<PAGE>
 
===============================================================================
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                               ----------------
 
                                  FORM 10-K/A
                               (Amendment No. 1)
(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)
 
                                (949) 863-1171
              Registrant's telephone number, including area code:
 
          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 February 22, 1999 was $407,683,098 based on 15,099,374
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 February 22, 1999, the Registrant had 16,581,482 shares of Common
Stock outstanding.
 
===============================================================================
<PAGE>
 
                                    PART I
 
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 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 six 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
 
                                       2
<PAGE>
 
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, 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, (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, and (vi) The
Parnassus Fund v. St. John Knits, Inc., et al., filed on February 12, 1999, by
The Parnassus Fund, as representative for a punitive class of unidientified
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 six 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.
 
                                       3
<PAGE>
 
                                   PART III
 
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The following table sets forth information regarding the directors and
executive officers of the Company:
 
<TABLE>
<CAPTION>
                                                                                          Years
                                                                                          with
Name                                               Position                          Age Company
----                                               --------                          --- -------
<S>                        <C>                                                       <C> <C>
Robert E. Gray...........  Chairman and Chief Executive Officer                       73    36
Marie St. John Gray......  Vice-Chairman, Chief Designer and Secretary                62    36
Kelly A. Gray............  President and Director                                     32    16
Roger G. Ruppert.........  Senior Vice President--Finance, Chief Financial Officer &
                            Director                                                  55    12
Karla R. Guyer...........  Senior Vice President--Marketing                           47    19
Bruce A. Fetter..........  Senior Vice President and Chief Operating Officer          44     2
David A. Krinsky.........  Director                                                   50     5
Richard A. Gadbois, III..  Director                                                   41     5
Robert C. Davis..........  Director                                                   51     1
Mark R. Goldston.........  Director                                                   44     1
Daniel T. Reiner.........  Director                                                   47     1
</TABLE>
 
Biographical Information
 
  Robert E. Gray, a co-founder of the Company, has served as Chairman of the
Board and Chief Executive Officer of the Company since its inception in 1962.
Prior to forming the Company, Mr. Gray held various sales and production
positions with Cannady Creations, a small sportswear company, from 1952 to
1962, his last position being General Manager. He graduated from the
University of Southern California with a B.A. degree in political science and
psychology. Mr. Gray is the husband of Marie St. John Gray and the father of
Kelly A. Gray.
 
  Marie St. John Gray, a co-founder of the Company, has served as Chief
Designer of the Company since its inception in 1962, Vice-Chairman of the
Board since 1988 and Secretary of the Company since March 1993. Prior to
forming the Company, Ms. Gray was a fashion model, served as hostess of the
Queen For a Day television show and was a fit model for some of the leading
designers in the Los Angeles area. Ms. Gray was born in Yugoslavia and
educated in Austria. Ms. Gray is the wife of Robert E. Gray and the mother of
Kelly A. Gray.
 
  Kelly A. Gray, a director of the Company since October 1994, became
President of the Company in April 1996. She served as Creative Director of the
Company from June 1991 and Executive Vice President--Creative Director from
December 1995 until April 1996. Ms. Gray also heads the Company's retail
boutique division and has design responsibilities for the St. John product
line and the Company's Griffith & Gray line. In addition, she has also been
the Company's Signature Model since 1982. Prior to becoming Creative Director,
Ms. Gray headed the Company's advertising department from 1988 to June 1991.
Prior to heading the advertising department of the Company, Ms. Gray held
various other administrative positions with the Company. Ms. Gray is the
daughter of Robert E. Gray and Marie St. John Gray.
 
  Roger G. Ruppert is a certified public accountant and was appointed as a
director of the Company in October 1994. He has served as Senior Vice
President--Finance and Chief Financial Officer of the Company since October
1986. Prior to joining the Company, Mr. Ruppert was Vice President--Finance
and Chief Financial Officer of Cardis Corporation, a publicly traded auto
parts distributor, from October 1985 to October 1986. Mr. Ruppert was with
Arthur Andersen & Co. for nine years prior to joining Cardis Corporation. He
graduated with a B.S. degree in engineering from the U.S. Naval Academy and
also received an M.B.A. from the University of California, Los Angeles.
 
                                       4
<PAGE>
 
  Karla R. Guyer has been Senior Vice President--Marketing of the Company
since 1993. Previously, she was Vice President--National Sales Manager since
August 1990. Ms. Guyer also served in various sales-related positions with the
Company from 1980 to 1990. Prior to joining the Company, Ms. Guyer worked for
Bullock's as a department manager of designer dresses and furs. Ms. Guyer
attended Fullerton College in California.
 
  Bruce A. Fetter was appointed Senior Vice President and Chief Operating
Officer during November 1997. He joined the Company in January 1997 as Vice
President-Distribution and in April was appointed Senior Vice President--
Operations. From August 1994 to December 1996 he held the position of Vice
President--Logistics for Bob's Stores, a division of the Melville Corporation.
Prior to this Mr. Fetter spent seventeen years with Mervyns, a Division of
Dayton Hudson, in various supply chain management and store management
positions including, Director--Operations and Director--Physical Distribution.
Mr. Fetter graduated with a B.S. degree from the University of Southern
California in 1976, majoring in business.
 
  David A. Krinsky became a director of the Company during fiscal 1993. He is
currently a partner in the law firm of O'Melveny & Myers. Previously, he was a
partner in the law firm of Pettis, Tester, Kruse & Krinsky from 1987 to August
1994. Prior to the formation of Pettis, Tester, Kruse & Krinsky, Mr. Krinsky
was a partner in the law firm of Gibson, Dunn & Crutcher from 1982 to 1987. He
received a B.A. and a J.D. degree from the University of Southern California
and an M.A. degree from Rutgers University.
 
