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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
-----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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 1-11805
-------------------------------------
DONNA KARAN INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3882426
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
550 Seventh Avenue, New York, New York 10018
(Address of principal executive offices)
(Zip Code)
(212) 789-1500
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former
fiscal year, if changed since last report)
-----------------------
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 periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding as
-----
Common Stock, par value $.01* of August 1, 1996
-----------------
21,468,034
* Does not include 18 shares of Class A Common Stock, par value $.01 per share,
or two shares of Class B Common Stock, par value
$.01 per share, outstanding as of such date.
<PAGE>
DONNA KARAN INTERNATIONAL INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
PAGE
----
<S> <C>
Predecessor Combined Statements of Operations for the
three months and six months ended July 2, 1995 and June 30, 1996........................................................ 3
Predecessor Combined Balance Sheets as of December 31, 1995 and June 30, 1996............................................ 4
Predecessor Combined Statements of Cash Flows for the
six months ended July 2, 1995 and June 30, 1996.......................................................................... 5
Notes to Predecessor Combined Financial Statements....................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................................................... 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................................ 18
2
</TABLE>
<PAGE>
DONNA KARAN INTERNATIONAL INC.
PREDECESSOR COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JULY 2, JUNE 30, JULY 2, JUNE 30,
1995 1996 1995 1996
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues.................................... $102,731 $117,641 $ 223,424 $ 277,226
Cost of sales................................... 71,619 80,496 148,109 187,220
Gross profit.................................... 31,112 37,145 75,315 90,006
Selling, general and administrative expenses.... 31,659 38,032 64,700 77,443
Operating income (loss)......................... (547) (887) 10,615 12,563
Other income (expense):
Equity in earnings of affiliate............... 1,391 621 1,391 1,609
Interest expense, net......................... (2,217) (2,249) (3,918) (4,296)
Interest expense on distribution notes........ -- (1,882) -- (1,882)
Gain on sale of interest in affiliates........ -- -- 18,673 --
Income (loss) before income taxes............... (1,373) (4,397) 26,761 7,994
Provision (benefit) for income taxes............ (48) (245) 1,360 445
Net income (loss)............................... $ (1,325) $ (4,152) $ 25,401 $ 7,549
========= ========= ======== =======
PRO FORMA
Historical income (loss) before income taxes.... $ (1,373) $ (4,397) $ 26,761 $ 7,994
Pro forma adjustments other than income taxes... 110 (1,706) 21,048 (249)
Pro forma income (loss) before income taxes..... (1,483) (2,691) 5,713 8,243
Pro forma provision (benefit) for income taxes.. (630) (1,144) 2,478 3,578
Pro forma net income (loss)..................... $ (853) $ (1,547) $ 3,235 $ 4,665
=========== =========== =========== ===========
Pro forma per share information................. $ ( .12) $ (.17) $ .08 $ .15
=========== =========== =========== ===========
Pro forma common shares outstanding............. 15,947,971 15,947,971 15,947,971 15,947,971
=========== =========== =========== ===========
See notes to predecessor combined financial statements.
3
</TABLE>
<PAGE>
DONNA KARAN INTERNATIONAL INC.
PREDECESSOR COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1996
---- ---- ----
(AUDITED) (UNAUDITED) (SEE NOTE 5)
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash................................................... $ 12,153 $ 2,738 $ 46,764
Accounts receivable, net of allowances of
$22,507 at December 31, 1995 and $22,830 at
June 30, 1996..................................... 62,231 55,457 55,457
Inventories............................................ 85,655 92,427 92,427
Prepaid expenses and other current assets.............. 9,946 16,141 28,141
-------- -------- --------
Total current assets.............................. 169,985 166,763 222,789
Property and equipment, at cost -net................... 22,505 26,395 26,395
Deposits and other noncurrent assets................... 11,485 12,949 14,305
-------- -------- --------
$203,975 $ 206,107 $ 263,489
======== ========= =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
<S> <C> <C> <C>
Accounts payable....................................... $ 53,825 $ 45,994 $ 45,994
Accrued expenses and other current liabilities......... 15,766 24,651 23,889
Current portion of long-term debt...................... 7,759 7,771 271
Distribution notes payable............................. -- 114,484 --
------- -------- --------
Total current liabilities......................... 77,350 192,900 70,154
Long-term debt......................................... 45,779 64,705 180
Stockholders' equity and partners' capital (deficit):
Common stock of Intermediate Entities............. 1,146 1,146 215
Additional paid in capital........................ -- -- 193,003
Retained earnings and partners' capital (deficit). 79,748 (52,581) --
Cumulative translation adjustment................. (48) (63) (63)
------- -------- --------
Total stockholders' equity and partners' capital
(deficit)........................................ 80,846 (51,498) 193,155
------- -------- --------
$203,975 $206,107 $263,489
======= ======== =======
See notes to predecessor combined financial statements.
4
</TABLE>
<PAGE>
DONNA KARAN INTERNATIONAL INC.
