<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1996
REGISTRATION NO. 333-3600
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
DONNA KARAN INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2337 13-3882426
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
----------------
550 SEVENTH AVENUE
NEW YORK, NEW YORK 10018
(212) 789-1500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
STEPHAN WEISS
DONNA KARAN INTERNATIONAL INC.
550 SEVENTH AVENUE NEW YORK,
NEW YORK 10018
(212) 789-1500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
ARNOLD S. JACOBS, ESQ. JEFFREY SMALL, ESQ.
PROSKAUER ROSE GOETZ & MENDELSOHN LLP SARAH JONES BESHAR, ESQ.
1585 BROADWAY DAVIS POLK & WARDWELL
NEW YORK, NEW YORK 10036 450 LEXINGTON AVENUE
(212) 969-3000 NEW YORK, NEW YORK 10017
(212) 450-4000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as possible after the Registration Statement becomes
effective.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] ________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _________________________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH
CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value....... $284,337,500 $98,048(2)
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated pursuant to Rule 457 solely for the purpose of calculating the
registration fee.
(2) $91,654 of such fee was previously paid.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
DONNA KARAN INTERNATIONAL INC.
CROSS REFERENCE SHEET SHOWING LOCATION
IN PROSPECTUS OF INFORMATION REQUIRED BY PART I OF FORM S-1
<TABLE>
<CAPTION>
REGISTRATION STATEMENT
ITEM AND HEADING LOCATION IN PROSPECTUS
---------------------- ----------------------
<S> <C>
1.Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus....... Facing Page of Registration Statement;
Cross Reference Sheet; Outside Front Cover
Page
2.Inside Front and Outside Back
Cover Pages of Prospectus...... Inside Front Cover of Prospectus
3.Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges............... Prospectus Summary; Risk Factors
4.Use of Proceeds................. Use of Proceeds
5.Determination of Offering
Price.......................... Underwriters
6.Dilution........................ Dilution
7.Selling Security Holders........ Not Applicable
8.Plan of Distribution............ Underwriters
9.Description of Securities to be
Registered..................... Outside Front Cover Page; Description of
Capital Stock
10.Interest of Named Experts and
Counsel........................ Not applicable
11.Information With Respect to the
Registrant
(a) Description of Business........ The Company; Reorganization; Business
(b) Description of Property........ Business
(c) Legal Proceedings.............. Business
(d) Dividends and Related
Stockholder Matters............ Risk Factors; Dividend Policy; Description
of Capital Stock
(e) Financial Statements........... Predecessor Combined Financial Statements
of Donna Karan International Inc.
(f) Selected Financial Data........ Selected Combined Financial Data
(g) Supplementary Financial
Information.................... Pro Forma Combined Financial Information
(h) Management's Discussion and
Analysis of Financial
Condition and Results of
Operations................... Management's Discussion and Analysis of
Financial Condition and Results of
Operations
(i) Changes in and Disagreements
with Accountants on
Accounting and Financial
Disclosure................... Not applicable
(j) Directors and Executive
Officers....................... Management
(k) Executive Compensation......... Management
(l) Security Ownership............. Principal Stockholders
(m) Certain Transactions........... Certain Relationships and Related Transac-
tions
12.Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities..... Not applicable
</TABLE>
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two separate prospectuses. The first
prospectus relates to a public offering in the United States and Canada of an
aggregate of 7,525,000 shares of Common Stock (the "U.S. Offering"). The
second prospectus relates to a concurrent offering outside the United States
and Canada of an aggregate of 3,225,000 shares of Common Stock (the
"International Offering" and, together with the U.S. Offering, the
"Offering"). The prospectuses for each of the U.S. Offering and the
International Offering will be identical with the exception of the alternate
front cover page for the International Offering. Such alternate page appears
in this Registration Statement immediately following the complete prospectus
for the U.S. Offering.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued June 10, 1996
10,750,000 Shares
[LOGO OF DONNA KARAN INTERNATIONAL APPEARS HERE]
COMMON STOCK
----------
OF THE 10,750,000 SHARES OF COMMON STOCK BEING OFFERED, 7,525,000 SHARES ARE
BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS
AND 3,225,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND
CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." ALL OF THE
10,750,000 SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY.
PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF
THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE
WILL BE BETWEEN $20 AND $23 PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION OF
THE FACTORS CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
----------
THE COMPANY'S COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK
EXCHANGE UNDER THE SYMBOL "DK," SUBJECT TO OFFICIAL NOTICE OF ISSUANCE.
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 OF THIS PROSPECTUS FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------
PRICE $ A SHARE
----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------
<S> <C> <C> <C>
Per Share.................. $ $ $
Total(3)................... $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Before deducting expenses of the Offering payable by the Company,
estimated at $ .
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
1,612,500 additional Shares of Common Stock at the price to public,
less underwriting discounts and commissions, for the purpose of
covering over-allotments, if any. If the Underwriters exercise such
option in full, the total price to public, underwriting discounts and
commissions, and proceeds to Company will be $ , $ , and $ ,
respectively. See "Underwriters."