  Richard A. Gadbois, III became a director of the Company during fiscal 1993.
He is currently a Senior Vice President of Corporate Executive Services for
Merrill Lynch. Previously, from 1989 to March 1994, he was a Senior Vice
President of Corporate Executive Services and a member of the Chairman's
Advisory Council of Prudential Securities Incorporated, where he specialized
in the development of a private banking service for entrepreneurs. Prior to
joining Prudential Securities, Mr. Gadbois held a similar position as Senior
Vice President, Executive Services/Corporate Finance at Shearson Lehman Hutton
where he worked from 1979 to 1989. Mr. Gadbois graduated with a B.A. degree
from the University of California, Santa Barbara in 1979, majoring in
economics.
 
  Robert C. Davis became a director of the Company during December 1998. He
was employed by the Company through April 1996 serving in various positions,
including President from December 1992. He also served as a director of the
Company from 1984 to 1996. Since leaving the Company he has worked as an
independent consultant. Prior to joining the Company in 1980, Mr. Davis was a
partner in a law firm, where he specialized in corporate law and litigation
matters. He received a B.A. degree from Michigan State University and a J.D.
degree from the University of Illinois. He also serves as a director for
Guess?, Inc.
 
  Mark R. Goldston became a director of the Company during December 1998. He
is currently Chairman and Chief Executive Officer of the Goldston Group, a Los
Angeles based strategic advisory firm specializing in repositioning companies.
From April 1996 to December 1998, he served as President and CEO of
Einstein/Noah Bagel Corp., a subsidiary of Boston Chicken, Inc. From June 1994
to April 1996 he was again Chairman and Chief Executive Officer of the
Goldston Group. Prior to that, he was the President and Chief Operating
Officer of L.A. Gear, Inc. from 1991 to June 1994.
 
  Daniel T. Reiner became a director of the Company during December 1998. He
is currently an entrepreneur and private investor whose activities have
spanned a wide variety of industries. He was the founder, Chairman, President
and CEO of Optical Devices, Inc., a high-technology manufacturer of contrast
enhancement filters for computer monitors through 1992.
 
                                       5
<PAGE>
 
Additional Information Regarding the Board of Directors
 
  The Board of Directors has two standing committees: (i) the Audit Committee;
and (ii) the Compensation Committee. The Audit Committee meets with the
Company's independent auditors, makes recommendations to the Board of
Directors concerning the acceptance of the reports of such auditors and the
accounting policies and procedures of the Company and reviews financial plans
and operating results of the Company. The Audit Committee is comprised of
Messrs. Gadbois and Krinsky. During fiscal year 1998, the Audit Committee held
three meetings. The Compensation Committee meets with management and makes
recommendations to the Board of Directors concerning the annual compensation
for all executive officers and key employees of the Company. The Compensation
Committee is comprised of Messrs. Gadbois and Krinsky. During fiscal year
1998, the Compensation Committee met once. The Board of Directors does not
have a standing nominating committee.
 
  In addition, in December 1998, the Board formed a Special Committee
consisting of three newly appointed outside directors, Messrs. Goldston, Davis
and Reiner, to evaluate and negotiate a proposal by Robert E. Gray, his family
and Vestar Capital Partners III, L.P. to acquire substantially all of the
Company's outstanding Common Stock.
 
  During the fiscal year ended November 1, 1998, the Board held 16 meetings.
Each director attended at least 75% of the meetings of the Board and its
committees on which they served during their period of service.
 
Director Compensation
 
  Directors holding salaried positions with the Company will not receive
compensation for their services as a director. All other directors will
receive $25,000 annually for their services as directors of the Company.
Messrs. Davis and Reiner, members of the Company's Special Committee, each
will receive $50,000 for their services on the Special Committee and the
Chairman of the Special Committee, Mr. Goldston, will receive $75,000 for his
services on such committee. During fiscal year 1998, the Board granted 15,000
options to an outside director who is no longer a member of the Company's
Board. These options have expired. In addition, on September 15, 1998, the
Board repriced an aggregate of 45,000 options held by three outside directors.
See "Repricing of Options."
 
Compensation Committee Interlocks and Insider Participation
 
  David A. Krinsky, a director of the Company, is a partner in the law firm of
O'Melveny & Myers, which has rendered legal services to the Company in the
past and is expected to provide legal services to the Company with respect to
various matters in the future.
 
  Richard A. Gadbois, a director of the Company, is a Senior Vice President of
Corporate Executive Services for Merrill Lynch, which has rendered investment
banking services to the Company in the past and is expected to provide such
services to the Company with respect to various matters in the future.
 
            SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
  Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of
a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the
Company. Executive officers, directors and greater-than ten percent
shareholders are required by Securities and Exchange Commission regulations to
furnish the Company with copies of all Section 16(a) forms they file.
 
  To the Company's knowledge, based solely on its review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended November 1, 1998, all
Section 16(a) filing requirements applicable to its executive officers,
directors and greater-than ten percent beneficial owners were satisfied.
 
                                       6
<PAGE>
 
Item 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
 
Summary Compensation Table
 
  The following table sets forth the compensation for services in all
capacities to the Company of the following persons (the "Named Executive
Officers"): (i) the chief executive officer during fiscal year 1998 and (ii)
the other four most highly compensated executive officers of the Company:
 
<TABLE>
<CAPTION>
                                   Annual Compensation(7)
                                -----------------------------    All Other
                           Year  Salary(1)          Bonus(1)   Compensation
                           ---- -----------       -----------  ------------
   <S>                     <C>  <C>               <C>          <C>
   Robert E. Gray........  1998 $1,617,132(2)           $ --      $1,383
     Chairman and Chief    1997  1,569,535(2)             --       1,189
      Executive Officer    1996  1,564,331(2)             --       1,423 
                                                           
   Marie St. John Gray...  1998    525,985                --       1,383
     Vice-Chairman, Chief  1997    419,457                --         321
      Designer and         1996    396,298                --         408 
      Secretary                                            
                                                           
   Kelly A. Gray.........  1998    663,432(3)             --       1,383
     President             1997    604,616(3)             --       1,510
                           1996    558,685(3)             --       1,831
                                                           
   David C. Frankel(4).    1998    258,912                --       1,383
     Executive Vice        1997    259,123                --         --
      President            1996     62,500(6)             --         -- 
                                                           
   Bruce A. Fetter.......  1998    258,130                --       1,383
     Chief Officer of      1997    155,334(6)             --      26,750(5)
      Operations           1996        --                 --         --      
                           
</TABLE>
--------
(1) The amounts shown in this column include amounts and awards accrued during
    each of fiscal years 1998, 1997 and 1996 that were earned but not paid in
    such fiscal year.
 