PREDECESSOR COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
JULY 2, JUNE 30,
1995 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income..................................................... $ 25,401 $ 7,549
Adjustments to reconcile net cash (used in) provided by
operating activities, as adjusted for effect of sale of Donna
Karan Japan:
Depreciation and amortization............................... 3,080 4,015
Provision for bad debts..................................... 295 249
Equity in earnings of affiliate............................. (1,391) (1,609)
Gain on sale of interests in affiliates..................... (18,673) --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivables.............. (356) 6,525
(Increase) in inventories................................ (8,504) (6,787)
(Increase) in prepaid expenses and other current assets.. (10,118) (6,197)
(Increase) in deposits and other noncurrent assets....... (664) (998)
Increase in accounts payable, accrued expenses, and
other current liabilities............................... 3,480 1,316
-------- --------
Net cash (used in) provided by operating activities............ (7,450) 4,063
-------- --------
INVESTING ACTIVITIES
Purchase of property and equipment............................. (3,262) (6,761)
Net cash from sale of interests in affiliates.................. 23,526 --
------ ------
Net cash provided by (used in ) investing activities........... 20,264 (6,761)
------ ------
FINANCING ACTIVITIES
Net increase in borrowing under revolving credit facility...... 7,276 22,554
Payments under capital lease................................... (118) (127)
Repayments of long-term debt................................... (10,800) (3,750)
Distributions to partners...................................... (7,198) (25,394)
-------- --------
Net cash used in financing activities.......................... (10,840) (6,717)
-------- --------
Increase (decrease) in cash.................................... 1,974 (9,415)
Cash at beginning of period.................................... 3,728 12,153
-------- --------
Cash at end of period.......................................... $ 5,702 $ 2,738
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.................................................. $ 3,282 $ 3,667
======== ========
Taxes paid..................................................... $ 1,754 $ 434
======== ========
See notes to predecessor combined financial statements.
5
</TABLE>
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited predecessor combined financial statements do not include all
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles. For
further information, such as significant accounting policies followed by the
Company, refer to the notes to the Company's audited predecessor combined
financial statements.
In the opinion of management, the unaudited predecessor combined financial
statements include all necessary adjustments (consisting of normal, recurring
accruals) for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented. The results of
operations for the three-month and six-month periods ended July 2, 1995 and June
30, 1996 are not necessarily indicative of the operating results to be expected
for a full year.
2. BASIS OF PRESENTATION
The accompanying predecessor combined financial statements include the
operations of The Donna Karan Company, Donna Karan Studio, The Donna Karan
Company Store G.P., DK Footwear Partners, Takihyo Fashion Company, L.P., Takihyo
Design Company, L.P., TFT Store Company, L.P., TFT Shoe Company, L.P., TFT Japan
Company, L.P., and DSTF Japan Company, which are affiliated general and limited
partnerships; Gabby Apparel, Inc., Tolara Tetragon Inc., Full Requirements
Merchandising, Inc., The Donna Karan Store Corporation, Tomio Tangents, Inc.,
Formal Reserve Management, Inc., DK Shoe Corp., Tangents Two, Inc., First Run
Management, Inc., Gabrielle Japan, Inc., TT DK Japan, Inc., and FM DK Japan,
Inc., which are affiliated United States corporations; Donna Karan Canada Inc.,
Donna Karan (H.K.) Limited and Donna Karan Italy, S.R.L., which are foreign
corporations; and, for the period it was a wholly-owned subsidiary (see Note 8),
Donna Karan Japan, K.K. ("Donna Karan Japan"), a Japanese joint stock company
(together, the "Company"). All companies other than The Donna Karan Company,
Donna Karan Studio, The Donna Karan Company Store, G.P., DK Footwear Partners,
Donna Karan Canada Inc., Donna Karan (H.K.) Limited, Donna Karan Italy, S.R.L.,
and Donna Karan Japan are intermediate United States holding companies.
The predecessor financial statements of these companies are being presented on
a combined basis because of their common ownership. The combined financial
statements have been prepared as if the entities had operated as a single
consolidated group since their respective dates of organization. All
significant intercompany balances and transactions have been eliminated.
Because Donna Karan International Inc. will conduct no business operations prior
to its acquisition of the companies, the statement of operations for Donna Karan
International Inc., is not included herewith. The equity method of accounting
is used for Donna Karan Japan during the period when it is 70% owned by a
nonaffiliated partner (see Note 8).
3. DISTRIBUTION NOTES
On April 16, 1996 the Company issued to its former principals and certain of
their affiliates distribution notes totaling $114,484,000 which represented an
estimate of the cumulative undistributed taxable income (on which taxes
previously have been paid) of the Company since its inception through the
anticipated closing date of the initial public offering. The notes bore
interest at a rate of 8% per annum, and were repaid with the proceeds of the
Company's initial public offering (see note 4).
4. INITIAL PUBLIC OFFERING
Effective July 3, 1996, the Company sold 10,750,000 shares of its common stock
at $24.00 per share in an initial public offering. Net proceeds of the
offering, after deducting underwriting discounts and commissions, aggregated
$242.5 million. Proceeds of the offering were used to retire the distribution
notes and accrued interest thereon totaling approximately $116.4 million, to
repay the Company's term loans and the revolving line of credit which totaled
approximately $76.8 million, to pay a certain one-time bonus under an employment
agreement which amounted to approximately $5.0 million and to pay a one-time fee
under a license agreement which amounted to approximately $5.0 million. The
remaining $39.3 million was retained for other general corporate purposes.
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (CONTINUED)
5. PRO FORMA ADJUSTMENTS (UNAUDITED)
In connection with the Company's initial public offering of stock (the
"Offering"), the former principals of the Company and certain of their
affiliates simultaneously contributed to Donna Karan International Inc. all of
the outstanding stock of and partnership interests in the entities that comprise
the Company, in exchange for common stock (the "Reorganization").
The following table sets forth for the six-month periods ended June 30, 1996
and July 2, 1995: (a) actual combined statements of income data; (b) pro forma
adjustments to reflect the Reorganization, the Offering, certain other
adjustments as if they had occurred on January 1, 1996 and January 2, 1995, and
adjustments arising from the sale of the Company's 70% interest in the
operations of Donna Karan Japan as if it had occurred on January 2, 1995; and
(c) pro forma combined statements of income data.
