outside
contractors primarily in Europe. In addition, the products sold through Amen
Wardy Home are primarily purchased from third party vendors.
 
  The basic raw materials for the Company's knitted apparel products consist
of wool originating from Australia and viscose rayon from Germany and Japan.
The manufacturing process begins when the wool and rayon are twisted together
on the Company's precision twisting machines. The twisted yarn is transferred
to the Company's dye house for dyeing. Yarn is dyed, based on garment orders
received. The dyed yarn is knitted on the Company's computerized electronic
knitting machines. The knitted pieces, or blankets, are cut, assembled and
finished in the Company's linking, seaming and hand finishing facilities. The
Company's jewelry and hardware manufacturing plants produce the buttons and
buckles for garments, as well as bracelets, earrings, necklaces, chokers, pins
and other accessories. The Company also manufactures many of its woven
products in its manufacturing facilities, including both the Sport and Coat
Collection lines. In addition, the Company manufactures blouses, jeans and
certain scarves in its own facilities.
 
  The Company's production staff coordinates all apparel manufacturing. The
vertical integration and constant monitoring of the manufacturing process
allows for timely reaction to styles or groups of styles that are in high
demand. This response time would be more difficult if the Company had to rely
on outside contractors.
 
  The Company's vertically integrated jewelry and hardware manufacturing
facility was completed in December 1991. This facility allows for extensive
product development by the Company's creative design team,
 
                                       5
<PAGE>
 
quality control over all phases of jewelry manufacturing and quick response to
production requirements. During fiscal 1998, the Company completed a new
jewelry and hardware manufacturing facility located in Mexico. The new
facility gives the Company additional manufacturing capacity as well as the
ability to lower the cost of certain jewelry and hardware components through
reduced labor costs.
 
Quality Control
 
  The Company has achieved its quality reputation by vertically integrating
manufacturing processes and maintaining control over its operations. The
Company's expansion into dyeing, yarn twisting and jewelry and hardware
manufacturing was due primarily to the inability of outside suppliers to
provide products meeting the Company's standards on a consistent and timely
basis. The Company's quality control program is designed to enable all
finished goods to meet the Company's standards. During the second quarter of
fiscal 1998, the Company incurred additional labor costs to repair finished
product which did not meet its final inspection criteria. Due to these issues,
the Company reevaluated its quality control program and instituted additional
procedures. Included in these changes was the appointment of a director of
quality control and the establishment of additional inspection points
throughout the manufacturing processes. During the manufacturing processes,
every garment is individually inspected.
 
  As noted above, the Company uses outside contractors primarily for the
manufacturing of its shoes, handbags and certain woven products. The Company
has instituted procedures to maintain the quality of products manufactured by
outside contractors.
 
Suppliers
 
  In the production of its knitwear, the Company uses the highest quality
wool, primarily from Australia. Generally, a wool commitment is taken with the
Company's primary U.S. spinner for a set quantity of wool based on the
Company's forecasted wool requirements for approximately one year. Other
spinners are available, both domestically and internationally, with comparable
pricing for spun Australian wool yarn. The Company also has yarn suppliers in
Europe and Asia. The Company generally maintains an inventory of twisted yarn
sufficient for approximately six weeks of production to protect it from
potential interruptions in the flow of raw materials. Rayon is available in
raw or dyed form from various European and Japanese suppliers. The Company
purchases fabric from various suppliers and has little difficulty in
satisfying its fabric requirements from Europe and Asia. Crystals, glass
beadings, pearls and raw materials used in manufacturing of paillettes are
purchased from certain suppliers in Europe. The Company believes there are
alternative sources for certain of these specialized items.
 
Trademarks
 
  The Company owns and utilizes several trademarks, principal among which are
St. John(R), St. John by Marie Gray(R), St. John Boutiques(R) and Griffith
Gray(R). The St. John(R) trademark is registered with the United States Patent
and Trademark Office and in several other major jurisdictions in the world.
The Company does not own the rights to sell its knitwear products under the
St. John trademark in Japan. Sales of the Company's products in Japan are made
under the trademark Marie Gray(R), which is also owned by the Company. The
Company regards its trademarks and other proprietary rights as valuable assets
and believes that they have significant value in the marketing of its
products. The Company vigorously protects its trademarks against infringement.
 
Regulation
 
  Federal, state and local regulations relating to the work place and the
discharge of materials into the environment are continually changing;
therefore, it is difficult to gauge the total future impact of such
regulations on the Company. However, the Company does not expect existing
government regulations to have a material effect on the Company's competitive
position, operating results or planned capital expenditures.
 
                                       6
<PAGE>
 
Subsidiaries
 
 St. John Knits International, Incorporated
 
  St. John Knits International, Incorporated ("International") is a foreign
sales corporation for the Company. International was incorporated during
fiscal 1997 in Barbados as a "large FSC" under Section 922 of the Internal
Revenue Code of 1986, as amended. International participates in certain of the
Company's foreign operations.
 
  Previously, the Company operated a "small FSC" under the name St. John Knits
International, Inc. This entity was dissolved during fiscal 1997.
 
 St. John Company, Ltd.
 
  St. John Company, Ltd. is a majority owned subsidiary of the Company which
was incorporated during fiscal 1997 under the laws of Japan. St. John Company,
Ltd. is licensed by the Company to distribute the Company's products in Japan.
During fiscal 1998, the Company increased its ownership percentage in this
subsidiary to 68 percent from 51 percent held previously.
 
 Amen Wardy Home Stores, LLC
 
  Amen Wardy Home Stores, LLC ("Amen"), a Delaware limited liability company,
is a 51 percent owned subsidiary of the Company. Amen was formed during fiscal
1997 to operate retail home furnishing boutiques.
 
 St. John Trademarks, Inc.
 
  St. John Trademarks, Inc. is a wholly owned subsidiary of the Company. St.
John Trademarks, Inc. and the Company have entered into a partnership
organized under the laws of Luxembourg to hold certain of the Company's
proprietary rights.
 
 St. John--Varian Development Company
 
  St. John--Varian Development Company, a 50 percent owned joint venture with
an unrelated third party, was formed during fiscal 1995. The joint venture
owns a 175,000 square foot building located in Irvine which is leased to the
Company under a lease agreement expiring in 2010.
 
 St. John--Italy, Inc.
 
  St. John--Italy, Inc., a California corporation, is a wholly owned
subsidiary of the Company. St. John--Italy, Inc. was incorporated during
fiscal 1996 to operate as a branch in Italy. During fiscal 1997, the entity
began operating as a buying office for the Company. Subsequent to the end of
fiscal 1998, the Company moved its operations to Irvine, California and began
the procedures to close its operations in Italy.
 
 St. John Knits AG
 
  St. John Knits AG is a wholly owned subsidiary of the Company which was
incorporated during fiscal 1996 under the laws of Switzerland. St. John Knits
AG operates a research and development facility and buying office located in
Switzerland.
 
 St. John de Mexico SA de CV
 
  St. John de Mexico SA de CV is a wholly owned subsidiary of the Company
which was incorporated during fiscal 1997 under the laws of Mexico. St. John
de Mexico operates as a manufacturing entity within Mexico to assist in the
production of the Company's jewelry and hardware components. During fiscal
1998, St. John de Mexico began assisting in the application of sequins on
certain of the Company's product lines.
 
                                       7
<PAGE>
 
Competition
 
  The apparel industry is highly competitive. The Company's competitors
include apparel manufacturers of all sizes, some of which have greater
financial resources than the Company. The Company competes primarily on the
basis of fashion, price and quality. The Company believes its competitive
advantages include its reputation for producing high quality, fashionable
products while maintaining a consistency of design and style. This high
quality and consistent design has resulted in the St. John name becoming
highly recognized and firmly established.
 
  The Company believes that its primary competition is not just other knitwear
manufacturers, but successful design houses such as Armani, Anne Klein,
Chanel, Donna Karan and Escada. The Company considers the risk of strong new
competitors to be limited due to barriers to entry such as significant start-
up costs and the long-term nature of supplier and customer relations. It has
been the Company's experience that during the past few years major retailers
have been increasingly unwilling to source products from suppliers who are not
well-capitalized or do not have established reputations for delivering quality
merchandise in a timely manner. However, there can be no assurances that
significant new competitors will not emerge in the future.
 
Employees
 
  At November 1, 1998, the Company had approximately 4,280 full-time
employees, including 7 in executive positions, approximately 270 in design and
sample production, 2,960 in production, 165 in quality control, 290 in retail,
115 in sales and advertising and the balance in clerical and office positions.
In addition, the Company had approximately 100 full-time employees working at
St. John de Mexico, 70 working at Amen Wardy Home and 35 at St. John Company,
Ltd. The Company is not party to any labor agreements, and none of its
employees are represented by a union. The Company believes a significant
number of its employees are highly skilled and that turnover among these
employees has been minimal. The Company considers its relationship with its
employees to be good and has not experienced any interruption of its
operations due to labor disputes.
 
Backlog
 
  At November 1, 1998, the Company had unfilled customer orders for the
cruise/spring season of approximately $99 million compared with approximately
$97 million as of November 2, 1997. Orders for the cruise/spring season are
generally shipped during November through April. The Company's experience has
been that the cancellations, rejections or returns of orders do not materially
reduce the amount of sales realized from its backlog.
 
Item 2. PROPERTIES
 
  The principal executive offices of the Company are located at 17422 Derian
Avenue, Irvine, California 92614.
 
Company-owned Properties
 
  The general location, use and approximate size of the Company-owned
properties are set forth below:
 
<TABLE>
<CAPTION>
                                                                     Approximate
                                                                       Area in
        Location                             Use                     Square Feet
------------------------  -----------------------------------------  -----------
<S>                       <C>                                        <C>
Irvine, California......  Design Facility, Showroom, Sewing,           110,500
                          Warehousing, Shipping
Tijuana, Mexico.........  Jewelry and Hardware Manufacturing            63,100
Van Nuys, California....  Assembling, Sewing                            27,900
San Ysidro, California..  Assembling                                    27,300
Irvine, California......  Warehousing, Administrative Offices           24,300
Irvine, California......  Knitting                                      20,500
</TABLE>
 
                                       8
<PAGE>
 
Leased Properties
 
  The general location, use, approximate size and lease expiration date of the
Company's principal leased properties are set forth below:
 
<TABLE>
<CAPTION>
                                                               Approximate   Lease
                                                                 Area in   Expiration
          Location                           Use               Square Feet    Date
-----------------------------  ------------------------------- ----------- ----------
<S>                            <C>                             <C>         <C>
Irvine, California(1)........  Knitting, Sewing, Finishing,      175,000      7/10
                               Shipping, Administrative
                               Offices
Irvine, California...........  Corporate Headquarters,            85,000      5/01
                               Showroom, Twisting, Dyeing
Alhambra, California.........  Assembling, Sewing                 41,000      8/01
Santa Ana, California........  Jewelry and Hardware               23,000      5/99
                               Manufacturing
Costa Mesa, California(2)....  Retail Boutique                    15,400      1/14
New York, New York...........  Showroom                           12,300     11/04
New York, New York(3)........  Retail Boutique                     7,500      6/11
Beverly Hills, California....  Retail Boutique                     7,000      3/06
New York, New York(3)........  Retail Boutique                     6,200      6/11
Chicago, Illinois............  Retail Boutique                     6,000      9/04
Las Vegas, Nevada............  Retail Boutique                     5,600      1/09
Munich, Germany..............  Retail Boutique                     4,400      4/02
</TABLE>
--------
(1) The Company leases this property from a general partnership in which the
    Company holds a 50 percent interest.
 
(2) This lease includes both the St. John Knits and Amen Wardy Home boutiques
    which were opened subsequent to the end of fiscal 1998.
 
(3) The square footage of the retail boutique located on 5th Avenue in New
    York City is covered by these two leases.
 
  As of November 1, 1998, annual base rents for the Company's leased
properties listed in the table above ranged from approximately $127,000 to
$1,204,000. In general, the terms of these leases provide for rent escalations
dependent upon either increases in the lessor's operating expenses or
fluctuations in the consumer price index in the relevant geographical area.
 
  The Company believes that there are facilities available for lease in the
event that either the productive capacities of the Company's manufacturing
facilities need to be expanded or a current lease of a manufacturing facility
expires. The Company also leases space for eleven additional retail boutiques,
two additional showrooms, one additional administrative facility, one
additional warehouse facility, nine outlet stores, five Amen Wardy Home stores
and a storage facility (aggregating approximately 225,000 square feet).
 
  The Company leases certain of its facilities from affiliates of the Company.
See "Certain Relationships and Related Transactions." The Company believes
that its existing facilities are well maintained and in good operating
condition.
 