(2) These amounts include $500,000 of annual salary that was earned but
    deferred in each of fiscal years 1998, 1997 and 1996, pursuant to the
    Employment Agreement, as amended, dated June 1, 1995 by and between the
    Company and Mr. Gray.
 
(3) These amounts include modeling fees of $250,000 which were paid to Ms.
    Gray during each of fiscal years 1998, 1997 and 1996.
 
(4) David Frankel resigned from his employment by the Company on February 10,
    1999.
 
(5) This amount represents relocation expenses paid by the Company.
 
(6) These amounts represent salary paid during a partial year due to the
    executive being hired during the applicable fiscal year.
 
(7) The Company has concluded that the aggregate amount of perquisites and
    other personal benefits, securities or property paid to each of the listed
    officers for each of the fiscal years 1998, 1997 and 1996 did not exceed
    the lesser of 10% of such officer's total annual salary and bonus for each
    such year or $50,000. Therefore, any such amounts are not included in the
    table.
 
Employment Agreements
 
  During fiscal 1995, the Company entered into an Employment Agreement with
Robert E. Gray commencing June 1, 1995 for three years. During fiscal 1998
this agreement was amended to extend the term to May 31, 2000. The Company
also entered into new Employment Agreements with Marie St. John Gray, Kelly A.
Gray and Bruce A. Fetter, effective July 14, 1998. The new employment
agreements extended through December 31, 1998 and renew automatically at the
end of each year. The agreements require each employee to devote substantially
his or her full business time and attention and best efforts to the affairs of
the Company during the term of the agreements. The agreements currently
provide for the payment of a base salary at the rate of $975,000
 
                                       7
<PAGE>
 
for Robert E. Gray, $500,000 for Marie St. John Gray, $420,000 for Kelly A.
Gray and $300,000 for Bruce A. Fetter. Mr. Gray's employment agreement also
provides for additional annual compensation of $500,000 to be deferred. Under
Kelly A. Gray's employment agreement, the Company also compensates Ms. Gray
$250,000 each year for her position as the Signature Model of the Company.
 
  The employment agreements for each of Robert, Marie and Kelly Gray and Bruce
Fetter also provide for the payment of severance benefits upon the termination
of the employee's employment. Each employment agreement provides that the
Company pay severance benefits in the form of compensation continuation for a
period equal to 18 months if the employee's employment is terminated by reason
of a disability. In cases where the employee's employment is terminated by
reason of the employee's death, the Company generally will provide certain
health insurance benefits to the employee's immediate family for a period of
six months.
 
  Under the agreements (excluding Mr. Gray's), in cases where the employee's
employment is terminated by the Company without cause or by the employee with
good reason, such severance benefits would include payment to the employee of
the employee's base salary for the longer of the remaining term of the
agreement or six months. For purposes of the employment agreements, (i)
termination by the Company "with cause" includes termination for dishonesty,
willful misconduct, a breach of a fiduciary duty which involves personal
profit or benefit to the employee, a willful violation and conviction of any
law and a material breach of the employment agreement and (ii) termination by
the employee "for good reason" includes termination as a result of the
assignment to the employee of duties inconsistent with the employee's position
and status, a substantial alteration in the nature, status or prestige of the
employee's responsibilities, the relocation of the Company's executive offices
to a point more than 50 miles from the location of such offices as of the date
of the applicable employment agreement and a reduction in the employee's base
salary. Under Mr. Gray's employment agreement, such severance benefits would
include payment to him of all base salary and all deferred compensation
payments through May 31, 2000.
 
  Under these employment agreements, termination of employment for good reason
also means voluntary termination by the employee as a result of (i) the
failure by the Company to obtain from any successor, before the succession
takes place, an agreement to assume and perform the employment agreements and
(ii) an occurrence of a "change of control event". A "change of control event"
takes place when a person or group of persons acquire ownership of 25% or more
of the outstanding Common Stock of the Company without first obtaining the
approval of the Company's then outstanding directors. These employment
agreements provide for additional severance benefits to the employees upon
these events of voluntary termination, including a lump sum payment equal to
two times the employee's then base salary.
 
  Kelly Gray has been the Company's Signature Model since 1982. Ms. Gray's
responsibilities as Signature Model include still photography modeling for the
Company's spring and fall clothing lines, fragrance and accessories. The
Company uses photographs of Ms. Gray in the Company's print advertising for
these products. The Company believes the modeling arrangement with Ms. Gray
contains terms no less favorable to the Company than those obtainable from
unaffiliated third parties.
 
  During fiscal 1998, David C. Frankel was employed by the Company subject to
an employment agreement which was effective July 14, 1998. Subsequent to the
end of fiscal 1998 Mr. Frankel resigned from his employment with the Company
and his employment agreement terminated.
 
Retirement Plan
 
  The Company maintains the Employees' Profit Sharing Plan, as amended (the
"Retirement Plan"), a qualified profit-sharing plan for the benefit of all
eligible employees. The Retirement Plan contemplates the sharing of profits
and is funded annually by cash contributions at the discretion of the
Company's Board of Directors. The Retirement Plan was funded in each of fiscal
years 1998, 1997 and 1996 with contributions of $500,000.
 