<TABLE>
<CAPTION>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996
------------------------------
ACTUAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
-------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues $277,226 $277,226
-------- --------
Gross profit 90,006 (7,248)(i) 82,758
Selling, general and administrative expenses 77,443 (1,500)(ii) 75,943
-------- -------
Operating income 12,563 6,815
Equity in earnings of affiliate 1,609 1,609
Interest expense (4,296) 3,475(iii) (181)
640(iv)
Interest expense on distribution notes (1,882) 1,882(v) 0
-------- -------
Income before provision for income taxes 7,994 8,243
Provision for income taxes 445 3,133(vi) 3,578
-------- -------
Net income $ 7,549 $ 4,665
======== =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 2, 1995
-----------------------------
ACTUAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
-------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues $ 223,424 (5,521)(vii) $ 217,903
-------- ----------- -------
Gross profit 75,315 (6,814)(vii) 63,042
(5,459)(i)
Selling, general and administrative expenses 64,700 (4,828)(vii) 58,714
-------- -------
(1,158)(ii)
Operating income 10,615 4,328
Equity in earnings of affiliate 1,391 394 (vii) 1,785
Interest expense (3,918) 3,235 (iii) (400)
283 (iv)
Gain on sale of interest in affiliates 18,673 (18,673) (vii) 0
------ -
Income before provision for income taxes 26,761 5,713
Provision for income taxes 1,360 1,118 (vi) 2,478
-------- -------
Net income $ 25,401 $ 3,235
======== ========
7
</TABLE>
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(i) Royalties of $5.5 million and $7.2 million in 1995 and 1996, respectively,
to be paid to a corporation owned by two of the Company's stockholders and
their affiliated trusts pursuant to a licensing agreement.
(ii) Decrease in aggregate compensation from $2.2 million to $1.0 million in
1995, and from $2.5 million to $1.0 million in 1996 for two of the
Company's executives pursuant to their employment agreements.
(iii) Reduction in interest costs of $3.2 million and $3.5 million in 1995 and
1996, respectively, assuming the application of up to $73.2 million and $90.4
million in 1995 and 1996, respectively (which amounts represent the maximum
amount of outstanding during the periods) of the proceeds from the Offering to
reduce the actual outstanding indebtedness under the Company's credit agreement.
(iv) Reduction of $0.3 million and $0.6 million in 1995 and 1996, respectively,
in amortization of deferred financing costs, which would have been written off
in connection with repayment of outstanding indebtedness under the Company's
credit agreement.
(v) Reduction in interest expense on distribution notes of $1.9 million in
1996, assuming since the distribution notes would not have been outstanding
during the period.
(vi) Increase of $1.1 million and $3.1 million in 1995 and 1996, respectively,
for income taxes based upon pro forma pre-tax income as if the Company had
been subject to Federal and additional state income taxes.
(vii) Adjustments to reflect the Company's sale of its 70% interest in the
operations of Donna Karan Japan, as if it had occurred on January 2, 1995. The
gain of $18.7 million has been excluded, and as a result of this sale, the
Company's combined statement of income has been adjusted to reflect the
accounting for the Company's interest in Donna Karan Japan using the equity
method of accounting for the period from January 2, 1995 until March 31, 1995,
the date of the sale. Accordingly, net revenues have been decreased by $5.5
million, which reflects the difference between net revenues generated by sales
from Donna Karan Japan to its customers and those net revenues of the Company
derived from sales to Donna Karan Japan (as if Donna Karan Japan were a customer
of the Company); gross profit has been decreased by $6.8 million; and selling,
general and administrative expenses have been decreased by $4.8 million, which
included management fee income of $0.3 million from an agreement with Donna
Karan Japan. In addition, under the equity method of accounting, $0.4 million
of equity in earnings of affiliate has been recorded to reflect the Company's
portion of Donna Karan Japan's net income (See note 8).
The following table sets forth for the three-month periods ended June 30, 1996
and July 2, 1995: (a) actual combined statements of income data; (b) pro forma
adjustments to reflect the Reorganization, the Offering, certain other
adjustments as if they occurred on January 1, 1996 and January 2, 1995; and (c)
pro forma combined statements of income data.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1996
--------------------------------
ACTUAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
---------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues $177,641 $177,641
Gross profit 37,145 (3,086)(i) 34,059
Selling, general and administrative expenses 38,032 (750)(ii) 37,282
-------- --------
Operating loss (887) (3,223)
Equity in earnings of affiliate 621 621
Interest expense (2,249) 1,840(iii) (89)
320(iv)
Interest expense on distribution notes (1,882) 1,882(v) 0
-------- --------
Loss before benefit for income taxes (4,397) (2,691)
Benefit for income taxes (245) (899)(vi) (1,144)
-------- --------
Net loss $ (4,152) $ (1,547)
======== =======
8
</TABLE>
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 2, 1995
-------------------------------
ACTUAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
---------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues $102,731 $102,731
-------- ---------
Gross profit 31,112 (2,538)(i) 28,574
Selling, general and administrative expenses 31,659 (579)(ii) 31,080
-------- ---------
Operating loss (547) (2,506)
Equity in earnings of affiliate 1,391 1,391
Interest expenses (2,217) 1,710 (iii) (368)
139 (iv)
-------- ---------
Loss before benefit for income taxes (1,373) (1,483)
Provision for income taxes (48) (582) (vi) (630)
-------- ---------
Net loss $ (1,325) $ (853)
======== =========
</TABLE>
(i) Royalties of $2.5 million and $3.1 million in 1995 and 1996, respectively,
to be paid to a corporation owned by two of the Company's stockholders and
their affiliated trusts pursuant to a licensing agreement.