----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to the approval of certain legal
matters by Davis Polk & Wardwell, counsel for the Underwriters. It is expected
that delivery of the Shares will be made on or about , 1996 at the office of
Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in
same day funds.
----------
MORGAN STANLEY & CO. BEAR, STEARNS & CO. INC.
Incorporated
MERRILL LYNCH & CO.
SMITH BARNEY INC.
, 1996
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
----------------
NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY OR
ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR
POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY JURISDICTION WHERE ACTION
FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS INTO
WHOSE POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE COMPANY AND THE
UNDERWRITERS TO INFORM THEMSELVES ABOUT, AND TO OBSERVE ANY RESTRICTIONS AS
TO, THE OFFERING OF THE COMMON STOCK AND THE DISTRIBUTION OF THIS PROSPECTUS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................................... 4
Risk Factors.......................................................... 12
Reorganization........................................................ 20
Use of Proceeds....................................................... 24
Dividend Policy....................................................... 24
Capitalization........................................................ 25
Dilution.............................................................. 27
Pro Forma Combined Financial Information.............................. 29
Selected Combined Financial Data...................................... 34
Management's Discussion and
Analysis of Financial Condition
and Results of Operations............................................ 35
Business.............................................................. 42
Management............................................................ 62
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain Relationships and Related Transactions........................ 70
Principal Stockholders................................................ 73
Description of Capital Stock.......................................... 74
Shares Eligible for Future Sale....................................... 77
Certain United States Federal Tax
Consequences to Non-United States Holders of Common Stock............ 78
Underwriters.......................................................... 81
Legal Matters......................................................... 84
Experts............................................................... 84
Additional Information................................................ 84
Glossary.............................................................. 85
Index to Predecessor Combined Financial Statements.................... F-1
</TABLE>
----------------
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
DURING THE OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR
THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES
10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
----------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
IN THIS PROSPECTUS, REFERENCES TO "DOLLAR" AND "$" ARE TO UNITED STATES
DOLLARS, AND THE TERMS "UNITED STATES" AND "U.S." MEAN THE UNITED STATES OF
AMERICA, ITS STATES, ITS TERRITORIES, ITS POSSESSIONS, AND ALL AREAS SUBJECT
TO ITS JURISDICTION.
----------------
Donna Karan New York(R), DKNY(R), DK(R), Donna Karan(R), DK Men(TM), a logo
consisting of the block letters DKNY and the words Donna Karan New York (with
dots below each word), DKNY Jeans and design graphics(R), and DKNY Coverings
and design graphics(R) are trademarks that will be licensed to the Company
upon the closing of the Offering. See "Business--Trademarks" and "Certain
Relationships and Related Transactions--License Agreement for Principal
Trademarks."
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus gives effect to the Reorganization (as defined in
"Reorganization"). As used in this Prospectus, references to the "Company" mean
the DK Companies (as defined in "Reorganization") as of dates and periods prior
to the closing of the Offering and, thereafter, collectively, Donna Karan
International Inc. and its subsidiaries. See "Reorganization." The financial
information of the Company contained herein includes the Intermediate Entities
(as defined in "Reorganization"). References herein to a specific year refer to
the Company's fiscal year, which is the 52- or 53-week period ending on the
Sunday nearest December 31. Certain capitalized terms used in this Prospectus
are defined in the Glossary included herein.
THE COMPANY
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(TM) and Donna Karan New York(TM) 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. In 1995, the Company's net revenues were $510.1
million and its operating income was $42.5 million, representing a 21.4% and
46.7% increase, respectively, over 1994 net revenues and operating income. The
Company's net income in 1995 was $53.7 million. On a pro forma basis, after
giving effect to the Reorganization, the Offering, and certain other
adjustments, the Company's net revenues were $504.6 million, its operating
income was $30.1 million, and its net income was $18.4 million for 1995. The
Company's products have significant international appeal, and in 1995,
approximately 33.9% of the Company's net revenues (excluding net revenues
generated from outlet stores and licensing) were to customers in international
markets.
The Company's net revenues (in millions) for 1995 were distributed as
follows:
<TABLE>
<CAPTION>
PRODUCT CATEGORIES
- ------------------
<S> <C>
Donna Karan New York(R)
collections for women(1).... $ 77
DKNY(R) collections for
women(1).................... 271
Donna Karan New York(R)
collections for men(1)...... 40
DKNY(R) collections for
men(1)...................... 37
Beauty products.............. 30
Outlet stores and licensing.. 55
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC MARKETS
- ------------------
<S> <C>
United States(2)............. $301
Japan........................ 64
Europe and the Middle East... 57
Asia (excluding Japan)....... 23
Other markets................ 10
</TABLE>
- --------
(1) Includes apparel, accessory, and shoe collections.
(2) Excludes in the United States $55 million of net revenues from outlet
stores and licensing.