                                       8
<PAGE>
 
Stock Option Plan
 
  The Company's 1993 Stock Option Plan (the "Plan") provides for the granting
of "incentive stock options," within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, and nonstatutory stock options. The
principal terms of the Plan are summarized below. This summary is qualified in
its entirety by the full text of the Plan, a copy of which is available upon
request from the Chief Financial Officer of the Company, Mr. Roger G. Ruppert,
2722 Michelson Drive, Irvine, California 92612. Capitalized terms used in this
summary are used as defined in the Plan.
 
  The purpose of the Plan is to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentives to the Employees, Directors and Consultants of the Company, and to
promote the success of the Company's business. The Plan was adopted by the
Company's shareholders and Board of Directors during January 1993. In January
1997, the Plan was amended to provide for acceleration of Options upon certain
events as described below. In March 1998, the Plan was amended to increase the
aggregate limit on the number of shares of the Company's Common Stock that may
be delivered pursuant to awards thereunder from 1.6 million shares to 2.35
million shares, an increase of 750,000 shares. This amendment also provided
that no more than 150,000 shares may be subject to all options granted under
the Plan to any one individual in any calendar year.
 
  Awards. The Plan authorizes the grant of stock options.
 
  Administration. The Plan will be administered by the Board or by a committee
appointed by the Board (for Plan purposes, "Board" means the Board of
Directors of the Company or any committee to the extent that the Board of
Directors of the Company has delegated administrative power over the Plan to
that committee). The Plan is currently administered by the Board of Directors
of the Company.
 
  Subject to other terms of the Plan, the Board (i) determines the Employees,
Directors and Consultants who will receive Options, (ii) determines the time
when Options will be granted, the number of Shares subject to the Options, the
exercise prices, and the terms and conditions of Options and (iii) has the
authority to interpret the provisions of the Plan and any Option granted under
the Plan and to adopt rules and regulations to administer the Plan. The Board
may permit the recipient of an Option to pay the exercise price of the Option
in the form of cash, the delivery of previously owned Common Shares, a
cashless exercise, or other consideration that may be acceptable to the Board.
The Board may accelerate the receipt or vesting of benefits pursuant to an
Option, extend the terms of an Option (subject to the maximum 10-year term on
Options under the Plan), and make certain adjustment to an outstanding Option
and authorize the conversion, succession or substitution of an Option, as
described generally below.
 
  Eligibility. Persons eligible to receive Options under the Plan include
employees of the Company (or any parent or subsidiary of the Company,
including officers), members of the Board and certain consultants to the
Company (or any parent or subsidiary of the Company). Subject to the power of
the Board to determine eligible persons to whom Options will be granted, there
are currently nine eligible Directors and approximately 4,300 eligible
Employees (which includes four Directors).
 
  Transfer Restrictions. Options granted under the Plan may not be sold,
pledged, hypothecated, assigned, encumbered, gifted or otherwise transferred
or alienate in any manner, either voluntarily or involuntarily by operation of
law, other than by will or the laws of decent or distribution, and may be
exercised during the lifetime of an Optionee only by such Optionee.
 
  Limits on Awards; Authorized Shares. The maximum aggregate number of Shares
which may be optioned and sold under the Plan is currently 2.35 million Shares
of authorized but unissued Common Stock of the Company. As of February 22,
1999, there remained 1,105,005 Shares available to be granted under the Plan.
The Plan also provides that maximum number of Shares in the aggregate that may
be subject to all Options granted under the Plan to any one individual in any
calendar year is 150,000 Shares.
 
                                       9
<PAGE>
 
  As is customary in incentive plans of this nature, the number and kind of
shares available under the Plan and the then outstanding Options, as well as
exercise or purchase prices and share limits, are subject to adjustment in the
event of certain changes in the Common Stock, reorganizations,
recapitalizations, reclassifications, stock dividends, stock splits, or
reverse stock splits, or similar events affecting the Common Stock.
 
  The Plan will not limit the authority of the Board to grant awards or
authorize any other compensation, with or without reference to the Common
Stock, under any other plan or authority.
 
  Stock Options. An option is the right to purchase Common Stock at a future
date at a specified price (the "exercise price"). The exercise price of
Incentive Stock Options (intended as incentive stock options within the
meaning of Section 422(b) of the Code and referred to herein as an "ISOs")
must be not less than the fair market value of a share of Common Stock on the
date the option is granted (110% with respect to optionees who own at least
10% of the outstanding Common Stock). Nonstatutory Stock Options shall have
such exercise prices as determined by the Board. Generally, each option will
expire not more than 10 years after the date of grant (five years with respect
to optionees who own at least 10% of the outstanding Common Stock).
 
  An option may either be an Incentive Stock Option or a Nonstatutory Stock
Option. ISO benefits are taxed differently from Nonstatutory Stock Options, as
described under "Federal Income Tax Treatment of Options under the Plan"
below. ISOs are also subject to more restrictive terms and are limited in
amount by the Code and the Plan. Full payment for Shares purchased on the
exercise of any option must be made at the time of such exercise in a manner
approved by the Board.
 
  Acceleration of Awards; Possible Early Termination of Awards. Upon the
occurrence of a merger, liquidation, sale of substantially all the assets of
the Company, or similar events affecting the Company, all the unvested
installments of the then outstanding Options will automatically become fully
vested and exercisable. Upon the occurrence of a "Terminating Transaction,"
Options will generally terminate unless provision has been made for their
continuance, assumption, or conversion. A "Terminating Transaction" is
generally defined in the Plan as a reorganization, merger, or similar
corporate transaction as a result of which the Company goes out of existence
or becomes a subsidiary of another corporation, or a sale of all or
substantially all of the Company's assets. Acceleration of Awards; Possible
Early Termination of Awards. Upon the occurrence of a merger, liquidation,
sale of substantially all the assets of the Company, or similar events
affecting the Company, all the unvested installments of the then outstanding
Options will automatically become fully vested and exercisable. Upon the
occurrence of a "Terminating Transaction," Options will generally terminate
unless provision has been made for their continuance, assumption, or
conversion. A "Terminating Transaction" is generally defined in the Plan as a
reorganization, merger, or similar corporate transaction as a result of which
the Company goes out of existence or becomes a subsidiary of another
corporation, or a sale of all or substantially all of the Company's assets.
 