(ii) Decrease in aggregate compensation from $1.1 million to $0.5 million in
1995, and from $1.3 million to $0.5 million in 1996 for two of the
Company's executives pursuant to their employment agreements.
(iii) Reduction in interest costs of $1.7 million and $1.8 million in 1995 and
1996, respectively, assuming the application of up to $82.3 million and $83.5
million in 1995 and 1996, respectively (which amounts represent the maximum
amount of outstanding during the periods) of the proceeds from the Offering to
reduce the actual outstanding indebtedness under the Company's credit agreement.
(iv) Reduction of $0.1 million and $0.3 million in 1995 and 1996, respectively,
in amortization of deferred financing costs, which would have been written
off in connection with repayment of outstanding indebtedness under the
Company's credit agreement.
(v) Reduction in interest expense on distribution notes of $1.9 million in
1996, assuming the distribution notes would not have been outstanding
during the period.
(vi) Increase of $0.6 million and $0.9 million in 1995 and 1996, respectively,
for income tax benefiys based upon pro forma pre-tax loss as if the Company
had been subject to Federal and additional state income taxes.
The unaudited pro forma balance sheet gives effect to the reorganization, the
initial public offering and the use of the proceeds therefrom as described in
note 4, the award of 105,100 shares of common stock to certain employees
pursuant to the Company's 1996 Stock Incentive Plan recorded as a one-time
charge of approximately $3 million, the write-off of deferred financing costs of
approximately $2.5 million, a $5 million charge related to the anticipated
consolidation of the Company's warehouse facilities, the recording of a deferred
tax asset of approximately $15.5 million, in addition to approximately $1.7
million of certain state and local deferred tax assets previously recorded, in
conjunction with becoming subject to Federal and additional state and local
income taxes, and the tax benefits and the net effect on additional paid-in
capital for the adjustments noted above.
9
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (CONTINUED)
Pro Forma Per Share Information
Pro forma per share information is based upon (a) 10,612,934 shares of common
stock outstanding during the period, (b) the number of shares of common stock
(5,229,937) sold by the Company, at an offering price of $24.00 per share
($22.18, net of expenses), the proceeds of which would be necessary to pay
approximately $116.0 million to the former principals of the Company and certain
of their affiliates in satisfaction of the distribution notes previously issued
(including accrued interest thereon), representing cumulative undistributed
taxable income on which taxes previously have been paid, and (c) 105,100 shares
of Common Stock which the Company awarded to certain employees pursuant to the
Company's stock incentive plan. The net income used in the calculation of pro
forma per share information for the six months ended July 2, 1995 and June 30,
1996 excludes the reduction of interest costs of $3.2 million and $3.5 million
in 1995 and 1996, respectively, and the reduction in amortization of deferred
financing costs of $0.3 million and $0.6 million in 1995 and 1996,
respectively, and the related tax effect of $1.5 million and $1.7 million in
1995 and 1996, respectively. The net income used in the calculation of pro
forma per share information for the quarters ended July 2, 1995 and June 30,
1996 excludes the reduction of interest costs of $1.7 million and $1.9 million
in 1995 and 1996, respectively, and the reduction in amortization of deferred
financing costs of $0.1 million and $0.3 million in 1995 and 1996, respectively,
and the related tax effect of $0.6 million and $0.9 million in 1995 and 1996,
respectively.
Supplementary pro forma per share information for the six months ended July 2,
1995 and June 30, 1996 is $0.17 and $0.24, respectively, and for the quarters
ended July 2, 1995 and June 30, 1996 is $(0.4) and $(0.08), respectively, based
upon 10,162,934 shares of common stock outstanding during the period increased
by (a) the sale of 5,229,937, shares of Common Stock at an offering price of
$24.00 per share ($22.18, net of expenses), the proceeds of which would be
necessary to repay approximately $72.2 million to the Company's lenders for the
term loans under the Company's credit facility and to reduce the amount
outstanding under the Company's revolving line of credit at June 30, 1996, and
(c) 105,000 shares of Common Stock which the Company awarded to certain
employees pursuant to the Company's stock incentive plan. The net income used
in the calculation of supplementary pro forma per share information for the six
months ended July 2, 1995 and June 30, 1996, is $3.2 million and $4.7 million,
respectively, and for the quarters ended July 2, 1995 and June 30, 1006, is
$(0.9) million and $(1.5) million, respectively.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
---- ----
<S> <C> <C>
Accrued operating expenses............. $8,590 $10,028
Accrued state and local income taxes... 2,351 3,241
Accrued compensation................... 885 6,202
Accrued taxes other than income taxes.. 2,244 2,273
Accrued interest....................... -- 1,941
Other.................................. 1,696 966
----- ----
$ 15,766 $ 24,651
======== ========
</TABLE>
7. 1996 STOCK INCENTIVE PROGRAM
Effective June 27, 1996, the Board of Directors of the Company granted options
to purchase an aggregate of 1,387,000 shares of Donna Karan International Inc.
common stock under the 1996 Stock Incentive Plan adopted on June 19, 1996 to
certain employees of and consultants to the Company. The options vest in 25%
installments commencing on the first anniversary of the date of the grant and
have an exercise price of $24 per share. The options expire 10 years after the
date of grant.
In addition, effective June 27, 1996, the Board of Directors of the Company
granted awards of an aggregate of 105,100 shares of Donna Karan International
Inc. common stock under the 1996 Stock Incentive Plan to certain employees of
the Company and Donna Karan Japan.