Item 3. LEGAL PROCEEDINGS
 
Amen Wardy Home Stores
 
  On October 5, 1998, Amen Wardy, Jr. ("Wardy Jr.") filed a complaint (the
"Wardy Jr. Complaint") against the Company, Amen Wardy Home Stores, LLC, a 51
percent owned subsidiary of the Company ("Amen"), Robert E. Gray, Marie St.
John Gray, Kelly A. Gray, Black and Co., Inc. and Jennifer Black in the
Superior Court of the State of California, County of Orange (Wardy, Jr. v. St.
John Knits, Inc., et al.). The complaint, which was amended on December 4,
1998, involves claims of wrongful termination, breach of
 
                                       9
<PAGE>
 
contract, breach of the implied covenant of good faith and fair dealing,
breach of fiduciary duty, slander, libel, intentional and negligent infliction
of emotional distress, an accounting fraud, negligent misrepresentation,
conspiring to commit fraud and aiding and abetting fraud. The complaint
alleges that Amen wrongfully terminated Wardy Jr. because he refused to
participate in improper accounting practices. The complaint also alleges that
the Company used Amen for its benefit and to the detriment of Amen. Wardy Jr.
seeks an unspecified amount of compensatory and punitive damages as well as
costs of suit, including attorneys' fees.
 
  On November 16, 1998, the Company and Amen filed a cross-complaint against
Wardy Jr., and a third party complaint against Amen Wardy, Sr., Bob Hightower
and Amen Wardy Home, Inc. ("AWHI") in the Superior Court of the State of
California, County of Orange. Together, these complaints involve claims of
breach of contract, breach of fiduciary duty and fraud. These complaints
allege that AWHI used Amen for its benefit and to the detriment of Amen and
the Company. The Company and Amen seek an unspecified amount of compensatory
and punitive damages, as well as costs of suit, including attorneys' fees.
 
  On November 17, 1998, AWH Direct, Inc. ("AWH Direct") filed a derivative
complaint against Amen, the Company, Robert E. Gray, Marie St. John Gray,
Kelly A. Gray, David A. Krinsky and David C. Frankel in the Superior Court of
the State of California, County of Orange (AWH Direct, LLC v. Amen Wardy Home
Stores, LLC, et al.). In this action AWH Direct is represented by the same
counsel as Wardy Jr. in Wardy Jr. v. St. John Knits, Inc., et al., described
above. AWH Direct claims that the defendants are liable for breach of
fiduciary duty, breach of contract, breach of the implied covenant of good
faith and fair dealing, wrongful refusal to allow inspection of books and
records and an accounting. The complaint makes allegations similar to the ones
made in the Wardy Jr. Complaint. AWH Direct seeks an unspecified amount of
compensatory and punitive damages, a mandatory injunction requiring defendants
to allow plaintiff immediate access to the books and records of Amen and costs
of suit, including attorneys' fees.
 
Securities Fraud Class Action
 
  On October 13, 1998, Binary Traders, Inc. filed a complaint on behalf of
purchasers of publicly traded securities of the Company during the period of
February 25, 1998 to August 25, 1998 against the Company, Robert E. Gray and
Kelly A. Gray in the United States District Court, Central District of
California, Southern Division (Binary Traders, Inc. v. St. John Knits, Inc.,
et al.). In this action, Binary Traders claims that the defendants violated
federal securities laws by allegedly making fraudulent statements to cover up
management's mistakes and certain material adverse conditions affecting the
Company's business. In addition, the complaint alleges that Mr. Gray traded
shares of the Company's common stock while in possession of allegedly material
non-public information. Binary Traders seeks class action certification and an
unspecified amount of compensatory damages.
 
Proposed Buy-out Litigation
 
  The Company is party to five lawsuits that allege claims against certain of
the Company's directors for breach of fiduciary duty alleged to have arisen
from a proposed transaction wherein Robert E. Gray, Chairman and Chief
Executive Officer of the Company, along with Vestar Capital Partners III,
L.P., offered to acquire substantially all of the outstanding common stock of
the Company through a buy-out transaction. All of these lawsuits were filed in
the Superior Court of the State of California for the County of Orange.
 
  The dates the lawsuits were instituted, as well as the principal parties to
the lawsuits, are as follows: (i) Tehrani v. St. John Knits, Inc., et al.,
filed on December 9, 1998, by Mishel S. Tehrani, as representative for a
putative class of unidentified members, against the Company, Robert E. Gray,
Marie St. John Gray, Kelly A. Gray, Roger G. Ruppert, Richard A. Gadbois III,
David A. Krinsky and Rick Rozar, (ii) Hill v. St. John Knits, Inc., et al.,
filed on December 9, 1998, by Kenneth O. Hill, as representative for a
putative class of unidentified members, against the Company, Robert E. Gray,
Marie St. John Gray, Kelly A. Gray, Roger G. Ruppert, Richard A. Gadbois III
and David A. Krinsky, (iii) Silverman v. St. John Knits, Inc., et al., filed
on December 23, 1998, by Shirley Silverman, as representative for a putative
class of unidentified members, against the Company,
 
                                      10
<PAGE>
 
Robert E. Gray, Marie St. John Gray, Kelly A. Gray, Roger G. Ruppert, Richard
A. Gadbois III and David A. Krinsky, (iv) Vinikow v. St. John Knits, Inc., et
al., filed on January 8, 1999, by Larry Vinikow as representative for a
putative class of unidentified members, against the Company, Robert E. Gray,
Marie St. John Gray, Kelly A. Gray, Roger G. Ruppert, Richard A. Gadbois III
and David A. Krinsky and (v) Howden v. St. John Knits, Inc., et al., filed on
January 15, 1999, by Richard Howden, Jr. as representative for a putative
class of unidentified members, against the Company, Robert E. Gray, Marie St.
John Gray, Kelly A. Gray, Roger G. Ruppert, Richard A. Gadbois III and David
A. Krinsky.
 
  The principal relief sought in the five actions is certification of the
putative class, an injunction of the proposed buy-out transaction from
proceeding or, to the extent the transaction is concluded, a rescission of the
buy-out transaction and damages and attorneys' fees in an unspecified amount.
 
  The Company is unable to estimate the outcome of these matters or any
potential liabilities it may incur. The Company expects to incur legal and
other defense costs as a result of such proceedings in an amount which it can
not currently estimate. These proceedings could involve a substantial
diversion of the time of some of the members of management, and an adverse
determination in, or settlement of, such litigation could involve payment of
significant amounts, which could have an adverse impact on the Company's
business, financial condition, results of operations and cash flows.
 
  The Company is not a party to any other litigation which is individually or
in the aggregate material to the business of the Company.
 
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  Not applicable.
 
                                      11
<PAGE>
 
                                    PART II
 
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
        SHAREHOLDER MATTERS
 
  The Company's common stock is traded on the New York Stock Exchange under
the symbol "SJK." The high and low trading prices of the Company's common
stock during each quarter of fiscal years 1998 and 1997, and the dividends
paid per share were as follows:
 
<TABLE>
<CAPTION>
                                        Fiscal 1998            Fiscal 1997
                                   ---------------------- ----------------------
Quarter                             High   Low   Dividend  High   Low   Dividend
-------                            ------ ------ -------- ------ ------ --------
<S>                                <C>    <C>    <C>      <C>    <C>    <C>
Fourth............................ $33.88 $13.00  $0.025  $49.19 $38.50  $0.025
Third............................. $44.75 $34.00  $0.025  $54.50 $38.75  $0.025
Second............................ $48.31 $38.63  $0.025  $45.50 $37.50  $0.025
First............................. $44.50 $36.38  $0.025  $48.13 $41.13  $0.025
</TABLE>
 
  As of January 26, 1999, the closing sales price for the Company's common
stock, as reported on the New York Stock Exchange, was $27.00.
 
  During fiscal years 1998 and 1997, the Company paid in the aggregate $0.10
per share in cash dividends to its shareholders. In addition, the Company
declared another quarterly dividend of $0.025 per share on December 16, 1998
to be paid in cash on February 17, 1999 to the shareholders of record on
January 15, 1999. The Company's ability to pay other dividends will depend
upon limitations under applicable law, certain covenants under the Company's
bank line of credit and other factors the Board of Directors deems relevant,
including results of operations, financial condition and capital and surplus
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources."
 
  As of January 26, 1999, the number of holders of record of the Company's
common stock was approximately 350, and there were approximately 9,000
beneficial owners of the Company's common stock.
 
                                      12
<PAGE>
 
Item 6. SELECTED FINANCIAL DATA
 
  The following selected financial data has been derived from the consolidated
financial statements of the Company which have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report included
elsewhere herein. This information should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto and Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
<TABLE>
<CAPTION>
                                              Fiscal Year Ended
                         -----------------------------------------------------------
                         November 1, November 2, November 3, October 29, October 30,
                            1998        1997        1996        1995        1994
                         ----------- ----------- ----------- ----------- -----------
                                  (in thousands, except per share amounts)
<S>                      <C>         <C>         <C>         <C>         <C>
Income Statement Data:
Net sales...............  $281,961    $242,101    $202,951    $161,795    $127,953
Cost of sales...........   120,883      99,545      88,871      74,252      59,179
                          --------    --------    --------    --------    --------
Gross profit............   161,078     142,556     114,080      87,543      68,774
Selling, general and
 administrative
 expenses...............   107,026      84,545      68,385      54,550      43,288
                          --------    --------    --------    --------    --------
Operating income........    54,052      58,011      45,695      32,993      25,486
Other income............     1,369         713       1,355         803         340
                          --------    --------    --------    --------    --------
Income before income
 taxes..................    55,421      58,724      47,050      33,796      25,826
Income taxes............    22,001      24,300      19,929      14,243      10,880
                          --------    --------    --------    --------    --------
Net income..............  $ 33,420    $ 34,424    $ 27,121    $ 19,553    $ 14,946
                          ========    ========    ========    ========    ========
Net income per common
 share-diluted(1).......  $   1.94    $   2.01    $   1.59    $   1.19    $   0.91
                          ========    ========    ========    ========    ========
Dividends per
 share(1)...............  $   0.10    $   0.10    $   0.10    $   0.10    $  0.075
                          ========    ========    ========    ========    ========
Weighted average shares
 outstanding(1).........    17,235      17,134      17,016      16,433      16,396
                          ========    ========    ========    ========    ========
<CAPTION>
                         November 1, November 2, November 3, October 29, October 30,
                            1998        1997        1996        1995        1994
                         ----------- ----------- ----------- ----------- -----------
                                               (in thousands)
<S>                      <C>         <C>         <C>         <C>         <C>
Balance Sheet Data:
Working capital.........  $ 89,190    $ 69,693    $ 49,628     $38,130     $31,442
Total assets............   182,390     153,904     116,494      85,973      62,634
Total debt..............       408         --          --          --          --
Shareholders' equity....   161,574     130,680      97,093      69,227      50,530
</TABLE>
--------
(1) Net income per share, dividends per share and weighted average shares
    outstanding have been adjusted for the 2-for-1 stock split which occurred
    during the third quarter of fiscal 1996.
 
                                      13
<PAGE>
 
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
  Management's discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes related thereto.
 
Results of Operations
 
  The following table is derived from the Company's Consolidated Statements of
Income and sets forth, for the periods indicated, the results of operations as
a percentage of net sales:
 
<TABLE>
<CAPTION>
                                                 Percentage of Net Sales
                                                    Fiscal Year Ended
                                           -----------------------------------
                                           November 1, November 2, November 3,
                                              1998        1997        1996
                                           ----------- ----------- -----------
<S>                                        <C>         <C>         <C>
Net sales.................................    100.0%      100.0%      100.0%
Cost of sales.............................     42.9        41.1        43.8
                                              -----       -----       -----
Gross profit..............................     57.1        58.9        56.2
Selling, general and administrative
 expenses.................................     38.0        34.9        33.7
                                              -----       -----       -----
Operating income..........................     19.1        24.0        22.5
Other income..............................      0.5         0.3         0.7
                                              -----       -----       -----
Income before income taxes................     19.6        24.3        23.2
Income taxes..............................      7.8        10.0         9.8
                                              -----       -----       -----
Net income................................     11.8%       14.3%       13.4%
                                              =====       =====       =====
</TABLE>
 
Fiscal 1998 Compared to Fiscal 1997
 
  Net sales for fiscal 1998 increased by $39,860,000, or 16.5% over fiscal
1997. This increase was principally attributable to (i) an increase in sales
to existing domestic retail customers of approximately $20,904,000, (ii) an
increase in sales by Company owned retail stores of approximately $10,176,000,
due in part to the increased sales of the New York boutique, the expansion of
the Las Vegas boutique, which was completed in May 1998, and the addition of
three retail outlet stores since the beginning of fiscal 1997, (iii) an
increase in sales of approximately $5,966,000 by Amen Wardy Home Stores, LLC,
a 51 percent owned subsidiary which commenced operations during the fourth
quarter of fiscal 1997 ("Amen") and (iv) an increase in international sales of
$2,814,000, which includes the sales of St. John Company, Ltd., a majority
owned subsidiary which commenced operations in Japan during the fourth quarter
of fiscal 1997 ("St. John Company, Ltd."). Net sales increased primarily as a
result of increased unit sales of various product lines.
 