4
<PAGE>
The Company has achieved its success through the implementation of the
following operating strategies:
. building the global name recognition and the distinctive brand image of
Donna Karan New York(R) in the exclusive designer market and the DKNY(R)
brand in the larger bridge market;
. establishing successful designer collections and then leveraging the
success of those collections and the depth of its design talent in the
larger bridge market;
. expanding on a worldwide basis, including in the United States, Europe
and the Middle East, Japan, and other parts of Asia;
. maintaining exclusivity of the brand image through coordinated global
advertising and marketing, selective licensing arrangements, and
controlled retail distribution; and
. offering a "head-to-toe" assortment of complementary luxury product
categories designed to satisfy the lifestyle needs of its customers.
Founded in 1984 on the talents of Ms. Donna Karan, a leading fashion
designer, the Company's initial focus was the Donna Karan New York(R)
Collection of women's designer apparel and accessories. The original collection
was based on Ms. Karan's concept of "seven easy pieces"--a collection of
bodysuits and tights, dresses, skirts, blouses, jackets, pants, and
accessories--that when layered in combinations achieved a consistent, but
varied, high fashion look. The Donna Karan New York(R) Collection for women
continues to represent high fashion apparel, made primarily with exclusively-
developed luxury fabrics and designed with an emphasis on comfort and fit. The
Donna Karan New York(R) Collection for women is recognized worldwide as one of
the premier women's designer collections. Each of the spring and fall
collections is introduced at major fashion shows which generate extensive
coverage in the domestic and international fashion press, as well as the
general media. The Donna Karan New York(R) Collection for women established the
Company as a leading international fashion design house.
The initial success of the Donna Karan New York(R) Collection for women made
possible the launch of the DKNY(R) bridge collection of women's apparel and
accessories in 1989. DKNY(R) was established as a separate brand name to create
a distinct and more casual fashion identity at lower prices while retaining an
association with the Donna Karan New York(R) designer image. The Company was
able to leverage the depth within its design team, as well as its sourcing
capabilities and distribution strength to successfully address the market
opportunity in the larger bridge market, thereby increasing its customer base
and range of products. Today, the women's apparel, accessory, and shoe
collections sold under the DKNY(R) brand name constitute the Company's largest
division, representing 53.1% of net revenues in 1995.
Consistent with its operating philosophy and leveraging its name recognition
and its strengths in design, sourcing, and distribution, the Company introduced
the Donna Karan New York(R) Collection for men in 1991 and the DKNY(R) men's
collection in 1992. The Donna Karan New York(R) Collection of designer apparel
for men is sophisticated, elegant, comfortable, and made of luxury fabrics. The
DKNY(R) men's collection is innovative, modern, relaxed, and made of
lightweight, tactile fabrics. The combined men's collections, which include
apparel and shoes, accounted for 15.0% of the Company's 1995 net revenues and
experienced a 68.2% increase in net revenues from 1994 to 1995.
To further leverage its strong brand name and image, in 1992 the Company
launched the Donna Karan New York(R) fragrance for women. Based upon the
success of that launch, the Company introduced men's and women's fragrance,
bath and body, and treatment products. Sales of the Beauty Division have grown
at a 96.0% compound annual growth rate since 1993 and represented 5.9% of the
Company's net revenues in 1995. The Company intends to introduce a new women's
fragrance under the Donna Karan New York(R) brand name in the second half of
1996. The Company also plans to introduce a DKNY(TM) women's fragrance in 1998
and a DKNY(TM) men's fragrance in 1999 with an appeal to a broader consumer
base.
5
<PAGE>
Due to the global recognition of the Donna Karan New York(R) and DKNY(R)
brands, the Company has been able to expand its sales internationally. In 1995,
the Company's net revenues in Japan, Europe and the Middle East, and other
parts of Asia represented 14.1%, 12.4%, and 5.1%, respectively, of net revenues
(excluding net revenues generated from outlet stores and licensing).
International sales increased from 1991 to 1995 from 14.4% to 33.9% of such net
revenues. Management believes international sales will continue to grow as a
percentage of the overall business and is focused on continuing to build the
infrastructure to support the growth of its brands worldwide.
To preserve the exclusivity of its brands, the Company maintains tight
control over advertising, marketing, distribution, and licensing. All worldwide
advertising, public relations, and marketing programs are managed on a
centralized basis through the Company's Creative Services and Public Relations
Departments in New York, which promote a consistent global image. In addition
to expenditures by its product licensees, expenditures by the Company on
advertising, public relations, and marketing of the Company's products totaled
$33.8 million in 1995 (and cumulatively, $101.8 million since 1993). Similarly,
the Company has been very selective in pursuing licensing opportunities and has
maintained strict control over design, quality, advertising, marketing, and
distribution in its five existing product licensing arrangements.