  Termination of or Changes to the Plan. The Board may amend, suspend, alter,
or terminate the Plan at any time. To the extent necessary or desirable to
comply with Rule 16b-3 of the Exchange Act, the Code or any other applicable
law or regulation, the Company will obtain shareholder approval for any
amendment to the Plan, but only in such a manner and to such a degree as
required under applicable law. The Plan will terminate on March 9, 2003,
unless earlier terminated by the Board. Outstanding Options may be amended,
subject, however, to the consent of the holder if the amendment adversely
affects the rights of the holder.
 
  Fiscal 1998. During fiscal 1998 and 1997, the Company granted 203,000 and
197,000 stock options, respectively, under the Plan (each stock option
referenced herein covers one share of the Common Stock). During fiscal 1998,
the Company repriced 324,334 stock options. At November 1, 1998, 921,652 stock
options were outstanding under the Plan with exercise prices ranging from
$8.50 to $39.13, and 677,960 of such outstanding options were exercisable.
 
                                      10
<PAGE>
 
Federal Income Tax Treatment of Options under the Plan
 
  The federal income tax consequences of the Plan under current federal law,
which is subject to change, are summarized in the following discussion which
deals with general tax principles applicable to the Plan. This summary is not
intended to be exhaustive and, among other considerations, does not describe
state, local, or international tax consequences.
 
  With respect to nonstatutory stock options, the Company is generally
entitled to deduct and the Optionee recognizes taxable income in an amount
equal to the difference between the Option exercise price and the fair market
value of the Shares at the time of exercise. With respect to ISOs, the Company
is generally not entitled to a deduction nor does the participant recognize
income at the time of exercise.
 
  If an Option is accelerated under the Plan in connection with a change in
control (as this term is used under the Code), the Company may not be
permitted to deduct the portion of the compensation attributable to the
acceleration ("parachute payments") if it exceeds certain threshold limits
under the Code (and certain related excise taxes may be triggered).
Furthermore, if the compensation attributable to Options is not
"performance-based" within the meaning of Section 162(m) of the Code, the
Company may not be permitted to deduct the aggregate non performance-based
compensation in excess of $1,000,000 in certain circumstances.
 
Option Grants in Last Fiscal Year
 
  The following table sets forth information with respect to the Named
Executive Officers concerning the number of stock options granted during the
fiscal year ended November 1, 1998:
 
<TABLE>
<CAPTION>
                                                                          Potential Realizable
                                                                            Value at Assumed
                                        Percent of                       Annual Rates of Stock
                            Number of  Total Options                     Price Appreciation for
                            Securities  Granted to                            Option Term
                            Underlying Employees in  Exercise Expiration ----------------------
   Name                      Options    Fiscal Year   Price      Date        5%         10%
   ----                     ---------- ------------- -------- ---------- ---------- -----------
   <S>                      <C>        <C>           <C>      <C>        <C>        <C>
   Robert E. Gray..........   50,000       24.63%    $39.063   7/14/08   $    63.63 $    101.32
   Bruce A. Fetter.........    5,000        2.46%     38.188   1/27/08        62.20       99.05
   Bruce A. Fetter.........    5,000        2.46%     44.000   4/27/08        71.67      114.12
   Bruce A. Fetter.........   10,000        4.93%     38.938   6/19/08        63.43      100.99
</TABLE>
 
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
 
  The following table sets forth information with respect to the Named
Executive Officers concerning the exercise of options during the fiscal year
ended November 1, 1998 and unexercised options held by each such officer as of
November 1, 1998:
 
<TABLE>
<CAPTION>
                                                 Number of Securities            Value of Unexercised
                                                Underlying Unexercised          In-the-Money Options at
                           Shares             Options at Fiscal Year-End           Fiscal Year-End(1)
                          Acquired    Value   ------------------------------   -------------------------
          Name           on Exercise Realized  Exercisable    Unexercisable    Exercisable Unexercisable
          ----           ----------- -------- -------------   --------------   ----------- -------------
<S>                      <C>         <C>      <C>             <C>              <C>         <C>
Robert E. Gray..........     --         --        420,000             --       $3,740,160        --
Marie St. John Gray.....     --         --         80,000             --          935,040        --
Kelly A. Gray...........     --         --         60,000             --          701,280        --
David C. Frankel(2).....     --         --         16,667          33,333          28,133     56,267
Bruce Fetter............     --         --          5,000          30,000           8,440     50,640
</TABLE>
--------
(1) The per share dollar value of the options is equal to the difference
    between the fair market value of one share of Common Stock and the per
    share exercise price of the options. The closing price per share of the
    Common Stock at November 1, 1998 was $20.188, as reported by the New York
    Stock Exchange.
 
(2) David Frankel resigned from his employment by the Company on February 10,
    1999.
 
 
                                      11
<PAGE>
 
Repricing of Options
 
  As discussed in the report below, the Company gave certain of its employees
and directors holding stock options the opportunity to exchange certain of
those options for new options with a lower exercise price. The new options
retained the same term and vesting schedule of the old options. The following
table sets forth certain information concerning the exchange and repricing of
options held by any executive officer of the Company during the last 10
complete fiscal years.
 