  Gross profit for fiscal 1998 increased by $18,522,000, or 13.0% as compared
with fiscal 1997, and decreased as a percentage of net sales to 57.1% from
58.9%. This decrease in the gross profit margin was partially attributable to
lower gross profit on sales at the outlet stores and lower gross profit
margins recorded during the fourth quarter due to higher production costs
related to specific styles in the knitwear line. In addition, the lower gross
profit margins were also due to increased costs related to overtime and the
training of new employees during fiscal 1998 and increased labor costs during
the second quarter of fiscal 1998 related to the time incurred to repair
finished product which, upon final inspection, did not meet the Company's
quality control standards. All of such additional costs were partially offset
by an increase in the number of garments being produced and sold without a
corresponding increase in certain production costs, due in part to the fixed
nature of these costs.
 
  Selling, general and administrative expenses for fiscal 1998 increased by
$22,481,000, or 26.6% over fiscal 1997, and increased as a percentage of net
sales to 38.0% from 34.9%. This increase was primarily due to (i) costs
incurred related to the start-up of the new home furnishing division, Amen
(ii) an increase in selling expenses due to increased costs of promoting and
marketing its products to its major customers, (iii) an increase in selling
expenses due to the Company's expansion of its sales and marketing team, (iv)
an increase in the
 
                                      14
<PAGE>
 
design staff, which handles the design function for all the Company's product
lines and (v) costs incurred in connection with the completion and start-up of
the jewelry manufacturing facility in Mexico and the acquisition of additional
warehouse space.
 
  Operating income for fiscal 1998 decreased by $3,958,000, or 6.8% over
fiscal 1997. Operating income as percentage of net sales decreased to 19.1%
from 24.0% during the same period. This decrease in the operating income as a
percentage of net sales was due to the decrease in the gross profit margin and
an increase in selling, general and administrative expenses as a percentage of
net sales.
 
Fiscal 1997 Compared to Fiscal 1996
 
  Net sales for fiscal 1997 increased by $39,150,000, or 19.3% over fiscal
1996. This increase was principally attributable to (i) an increase in sales
to existing domestic retail customers of approximately $23,017,000, (ii) an
increase in sales by Company owned retail stores of approximately $12,820,000,
due in part to the expansion of the New York boutique, which was completed in
October 1996, and the addition of one retail boutique and two retail outlet
stores since the beginning of fiscal 1996 and (iii) an increase in sales to
international retail customers of $3,313,000. Net sales increased primarily as
a result of increased unit sales of various product lines.
 
  Gross profit for fiscal 1997 increased by $28,476,000, or 25.0% as compared
with fiscal 1996, and increased as a percentage of net sales to 58.9% from
56.2%. This increase in the gross profit margin was primarily due to an
increase in the number of garments being produced and sold without a
corresponding increase in the production costs, due in part to the fixed
nature of certain costs.
 
  Selling, general and administrative expenses for fiscal 1997 increased by
$16,160,000, or 23.6% over fiscal 1996, and increased as a percentage of net
sales to 34.9% from 33.7%. This increase was primarily due to (i) an increase
in promotion and advertising expenses related to an expansion of the Company's
advertising program, (ii) an increase in salaries due to the Company's
continued effort to build its sales and marketing team and (iii) an expansion
of the Company's sales to foreign customers which include, among other things,
import duty, sales commissions, and additional freight charges.
 
  Operating income for fiscal 1997 increased by $12,316,000 or 27.0% over
fiscal 1996. Operating income as percentage of net sales increased to 24.0%
from 22.5% during the same period. This increase in operating income as a
percentage of net sales was due to the increase in the gross profit margin
which was partially offset by the increase in selling, general and
administrative expenses as a percentage of net sales.
 
  Other income for fiscal 1997 decreased by $642,000 as compared with fiscal
1996. This decrease was primarily due to the receipt of a workers'
compensation insurance dividend of $316,000 during the first quarter of fiscal
1996, which related to the policy period ended December 31, 1994.
 
Liquidity and Capital Resources
 
  The Company's primary cash requirements are to fund the Company's working
capital needs, primarily inventory and accounts receivable, and for the
purchase of property and equipment. During fiscal 1998, cash provided by
operating activities was $24,982,000. Cash provided by operating activities
was primarily generated by net income and an increase in accrued expenses and
a decrease in accounts receivable, while cash used in operating activities was
primarily used to fund an increase in inventories and deferred income tax
benefit and a decrease in income taxes and accounts payable. Cash used in
investing activities was $22,377,000 during fiscal 1998. The principal use of
cash in investing activities was for (i) the purchase of 56 computerized
knitting machines, (ii) the purchase of property and construction of
improvements for the jewelry and garment hardware manufacturing facility in
Mexico, (iii) the construction of leasehold improvements for a new boutique
location in Las Vegas, (iv) the construction of leasehold improvements for an
Amen Wardy Home boutique location at South Coast Plaza in Costa Mesa,
California and (v) the construction of improvements for a new manufacturing
location in San Ysidro, California.
 
                                      15
<PAGE>
 
  The Company anticipates purchasing property and equipment of approximately
$19,000,000 during fiscal 1999. The estimated $19,000,000 will be used
principally for (i) upgrades to the Company's computer systems, (ii) the
purchase of computerized knitting machines, (iii) the completion of the
construction of leasehold improvements for a new boutique location at South
Coast Plaza in Costa Mesa, California and (iv) the construction of leasehold
improvements for a new boutique location in Hawaii and one additional new
boutique location.
 
  As of November 1, 1998, the Company had approximately $89,190,000 in working
capital and $15,512,000 in cash and marketable securities. The Company's
principal source of liquidity is internally generated funds. The Company also
has a $25,000,000 bank line of credit ("Line of Credit") which expires on
March 1, 2000. The Line of Credit is unsecured and borrowings thereunder bear
interest at the Company's choice of the bank's reference rate (8.0 percent at
November 1, 1998) or an offshore rate plus 1.5 percent. The availability of
funds under the Line of Credit is subject to the Company's continued
compliance with certain covenants, including a covenant that sets the maximum
amount the Company can spend annually on the acquisition of fixed or capital
assets, and certain financial covenants, including a minimum quick ratio, a
minimum tangible net worth and a maximum ratio of total liabilities to
tangible net worth. The Company may not declare or pay any dividends if the
Company fails to perform its obligations under, or fails to meet the
conditions of, the Line of Credit or if payment of the dividend creates a
default under the Line of Credit. As of November 1, 1998, no amounts were
outstanding under the Line of Credit. The Company invests its excess funds
primarily in a money market fund, investment grade commercial paper and tax
exempt municipal bonds.
 
  The Company believes it will be able to finance its working capital and
capital expenditure requirements on both a short-term and long-term basis with
internally generated funds.
 
  The Company paid approximately $2,084,000 in dividends to its shareholders
during fiscal 1998. On December 16, 1998, the Company declared another
quarterly cash dividend of $0.025 per outstanding share to be paid on February
17, 1999 to shareholders of record on January 15, 1999. Future dividends by
the Company remain subject to limitations under applicable law, certain
covenants under the line of credit and other factors the Board of Directors
deems relevant, including results of operations, financial condition and
capital requirements.
 
New Accounting Pronouncements
 
  See Note 2(n) "New Accounting Pronouncements" included under the caption
Notes to Consolidated Financial Statements included elsewhere in this
document.
 
Proposed Buy-Out Transaction
 
  On December 8, 1998, the Board of Directors of the Company formed an
independent committee to evaluate a proposal (the "Proposal") received from
Company founder, Chairman and Chief Executive Officer Bob Gray and Vestar
Capital Partners III, L.P. ("Vestar") to purchase substantially all of the
outstanding common stock of the Company for $28 per share in cash (the
"Proposed Transaction"). In the Proposal, Mr. Gray and Vestar indicated that
the consummation of the Proposed Transaction was subject to certain
conditions, including the negotiation and execution of a definitive
acquisition agreement, the receipt of financing and satisfactory completion of
due diligence investigations of the Company. Mr. Gray and Vestar also stated
that the Proposal was a preliminary indication of interest and was non-
binding. In addition, Mr. Gray and Vestar informed the Company of a commitment
to provide equity financing from Vestar and discussions with Chase Manhattan
Bank to provide the balance of the required financing for the transaction. Mr.
Gray and Vestar provided in the Proposal that the Proposal would expire on
December 31, 1998 (the "Termination Date"). Mr. Gray and Vestar subsequently
extended the Termination Date on December 30, 1998, January 14, 1999 and
January 21, 1999, to January 15, 1999, January 22, 1999 and February 1, 1999,
respectively.
 
Stock Repurchase Plan
 
  The Board of Directors authorized a stock repurchase plan on August 26,
1998. This repurchase program allows the purchase of up to one million shares
of the Company's common stock. During fiscal 1998, the
 
                                      16
<PAGE>
 
Company repurchased 164,400 shares for an aggregate purchase price of
$2,880,000. The Company did not make any purchases of its common stock
subsequent to the end of fiscal 1998.
 
Year 2000
 
  The Company uses various types of technology in the operations of its
business. Some of this technology incorporates date identification functions;
however, many of these date identification functions were developed to use
only two digits to identify a year. These date identification functions, if
not corrected, could cause their relating technology to fail or create
erroneous results by or at the year 2000.
 
  The Company is continuing to assess the impact of Year 2000 issues on its
information and non-information technology systems. As part of this process,
the Company retained the services of an independent contractor with experience
in analyzing and addressing Year 2000 issues. In addition, the Company has
developed a five-phased plan with respect to the Year 2000 readiness of its
internal technology systems. This plan involves (i) creating awareness inside
the Company of Year 2000 issues, (ii) analyzing the Company's Year 2000 state
of readiness, (iii) correcting systems or acquiring new ones as needed, (iv)
testing the corrected or new systems and (v) incorporating the corrected or
new systems into the Company's business. The Company had substantially
completed all five phases of the plan prior to the end of 1998.
 
  The Company has also developed a plan to address the impact that Year 2000
issues of its vendors and customers may have on the Company's operations. The
Company is currently finalizing its evaluation of the materiality of its
vendor and customer relationships and has initiated communications with
certain of its significant vendors and customers to identify and minimize
disruptions to the Company's operations and to assist in resolving Year 2000
issues. The Company had substantially completed its evaluation at the end of
fiscal 1998; however, there can be no assurances that the systems and products
of other companies on which the Company relies will not have an adverse effect
on the Company's business, operations or financial condition. In the event
that completion of the Company's Year 2000 evaluation of its vendors and
customers is not assured by the end of 1999, the Company intends to determine
appropriate contingency plans.
 
  As of November 1, 1998, the Company had incurred approximately $304,000 in
costs related to the Year 2000 issue. The Company believes that additional
costs related to the Year 2000 issue will not be material to the Company's
business, operations or financial condition. However, estimates of Year 2000
related costs are based on numerous assumptions and there is no certainty that
estimates will be achieved and actual costs could be materially greater than
anticipated. The Company anticipates that it will fund its additional Year
2000 costs from current working capital.
 
Forward Looking Statements
 
  This Annual Report on Form 10-K contains certain statements which describe
the Company's beliefs concerning future business conditions and the outlook
for the Company based on currently available information. Wherever possible
the Company has identified these "forward looking" statements (as defined in
Section 21E of the Securities Exchange Act of 1934) by words such as
"anticipates," "believes," "estimates," "expects" and other similar
expressions. The forward looking statements and associated risks set forth
herein may include or relate to: (i) the Company's anticipated purchases of
property and equipment during fiscal 1999, (ii) the Company's belief that it
will be able to fund its working capital and capital expenditure requirements
with internally generated funds, (iii) the Company's anticipated completion of
its Year 2000 readiness plans and (iv) the costs and source of funds to
address the Company's Year 2000 issues.
 
  These forward looking statements are subject to risks, uncertainties and
other factors which could cause the Company's actual results, performance or
achievements to differ materially from those expressed in, or implied by,
these statements. These risks, uncertainties and other factors include, but
are not limited to, the following: (i) the financial strength of the retail
industry and the level of consumer spending for apparel and accessories, (ii)
the Company's ability to develop, market and sell its products, (iii)
increased competition from other
 
                                      17
<PAGE>
 
manufacturers and retailers of women's clothing and accessories, (iv) general
economic conditions and (v) any unanticipated problems or delays in the
completion by the Company to become Year 2000 ready or the failure of the
Company's vendors or customers to do so.
 