To reinforce its exclusive image and appeal, the Company sells its products
in the United States through a limited number of stores, including better
department stores and large specialty stores, such as Bloomingdale's, Macy's,
Saks Fifth Avenue, Neiman Marcus, Bergdorf Goodman, and Nordstrom, and better
boutiques catering to fashion-conscious customers. Management believes sales of
the Company's products typically rank among the leading fashion houses in terms
of revenues in the department and large specialty stores in which they are
sold. The Company sells its products internationally through better department
and specialty stores and boutiques, as well as full-price, free-standing retail
stores operated by third parties under the names Donna Karan New York(TM),
DKNY(TM), and Donna Karan(TM) (the "International Retail Stores"). These free-
standing retail stores exclusively showcase the Company's products. As of March
1, 1996, 29 free-standing International Retail Stores were located in 16
countries in Europe, the Middle East, and Asia. In March 1995, the Company
entered into a retail agreement (the "Retail Agreement") with Hotel Properties
Limited, a Singapore public company ("HPL"), and a corporation owned by a
private investor with a substantial interest in HPL, providing for the
establishment by HPL of an aggregate of 29 free-standing International Retail
Stores, in Hong Kong, The People's Republic of China, The Philippines, South
Korea, Taiwan, and Japan by December 31, 2000, the first of which opened in
Hong Kong in January 1996.
The Company has continued to develop additional products which address the
lifestyle needs of its customers. During the past five years, the Company has
expanded its product offerings to include the Donna Karan New York(R)
Essentials and DKNY(R) Essentials collections for women, the Donna Karan New
York(R) Signature collection for men, the DKNY(R) jeans and petite collections
for women, DK Men(TM) and Donna Karan New York(TM) men's and women's beauty
products, respectively, as well as DKNY(R) men's and women's shoes. By
expanding its collections, the Company establishes a larger potential customer
base by offering a "head-to-toe" product assortment.
The Company's goals are to continue to leverage its strong brand name and
image by expanding its current product offerings and to increase its presence
in domestic and international markets. The principal elements of the Company's
growth strategy are to:
. Increase number of doors. During 1996, the Company expects selectively
to increase the number of domestic doors (a "door" is a single retail
outlet) through which its more recently-introduced products, including
its beauty products and men's apparel, will be sold and to increase the
number of international doors through which the Company's products are
sold.
6
<PAGE>
. Increase number of free-standing retail stores. The Company anticipates
that 10 additional free-standing International Retail Stores will be
opened in 1996 (including five stores to be opened under the Retail
Agreement with HPL) and currently is considering a strategy for the
opening of full-price, free-standing retail stores by or in arrangements
with third parties in select locations in the United States.
. Continue product segmentation and expansion. By continuing to segment
and expand its collections, the Company provides a greater "head-to-toe"
product assortment to better satisfy the lifestyle needs of existing
customers and to appeal to new customers. In addition, expanding its
product offerings allows the Company to increase sales through existing
doors. The Company intends to launch a new women's fragrance under the
Donna Karan New York(R) brand name in the second half of 1996, to add
casual sportswear to its Donna Karan New York(R) men's collection, and
to expand the range of the current activewear offerings included within
the DKNY(R) women's collection for spring 1997. In addition, the Company
intends to increase the product range of its Donna Karan New York(R)
Essentials collection for women under its new Donna Karan New York(R)
Signature label for spring 1997.
. Broaden customer base. The Company plans to target broader market
opportunities at lower prices than its apparel products with additional
luxury products in categories such as beauty and accessories.
. Expand licensing efforts. Having successfully established its brands
worldwide, the Company now intends to expand its licensing efforts
through the selective granting of new product licenses.
Ms. Karan, the Company's Chairman, Chief Executive Officer, Chief Designer,
and a substantial stockholder, has been designing fashion-forward apparel for
over 25 years and is recognized as one of the world's preeminent fashion
designers. Mr. Ruzow, the Company's President and Chief Operating Officer, has
over 30 years of experience in the apparel industry. The Company's other
executive officers and division presidents have significant experience in the
fashion industry, with an average of over 20 years of experience.
The principal executive offices of the Company are located at 550 Seventh
Avenue, New York, New York 10018. Its telephone number is (212) 789-1500.
7
<PAGE>
THE OFFERING
COMMON STOCK OFFERED:
U.S. Offering............. 7,525,000 Shares
International Offering.... 3,225,000 Shares
Total..................... 10,750,000 Shares
Common Stock to be
Outstanding After the
Offering(1)(2)(3).......... 21,487,934 Shares
Use of Proceeds(3).......... The Company intends to use the net proceeds of
the Offering as follows: (i) to pay approximately
$116.0 million to members of the Takihyo Group
(as defined herein) and members of the
Karan/Weiss Group (as defined herein) in
satisfaction of the Distribution Notes (as
defined herein) previously issued (including
accrued interest thereon), representing
cumulative undistributed taxable income on which
taxes previously have been paid; (ii) to pay
approximately $80.0 million to the Company's
lenders in satisfaction of the term loans and the
revolving line of credit under the Company's
Credit Agreement (as defined herein), which
amount represents the outstanding balance as of
June 10, 1996; (iii) to pay $5.0 million to
Stephen L. Ruzow, the President of the Company,
representing a one-time payment pursuant to his
employment agreement; (iv) to pay approximately
$5.0 million to Gabrielle Studio (as defined
herein), representing a one-time payment made in
connection with the License Agreement (as defined
herein) (which by its terms will amend previously
existing licensing arrangements that could in
certain circumstances, including the Offering,
provide for higher royalty payments to Gabrielle
Studio than those under the License Agreement);
and (v) for general corporate purposes. See
"Reorganization," "Use of Proceeds,"
"Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of
Operations," "Management--Compensation
Arrangements," and "Certain Relationships and
Related Transactions--License Agreement for
Principal Trademarks."