                        TEN-YEAR OPTION REPRICING TABLE
 
<TABLE>
<CAPTION>
                                   Number of                                            Length of
                                  Securities                                          Original Term
                                  Underlying  Market Price of Exercise Price   New    Remaining at
                                    Options    Stock at Time    at Time of   Exercise    Date of
Name                       Date   Repriced(#) of Repricing($)  Repricing($)  Price($)   Repricing
----                      ------- ----------- --------------- -------------- -------- -------------
<S>                       <C>     <C>         <C>             <C>            <C>      <C>
David C. Frankel(1)...... 6/19/98   25,000        $38.94          $45.00      $38.94      8Y 5M
 Executive Vice President 8/27/98   25,000         18.50           44.63       18.50      8Y 3M
                          8/27/98   25,000         18.50           38.94       18.50      8Y 5M
 
Roger G. Ruppert......... 8/27/98   10,000         18.50           44.25       18.50      8Y 3M
 Senior Vice President of
 Finance/CFO
 
Bruce Fetter............. 8/27/98    5,000         18.50           41.00       18.50      8Y 6M
 Chief Operating Officer  8/27/98   10,000         18.50           41.69       18.50     8Y 11M
                          8/27/98    5,000         18.50           38.19       18.50      8Y 5M
                          8/27/98    5,000         18.50           44.00       18.50      9Y 8M
                          8/27/98   10,000         18.50           38.94       18.50     9Y 10M
 
Karla R. Guyer........... 8/27/98    5,000         18.50           41.69       18.50     8Y 11M
 Senior Vice President of
 Marketing
</TABLE>
--------
(1) Mr. Frankel resigned his employment by the Company effective February 10,
    1999. Pursuant to the terms of the Plan, only his vested options, covering
    33,332 shares, remained after his resignation. In addition, these vested
    options will expire on May 11, 1999.
 
Report of the Board of Directors on Repricing of Options
 
  On June 19, 1998, the Board of Directors granted David C. Frankel the right
to exchange options covering the purchase of 25,000 shares of the Company's
Common Stock for new stock options. The exercise price of the new options was
$38.94, the closing sales price of the Company's Common Stock on June 18,
1998. The new stock options granted in connection with the repricing retained
the vesting dates and expiration dates of the original options. The exercise
price of the original options was $45.00.
 
  On August 27, 1998, the Board of Directors granted certain of the Company's
executive officers and other employees who had been granted options to
purchase shares of the Company's Common Stock the right to exchange such
options for new stock options with an exercise price of $18.50 per share, the
closing sales price of the Company's Common Stock on August 26, 1998. The new
stock options granted in connection with the repricing retained the vesting
dates and expiration dates of the original options. In total, options to
purchase an aggregate of 254,334 shares of Common Stock at exercise prices
ranging from $22.50 to $45.00 were repriced.
 
  On September 15, 1998, the Board of Directors repriced an aggregate of
45,000 options to purchase shares of the Company's Common Stock held by three
non-employee directors. The exercise price of the new options is $18.00, the
closing sales price of the Company's Common Stock on September 14, 1998. The
new stock options granted in connection with the repricing retained the
vesting dates and expiration dates of the original options. The exercise
prices of the original options ranged from $38.94 to $45.75.
 
                                      12
<PAGE>
 
  Stock options are intended to provide long-term incentives to officers,
other employees and directors of the Company to improve the Company's
financial performance and to assist in the recruitment, motivation and
retention of key professional and managerial personnel. In authorizing the
option repricing, the Board of Directors considered the fact that the broad
decline in the price of the Company s Common Stock had resulted in a
substantial number of the Company's outstanding stock options having exercise
prices considerably above the market price of the Common Stock. The Board
determined that the disparity between the exercise price of the options and
the then market price substantially impaired the effectiveness of such options
as meaningful performance incentives. Consistent with the Company's philosophy
of utilizing equity incentives to motivate and retain management and
employees, the Board determined it was in the best interest of the Company and
its shareholders to restore the performance incentives intended to be provided
by options by reducing the exercise price of the overpriced options.
 
                                          Robert E. Gray
                                          Marie St. John Gray
                                          Kelly A. Gray
                                          Roger G. Ruppert
                                          Richard A. Gadbois, III
                                          David A. Krinsky
 
                                      13
<PAGE>
 
  Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate future
filings, including this Proxy Statement, in whole or in part, the following
report of the Compensation Committee and the Performance Graph shall not be
deemed to be incorporated by reference into any such filings.
 
                              COMPENSATION REPORT
 
  The Compensation Committee of the Board of Directors (the "Committee") is
comprised of two independent outside directors. No member of the Committee is
a former or current officer or employee of the Company or any of its
subsidiaries. The Committee is responsible for setting and administering the
policies that govern compensation for executive officers and key employees.
The Committee evaluates the performance of management and determines
compensation policies and levels.
 
 Executive Compensation Philosophy
 
  The Company believes that compensation should reflect the value created for
its shareholders, while supporting the business strategies and long-range
plans of the Company. Accordingly, the Company's executive compensation
program is based on guiding principles designed to align compensation with the
Company's business strategy and performance. These principles are:
 
    (i) to attract and retain key executives critical to the long-term
  success of the Company who are of the highest caliber;
 
    (ii) to motivate executives to enhance long-term shareholder value by
  building appropriate ownership in the Company; and
 
    (iii) to provide salary increases to key executives whose efforts can be
  reflected in the Company's annual and long-term plans and goals.
 
 Executive Compensation Components
 
  The Company's executive compensation is based on three principal components,
each of which is intended to serve the Company's overall compensation
philosophy.
 
  Base Salary. Base salary for each executive is intended to be determined
principally by the following factors:
 
    (i) the executive's contribution to the Company's business;
 
    (ii) the executive's length of service with the Company; and
 
    (iii) the executive's unique talents and abilities with respect to the
  Company's operations.
 
  Salaries for executive officers are provided in employment agreements
between the Company and the executive officers. Such salaries are reviewed by
the Committee on an annual basis.
 
  Annual Bonuses. The Company does not award bonuses to its executive
officers, except in extraordinary situations. The Company believes that an
executive officer is always expected to perform his or her duties to the best
of his or her ability. Consequently, the Company believes that an annual base
salary itself should provide for that performance, and a bonus generally
should not be paid.
 