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
  The Company has exposure to fluctuations in foreign currency exchange rates
for the revenues derived from sales to its foreign customers denominated in
foreign currency. In order to reduce the effects of such fluctuations, under
established procedures and controls, the Company enters into forward
contracts. These contractual arrangements are entered with a major financial
institution. The Company does not hold derivative financial instruments for
trading.
 
  The primary business objective of this hedging program is to secure the
anticipated profit on sales denominated in foreign currencies. Forward
contracts are entered into at the time the Company's products are priced and
ready for sale. The Company's primary exposure to foreign exchange fluctuation
is on the deutsche mark. At November 1, 1998, the Company had contracts
maturing through May 28, 1999 to sell 5.4 million deutsche marks at rates
ranging from 1.71 to 1.77 deutsche marks to the U.S. dollar.
 
Item 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
 
  See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements and supplementary data filed with this
report.
 
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
  Not applicable.
 
                                   PART III
 
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The information required by this item will be included in the Company's
Proxy Statement with respect to its 1999 Annual Meeting of Shareholders to be
filed with the Commission within 120 days of November 1, 1998, under the
captions "Election of Directors" and "Executive Officers," and is incorporated
herein by this reference as if set forth in full herein.
 
Item 11. EXECUTIVE COMPENSATION
 
  The information required by this item will be included in the Company's
Proxy Statement with respect to its 1999 Annual Meeting of Shareholders to be
filed with the Commission within 120 days of November 1, 1998 under the
captions "Executive Compensation and Other Information," "Election of
Directors," "Compensation Report," and "Company Stock Price Performance," and
is incorporated herein by this reference as if set forth in full herein.
 
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information required by this item will be included in the Company's
Proxy Statement with respect to its 1999 Annual Meeting of Shareholders to be
filed with the Commission within 120 days of November 1, 1998 under the
caption "Security Ownership of Certain Beneficial Owners and Management," and
is incorporated herein by this reference as if set forth in full herein.
 
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information required by this item will be included in the Company's
Proxy Statement with respect to its 1999 Annual Meeting of Shareholders to be
filed with the Commission within 120 days of November 1, 1998 under the
caption "Certain Transactions," and is incorporated herein by this reference
as if set forth in full herein.
 
                                      18
<PAGE>
 
                                    PART IV
 
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
  (a) The following documents are filed as part of this report:
 
    1. Consolidated Financial Statements--See "Index to Consolidated
  Financial Statements"
 
    2. Consolidated Financial Statement Schedule--See "Index to Consolidated
  Financial Statements"
 
    3. Exhibits--See "Exhibit Index"
 
  (b) Reports on Form 8-K
 
    1. On September 4, 1998, the Company filed a Form 8-K with the Securities
       and Exchange Commission reporting that, effective August 31, 1998,
       Amen Wardy, Jr. was terminated as Chief Executive Officer of Amen
       Wardy Home Stores, LLC.
 
    2. On September 9, 1998, the Company filed a Form 8-K with the Securities
       and Exchange Commission reporting that, on August 26, 1998, the
       Company issued a press release to announce a stock repurchase program
       to purchase up to one million shares of the Company's common stock.
 
                                      19
<PAGE>
 
                              ST. JOHN KNITS, INC.
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS..................................  21
 
CONSOLIDATED FINANCIAL STATEMENTS
  Consolidated Balance Sheets at November 1, 1998 and November 2, 1997....  22
  Consolidated Statements of Income for the years ended November 1, 1998,
   November 2, 1997 and November 3, 1996..................................  23
  Consolidated Statements of Shareholders' Equity for the years ended
   November 1, 1998, November 2, 1997 and November 3, 1996................  24
  Consolidated Statements of Cash Flows for the years ended November 1,
   1998, November 2, 1997 and November 3, 1996............................  25
  Notes to Consolidated Financial Statements..............................  26
 
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
  Schedule II--Valuation and Qualifying Account...........................  37
</TABLE>
 
                                       20
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To St. John Knits, Inc.:
 
  We have audited the accompanying consolidated balance sheets of ST. JOHN
KNITS, INC. (a California corporation) and subsidiaries as of November 1, 1998
and November 2, 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended November 1, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of St. John Knits, Inc. and subsidiaries as of November 1, 1998 and
November 2, 1997, and the results of their operations and their cash flows for
each of the three years in the period ended November 1, 1998 in conformity
with generally accepted accounting principles.
 
  Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
 
 
                                          Arthur Andersen LLP
 
Orange County, California
December 18, 1998 (except for
 the matter discussed in Note
 12 as to which the date is
 January 8, 1999)
 
                                      21
<PAGE>
 
                              ST. JOHN KNITS, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                    November 1,   November 2,
                      ASSETS                            1998          1997
                      ------                        ------------  ------------
<S>                                                 <C>           <C>
Current assets:
  Cash and cash equivalents........................ $ 14,336,872  $ 14,266,564
  Investments......................................    1,175,427     2,351,765
  Accounts receivable, net.........................   35,562,189    36,572,423
  Inventories......................................   47,748,286    30,736,980
  Deferred income tax benefit......................    7,743,961     5,793,961
  Other............................................    2,377,352     2,591,742
                                                    ------------  ------------
    Total current assets...........................  108,944,087    92,313,435
                                                    ------------  ------------
Property and equipment:
  Machinery and equipment..........................   47,023,808    35,903,659
  Leasehold improvements...........................   30,691,098    25,351,868
  Buildings........................................   17,883,700    11,572,917
  Furniture and fixtures...........................    6,462,833     5,434,754
  Land.............................................    5,786,857     3,536,606
  Construction in progress.........................      666,481     4,225,573
                                                    ------------  ------------
                                                     108,514,777    86,025,377
  Less--Accumulated depreciation and amortization..   38,627,543    28,222,633
                                                    ------------  ------------
                                                      69,887,234    57,802,744
                                                    ------------  ------------
Other assets.......................................    3,558,347     3,787,396
                                                    ------------  ------------
                                                    $182,389,668  $153,903,575
                                                    ============  ============
       LIABILITIES AND SHAREHOLDERS' EQUITY
       ------------------------------------
Current liabilities:
  Accounts payable................................. $  8,303,874  $ 10,034,396
  Accrued expenses.................................   11,329,773    10,504,934
  Income taxes payable.............................      120,657     2,081,242
                                                    ------------  ------------
    Total current liabilities......................   19,754,304    22,620,572
                                                    ------------  ------------
Long-term debt.....................................      407,599           --
                                                    ------------  ------------
Minority interest..................................      653,435       602,910
                                                    ------------  ------------
Commitments and contingencies (Notes 7, 10, 11 and
 12)
Shareholders' equity:
  Preferred Stock, no par value: Authorized--
   2,000,000 shares, issued and outstanding--none..          --            --
  Common Stock, no par value: Authorized--
   40,000,000 shares, issued and outstanding--
   16,579,484 and 16,634,548 shares, respectively..      502,799       502,799
  Unrealized loss on securities....................      (27,504)          --
  Cumulative translation adjustment................      197,249       (19,351)
  Additional paid-in capital.......................   17,882,672    18,929,541
  Retained earnings................................  143,019,114   111,267,104
                                                    ------------  ------------
                                                     161,574,330   130,680,093
                                                    ------------  ------------
                                                    $182,389,668  $153,903,575
                                                    ============  ============
</TABLE>
 
                            See accompanying notes.
 
                                       22
<PAGE>
 
                              ST. JOHN KNITS, INC.
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                 For the years ended
                                        --------------------------------------
                                        November 1,  November 2,  November 3,
                                            1998         1997         1996
                                        ------------ ------------ ------------
<S>                                     <C>          <C>          <C>
Net sales.............................. $281,960,763 $242,100,843 $202,951,000
Cost of sales..........................  120,882,597   99,545,173   88,870,838
                                        ------------ ------------ ------------
Gross profit...........................  161,078,166  142,555,670  114,080,162
Selling, general and administrative
 expenses..............................  107,025,666   84,544,884   68,385,089
                                        ------------ ------------ ------------
Operating income.......................   54,052,500   58,010,786   45,695,073
Other income...........................    1,369,022      712,694    1,355,234
                                        ------------ ------------ ------------
Income before income taxes.............   55,421,522   58,723,480   47,050,307
Income taxes...........................   22,000,904   24,299,829   19,928,645
                                        ------------ ------------ ------------
Net income............................. $ 33,420,618 $ 34,423,651 $ 27,121,662
                                        ============ ============ ============
Net income per common share--basic..... $       2.00 $       2.07 $       1.64
                                        ============ ============ ============
Net income per common share--diluted... $       1.94 $       2.01 $       1.59
                                        ============ ============ ============
Dividends per share.................... $       0.10 $       0.10 $       0.10
                                        ============ ============ ============
Shares used in the calculation of net
 income per share--basic...............   16,693,955   16,614,975   16,518,077
                                        ============ ============ ============
Shares used in the calculation of net
 income per share--diluted.............   17,234,630   17,133,631   17,015,991
                                        ============ ============ ============
</TABLE>
 
 
 
 
                            See accompanying notes.
 
                                       23
<PAGE>
 
                              ST. JOHN KNITS, INC.
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                            Common Stock
                         -------------------- Additional   Cumulative  Unrealized
                           Number               Paid-In    Translation  Loss on     Retained
                         of Shares    Amount    Capital    Adjustment  Securities   Earnings       Total
                         ----------  -------- -----------  ----------- ---------- ------------  ------------
<S>                      <C>         <C>      <C>          <C>         <C>        <C>           <C>
Balance, October 29,
 1995................... 16,468,734  $502,799 $15,687,393   $    --     $    --   $ 53,037,048  $ 69,227,240
  Dividends declared
   ($.10 per share).....        --        --          --         --          --     (1,653,348)   (1,653,348)
  Shares issued upon
   exercise of options
   including tax
   benefit..............    130,330       --    2,397,758        --          --            --      2,397,758
  Net income............        --        --          --         --          --     27,121,662    27,121,662
                         ----------  -------- -----------   --------    --------  ------------  ------------
Balance, November 3,
 1996................... 16,599,064   502,799  18,085,151        --          --     78,505,362    97,093,312
  Dividends declared
   ($.10 per share).....        --        --          --         --          --     (1,661,909)   (1,661,909)
  Shares issued upon
   exercise of options
   including tax
   benefit..............     35,484       --      844,390        --          --            --        844,390
  Foreign currency
   translation
   adjustment...........        --        --          --     (19,351)        --            --        (19,351)
  Net income............        --        --          --         --          --     34,423,651    34,423,651
                         ----------  -------- -----------   --------    --------  ------------  ------------
Balance November 2,
 1997................... 16,634,548   502,799  18,929,541    (19,351)        --    111,267,104   130,680,093
  Dividends declared
   ($.10 per share).....        --        --          --         --          --     (1,668,608)   (1,668,608)
  Shares issued upon
   exercise of options
   including tax
   benefit..............    109,336       --    1,832,969        --          --            --      1,832,969
  Shares repurchased....   (164,400)      --   (2,879,838)       --          --            --     (2,879,838)
  Unrealized loss on
   securities...........        --        --          --         --      (27,504)          --        (27,504)
  Foreign currency
   translation
   adjustment...........        --        --          --     216,600         --            --        216,600
  Net income............        --        --          --         --          --     33,420,618    33,420,618
                         ----------  -------- -----------   --------    --------  ------------  ------------
Balance November 1, 1998 16,579,484  $502,799 $17,882,672   $197,249    $(27,504) $143,019,114  $161,574,330
                         ==========  ======== ===========   ========    ========  ============  ============
</TABLE>
 
 
 
                            See accompanying notes.
 