New York Stock Exchange
symbol...................... "DK"
- --------
(1) Includes 125,000 shares of Common Stock which the Company expects to award
to certain employees of the Company pursuant to the 1996 Stock Incentive
Plan on the effective date of the Offering. Excludes an aggregate of
1,475,000 shares of Common Stock reserved for issuance under the Company's
1996 Stock Incentive Plan. The Company expects to grant options for
shares of Common Stock to certain employees of the Company pursuant to the
1996 Stock Incentive Plan at the initial offering price on the effective
date of the Offering. Also excludes an aggregate of 100,000 shares of
Common Stock reserved for issuance under the Company's 1996 Non-Employee
Director Stock Option Plan. See "Management--1996 Stock Incentive Plan" and
"--1996 Non-Employee Director Stock Option Plan."
(2) Excludes 18 shares of Class A Common Stock and two shares of Class B Common
Stock held by members of the Karan/Weiss Group and members of the Takihyo
Group, respectively, which will be outstanding after the Offering. See
"Reorganization" and "Description of Capital Stock."
(3) Assumes an initial public offering price of $21.50 and no exercise of the
Underwriters' over-allotment option.
8
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
The following table sets forth, for the periods and at the dates indicated,
summary combined financial data for the Company. Such data have been derived
from the audited and unaudited Predecessor Combined Financial Statements of the
Company included elsewhere herein. See "Selected Combined Financial Data." The
following table also includes certain unaudited pro forma combined statement of
income data for 1995 and 1996 which give effect to the Reorganization, the
Offering, and certain other adjustments as if they occurred on January 2, 1995.
In addition, the unaudited pro forma combined balance sheet data gives effect
to the Reorganization, the Offering, and certain other adjustments as if they
occurred on March 31, 1996. See "Pro Forma Combined Financial Information."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL QUARTER ENDED
---------------------------------------------------------- ----------------------
DECEMBER 28, JANUARY 2, JANUARY 2, JANUARY 1, DECEMBER 31, APRIL 2, MARCH 31,
1991(1) 1993 1994 1995 1995 1995 1996
------------ ---------- ---------- ---------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net revenues........... $196,570 $259,947 $364,705 $420,164 $ 510,126 $ 120,693 $ 159,585
Gross profit........... 64,496 92,309 130,475 148,992 179,437 44,203 52,861
Selling, general, and
administrative
expenses.............. 54,544 63,933 102,748 119,995 136,906 33,041 39,411
-------- -------- -------- -------- ---------- ---------- ----------
Operating income....... 9,952 28,376 27,727 28,997 42,531 11,162 13,450
Equity in earnings of
affiliate(2).......... -- -- -- -- 2,519 -- 988
Interest expense, net.. (82) (892) (4,063) (8,862) (7,650) (1,701) (2,047)
Other expense(3)....... -- -- (2,980) (2,651) -- -- --
Gain on sale of
interests in
affiliate(2).......... -- -- -- -- 18,673 18,673 --
-------- -------- -------- -------- ---------- ---------- ----------
Income before provision
for certain state,
local, and foreign
income taxes.......... 9,870 27,484 20,684 17,484 56,073 28,134 12,391
Provision for certain
state, local, and
foreign income taxes.. 2,187 3,522 1,312 1,139 2,398 1,408 690
-------- -------- -------- -------- ---------- ---------- ----------
Net income............. $ 7,683 $ 23,962 $ 19,372 $ 16,345 $ 53,675 $ 26,726 $ 11,701
======== ======== ======== ======== ========== ========== ==========
PRO FORMA STATEMENT OF INCOME DATA (UNAUDITED)(4)(5)(6):
Net revenues.......................................................... $ 504,605 $ 115,172 $ 159,585
Gross profit.......................................................... 159,817 34,468 48,699
Selling, general, and administrative expenses......................... 129,761 27,634 38,661
---------- ---------- ----------
Operating income...................................................... 30,056 6,834 10,038
Equity in earnings of affiliate....................................... 2,913 394 988
Interest expense, net................................................. (839) (32) (94)
---------- ---------- ----------
Income before provision for income taxes.............................. 32,130 7,196 10,932
Provision for income taxes............................................ 13,705 3,108 4,721
---------- ---------- ----------
Net income............................................................ $ 18,425 $ 4,088 $ 6,211
========== ========== ==========
Pro forma per share information(7).................................... $ .88 $ .19 $ .31
========== ========== ==========
Number of common shares assumed outstanding(7)........................ 16,584,708 16,584,708 16,584,708
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
PRO FORMA,
AS ADJUSTED(8)
ACTUAL (UNAUDITED)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $118,766 $157,417
Total assets.......................................... 226,267 254,277
Total long-term debt, including current portion....... 72,724 514
Stockholders' equity and partners' capital............ 91,791 195,792
</TABLE>
9
<PAGE>
(1) Selling, general, and administrative expenses for 1991 included payments of
and accruals for consulting fees to the Principals (as defined herein) of
$14.0 million in addition to amounts paid to certain executives pursuant to
their then existing employment arrangements. Excluding these consulting
fees, operating income and net income would have been $24.0 million and
$21.7 million, respectively.