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (CONTINUED)
8. SALE OF INTERESTS IN AFFILIATES
The Company conducts operations in Japan through Donna Karan Japan. DSTF
Japan Company has a profit sharing agreement (the "DSTF Agreement") with Donna
Karan Japan whereby 90% of the income before taxes of Donna Karan Japan is
allocated to DSTF Japan Company. On March 31, 1995, the Company sold 70% of its
interest in the DSTF Agreement and 70% of the stock of Donna Karan Japan to a
nonaffiliated party. The Company recognized a gain on this transaction, net of
transaction costs, of $18,673,000. Subsequent to the sale, the Company records
a 27% interest in the operations of Donna Karan Japan through its 30% interest
in the DSTF Agreement and a 3% interest in the operations of Donna Karan Japan
through its remaining interest in Donna Karan Japan. As a result, the Company
has accounted for its combined 30% interest in the operations of Donna Karan
Japan using the equity method of accounting. Simultaneously with the sales
transaction, the Company entered into an agreement with Donna Karan Japan which
provides for a fee based upon net sales of Donna Karan Japan. Management fee
income, which is included in selling, general and administrative expenses,
amounted to $ 393,000 and $890,000 during the three - and six - month periods
ended June 30, 1996, respectively. The equity investment in Donna Karan Japan
of $2,535,000 and $ 3,888,000 as of December 31, 1995 and June 30, 1996,
respectively, is included in "Deposits and other noncurrent assets" in the
accompanying combined balance sheet.
9. PRO FORMA INCOME TAXES
The entities in the combined group were partnerships, or corporations that
have elected to be taxed as S corporations pursuant to the Internal Revenue
Code. In connection with the Offering, the Company has become subject to
Federal and additional state income tax. The pro forma provision for income
taxes represents the income tax provisions that would have been reported had the
Company been subject to Federal and additional state income taxes.
The Company has adopted the provisions of SFAS No. 109. This adoption had no
material effect on the provision for income taxes. SFAS No. 109 requires the
asset and liability method of accounting for income taxes. Under the asset and
liability method, deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial carrying amounts and the tax
bases of existing assets and liabilities. The pro forma income tax provision
has been prepared according to SFAS No. 109.
Concurrent with becoming subject to Federal and additional state income taxes,
the Company will record a deferred tax asset and a corresponding tax benefit in
the statement of income in accordance with the provisions of SFAS No. 109. The
amount at June 30, 1996 would have been increased by approximately $15.5
million, resulting in a total deferred tax asset of approximately $17.2 million
which includes certain state and local tax assets recorded on a historical
basis. The deferred tax asset includes approximately $3.0 million as a result
of certain changes in accounting for inventory reserves for income tax purposes.
<TABLE>
<CAPTION>
The foreign and domestic components of pro forma income before pro forma income taxes were as follows
(in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JULY 2, JUNE 30, JULY 2, JUNE 30,
1995 1996 1995 1996
------- ------- ------ ------
<S> <C> <C> <C> <C>
Domestic.......... $(4,239) $(4,313) $2,563 $5,624
Foreign........... 2,756 1,622 3,150 2,619
------- ------- ------ ------
$(1,483) $(2,691) $5,713 $8,243
======= ======= ====== ======
11
</TABLE>
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (CONTINUED)
The pro forma income tax provision (benefit) consists of the following (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- -----------------
JULY 2, JUNE 30, JULY 2, JUNE 30,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current income taxes:
Federal taxes......................... $(722) $(1,222) $2,080 $1,979
State and local taxes................. (299) (302) 863 1,038
Foreign taxes......................... 202 380 263 431
----- ------- ------ ------
(819) (1,144) 3,206 3,448
Deferred income taxes 189 - (728) 130
----- ------- ------ ------
$(630) $(1,144) $2,478 $3,578
====== ======== ====== ======
</TABLE>
A reconciliation setting forth the differences between the pro forma
effective tax rate of the Company and the U.S. Federal statutory tax rate is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- -----------------
JULY 2, JUNE 30, JULY 2, JUNE 30,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Federal statutory rate................ 35.0% 35.0% 35.0% 35.0%
State and local taxes, net of Federal tax
benefits............................. 7.6 7.6 7.6 7.3
Other items, net, none of which
individually exceeds 5% of Federal
taxes at statutory rates (0.1) (0.1) 0.8 1.1
------- ------- ------ -----
Effective tax rate.................... 42.5% 42.5% 43.4% 43.4%
======= ======= ======= ======
</TABLE>
Pro forma deferred income taxes will reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for pro forma
financial reporting and the amounts used for income tax purposes. Significant
components of the Company's deferred tax asset as of June 1996 are as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
Book over tax depreciation........ $ 3,700
Allowance for doubtful accounts... 2,500
Inventory reserves................ 3,000
Uniform inventory capitalization.. 700
Other book accruals............... 7,300
-------
$17,200
=======
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Donna Karan International Inc. is one of the world's leading international
fashion design houses. The Company designs, contracts for the production of,
markets, and distributes "designer" and "bridge" collections of men's and
women's clothing, sportswear, accessories, and shoes under the Donna Karan New
York(R) and DKNY(R) brand names, respectively. The Company also develops,
contracts for the production of, markets, and distributes collections of men's
and women's fragrance, bath and body, and treatment products under the DK Men(R)
and Donna Karan New York(R) brand names, respectively. In addition, the Company
selectively has granted licenses for the manufacture and distribution of certain
other products under the Donna Karan New York(R) and DKNY(R) brand names,
including hosiery, intimate apparel, eyewear, and most recently, a license for
children's apparel under the DKNY(R) brand name in Europe and the Middle East.