                                       24
<PAGE>
 
                              ST. JOHN KNITS, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                For the years ended
                                       ----------------------------------------
                                       November 1,   November 2,   November 3,
                                           1998          1997          1996
                                       ------------  ------------  ------------
<S>                                    <C>           <C>           <C>
Cash flows from operating activities:
  Net income.........................  $ 33,420,618  $ 34,423,651  $ 27,121,662
  Adjustments to reconcile net income
   to net cash provided by operating
   activities:
    Depreciation and amortization....    11,370,680     8,858,703     7,042,376
    Net increase in deferred income
     tax benefit.....................    (1,950,000)     (300,000)   (1,925,194)
    Loss on disposal of property and
     equipment.......................       483,920       215,810        42,792
    Partnership losses...............       331,405       351,165       224,368
    Minority interest in income of
     consolidated subsidiaries.......        50,525       602,910           --
    (Increase) decrease in accounts
     receivable......................     1,010,234    (8,478,817)   (6,969,300)
    Increase in inventories..........   (17,011,306)   (7,117,926)   (8,710,012)
    (Increase) decrease in other
     current assets..................       214,390    (1,322,360)   (1,022,146)
    (Increase) decrease in other
     assets..........................      (488,410)        6,700    (1,501,100)
    Increase (decrease) in accounts
     payable.........................    (1,730,522)    4,629,995       923,607
    Increase (decrease) in accrued
     expenses........................     1,240,704    (1,004,422)    2,343,116
    Decrease in income taxes
     payable.........................    (1,960,585)     (262,758)     (729,125)
    Decrease in deferred income tax
     liability.......................           --       (143,941)          --
                                       ------------  ------------  ------------
      Net cash provided by operating
       activities....................    24,981,653    30,458,710    16,841,044
                                       ------------  ------------  ------------
Cash flows from investing activities:
  Proceeds from sale of property and
   equipment.........................        10,499        84,641        60,294
  Purchase of property and
   equipment.........................   (23,648,032)  (22,751,076)  (21,400,369)
  Purchase of trademarks.............           --       (747,928)          --
  Purchase of short-term
   investments.......................           --       (204,959)     (347,006)
  Sale of short-term investments.....     1,176,338     2,075,710     2,524,182
  Capital contributions to
   partnership.......................           --        (67,108)     (995,869)
  Capital distributions from
   partnership.......................        84,496        68,500        44,500
                                       ------------  ------------  ------------
      Net cash used in investing
       activities....................   (22,376,699)  (21,542,220)  (20,114,268)
                                       ------------  ------------  ------------
Cash flows from financing activities:
  Dividends paid.....................    (2,084,472)   (1,661,022)   (1,650,090)
  Issuance of common stock...........     1,832,969       844,390     2,397,758
  Proceeds from issuance of long-term
   debt..............................       407,599           --            --
  Payment for the repurchase of
   common stock......................    (2,879,838)          --            --
                                       ------------  ------------  ------------
      Net cash provided by (used in)
       financing activities..........    (2,723,742)     (816,632)      747,668
                                       ------------  ------------  ------------
Effect of exchange rate changes......       216,600       (19,351)          --
                                       ------------  ------------  ------------
Unrealized loss on securities........       (27,504)          --            --
                                       ------------  ------------  ------------
Net increase (decrease) in cash and
 cash equivalents....................        70,308     8,080,507    (2,525,556)
Beginning balance, cash and cash
 equivalents.........................    14,266,564     6,186,057     8,711,613
                                       ------------  ------------  ------------
Ending balance, cash and cash
 equivalents.........................  $ 14,336,872  $ 14,266,564  $  6,186,057
                                       ============  ============  ============
Supplemental disclosures of cash flow
 information:
  Cash received during the year for
   interest income...................  $  1,154,834  $    988,272  $    717,099
                                       ============  ============  ============
  Cash paid during the year for:
    Interest expense.................  $        --   $     46,954  $        --
                                       ============  ============  ============
    Income taxes.....................  $ 25,286,040  $ 24,526,911  $ 20,565,267
                                       ============  ============  ============
</TABLE>
 
                            See accompanying notes.
 
                                       25
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
            November 1, 1998, November 2, 1997 and November 3, 1996
 
1. Company Background and Basis of Presentation
 
  The consolidated financial statements include the accounts of St. John
Knits, Inc. ("St. John"), a California corporation, and its subsidiaries. St.
John and its subsidiaries are collectively referred to herein as "the
Company." All interdivisional and intercompany transactions and accounts have
been eliminated in consolidation. The Company is a leading designer,
manufacturer and marketer of women's clothing and accessories. The Company's
products are distributed primarily through specialty retailers and the
Company's own retail boutiques and outlets.
 
  During fiscal 1997 the Company formed St. John Company, Ltd. in Japan to
operate as a 51 percent owned subsidiary to distribute the Company's products
in Japan. During fiscal 1998 the Company increased its ownership percentage to
68 percent. During fiscal 1997 the Company also formed Amen Wardy Home Stores,
LLC, a 51 percent owned subsidiary which operates five home furnishing
boutiques under the name Amen Wardy Home. The operations of both entities are
included in the accompanying consolidated financial statements.
 
2. Summary of Accounting Policies
 
 a. Definition of Fiscal Year
 
  The Company utilizes a 52-53 week fiscal year whereby the fiscal year ends
on the Sunday nearest to October 31. Accordingly, fiscal years 1998, 1997 and
1996 ended on November 1, November 2 and November 3, respectively. Fiscal
years 1998 and 1997 were comprised of 52 weeks, and fiscal year 1996 was
comprised of 53 weeks.
 
 b. Use of Estimates
 
  The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
 
 c. Revenue Recognition
 
  Revenue on sales to specialty retailers is recognized when the goods are
shipped. The Company establishes liabilities for estimated returns and
allowances at the time of shipment. The Company also provides for estimated
discounts when recording sales. Retail sales are recognized at the point of
sale. The Company establishes liabilities for estimated returns at the retail
stores. Accounts receivable are shown net of allowances for discounts and
uncollectible amounts of $2,488,000 and $951,000 in fiscal year 1998, and
$2,543,000 and $905,000 in fiscal year 1997, respectively.
 
 d. Inventories
 
  Inventories are valued at the lower of cost or market. During fiscal 1997
the Company elected to change its method of accounting for its inventory from
the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.
This change did not have a material effect on the financial statements for any
year presented. Therefore, the cumulative effect ($363,000) was reflected in
the fiscal year 1997 financial statements as a reduction of cost of goods
sold.
 
 
                                      26
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
            November 1, 1998, November 2, 1997 and November 3, 1996
 
 
  Inventories are comprised of the following:
 
<TABLE>
<CAPTION>
                                                            1998        1997
                                                         ----------- -----------
     <S>                                                 <C>         <C>
     Raw materials...................................... $14,529,822 $10,362,158
     Work in process....................................   8,896,248   6,451,053
     Finished products..................................  24,322,216  13,923,769
                                                         ----------- -----------
                                                         $47,748,286 $30,736,980
                                                         =========== ===========
</TABLE>
 
 e. Property and Equipment
 
  Property and equipment are stated at cost. The Company provides for
depreciation using the straight-line method to provide for the retirement of
property and equipment at the end of their estimated useful lives, which range
from three to thirty-nine years.
 
 f. Cash and Cash Equivalents
 
  For purposes of the statements of cash flows, cash and cash equivalents
include all liquid debt instruments purchased with a maturity of three months
or less.
 
 g. Foreign Exchange Transactions and Contracts
 
  The Company enters into foreign exchange contracts as a hedge against
exchange rate risk on the collection of certain accounts receivable
denominated in a foreign currency. Market value gains and losses are
recognized as the contracts mature, and exchange adjustments resulting from
foreign currency transactions are offset by exchange gains or losses
recognized from such contracts.
 
 h. Income Taxes
 
  The Company utilizes the liability method of accounting for income taxes
required by Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes."
 
 i. Earnings per Share
 
  The Company adopted SFAS No. 128 "Earnings Per Share" during fiscal 1998.
Under the new requirement, primary earnings per share was replaced with basic
earnings per share. Basic earnings per share excludes the dilutive effect of
common stock equivalents, including stock options. Diluted earnings per share,
which replaced fully diluted earnings per share, includes all dilutive items.
Dilution is calculated based upon the treasury stock method, which assumes
that all dilutive securities were exercised and that the proceeds received
were applied to repurchase outstanding shares at the average market price
during the period.
 
  As a result of the adoption of SFAS No. 128, primary earnings per share for
fiscal 1997 and 1996 were restated from $2.01 to $2.07 and from $1.59 to
$1.64, respectively, to reflect the change to basic earnings per share. The
difference between basic and diluted earnings per share, as shown on the
Company's Consolidated Statements of Income, is due to the dilutive effect of
stock options outstanding.
 
 j. Two-for-One Stock Split
 
  On March 12, 1996, the Board of Directors declared a two-for-one common
stock split which was distributed on May 6, 1996 to shareholders of record at
the close of business on April 8, 1996. All share and per share data included
in the consolidated financial statements and accompanying notes have been
adjusted to reflect the stock split.
 
                                      27
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
            November 1, 1998, November 2, 1997 and November 3, 1996
 
 
 k. Foreign Currency Translation
 
  The Company translates the financial statements of its foreign subsidiaries
from the local (functional) currencies to U.S. dollars in accordance with SFAS
No. 52 "Foreign Currency Translation". Substantially all assets and
liabilities of the Company's foreign subsidiaries are translated at year-end
exchange rates, while revenue and expenses are translated at average exchange
rates prevailing during the year. Adjustments for foreign currency translation
fluctuations are excluded from net income and are included as a separate
component of consolidated shareholders' equity.
 
 l. Advertising and Promotion
 
  All costs associated with advertising and promotion of the Company's
products are expensed as incurred.
 
 m. Investments
 
  The Company's investments are categorized as available-for-sale securities,
as defined by SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities." Unrealized holding gains and losses are reflected as a net
amount in a separate component of stockholders' equity until realized. For the
purpose of computing realized gains and losses, cost is identified on a
specific identification basis.
 
 n. New Accounting Pronouncements
 
  In June 1997, the Financial Accounting Standards Board issued SFAS Nos.130
and 131, "Reporting Comprehensive Income" and "Disclosures about Segments of
an Enterprise and Related Information." The Company will be required to adopt
these standards in fiscal 1999. The adoption of these standards is not
expected to have a material impact on the Company's financial position or
results of operations.
 
  In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 "Reporting on the Costs of Start-up Activities".
The Company will be required to adopt this standard in fiscal 2000. The
adoption of this standard is not expected to have a material impact on the
Company's financial position or results of operations.
 
3. Fair Value of Financial Instruments
 
  The carrying amounts of cash and cash equivalents approximate fair value.
Investments consist primarily of municipal bonds with maturity dates of less
than six months and common stock, which are classified as available-for-sale.
 
  Investments available-for-sale at November 1, 1998 and November 2, 1997 are
as follows:
 
<TABLE>
<CAPTION>
                                                             Market   Unrealized
                  November 1, 1998                 Cost      Value       Loss
                  ----------------              ---------- ---------- ----------
     <S>                                        <C>        <C>        <C>
     Municipal Securities...................... $1,000,000 $1,000,000  $   --
     Common Stock..............................    202,931    175,427   27,504
                                                ---------- ----------  -------
                                                $1,202,931 $1,175,427  $27,504
                                                ========== ==========  =======
<CAPTION>
                  November 2, 1997
                  ----------------
     <S>                                        <C>        <C>        <C>
     Municipal Securities...................... $1,500,000 $1,500,000  $   --
     Money Market Fund.........................    833,511    833,511      --
     Common Stock..............................     18,254     18,254      --
                                                ---------- ----------  -------
                                                $2,351,765 $2,351,765  $   --
                                                ========== ==========  =======
</TABLE>
 
 
                                      28
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
            November 1, 1998, November 2, 1997 and November 3, 1996
 
 
  The Company holds various foreign exchange contracts. At November 1, 1998,
the Company had contracts maturing through May 28, 1999 to sell 5.4 million
deutsche marks and 365,000 British pounds at rates ranging from 1.71 to 1.77
deutsche marks to the U.S. dollar and 1.63 to 1.64 U.S. dollars to the British
pound. At November 2, 1997, the Company had contracts maturing through
November 10, 1998 to sell 10.9 million deutsche marks and 670,000 British
pounds at rates ranging from 1.55 to 1.71 deutsche marks to the U.S. dollar
and 1.62 to 1.66 U.S. dollars to the British pound. At November 1, 1998 and
November 2, 1997 the fair value of these foreign exchange contracts were less
than the face value by $197,000 and $96,000, respectively.
 
  During the fourth quarter of fiscal 1998, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The adoption
of SFAS No. 133 did not have a material effect on the Company's financial
position or results of operations. It is the Company's policy to reduce the
effects of fluctuations in foreign currency exchange rates associated with its
sale of goods denominated in foreign currency by entering into forward
contracts. The Company enters into contracts to sell foreign currencies in the
future only to protect the U.S. dollar value of certain investments and future
foreign currency transactions. The Company does not engage in speculation. The
gains and losses on these contracts are included in income upon maturity and
offset the foreign exchange gains and losses reported on the underlying
transactions. The total net gain recorded during fiscal 1998 was approximately
$321,000 and is included as an offset to selling, general and administrative
expenses on the accompanying consolidated statements of income.
 