(2) On March 31, 1995, the Company sold 70% of its interest in the operations
of Donna Karan Japan to a nonaffiliated party. The Company recognized a
gain on this transaction, net of transaction costs, of $18.7 million.
Subsequent to the sale, the Company has accounted for its remaining 30%
interest in the operations of Donna Karan Japan using the equity method of
accounting. Equity in earnings of affiliate amounted to $2.5 million and
$1.0 million for the year ended December 31, 1995 and the quarter ended
March 31, 1996, respectively. See Note 9 to Notes to Predecessor Combined
Financial Statements.
(3) Other expenses represent charges, primarily legal and other professional
fees, related to a proposed initial public offering in 1993 amounting to
$3.0 million and a proposed debt offering in 1994 amounting to $2.7
million.
(4) The unaudited pro forma statement of income data for the fiscal year ended
December 31, 1995 reflects the Reorganization, the Offering, and the
following adjustments as if they had occurred on January 2, 1995: (a)
royalties of $12.8 million to be paid to Gabrielle Studio pursuant to the
License Agreement; (b) a decrease in aggregate compensation from $4.3
million to $2.0 million for two of the Company's executives pursuant to
their new employment agreements; (c) a reduction in interest costs of $6.2
million assuming the application of up to $75.7 million (which amount
represents the maximum amount outstanding during the year) of the proceeds
from the Offering to reduce the actual outstanding indebtedness under the
Credit Agreement; (d) a reduction of $0.6 million in amortization of
deferred financing costs, which costs would have been written off in
connection with repayment of outstanding indebtedness under the Credit
Agreement; and (e) an increase of $11.3 million for income taxes based upon
pro forma pre-tax income as if the Company had been subject to Federal and
additional state income taxes. In addition, the unaudited pro forma
statement of income data reflects 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.
(5) The unaudited pro forma statement of income data for the fiscal quarters
ended April 2, 1995 and March 31, 1996 reflect the Reorganization, the
Offering, and the following adjustments as if they had occurred on January
2, 1995: (a) royalties of $2.9 million and $4.2 million in 1995 and 1996,
respectively, payable to Gabrielle Studio pursuant to the License
Agreement; (b) a 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 new employment agreements;
(c) a reduction in interest costs of $1.5 million and $1.6 million in 1995
and 1996, respectively, assuming the application of up to $73.2 million and
$87.4 million in 1995 and 1996, respectively, (which amounts represent the
maximum amount outstanding during the periods) of the proceeds from the
Offering to reduce the actual outstanding indebtedness under the Credit
Agreement; (d) a reduction of $0.1 million and $0.3 million in 1995 and
1996, respectively, in amortization of deferred financing costs, which
costs would have been written off in connection with repayment of
outstanding indebtedness under the Credit Agreement; and (e) an increase of
$1.7 million and $4.0 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. In addition, the
unaudited pro forma statement of income data for the quarter ended April 2,
1995 reflects 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.
(6) The pro forma statement of income data does not include the non-recurring
pre-tax charge of approximately $20.3 million (approximately $11.6 million
on an after-tax basis) which the Company expects to accrue immediately
following the closing of the Offering, relating to (a) the anticipated
consolidation of the Company's warehouse facilities ($5.0 million), (b) a
one-time payment to the President of the Company pursuant to his employment
agreement ($5.0 million), (c) a one-time payment to Gabrielle Studio in
connection with the License Agreement (approximately $5.0 million), (d) the
write-off of deferred financing costs related to the Company's Credit
Agreement ($2.7 million), and (e) a one-time charge of approximately $2.7
million in connection with the award of 125,000 shares of Common Stock to
certain employees pursuant to the Company's 1996 Stock Incentive Plan. In
addition, the unaudited pro forma statement of
10
<PAGE>
income data does not include a deferred tax asset of approximately $15.6
million at December 31, 1995 and $15.5 million at March 31, 1996, in
addition to certain state and local deferred tax assets recorded on a
historical basis, which the Company will record concurrently with becoming
subject to Federal and additional state and local income taxes.