  Stock Options. Executive officers are eligible to receive grants of
incentive stock options and nonstatutory stock options under the Company's
1993 Stock Option Plan, as amended (the "Plan"). The Plan is an integral part
of the Company's compensation system. The Plan is designed to encourage and
create ownership of the Common Stock by key employees. Through the Plan, long-
range interests of key employees are aligned with
 
                                      14
<PAGE>
 
shareholders' interests as these employees build meaningful stakes in the
Company. Awards to executive officers must be granted with exercise prices at
least equal to the fair market value of the underlying Common Stock at the
date of grant. Stock options generally vest in installments over multiple
years.
 
 CEO Compensation
 
  The Company entered into a three-year employment agreement with Mr. Gray
effective June 1, 1995 which was subsequently amended to extend the term
through May 31, 2000. The agreement requires Mr. Gray to devote substantially
his full business time and attention and best efforts to the affairs of the
Company during the term of the agreement. The agreement provides for the
payment of a base salary at the rate of $975,000 per year. The agreement also
provides for additional compensation totaling $500,000 per year to be
deferred. The agreement provides for the payment of severance benefits upon
termination of Mr. Gray's employment. Under certain circumstances, such
severance benefits would include a lump sum payment to Mr. Gray equal to his
then base salary for the remaining term of the agreement and all remaining
deferred compensation payments called for through the end of such term. In
some circumstances, these severance benefits would also include an additional
lump sum payment equal to two times Mr. Gray's then base salary. As discussed
above, Mr. Gray generally shall not be entitled to an annual bonus. In fiscal
1998, Mr. Gray received a grant of 50,000 stock options, all of which vested
immediately.
 
  The executive compensation practices of the Company are constantly re-
evaluated to ensure their support of the strategic goals of the Company and
their contribution to the creation of shareholder value.
 
  The foregoing report has been furnished by the Committee:
 
                                          Richard A. Gadbois, III
                                          David A. Krinsky
 
January 29, 1999
 
                                      15
<PAGE>
 
                        COMPANY STOCK PRICE PERFORMANCE
 
  The following graph assumes that $100 was invested on October 31, 1993 in
each of St. John Knits, Inc., the S&P 500 Index and the S&P Textile-Apparel
Manufacturers Index ("Textile Index"). It also assumes reinvestment of
dividends, where applicable.
 
                    COMPARISON OF CUMULATIVE TOTAL RETURN*
                 AMONG ST. JOHN KNITS, INC., THE S&P 500 INDEX
                AND THE S&P TEXTILE-APPAREL MANUFACTURERS INDEX
           FOR THE PERIOD FROM OCTOBER 31, 1993 TO NOVEMBER 1, 1998
 
 
 
 
 
 
<TABLE>
<CAPTION>
                                                  Cumulative Total Return
                          -----------------------------------------------------------------------
                          October 31, October 31, October 29, November 3, November 2, November 1,
                             1993        1994        1995        1996        1997        1998
                          ----------- ----------- ----------- ----------- ----------- -----------
<S>                       <C>         <C>         <C>         <C>         <C>         <C>
St. John Knits, Inc.....    $100.00     $182.00     $285.00     $559.00     $484.00     $244.00
S&P 500.................    $100.00     $104.00     $131.00     $163.00     $215.00     $263.00
S&P Textiles (Apparel)..    $100.00     $120.00     $112.00     $140.00     $160.00     $124.00
</TABLE>
 
*  The historical stock performance shown on the graph is not intended to and
   may not be indicative of future stock performance.
 
                                      16
<PAGE>
 
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The following table sets forth information as of February 19, 1999,
regarding the beneficial ownership of the Company's Common Stock by: (i) each
person who is known by the Company to be the beneficial owner of more than 5%
of the Common Stock; (ii) each of the directors and director nominees of the
Company; (iii) each executive officer listed in the Summary Compensation Table
and (iv) all current directors and executive officers of the Company as a
group.
 
<TABLE>
<CAPTION>
                                                        Approximate
                                                         Number of
                                                           Shares
                                                        Beneficially Percentage
   Name                                                    Owned       Owned
   ----                                                 ------------ ----------
   <S>                                                  <C>          <C>
   Vestar Capital Partners III, L.P.(1)................  1,205,983       7.3%
   Robert E. Gray(2)...................................  1,078,079       6.3
   Marie St. John Gray(3)..............................    738,079       4.4
   Kelly A. Gray(4)....................................    607,904       3.7
   Robert C. Davis(5)..................................    264,000       1.7
   David C. Frankel(6).................................     33,332        *
   Roger G. Ruppert(7).................................     27,666        *
   Richard A. Gadbois, III(8)..........................     21,666        *
   David A. Krinsky(8).................................     20,666        *
   Bruce Fetter(9).....................................      9,957        *
   Mark L. Goldston....................................          0        *
   Daniel T. Reiner....................................          0        *
   All current directors and executive officers as a
    group (eleven persons)(10).........................  2,147,436      12.5%
</TABLE>
--------
 *  Less than 1%.
 
(1) Vestar, certain of its affiliates and the Grays filed a fourth amendment
    to their Schedule 13D on February 10, 1999 with respect to shares of St.
    John common stock. Vestar and its affiliates may be deemed to have
    acquired beneficial ownership of this stock by virtue of a voting
    agreement entered into among Vestar and the Grays and more particularly
    described in this fourth amendment to their Schedule 13D.
 