4. Accrued Expenses
 
  Accrued expenses for fiscal years 1998 and 1997 are comprised of the
following:
 
<TABLE>
<CAPTION>
                                                           1998        1997
                                                        ----------- -----------
     <S>                                                <C>         <C>
     Wages and benefits................................ $ 5,135,454 $ 4,013,350
     Workers' compensation.............................     646,100     796,382
     Profit-sharing plan contribution..................     500,000     500,000
     Promotional and advertising allowance.............   1,896,955   1,741,896
     Other.............................................   3,151,264   3,453,306
                                                        ----------- -----------
                                                        $11,329,773 $10,504,934
                                                        =========== ===========
</TABLE>
 
5. Income Taxes
 
  The provision for income taxes for fiscal years 1998, 1997 and 1996,
consists of the following:
 
<TABLE>
<CAPTION>
                                               1998        1997        1996
                                            ----------- ----------- -----------
     <S>                                    <C>         <C>         <C>
     Current:
       Federal............................. $17,568,636 $18,878,088 $16,434,369
       State...............................   4,220,969   5,335,096   4,277,275
                                            ----------- ----------- -----------
                                             21,789,605  24,213,184  20,711,644
     Deferred provision (benefit)..........     211,299      86,645    (782,999)
                                            ----------- ----------- -----------
                                            $22,000,904 $24,299,829 $19,928,645
                                            =========== =========== ===========
</TABLE>
 
 
                                      29
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
            November 1, 1998, November 2, 1997 and November 3, 1996
 
 
  The components of the deferred income tax provision (benefit) for fiscal
years 1998 and 1997 are as follows:
 
<TABLE>
<CAPTION>
                                             1998       1997        1996
                                           ---------  ---------  -----------
     <S>                                   <C>        <C>        <C>
     Allowance for uncollectible accounts. $  16,718  $  57,083  $       --
     Inventory adjustments to market......  (431,311)   609,067   (1,286,168)
     Accrued expenses.....................   663,042   (429,750)     374,841
     Depreciation.........................   (37,150)  (149,755)     128,328
                                           ---------  ---------  -----------
                                           $ 211,299  $  86,645  $  (782,999)
                                           =========  =========  ===========
</TABLE>
 
  The components of the Company's deferred income tax benefit as of November
1, 1998 and November 2, 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                             1998       1997
                                                          ---------- ----------
     <S>                                                  <C>        <C>
     Deferred income tax benefit:
       Tax basis adjustments to inventory................ $2,126,806 $1,952,210
       Allowance for uncollectible accounts..............    879,725    364,583
       Inventory adjustments to market...................  2,283,321  2,952,273
       Accrued expenses..................................  2,454,109    524,895
                                                          ---------- ----------
                                                          $7,743,961 $5,793,961
                                                          ========== ==========
</TABLE>
 
  The reported provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to the income before provision
for income taxes for fiscal years 1998, 1997 and 1996 as follows:
 
<TABLE>
<CAPTION>
                                            1998         1997        1996
                                         -----------  ----------- -----------
     <S>                                 <C>          <C>         <C>
     Income tax provision computed at
      statutory rate.................... $19,397,537  $20,553,218 $16,467,607
     State taxes, net of federal
      benefit...........................   3,350,232    3,549,834   2,844,192
     Tax credits and other..............    (746,865)     196,777     616,846
                                         -----------  ----------- -----------
     Tax provision...................... $22,000,904  $24,299,829 $19,928,645
                                         ===========  =========== ===========
</TABLE>
 
6. Benefit and Stock Option Plans
 
  The Company is self-insured for a portion of its medical benefits programs.
Amounts charged to expense for health benefits were $3,594,000, $3,110,000 and
$3,137,000 for fiscal years 1998, 1997 and 1996, respectively, and were based
on actual claims and an estimate of claims incurred but not reported. The
current liability for health benefits is included in accrued expenses on the
accompanying consolidated balance sheets. The Company maintains excess
insurance coverage on an individual and an aggregate basis.
 
  The Company maintains a qualified profit-sharing plan for the benefit of all
eligible employees. This plan contemplates the sharing of profits annually at
the discretion of the Board of Directors and is funded by cash contributions.
The contribution to this plan was $500,000, in each of the fiscal years 1998,
1997 and 1996.
 
  The Company has one stock option plan, the 1993 St. John Knits, Inc. Stock
Option Plan (the "Plan"). Options granted under the Plan may be either
incentive or nonstatutory stock options. The Company accounts for the Plan
under Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees", under which no compensation cost has been recognized for fiscal
years 1998, 1997 and 1996.
 
                                      30
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
            November 1, 1998, November 2, 1997 and November 3, 1996
 
 
  SFAS No. 123 "Accounting for Stock-Based Compensation" was issued in 1995
and, if fully adopted, changes the methods for recognition of cost on plans
similar to that of the Company. Adoption of SFAS No. 123 is optional for
employee stock option grants, however pro forma disclosure as if the Company
had adopted the cost recognition method is required. Had compensation cost for
stock options awarded under the Plan been determined consistent with SFAS No.
123, the Company's net income and earnings per share would have reflected the
following pro forma amounts:
 
<TABLE>
<CAPTION>
                                                         1998        1997
                                                      ----------- -----------
     <S>                     <C>                      <C>         <C>
     Net income:             As reported............. $33,420,618 $34,423,651
                             Pro forma............... $31,818,853 $33,605,519
     Net income per share--
      diluted:               As reported.............       $1.94       $2.01
                             Pro forma...............       $1.85       $1.96
</TABLE>
 
  The Company may grant up to 2,350,000 options under the Plan. The Company
has granted 1,625,334 options through November 1, 1998. The options are
primarily issued at fair market value with exercise prices equal to the
Company's stock price at the date of grant. Options generally vest over three
years; are exercisable in whole or in installments; and expire ten years from
date of grant.
 
  The following is a summary of the activity in the Plan for fiscal years
1998, 1997, and 1996:
 
<TABLE>
<CAPTION>
                               1998               1997              1996
                         ------------------ ----------------- ------------------
                                   Weighted          Weighted           Weighted
                                   Average           Average            Average
                                   Exercise          Exercise           Exercise
                          Shares    Price   Shares    Price    Shares    Price
                         --------  -------- -------  -------- --------  --------
<S>                      <C>       <C>      <C>      <C>      <C>       <C>
Outstanding, beginning
 of year................  842,988   $17.16  681,472   $ 9.45   784,470   $ 8.81
Granted.................  527,334    27.12  197,000    42.27    28,000    23.04
Exercised............... (109,336)    9.79  (35,484)    8.50  (130,330)    8.50
Forfeited............... (339,334)   39.44      --       --       (668)    8.50
                         --------   ------  -------   ------  --------   ------
Outstanding, end of
 year...................  921,652   $15.42  842,988   $17.16   681,472   $ 9.45
                         ========   ======  =======   ======  ========   ======
Exercisable, end of
 year...................  677,960   $14.37  668,644   $11.28   625,458   $ 8.68
Weighted average fair
 value of options
 granted................            $11.34            $17.93             $ 8.80
</TABLE>
 
  During fiscal 1998, a total of 324,334 options were repriced.
 
  The following is a detail of the stock options outstanding at November 1,
1998, including weighted average contractual life and exercise price
information:
 
<TABLE>
<CAPTION>
                                                   Weighted Average
                                               -------------------------
         Range of        Options     Options      Remaining     Exercise
     Exercise Prices   Outstanding Exercisable Contractual Life  Price
     ---------------   ----------- ----------- ---------------- --------
     <S>               <C>         <C>         <C>              <C>
          $8.50          492,818     492,818         4.36        $ 8.50
     $15.06 to $23.00    328,834      85,142         9.48         18.58
     $39.06 to $39.13    100,000     100,000         9.10         39.09
     ----------------    -------     -------         ----        ------
               
     $8.50 to $39.13     921,652     677,960         6.70        $15.42
     ================    =======     =======         ====        ======
               
</TABLE>
 
  For purposes of the pro forma presentation above, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes pricing
model with the following assumptions used for the grants in fiscal years 1998
and 1997: weighted average risk-free interest rate of 5.55 and 6.32 percent;
weighted average volatility of 27.5 and 31.0 percent; expected life of 6
years; and weighted average dividend yield of 0.263 and 0.237 percent.
 
                                      31
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
            November 1, 1998, November 2, 1997 and November 3, 1996
 
 
7. Commitments
 
  The Company has entered into various leases for manufacturing, showroom,
warehouse, retail and office locations, including leases with related parties
(Note 9). The leases expire at various dates through the year 2014 and certain
leases contain renewal options. Rental expense under these leases was
approximately $12,052,000, $9,474,000 and $8,094,000 in fiscal years 1998,
1997 and 1996, respectively.
 
  The following is a schedule of future minimum rental payments required under
noncancellable operating leases as of November 1, 1998:
 
<TABLE>
     <S>                                                            <C>
     1999.......................................................... $ 12,802,000
     2000..........................................................   12,247,000
     2001..........................................................   11,305,000
     2002..........................................................   10,831,000
     2003..........................................................   10,222,000
     Thereafter....................................................   69,584,000
                                                                    ------------
                                                                    $126,991,000
                                                                    ============
</TABLE>
 
  The Company has various employment contracts with certain key employees,
which expire at various times through June 1, 2000. These agreements provide
for total annual compensation aggregating $3,634,000 and the payment of
severance benefits upon the termination of employment.
 
  As of November 1, 1998 and November 2, 1997, the Company's commitments to
purchase wool yarn were approximately $12,779,000 and $11,847,000
respectively. The Company's commitment to purchase computerized knitting
machines totaled approximately $569,000 and $2,326,000 at November 1, 1998 and
November 2, 1997, respectively.
 
  On November 4, 1998, the Board of Directors of the Company adopted a
shareholder rights plan whereby shareholders will receive one right for each
share of common stock. The rights were issued as a dividend to shareholders of
record on November 18, 1998. Generally, the plan provides that if a person or
group acquires more than 15 percent of the Company's stock, holders of the
rights will be entitled to purchase the Company's stock at half of market
value. The plan also provides that if the Company is acquired in a merger or
other business combination after a person or group acquires more than 15
percent of the Company's stock, holders of the rights will be entitled to
purchase the acquiring company's stock at half of market value. Subject to
certain restrictions, the Company will be entitled to redeem the rights for
$0.01 per right at any time until the first date of public announcement that a
15 percent position in the Company has been acquired.
 
8. Line of Credit and Long-term Debt
 
  The Company has a line of credit agreement with a bank. The agreement
provides for a $25,000,000 line of credit that matures March 1, 2000.
Borrowings under the line bear interest at the bank's reference rate
(8.0 percent at November 1, 1998) or an offshore rate plus 1.5 percent. The
agreement contains covenants, which, among other matters, restrict capital
expenditures, dividends, investments, loans and advances and require the
maintenance of certain financial ratios. No amounts were due under this line
of credit at either November 1, 1998 or November 2, 1997. Letters of credit
outstanding under the line of credit totaled approximately $111,000 and
$331,000 at November 1, 1998 and November 2, 1997, respectively.
 
                                      32
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
            November 1, 1998, November 2, 1997 and November 3, 1996
 
 
  The long-term debt included on the consolidated balance sheet at November 1,
1998 represents the long-term portion of a term loan incurred by the Company's
Japanese subsidiary, St. John Company, Ltd. The loan requires 36 equal monthly
installments including principal and interest through August 2001. The
effective interest rate for the loan was 2.1 percent at November 1, 1998. The
current portion of this loan is included in accrued liabilities on the
accompanying consolidated balance sheets.
 
9. Related-Party Transactions
 
  The Company leases its corporate headquarters/manufacturing facility and one
other manufacturing facility from partnerships in which a shareholder of the
Company is a significant partner. The annual payments on these leases were
approximately $975,000, $884,000 and $966,000 in fiscal years 1998, 1997 and
1996, respectively. The leases expire at various dates during fiscal year 2001
and are included in the future minimum rental payments disclosure (Note 7).
 
  The Company periodically rents personal property provided by a company that
is owned by a shareholder. Rental payments for the use of such equipment were
approximately $21,000, $30,000 and $37,000 in fiscal years 1998, 1997 and
1996, respectively.
 
  At November 1, 1998 and November 2, 1997, the Company held a 50 percent
ownership interest in a partnership which leases transportation equipment to
the Company. The holder of the other 50 percent ownership interest is a
corporation which is wholly-owned by one of the Company's shareholders. During
fiscal 1996, the Company made net capital contributions to the partnership of
approximately $951,000. At November 1, 1998 and November 2, 1997, the
Company's investment in this partnership, net of partnership losses, was
approximately $854,000 and $1,270,000, respectively, and is included in other
assets on the accompanying consolidated balance sheets. During fiscal years
1998, 1997 and 1996, the Company made lease payments to the partnership of
$868,000, $840,000 and $572,000, respectively. During the same years, the
Company reported net losses from the activities of the partnership of
$331,000, $351,000 and $224,000, respectively.
 