The following discussion provides information and analysis of the Company's
results of operations for the second quarters of 1995 and 1996 and for the
first half of 1995 and 1996. The Company utilizes a 52- or 53- week fiscal year
ending on the Sunday nearest December 31. Accordingly, the second quarters and
first half of 1995 and 1996 ended July 2, 1995 and June 30, 1996, respectively.
The second quarters in 1995 and 1996 contained 13 weeks and the first half years
in 1995 and 1996 contained 26 weeks. As used in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Donna Karan New
York(R) collections and the DKNY(R) collections each include apparel,
accessories, and shoes.
Pro forma information is derived from the Company's Predecessor Combined
Financial Statements. The unaudited pro forma combined statement of income
gives effect to the reorganization, the offering, and certain other adjustments
as if they occurred on January 2, 1995.
Comparison of Second Quarter 1996 to Second Quarter 1995
- --------------------------------------------------------
<TABLE>
<CAPTION>
Historical Pro Forma
--------------- --------------------------------
1995 1996 1995 1996
--------------- --------------- --------------- ---------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................................. $102.7 100.0% $117.6 100.0% $102.7 100.0% $117.6 100.0%
Gross profit.................................. 31.1 30.3 37.1 31.5 28.6 27.8 34.1 29.0
Selling, general and administrative expenses.. 31.6 30.8 38.0 32.3 31.1 30.3 37.3 31.7
Operating loss................................ (0.5) (0.5) (0.9) (0.8) (2.5) (2.4) (3.2) (2.7)
Equity in earnings of affiliate............... 1.4 1.4 0.6 0.5 1.4 1.4 0.6 0.5
Net loss...................................... (1.3) (1.2) (4.2) (3.6) (0.9) (0.9) (1.5) (1.3)
</TABLE>
Net revenues were $117.6 million in the second quarter of 1996, an increase of
14.5%, from the net revenues of $102.7 million recorded in the second quarter
of 1995. The increase was due primarily to: a $6.4 million, or 119.4%, increase
in the DKNY(R) men's collections; a $4.4 million, or 7.7%, increase in the
DKNY(R) women's collections; a $3.8 million, or 53.8%, increase in the Donna
Karan New York(R) collections for men; a $2.6 million, or 19.2%, increase in
outlet stores and licensing and a $1.2 million, or 17.8%, increase in beauty
products. The increase was somewhat offset by a decrease of $3.5 million, or
26.9%, in the Donna Karan New York(R) collections for women.
13
<PAGE>
The increase in the DKNY(R) men's collections resulted from continued
significant growth in international sales, as well as domestic growth. The
increase in the DKNY(R) women's collections resulted primarily from
international growth. The increase in Donna Karan New York(R) collections for
men primarily resulted from international growth, as well as domestic growth.
The increase in the Beauty Division is primarily due to the expanded product
offering in 1996 compared to 1995. The decrease in net revenue in the Donna
Karan New York(R) collections for women resulted primarily from a planned
reduction in the number of doors carrying the women's collections in
anticipation of the introduction of the new Signature collection for Spring 1997
and the reduction of the accessories business as it is refocused from a
collection-coordinated line to a "main floor" line.
Gross profit as a percent of sales was 31.5% and 30.3% (29.0% and 27.8% on a
pro forma basis) in the second quarter of 1996 and 1995, respectively. The
increase in the gross margin is primarily attributable to leveraging relatively
fixed production costs as a result of increased sales volume.
Selling, general and administrative expenses increased to 32.3% ( 31.7% on a
pro forma basis) of net revenues in the second quarter of 1996 from 30.8% (30.3%
on a pro forma basis) of net revenues for the same period of 1995. The
increase is due, in large part, to increases in infrastructure spending to
support an anticipated annual increase in net revenue.
Operating loss increased to $.9 million ($3.2 million on a pro forma basis)
in the second quarter of 1996 from $.5 million ($2.5 million on a pro forma
basis) in the same period in 1995. The increase in the loss for the periods was
due, in large part, to increases in infrastructure spending to support an
anticipated annual increase in net revenue, as noted above.
Interest expense on distribution notes was incurred on the distribution notes
that were issued to the former principals of the Company and their affiliates,
which notes were paid on July 3, 1996 with the proceeds of the Company's initial
public offering.
Net loss for the second quarter was $4.2 million ($1.5 million on a pro forma
basis) in 1996 and $1.3 million ($0.9 million on a pro forma basis) in 1995. As
noted above, the increase in the net loss was due, in large part, to an increase
in infrastructure spending to support an anticipated annual increase in net
revenue. The increase in net loss was also due to the accrual of interest
expense on the distribution notes issued to the former principals of the Company
and their affiliates.