(7) Pro forma per share information is based on 10,612,934 shares of Common
Stock outstanding prior to the Offering, increased by the sale of
5,846,774 shares of Common Stock assuming an offering price of $21.50 per
share ($19.84, net of expenses), the proceeds of which would be necessary
to pay approximately $116.0 million in satisfaction of the Distribution
Notes and 125,000 shares of Common Stock which the Company expects to
award to certain employees pursuant to the Company's 1996 Stock Incentive
Plan. The net income used in the calculation of pro forma per share
information for the year ended December 31, 1995 excludes the reduction of
interest costs of $6.2 million in (4)(c) above and the reduction in
amortization of deferred financing costs of $0.6 million noted in (4)(d)
above, and the related tax effect of $2.9 million. The net income used in
the calculation of pro forma per share information for the quarters ended
April 2, 1995 and March 31, 1996 excludes the reduction of interest costs
of $1.5 million and $1.6 million in 1995 and 1996, respectively, in (5)(c)
above and the reduction in amortization of deferred financing costs of
$0.1 million and $0.3 million in 1995 and 1996, respectively, in (5)(d)
above, and the related tax effect of $0.7 million and $0.8 million in 1995
and 1996, respectively.
Supplementary pro forma per share information for the year ended December
31, 1995, and quarters ended April 2, 1995 and March 31, 1996 are $.91,
$.20, and $.31, respectively, based on 10,612,934 shares of Common Stock
outstanding prior to the Offering, increased by (a) the sale of 5,846,774
shares of Common Stock assuming an offering price of $21.50 per share
($19.84, net of expenses), the proceeds of which would be necessary to pay
approximately $116.0 million in satisfaction of the Distribution Notes, (b)
the sale of 3,639,113 shares of Common Stock assuming an offering price of
$21.50 per share ($19.84, 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 March 31, 1996,
and (c) 125,000 shares of Common Stock which the Company expects to award
to certain employees pursuant to the Company's 1996 Stock Incentive Plan.
The net income used in the calculation of supplementary pro forma per share
information is $18.4 million, $4.1 million, and $6.2 million for the year
ended December 31, 1995 and the quarters ended April 2, 1995 and March 31,
1996, respectively.
(8) The unaudited pro forma, as adjusted, balance sheet data reflects (a) the
Reorganization, (b) the issuance of the Distribution Notes, (c) the sale
of the shares of Common Stock offered by the Company hereby assuming an
initial public offering price of $21.50 per share and no exercise of the
Underwriters' over-allotment option, (d) the application of the estimated
net proceeds received by the Company therefrom to pay the Distribution
Notes, to pay the amount outstanding under the Company's credit facility
at March 31, 1996, to pay Stephen L. Ruzow a one-time payment pursuant to
his employment agreement, to pay to Gabrielle Studio a one-time payment in
connection with the License Agreement, and for general corporate purposes,
(e) the non-recurring pre-tax charge of approximately $20.3 million
(approximately $11.6 million on an after-tax basis) which the Company
expects to accrue immediately following the closing of the Offering as
described in note 6 above, and (f) a deferred tax asset of approximately
$15.5 million described in note 6 above.
11
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the following information in
conjunction with the other information contained in this Prospectus before
purchasing the Common Stock offered hereby.
DEPENDENCE ON KEY PERSONNEL
The future success of the Company largely is dependent on the talents and
efforts of Ms. Karan, the Company's Chairman of the Board, Chief Executive
Officer, and Chief Designer, as well as on the talents and abilities of key
members of the Company's design teams and other key management executives. The
Company believes that it has developed depth and experience within its design
teams and management; however, no assurance can be given that the Company's
business would not be adversely affected if certain key members of the
Company's design teams or management ceased to be active in the business of
the Company. Ms. Karan is also integral to the Company's marketing efforts.
The loss of the services of Ms. Karan would have a material adverse effect on
the Company. The Company maintains key-person life insurance in the amount of
$1,000,000 on the life of Ms. Karan.
Effective upon the consummation of the Offering, Ms. Karan and the Company
will enter into an employment agreement, which provides for Ms. Karan to be
the Company's Chairman of the Board of Directors, Chief Executive Officer, and
Chief Designer. Under the employment agreement, Ms. Karan may engage in
certain activities for her personal benefit, such as personal endorsements and
appearances, motion pictures, television, writing, speaking and teaching
engagements, photography, the fine arts, designing for stage, film and other
media, architectural, industrial, and interior design (exclusive of home
furnishings) and sales of limited edition products based on such designs, and
consulting services in connection with the foregoing; provided such activities
are not directly competitive with the Company's principal product lines and
price points and do not interfere with her primary obligations to the Company.
The employment agreement requires Ms. Karan to provide at least four months'
notice of intent to terminate the agreement. During the initial three-year
term of the employment agreement, Ms. Karan may terminate her employment as
Chief Executive Officer without reason, and after such initial three-year
term, Ms. Karan may terminate her employment as Chairman of the Board of
Directors, Chief Executive Officer, and Chief Designer without reason. The
employment agreement also may be terminated at any time without notice by Ms.