10. Current Vulnerability Due to Certain Concentrations
 
  A substantial portion of the Company's sales are made to three major
customers. These three customers accounted for 17,14 and 14 percent of net
sales during fiscal 1998, 17, 15 and 15 percent of net sales during fiscal
1997 and 18, 15 and 15 percent during fiscal 1996. The loss of any one of
these customers could have a materially adverse affect on the Company's
business.
 
  The Company sells primarily to specialty apparel retailers; thus, the risk
of collection losses is concentrated in this industry. Management believes
that the Company's credit and collection policies are adequate to prevent
significant collection losses and that the allowance for uncollectible
accounts is adequate at November 1, 1998 and November 2, 1997.
 
11. Litigation
 
 Amen Wardy Home Stores
 
  On October 5, 1998, Amen Wardy, Jr. ("Wardy Jr.") filed a complaint (the
"Wardy Jr. Complaint") against the Company, Amen Wardy Home Stores, LLC, a 51
percent owned subsidiary of the Company ("Amen"), Robert E. Gray, Marie St.
John Gray, Kelly A. Gray, Black and Co., Inc. and Jennifer Black in the
Superior Court of the State of California, County of Orange (Wardy, Jr. v. St.
John Knits, Inc., et al.). The
 
                                      33
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
            November 1, 1998, November 2, 1997 and November 3, 1996
 
complaint, which was amended on December 4, 1998, involves claims of wrongful
termination, breach of contract, breach of the implied covenant of good faith
and fair dealing, breach of fiduciary duty, slander, libel, intentional and
negligent infliction of emotional distress, an accounting fraud, negligent
misrepresentation, conspiring to commit fraud and aiding and abetting fraud.
The complaint alleges that Amen wrongfully terminated Wardy Jr. because he
refused to participate in improper accounting practices. The complaint also
alleges that the Company used Amen for its benefit and to the detriment of
Amen. Wardy Jr. seeks an unspecified amount of compensatory and punitive
damages as well as costs of suit, including attorneys' fees.
 
  On November 16, 1998, the Company and Amen filed a cross-complaint against
Wardy Jr., and a third party complaint against Amen Wardy, Sr., Bob Hightower
and Amen Wardy Home, Inc. ("AWHI") in the Superior Court of the State of
California, County of Orange. Together, these complaints involve claims of
breach of contract, breach of fiduciary duty and fraud. These complaints
allege that AWHI used Amen for its benefit and to the detriment of Amen and
the Company. The Company and Amen seek an unspecified amount of compensatory
and punitive damages, as well as costs of suit, including attorneys' fees.
 
  On November 17, 1998, AWH Direct, Inc. ("AWH Direct") filed a derivative
complaint against Amen, the Company, Robert E. Gray, Marie St. John Gray,
Kelly A. Gray, David A. Krinsky and David C. Frankel in the Superior Court of
the State of California, County of Orange (AWH Direct, LLC v. Amen Wardy Home
Stores, LLC, et al.). In this action AWH Direct is represented by the same
counsel as Wardy Jr. in Wardy Jr. v. St. John Knits, Inc., et al., described
above. AWH Direct claims that the defendants are liable for breach of
fiduciary duty, breach of contract, breach of the implied covenant of good
faith and fair dealing, wrongful refusal to allow inspection of books and
records and an accounting. The complaint makes allegations similar to the ones
made in the Wardy Jr. Complaint. AWH Direct seeks an unspecified amount of
compensatory and punitive damages, a mandatory injunction requiring defendants
to allow plaintiff immediate access to the books and records of Amen and costs
of suit, including attorneys' fees.
 
 Securities Fraud Class Action
 
  On October 13, 1998, Binary Traders, Inc. filed a complaint on behalf of
purchasers of publicly traded securities of the Company during the period of
February 25, 1998 to August 25, 1998 against the Company, Robert E. Gray and
Kelly A. Gray in the United States District Court, Central District of
California, Southern Division (Binary Traders, Inc. v. St. John Knits, Inc.,
et al.). In this action, Binary Traders claims that the defendants violated
federal securities laws by allegedly making fraudulent statements to cover up
management's mistakes and certain material adverse conditions affecting the
Company's business. In addition, the complaint alleges that Mr. Gray traded
shares of the Company's common stock while in possession of allegedly material
non-public information. Binary Traders seeks class action certification and an
unspecified amount of compensatory damages.
 
 Proposed Buy-out Litigation
 
  Effective December 8, 1998, the Company received a proposal from Robert E.
Gray, Chairman and Chief Executive Officer, and Vestar Capital Partners III,
L.P. to purchase substantially all of the outstanding common stock of the
Company through a buy-out transaction. The Company has appointed an
independent committee of directors to evaluate the proposed transaction.
 
  The Company is party to lawsuits that allege claims against certain of the
Company's directors for breach of fiduciary duty alleged to have arisen from
the proposed buy-out transaction. The lawsuits were filed in the Superior
Court of the State of California for the County of Orange.
 
                                      34
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
            November 1, 1998, November 2, 1997 and November 3, 1996
 
 
  The dates the lawsuits were instituted, as well as the principal parties to
the lawsuits, are as follows: (i) Tehrani v. St. John Knits, Inc., et al.,
filed on December 9, 1998, by Mishel S. Tehrani, as representative for a
putative class of unidentified members, against the Company, Robert E. Gray,
Marie St. John Gray, Kelly A. Gray, Roger G. Ruppert, Richard A. Gadbois III,
David A. Krinsky and Rick Rozar and (ii) Hill v. St. John Knits, Inc., et al.,
filed on December 9, 1998, by Kenneth O. Hill, as representative for a
putative class of unidentified members, against the Company, Robert E. Gray,
Marie St. John Gray, Kelly A. Gray, Roger G. Ruppert, Richard A. Gadbois III
and David A. Krinsky.
 
  The principal relief sought in the these actions is certification of the
putative class, an injunction of the proposed buy-out transaction from
proceeding or, to the extent the transaction is concluded, a rescission of the
buy-out transaction and damages and attorneys' fees in an unspecified amount.
 
  The Company is unable to estimate the outcome of these matters or any
potential liabilities it may incur. The Company expects to incur legal and
other defense costs as a result of such proceedings in an amount which it can
not currently estimate. These proceedings could involve a substantial
diversion of the time of some of the members of management, and an adverse
determination in, or settlement of, such litigation could involve payment of
significant amounts, which could have an adverse impact on the Company's
business, financial condition, results of operations and cash flows.
 
12. Subsequent Events
 
  Additional lawsuits were instituted in regards to the proposed buy-out
transaction. The lawsuits were filed in the Superior Court of the State of
California for the County of Orange. The dates the lawsuits were instituted,
as well as the principal parties to the lawsuits, are as follows: (i)
Silverman v. St. John Knits, Inc., et al., filed on December 23, 1998, by
Shirley Silverman, as representative for a putative class of unidentified
members, against the Company, Robert E. Gray, Marie St. John Gray, Kelly A.
Gray, Roger G. Ruppert, Richard A. Gadbois III and David A. Krinsky and (ii)
Vinikow v. St. John Knits, Inc., et al., filed on January 8, 1999, by Larry
Vinikow as representative for a putative class of unidentified members,
against the Company, Robert E. Gray, Marie St. John Gray, Kelly A. Gray, Roger
G. Ruppert, Richard A. Gadbois III and David A. Krinsky.
 
  The principal relief sought in the these actions is certification of the
putative class, an injunction of the proposed buy-out transaction from
proceeding or, to the extent the transaction is concluded, a rescission of the
buy-out transaction, and damages and attorneys' fees in an unspecified amount.
 
  The Company is unable to estimate the outcome of these matters or any
potential liabilities it may incur. The Company expects to incur legal and
other defense costs as a result of such proceedings in an amount which it can
not currently estimate. These proceedings could involve a substantial
diversion of the time of some of the members of management, and an adverse
determination in, or settlement of, such litigation could involve payment of
significant amounts, which could have an adverse impact on the Company's
business, financial condition, results of operations and cash flows.
 
                                      35
<PAGE>
 
                              ST. JOHN KNITS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
            November 1, 1998, November 2, 1997 and November 3, 1996
 
 
13. Results by Quarter (Unaudited)
 
  The unaudited results by quarter for fiscal years 1998 and 1997 are shown
below:
 
<TABLE>
<CAPTION>
                                                  First  Second   Third  Fourth
                                                 Quarter Quarter Quarter Quarter
                                                 ------- ------- ------- -------
                                                 (in thousands, except per share
                                                            amounts)
<S>                                              <C>     <C>     <C>     <C>
Year ended November 1, 1998
  Net sales..................................... $68,761 $69,806 $67,727 $75,667
  Gross profit..................................  39,778  40,876  39,428  40,996
  Net income....................................   9,220   9,746   7,325   7,129
  Net income per common share--diluted..........    0.54    0.57    0.43    0.42
Year ended November 2, 1997
  Net sales..................................... $56,175 $59,563 $54,811 $71,552
  Gross profit..................................  31,756  35,871  32,163  42,767
  Net income....................................   7,383   8,874   7,201  10,965
  Net income per common share--diluted..........    0.43    0.52    0.42    0.64
</TABLE>
 
                                       36
<PAGE>
 
                                                                     SCHEDULE II
 
                              ST. JOHN KNITS, INC.
 
                        VALUATION AND QUALIFYING ACCOUNT
 
                  For the Fiscal Years Ended November 1, 1998,
                     November 2, 1997 and November 3, 1996
 
<TABLE>
<CAPTION>
                                  Balance at  Charged to            Balance at
                                 Beginning of Costs and               End of
                                 Fiscal Year   Expenses  Deductions Fiscal Year
                                 ------------ ---------- ---------- -----------
<S>                              <C>          <C>        <C>        <C>
Allowance for Uncollectible
 Accounts:
  Fiscal year ended November 1,
   1998.........................   $905,000    $283,826   $238,099   $950,727
  Fiscal year ended November 2,
   1997.........................   $750,000    $369,987   $214,987   $905,000
  Fiscal year ended November 3,
   1996.........................   $750,000    $ 88,547   $ 88,547   $750,000
</TABLE>
 
                                       37
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
 
Date: January 27, 1999
 
                                          ST. JOHN KNITS, INC. (Registrant)
 
                                                       /s/ BOB GRAY
                                          By:__________________________________
                                                         Bob Gray
                                                 Chairman of the Board and
                                                  Chief Executive Officer
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
 
           SIGNATURE                         TITLE                   DATE      
           ---------                         -----                   ----      
                                                                               
         /s/ BOB GRAY              Chairman of the Board       January 27, 1999
-------------------------------    and Chief Executive                         
           Bob Gray                Officer (Principal                          
                                   Executive Officer)                          
                                                                               
    /s/ MARIE ST. JOHN GRAY        Vice Chairman of the        January 27, 1999
-------------------------------    Board, Chief Designer                       
      Marie St. John Gray          and Secretary                               
                                                                               
       /s/ KELLY A. GRAY           Director and President      January 27, 1999
-------------------------------                                                
         Kelly A. Gray                                                         
                                                                               
      /s/ ROGER G. RUPPERT         Director, Senior Vice       January 27, 1999
-------------------------------    President-Finance and                       
        Roger G. Ruppert           Chief Financial Officer                     
                                   (Principal Financial                        
                                   Officer and Principal                       
                                   Accounting Officer)                         
                                                                               
      /s/ DAVID A. KRINSKY         Director                    January 27, 1999
-------------------------------                                                
        David A. Krinsky                                                       
                                                                               
  /s/ RICHARD A. GADBOIS, III      Director                    January 27, 1999
-------------------------------                                                
    Richard A. Gadbois, III                                                    
                                                                               
      /s/ ROBERT C. DAVIS          Director                    January 27, 1999
-------------------------------                                                
        Robert C. Davis                                                        
                                                                               
    /s/ DANIEL THOMAS REINER       Director                    January 27, 1999
-------------------------------                                                
      Daniel Thomas Reiner                                                     
                                                                               
      /s/ MARK R. GOLDSTON         Director                    January 27, 1999
-------------------------------
        Mark R. Goldston
 