(2) Includes 603,439 shares which are owned by the Gray Family Trust, of which
    Robert E. Gray and Marie St. John Gray serve as co-Trustees. In addition,
    includes 54,640 shares which are owned by the Kelly Ann Gray Trust, of
    which Robert E. Gray and Marie St. John Gray serve as co-Trustees, and
    also includes 420,000 shares issuable upon exercise of options exercisable
    at or within 60 days of February 19, 1999. The Gray Family Trust is party
    to two "zero-cost collar" arrangements with Merrill Lynch, Pierce,
    Fenner & Smith. The first arrangement is with respect to 20,700 shares of
    common stock of St. John beneficially owned by such trust and was entered
    into in April of 1998 (the "April Collar"). Under this arrangement, the
    Gray Family Trust (i) bought from Merrill Lynch a European-style put
    relating to 20,700 shares of St. John common stock at a price of $43.13
    per share, subject to adjustment and (ii) sold to Merrill Lynch a
    European-style call relating to 20,700 shares of common stock of St. John
    at a price of $60.86 per share, subject to adjustment. The Gray Family
    Trust paid $3.70 per share for the put and Merrill Lynch paid $3.70 per
    share for the call. The put and call are not exercisable until, and are
    scheduled to expire, on or about April 10, 2000, and if one of the two is
    in the money at the close of trading on that date, the option will be
    deemed to be automatically exercised. The second arrangement, entered into
    in July of 1996 (the "July Collar") and also with Merrill Lynch is on the
    same terms as the April Collar, with the following differences: (i) it
    relates to 50,000 shares of common stock of St. John beneficially owned by
    the Gray Family Trust, (ii) the put price is $46.16 and the call price is
    $59.08, subject to adjustment, (iii) the put and call are scheduled to
    expire on or about July 6, 1999 and (iv) the price per share for each of
    the put and the call was $4.67.
 
                                      17
<PAGE>
 
(3)  Includes 603,439 shares which are owned by the Gray Family Trust, of
     which Robert E. Gray and Marie St. John Gray serve as co-Trustees. In
     addition, includes 54,640 shares which are owned by the Kelly Ann Gray
     Trust, of which Robert E. Gray and Marie St. John Gray serve as co-
     Trustees, and also includes 80,000 shares issuable upon exercise of
     options exercisable at or within 60 days of February 19, 1999. The Gray
     Family Trust is party to two "zero-cost collar" arrangements with Merrill
     Lynch, described in footnote (2) above.
 
(4)  Includes 60,000 shares issuable upon exercise of options exercisable at
     or within 60 days of February 19, 1999. Kelly Gray is party to two "zero-
     cost collar" arrangements with Merrill Lynch. The first arrangement is
     with respect to 20,700 shares of common stock of St. John beneficially
     owned by Kelly Gray, was entered into with Merrill Lynch in April 1998
     and is otherwise on identical terms as the April Collar. The second
     arrangement is with respect to 60,000 shares of common stock of St. John
     beneficially owned by Kelly Gray, was entered into in July of 1996 and is
     otherwise on identical terms as the July Collar.
 
(5)  Includes 244,770 shares held by the Robert C. and Alison Davis Charitable
     Remainder Trust. Also includes 19,230 shares held by the Robert and
     Alison Davis Family Foundation. Mr. Davis serves as co-trustee for both
     the trust and foundation.
 
(6)  Includes 33,332 shares issuable upon exercise of options exercisable at
     or within 60 days of February 19, 1999.
 
(7)  Includes 26,666 shares issuable upon exercise of options exercisable at
     or within 60 days of February 19, 1999.
 
(8)  Includes 16,666 shares issuable upon exercise of options exercisable at
     or within 60 days of February 19, 1999.
 
(9)  Includes 8,332 shares issuable upon exercise of options exercisable at or
     within 60 days of February 19, 1999.
 
(10) Includes 665,328 shares issuable upon exercise of options exercisable at
     or within 60 days of February 19, 1999.
 
                                      18
<PAGE>
 
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The Company leases its corporate office and manufacturing facility in
Irvine, California from GM Properties, a partnership in which the Gray Family
Trust has a 50% general partnership interest. The lease is for a five-year
term expiring on May 30, 2001, with the Company having the option to extend
the lease for another five-year term at a lease amount to be agreed upon. The
current base monthly lease payment under this lease is approximately $60,000,
with annual increases of 4%. During fiscal years 1998, 1997 and 1996, the
Company paid GM Properties $701,000, $621,000 and $645,000, respectively,
under this lease.
 
  The Company leases its Alhambra, California manufacturing facility from
Alhambra Partners, a limited partnership in which the Gray Family Trust has a
65% general partnership interest. The lease is for a five-year term expiring
on August 31, 2001, with the Company having the option to extend the lease for
a five-year term at a lease amount to be agreed upon. The current base monthly
lease payment under this lease is approximately $24,000, with annual increases
of 4%. During fiscal years 1998, 1997 and 1996, the Company paid Alhambra
Partners $274,000, $263,000 and $321,000, respectively, under this lease.
 
  The Company periodically rents certain personal property from Ocean Air
Charters, Inc. ("Ocean"), in which Robert E. Gray and Marie St. John Gray are
the sole shareholders. During fiscal years 1998, 1997 and 1996, the Company
paid $21,000, $30,000, and $37,000, respectively, with respect to such
property. In addition, the Company and Ocean each hold a 50% ownership
interest in a partnership ("Partnership") which owns an airplane. As of
November 1, 1998, each partner had a net capital investment in the Partnership
of approximately $854,000. During fiscal years 1998, 1997 and 1996, the
Partnership leased the airplane to the Company and received lease payments
totaling $868,000, $840,000 and $572,000, respectively. As of April 1, 1998,
the Company and the Partnership entered into a lease agreement for the
airplane expiring March 31, 1999, at a lease rate of $73,500 per month.
 
  Each of the arrangements between the Company and entities controlled by the
Gray family is, in the opinion of management, on terms no less favorable to
the Company than those that were available from persons not affiliated with
the Company.
 
  In addition, see "Compensation Committee Interlocks and Insider
Participation."
 
                                      19
<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 Amendment to be
signed on its behalf by the undersigned, thereunto duly authorized.
 
Date: February 24, 1999
 
                                          ST. JOHN KNITS, INC. (Registrant)
 
                                                       /s/ BOB GRAY
                                          By:__________________________________
                                                         Bob Gray
                                                 Chairman of the Board and
                                                  Chief Executive Officer
 
                                      20