Comparison of first half of 1996 to first half of 1995
- ------------------------------------------------------
<TABLE>
<CAPTION>
Historical Pro Forma
-------------- ----------------------
1995 1996 1995 1996
-------------- -------------- -------------- --------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................................. $223.4 100.0% $277.2 100.0% $217.9 100.0% $277.2 100.0%
Gross profit.................................. 75.3 33.7 90.0 32.5 63.0 28.9 82.8 29.9
Selling, general and administrative expenses.. 64.7 29.0 77.4 27.9 58.7 26.9 75.9 27.4
Operating income.............................. 10.6 4.7 12.6 4.5 4.3 2.0 6.8 2.5
Equity in earnings of affiliate............... 1.4 0.6 1.6 0.6 1.8 0.8 1.6 0.6
Net income.................................... 25.4 11.4 7.5 2.7 3.2 1.5 4.7 1.7
</TABLE>
Net revenues were $277.2 million in the six months ended June 30, 1996, an
increase of 24.1% (27.2% on a pro forma basis) from the net revenues of $223.4
million ($217.9 million on a pro forma basis) recorded in the six months ended
July 2, 1995. The increase was due primarily to: a $24.0 million, or 18.8%,
increase in the DKNY(R) women's collections; a $18.7 million, or 156.1%,
increase in the DKNY(R) men's collections; a $6.4 million, or 39.9%, increase in
the Donna Karan New York(R) collections for men; a $5.6 million, or 23.4%,
increase in outlet stores and licensing and a $2.5 million, or 25.3%, increase
in beauty products. The increase was somewhat offset in the six months ended
June 30, 1996 by a decrease of $3.4, or 10.2%, in the Donna Karan New York(R)
Collections for women from the same period in 1995. Revenues on a pro forma
basis were impacted by the sale of Donna Karan Japan (see note 5 (vii) to
Predecessor Combined Financial Statements).
14
<PAGE>
The increase in DKNY(R) women's collections was the result primarily of
international growth. The increase in net revenue in the DKNY(R) men's
collections resulted from significant growth in international sales, as well as
domestic growth. The increase in Donna Karan New York(R) collections for men
primarily resulted from growth domestically, as well as internationally. The
increase in the Beauty Division is due to the expanded product offering in 1996
compared to 1995. The decrease in net revenue in the Donna Karan New York(R)
collections for women resulted primarily from a planned reduction in the number
of doors carrying the women's collections in anticipation of the introduction of
the new Signature collection for Spring 1997 and the reduction of the
accessories business as it is refocused from a collection-coordinated line to a
"main floor" line.
Gross profit as a percent of sales was 32.5% and 33.7% in the first half of
1996 and 1995, respectively. The decrease in the gross margin is primarily due
to the sale of the operations of Donna Karan Japan in March of 1995. This
transaction resulted in a nonrecurring credit of $0.9 million to recognize
previously deferred profit in Donna Karan's inventory, as well as a reduction in
the consolidated margin in 1996 since Donna Karan Japan was accounted for on the
equity basis. On a pro forma basis, gross profit as a percent of sales was
29.9% and 28.9% in the first half of 1996 and 1995, respectively. The
improvement in the gross margin percentage was primarily attributable to
leveraging relatively fixed production costs as a result of increased sales
volume.
Selling, general and administrative expenses decreased to 27.9% of net
revenues in the half year ended June 30, 1996 from 29.0% of net revenues for
the same period of 1995. This decrease is primarily due to the leverage
obtained from the increased net revenue base, and the additional $0.5 million
of management fees received from Donna Karan Japan. For pro forma purposes, the
Company eliminated the operations of Donna Karan Japan during the first quarter
of 70% of the Company's interest in the operations, including the selling,
general and administrative expense of Donna Karan Japan (see note 5 (vii) to the
Predecessor Combined Financial Statements).
Operating income increased to $12.6 million ($6.8 million on a pro forma
basis) in the six months ended June 30, 1996 from $10.6 million ($4.3 million on
a pro forma basis) in the same period in 1995. Operating income increased, as
noted above, due to sales increases in several divisions of the Company,
somewhat offset by an slight increase in selling, general and
administrative expenses.
Interest expense on distribution notes was incurred on the distribution notes
that were issued to the former principals of the Company and their affiliates,
which were paid on July 3, 1996 with the proceeds of the Company's initial
public offering.
Net income decreased, on an historical basis, from $25.4 million in the first
half of 1995 to $7.5 million in the first half of 1996. This decrease was
primarily due to the gain on the sale of Donna Karan Japan in March of 1995 of
$18.7 million and the increased interest expense on distribution notes of $1.9
million in 1996. The decrease was somewhat offset by the increase in operating
income and a decrease in the provision for income taxes. On a pro forma basis,
net income increased from $3.2 million for the first half of 1995 to $4.7
million for the first half of 1996. This increase is due primarily to an
increase in the gross profit margin of 1.0%, while selling, general
and administrative expenses only increased .5% (as a percentage of net sales).
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's principal need for funds were to finance working
capital (principally inventory and receivables), capital expenditures, and
investments in the start up of new collections and the extension of existing
collections. The Company has relied on cash flow from operations, bank lines of
credit, and loans for its capital requirements.
15
<PAGE>
Subsequent to the consummation of the Offering the Company's cash flow needs
have changed as a result of (i) reduced interest costs associated with the
application of the net proceeds of the Offering to reduce outstanding
indebtedness under the Company's credit agreement, (ii) decreased compensation
for two of the Company's executives pursuant to their new employment agreements,
and (iii) the absence of distributions, primarily for payment of taxes, paid by
the Company to the principals and stockholders of the intermediate holding
companies. Offsetting such changes will be the need to apply funds to the
payment of Federal and additional state and local income taxes and royalties to
Gabrielle Studio, Inc. pursuant to a License Agreement. See note 5 to the
Predecessor Combined Financial Statements. Any net use of cash for such
changes is expected to be funded through operations.
At June 30, 1996, the Company had a working capital deficit of $ 26.1 million,
compared to working capital of $ 93.6 million at December 31, 1995. The change
in working capital was due primarily to the issuance of the distribution notes
payable to the former principals of the Company and their affiliates in the
amount of $114.5 million. Pro forma working capital at June 30, 1996 was
$152.6 million, which for the most part, gives effect to the receipt of the
proceeds from the Offering. See note 5 to the Predecessor Combined Financial
Statements for a description of adjustments included in the pro forma balance
sheet at June 30, 1996.