                                      38
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                     Sequential
 Exhibit                                                                Page
 Number                         Description                            Number
 -------                        -----------                          ----------
 <C>     <S>                                                         <C>
   3.1   Articles of Incorporation of the Company(1)
   3.2   Bylaws of the Company(1)
   3.3   Certificate of Determination of Preferences of Series A
         Junior Participating Preferred Stock of St. John Knits,
         Inc. (incorporated by reference to Exhibit 3.1 of the
         Company's Current Report of Form 8-K filed on November
         12, 1998 (File No. 1-11752))
   4.1   Rights Agreement, dated as of November 9, 1998, between
         St. John Knits, Inc. and Harris Trust Company of
         California, as rights agent (incorporated by reference to
         Exhibit 4.1 of the Company's Current Report on Form 8-K
         filed on November 12, 1998 (File No. 1-11752))
  10.1   Lease Amendment Agreement dated April 1, 1997 between the
         Company and G.M. Properties (increasing the space of the
         corporate headquarters, warehousing and Manufacturing
         facility)(6)
  10.2   Retail Lease dated August 8, 1995 by and between the
         Company and Wilshire Roxbury Enterprises, a California
         Limited Partnership (Beverly Hills Boutique)(4)
  10.3   Agreement of Lease dated as of December 31, 1995 by and
         between the Company and Rolex Realty Company, Inc. (New
         York Boutique)(4)
  10.4   Lease dated June 1, 1986 between G.M. Properties and the
         Company (Corporate Headquarters)(1)
  10.5   Industrial Real Estate Lease dated November 13, 1985
         between the Alhambra Partners, a California Limited
         Partnership, and the Company, together with Amendment No.
         1 to Industrial Real Estate Lease dated November 13, 1985
         and Option to Extend Term dated November 13, 1985
         (Assembling, Sewing)(1)
  10.6   Agreement of Lease dated March 1, 1991 by and between the
         Company and Broadway and 41st Associates Limited
         Partnership, as amended by letter agreements dated March
         4, 1991, November 6, 1991, and November 7, 1991, and as
         further amended by Lease Extension and Modification
         Agreement dated October 22, 1993 (New York Showroom)(1)
  10.7   Agreement of Lease dated October 22, 1993 by and between
         the Company and Broadway and 41st Associates Limited
         Partnership (New York Showroom)(2)
 *10.8   Description of Directors Compensation Plan(5)
  10.9   Agreement of Lease dated January 11, 1991 by and between
         Rolex Realty Company, Inc. and the Company together with
         Lease Modification Agreement dated January 11, 1991 and
         Second Lease Modification Agreement dated April 12, 1991
         (New York Boutique)(1)
  10.10  Amended and Restated Agreement of Limited Partnership of
         SJA 1&2, Ltd. dated October 31, 1993 by and between the
         Company and Ocean Air Charters, Inc.(2)
 *10.11  Amended and Restated Employment Agreement dated as of
         July 13, 1998 between the Company and Robert E.Gray
         (incorporated by reference to Exhibit 10.3 of the
         Company's Quarterly Report on Form 10-Q for the quarter
         ended August 2, 1998 (File No. 1-11752))
 *10.12  Employment Agreement dated as of July 14, 1998 between
         the Company and Marie St. John Gray (incorporated by
         reference to Exhibit 10.4 of the Company's Quarterly
         Report on Form 10-Q for the quarter ended August 2, 1998
         (File No. 1-11752))
  10.13  Product Design and Development Agreement dated August 5,
         1997 among the Company, Amen Wardy, Sr. and Amen Wardy,
         Jr.(6)
 *10.14  Employment Agreement dated as of July 14, 1998 between
         the Company and Kelly A. Gray (incorporated by reference
         to Exhibit 10.5 of the Company's Quarterly Report on Form
         10-Q for the quarter ended August 2, 1998 (File No. 1-
         11752))
 *10.15  Employment Agreement dated as of July 14, 1998 between
         the Company and Bruce Fetter (incorporated by reference
         to Exhibit 10.9 of the Company's Quarterly Report on
         Form 10-Q for the quarter ended August 2, 1998 (File
         No.1-11752))
 *10.16  Employment Agreement dated as of July 14, 1998 between
         the Company and Roger G. Ruppert (incorporated by
         reference to Exhibit 10.6 of the Company's Quarterly
         Report on Form 10-Q for the quarter ended August 2, 1998
         (File No. 1-11752))
</TABLE>
 
                                       39
<PAGE>
 
<TABLE>
<CAPTION>
                                                                     Sequential
 Exhibit                                                                Page
 Number                         Description                            Number
 -------                        -----------                          ----------
 <C>     <S>                                                         <C>
 *10.17  Employment Agreement dated as of July 14, 1998 between
         the Company and Karla R. Guyer (incorporated by reference
         to Exhibit 10.8 of the Company's Quarterly Report on Form
         10-Q for the quarter ended August 2, 1998 (File No. 1-
         11752))
 *10.18  St. John Knits, Inc. Employees' Profit Sharing Plan dated
         as of August 21, 1995(4)
  10.19  Aircraft Lease dated April 1, 1998 by and between the
         Company and Ocean Air Charters, Inc. as Trustee of the
         SJA 1&2, Ltd. Trust (Lease for Company airplane)
         (incorporated by reference to Exhibit 10.1 of the
         Company's Quarterly Report on Form 10-Q for the quarter
         ended May 3, 1998 (File No. 1-11752))
 *10.20  1993 Stock Option Plan(1)
 *10.21  Form of Indemnity Agreement by and between the Company
         and each of its directors and officers(1)
  10.22  Agreement to Form Partnership and Escrow Instructions
         dated November 7, 1994 by and between the Company and
         Varian Associates, a California General Partnership(3)
  10.23  Wool Yarn Purchase Agreement dated July 29, 1998, by and
         between the Company and the Kent Manufacturing Company
         (incorporated by reference to Exhibit 10.2 of the
         Company's Quarterly Report on Form 10-Q for the quarter
         ended May 3, 1998 (File No. 1-11752))
  10.24  Agreement effective as of September 1, 1993 by and among
         the Company, Escada A.G. and Amira Verwaltungs A.G.
         (assumption of lease by the Company)(2)
  10.25  Lease dated September 26, 1994 by and between the Company
         and La Salle National Bank, as Trustee under Trust
         Agreement dated October 8, 1974, known as Trust
         Number 48163 (Chicago Boutique)(3)
  10.26  Distribution Agreement dated June 11, 1997 by and between
         the Company and Gary Farn, Ltd.(6)
  10.27  Business Loan Agreement dated December 15, 1995 by and
         between the Company and Bank of America National Trust
         and Savings Association(4)
  10.28  General Partnership Agreement of St. John-Varian
         Development Company dated April 3, 1995 by and between
         the Company and Varian Associates, a California General
         Partnership(4)
  10.29  Lease Agreement dated April 3, 1995 by and between the
         Company and St. John-Varian Development Company
         (Knitting, Sewing, Finishing, Shipping, Administrative
         Offices)(4)
  10.30  Joint Venture Agreement dated July 17, 1997 between the
         Company and Commercial Development Co., Ltd.(6)
  10.31  Agreement for Purchase and Sale of Real Property and
         Joint Escrow Instruction dated as of January 15, 1996
         between the Company and Baxter Healthcare Corporation
         (Storage)(5)
  10.32  Lease Extension Agreement dated February 6, 1996 between
         the Company and G.M. Properties (extending the lease for
         the Company's current Corporate Headquarters)(5)
  10.33  Lease Agreement dated June 5, 1998 between the Company
         and South Coast Plaza, a California General Partnership
         (South Coast Plaza boutique)(incorporated by reference to
         Exhibit 10.1 of the Company's Quarterly Report on Form
         10-Q for the quarter ended August 2, 1998 (File No. 1-
         11752))
  10.34  Lease Extension Agreement dated as of September 1, 1996
         between the Company and Alhambra Partners (extending the
         lease for one of the Company's Assembling and Sewing
         facilities)(5)
  10.35  License and Distribution Agreement dated as of August 1,
         1997 between the Company and St. John Co., Ltd.(6)
  10.36  Agreement for Purchase and Sale of Real Property and
         Joint Escrow Instruction dated as of March 12, 1996 by
         and between the Company and Baxter Healthcare Corporation
         (Design/Manufacturing)(5)
  10.37  Amendment No. 1 to Business Loan Agreement dated as of
         April 26, 1996 by and between the Company and Bank of
         America National Trust and Savings Association(5)
 *10.38  Amendment No. I to the St. John Knits, Inc. 1993 Stock
         Option Plan(5)
  10.39  Asset Purchase Agreement dated as of August 29, 1996
         among the Company, Jakob Schlaepfer & Co. AG and Jakob
         Schlaepfer, Inc.(5)
  10.40  Amendment No. 2 to Business Loan Agreement between the
         Company and Bank of America National Trust and Savings
         Association(5)
</TABLE>
 
                                       40
<PAGE>
 
<TABLE>
<CAPTION>
                                                                     Sequential
 Exhibit                                                                Page
 Number                         Description                            Number
 -------                        -----------                          ----------
 <C>     <S>                                                         <C>
  10.41  Manufacturing and Supply Agreement dated as of November
         9, 1996 by and between the Company and Calzaturificio
         M.A.B. S.p.A.(5)
  10.42  Limited Liability Company Agreement for Amen Wardy Home
         Stores, LLC dated August 5, 1997, among the Company, AWH
         Direct, LLC, Amen Wardy, Sr., Amen Wardy, Jr., Amen Wardy
         Home, Inc., Bob Hightower and Amen Wardy Home
         Stores, LLC(6)
  10.43  Sales Representative Agreement dated November 13, 1996 by
         and between the Company and Hilda Chang(5)
  10.44  Not Used
  10.45  Wool Yarn Purchase Agreement dated July 29, 1998 by and
         between the Company and Kent Manufacturing Company(7)
 *10.46  Amendment No. II to the St. John Knits, Inc. 1993 Stock
         Option Plan (incorporated by reference to Exhibit 10.2 of
         the Company's Quarterly Report on Form 10-Q for the
         quarter ended May 3, 1998 (File No. 1-11752))
  10.47  Amendment No. 3 to Business Loan Agreement between the
         Company and Bank of America National Trust and Savings
         Association(6)
  10.48  Lease Agreement dated December 10, 1997 by and between
         the Company and Forum Developers Limited Partnership, A
         Nevada Limited Partnership (Las Vegas Boutique)(6)
  10.49  Amendment No. 4 to Business Loan Agreement between the
         Company and Bank America National Trust and Savings
         Association(6)
  10.50  Unit Price Construction Agreement between St. John de
         Mexico, S.A. de C.V. and Administration Tijuana
         Industrial, S.A. de C.V.(6)
  10.51  Amendment No. 5 to the Business Loan Agreement between
         the Company and Bank of America National Trust and
         Savings Association (incorporated by reference to
         Exhibit 10.3 of the Company's Quarterly Report on Form
         10-Q for the quarter ended May 3, 1998 (File No. 1-
         11752))
  10.52  Amendment No. 6 to the Business Loan Agreement between
         the Company and Bank of America National Trust and
         Savings Association (incorporated by reference to
         Exhibit 10.10 of the Company's Quarterly Report on Form
         10-Q for the quarter ended August 2, 1998
         (File No. 1-11752))
  10.53  Amendment No. 7 to the Business Loan Agreement between
         the Company and Bank of America National Trust and
         Savings Association (incorporated by reference to
         Exhibit 10.11 of the Company's Quarterly Report on Form
         10-Q for the quarter ended August 2, 1998
         (File No. 1-11752))
  23.1   Consent of Arthur Andersen LLP, Independent Public
         Accountants(7)
  27.1   Financial Data Schedule(7)
</TABLE>
-------
(1) Incorporated by reference to Exhibit of same number to the Company's
    Registration Statement on Form S-1, as amended (file no. 33-57128) on file
    with the Securities and Exchange Commission.
(2) Incorporated by reference to Exhibit of same number to the Company's
    Report on Form 10-K for the Fiscal Year ended October 31, 1993 on file
    with the Securities and Exchange Commission.
(3) Incorporated by reference to Exhibit of same number to the Company's
    Report on Form 10-K for the Fiscal Year ended October 30, 1994 on file
    with the Securities and Exchange Commission.
(4) Incorporated by reference to Exhibit of same number to the Company's
    Report on Form 10-K for the Fiscal Year ended October 29, 1995 on file
    with the Securities and Exchange Commission.
(5) Incorporated by reference to Exhibit of same number to the Company's
    Report on Form 10-K for the Fiscal Year ended November 3, 1996 on file
    with the Securities and Exchange Commission.
(6) Incorporated by reference to Exhibit of same number to the Company's
    Report on Form 10-K for the Fiscal Year ended November 2, 1997 on file
    with the Securities and Exchange Commission.
(7) Filed herewith.
 
 *  A management contract or compensatory plan or arrangement.
 
                                      41