The Company has received a commitment letter from a bank relating to a new
$150.0 million, three-year revolving credit facility (the "New Credit Facility),
which includes a $60.0 million subfacility for letters of credit and a $30.0
million subfacility for loans in certain foreign currencies to the extent
available. Borrowings under the New Credit Facility will bear interest at the
lead bank's prime rate or, at the option of the Company, at a fixed margin
(ranging from 0.5% to 0.75%) over LIBOR. The outstanding balance under the New
Credit Facility will be required to be paid down below a specified level for 45
days each year. The Commitment Letter provides that the New Credit Facility
will be secured by accounts receivable, inventory, and certain intangibles of
the Company and a pledge of all the equity interests of the subsidiaries of the
Company. The New Credit Facility will include financial and other restrictive
covenants, including a limitation on the amount of dividends which the Company
can pay. The Commitment Letter provides that the New Credit Facility will be
used to repay any remaining amounts outstanding under the Company's existing
Credit Agreement, for working capital needs, and for general corporate purposes.
The Commitment Letter provides that closing the New Credit Facility will be
subject to a number of conditions, and there can be no assurance that the
Company will enter into the New Credit Facility.
Capital expenditures, primarily for equipment, machinery, computers, office
furniture, leasehold improvements, and outlet stores, were approximately $2.6
million and $1.6 million for the quarters ended June 30, 1996 and July 2, 1995,
respectively. Capital expenditures for the six months ended June 30, 1996 and
July 2, 1995 were $6.8 million and $3.3 million, respectively.
Prior to the closing date of the initial public offering, the interests of the
former principals of the Company were held through intermediate entities. Each
of the former intermediate entities that was a corporation was treated for
Federal and certain state tax purposes as an S corporation under the Internal
Revenue Code and comparable state tax provisions. As a result, the former
principals of the Company and their affiliates were obligated to pay Federal and
certain state income taxes on their allocable portion of the income of the
Company. The Company made various distributions to the former intermediate
entities which, in turn, made various payments or distributions to the former
principals and their affiliates which enabled the former principals and their
affiliates to pay their income taxes on their allocable portions of the income
of the Company. During the six months ended June 30, 1996, the Company made
distributions of $5.4 millions with respect to taxes on 1995 and prior years'
income which were payable in 1996, $7.8 million with respect to 1996 taxable
income, $ 6.4 million of cash held in former intermediate entities, and $5.8
million of taxes payable in connection with the sale of 70% of the Company's
interest in the operation of Donna Karan Japan, for a total of $25.4 million.
The Company anticipates that it will be able to satisfy its ongoing cash
requirements for the foreseeable future, primarily with cash flow from
operations, supplemented by borrowings under its then existing credit agreement.
16
<PAGE>
SEASONALITY OF BUSINESS
As previously disclosed, the Company's business varies with general seasonal
trends that are characteristic of the apparel and beauty industries, and it
generally experiences lower net revenues and net income in the first half of
each fiscal year as compared to the second half of its fiscal year.
Accordingly, the Company's outstanding borrowings under it's credit agreement,
historically, have been lower on or about its fiscal year end. On a quarter to
quarter basis, the Company's operations may vary with production and shipping
schedules, the introduction of new products, and variation in the timing of
certain holidays from year to year. To the extent the Company continues to
expand its business, the Company's operating performance may not reflect the
typical seasonality of the apparel and beauty industries.
The Company historically has experienced lower net revenues in the second
quarter than in other quarters due to (i) lower demand among retail customers
typical of the apparel industry, and (ii) certain expenses that are constant
throughout the year being relatively higher as a percentage of net revenues. As
sales of the Company's beauty products increase relative to sales of its other
products, the Company's net revenues and operating income will be increasingly
influenced by the seasonality of the beauty industry. In general, the fragrance
portion of the beauty industry experiences lower net revenues and operating
income in the first three quarters and has substantially higher net revenues and
operating income in the fourth quarter. Fragrance products are the primary
component of the Company's beauty business.
17
<PAGE>
DONNA KARAN INTERNATIONAL INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1996.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DONNA KARAN INTERNATIONAL INC.
(Registrant)
Date: August 13, 1996 By: /s/ Stephen L. Ruzow
__________________________________
Stephen L. Ruzow, President &
Chief Operating Officer
Date: August 13, 1996 By: /s/ Joseph B. Parsons
__________________________________
Joseph B. Parsons, Executive
Vice President &
Chief Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27 - FINANCIAL DATA SCHEDULE 6/30/96
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,738
<SECURITIES> 0
<RECEIVABLES> 89,398
<ALLOWANCES> 22,830
<INVENTORY> 92,427
<CURRENT-ASSETS> 166,763
<PP&E> 52,130
<DEPRECIATION> 25,735
<TOTAL-ASSETS> 206,107
<CURRENT-LIABILITIES> 192,900
<BONDS> 0
0
0
<COMMON> 1,146
<OTHER-SE> (52,581)
<TOTAL-LIABILITY-AND-EQUITY> 206,107
<SALES> 277,226
<TOTAL-REVENUES> 277,226
<CGS> 187,220
<TOTAL-COSTS> 187,220
<OTHER-EXPENSES> 77,443
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,296
<INCOME-PRETAX> 7,994
<INCOME-TAX> 445
<INCOME-CONTINUING> 7,549
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,549
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1> Earnings per share were calculated on a pro-forma basis only. See footnote
5 of the notes to predecessor combined financial statements.
</FN>
</TABLE>