Karan for "good reason," which includes, among other events, a Change in
Control (as defined in the Glossary), including certain changes in ownership
of voting securities, an acquisition by a third party of 30% of the voting
securities of the Company, mergers, sales of assets, and changes in the
composition of the Board of Directors. See the Glossary for a complete
description of Change in Control. The employment agreement provides that for a
period of one year following termination Ms. Karan shall not participate or
engage in, either directly or indirectly, with the exception of Gabrielle
Studio, any business activity that is directly competitive with the Company's
then current principal product lines and price points and could reasonably be
expected to have a material adverse effect on the Company. In addition, the
Company has employment agreements with certain other of its key management
executives. See "Management--Compensation Arrangements."
DEPENDENCE ON AND PROTECTION OF LICENSED INTELLECTUAL PROPERTY RIGHTS
In connection with the Reorganization and upon the closing of the Offering,
Gabrielle Studio, Inc. ("Gabrielle Studio"), a corporation wholly-owned by Ms.
Karan, her husband, Stephan Weiss, and trusts established for the benefit of
Ms. Karan and for the benefit of Ms. Karan's and Mr. Weiss' children (the "KW
Trusts"), will enter into a license agreement with the Company (the "License
Agreement"), which will amend in its entirety the licensing arrangements
previously existing between the Company and Gabrielle Studio. The License
Agreement provides for the grant of an exclusive license in perpetuity
throughout the world to use, and sublicense the right to use, the trademarks
"Donna Karan," "Donna Karan New York," "DKNY," "DK," and, in addition, all
current and future variations thereof (collectively, the "Licensed Marks"),
and to use, and sublicense the right to use, the name and likeness of Ms.
Donna Karan, in connection with the design, manufacture, distribution, sale
(both at retail and at wholesale), advertising, marketing, and promotion of
12
<PAGE>
products and offering of store services, other than products and specified
services for which Gabrielle Studio has retained the right to use or license
such trademarks. See "Certain Relationships and Related Transactions--License
Agreement for Principal Trademarks" for a more complete description of the
terms of this license and the royalty payable thereunder. The Company considers
its rights under the License Agreement to be material, and as a result,
termination of the License Agreement and the loss of the right to use such
Licensed Marks would have a material adverse effect upon the Company.
The License Agreement will impose certain obligations on the Company with
respect to the quality of the products to be sold bearing, and services offered
in connection with, the Licensed Marks or the name or likeness of Ms. Karan and
the sales and promotional materials used with respect to the products bearing
the Licensed Marks or the name or likeness of Ms. Karan and services offered in
connection therewith. In addition, the License Agreement will provide that at
such time as Ms. Karan is no longer the Chief Executive Officer and Chief
Designer or Chairman of the Board of Directors and Chief Designer of the
Company, the Licensed Marks may only be used by the Company in the market
segments in which such Licensed Marks previously were used.
The License Agreement will provide that it may be terminated by Gabrielle
Studio upon the failure of the Company to pay any amount due within 60 days of
receipt of notice of such failure, or if the Company violates the quality
control provisions of the License Agreement and fails to initiate and
thereafter pursue appropriate corrective action within 60 days after a final
unappealable determination by an arbitration tribunal or court of competent
jurisdiction that such violation has occurred. The License Agreement also may
be terminated by Gabrielle Studio upon the occurrence of, among other events, a
Change in Control, including certain changes in ownership of voting securities,
an acquisition by a third party of 30% of the voting securities of the Company,
mergers, sales of assets, and changes in the composition of the Board of
Directors. See the Glossary for a complete description of Change in Control.
While Gabrielle Studio and its shareholders have lessened the likelihood of a
bankruptcy proceeding by agreeing that Gabrielle Studio will not engage in any
activities other than those related to the License Agreement, there can be no
assurance that a case under the Federal bankruptcy laws will not be commenced
by or against Gabrielle Studio in the future. If such a case were to be
commenced, the trustee in the bankruptcy case or Gabrielle Studio, as debtor-
in-possession, could reject the License Agreement. In such event, the Company
would lose its right to use the Licensed Marks, which would have a material
adverse effect on the Company. See "Reorganization" and "Certain Relationships
and Related Transactions--License Agreement for Principal Trademarks."
Upon the closing of the Offering, Mr. Weiss will grant to the Company an
exclusive, royalty-free, worldwide license for the use of the designs for the
bottles in which the Beauty Division products currently are packaged and a non-
exclusive, royalty-free, worldwide license for use of the utility patents for
such bottles. The grant of this license does not provide for sublicenses to
independent third parties. Additionally, this license agreement may be
terminated by licensor for material breaches of the agreement which remain
uncured for a period of 180 days after notice. The termination of this license
agreement could have a material adverse effect on the Company. See "Certain
Relationships and Related Transactions--License Agreement for Perfume Bottles."
The Company devotes substantial resources to the registration, maintenance,
and protection of its intellectual property rights (including the Licensed
Marks). There can be no assurance that the actions taken by the Company to
establish and protect its trademarks, including the Licensed Marks, and other
proprietary rights will prevent imitation of its products or infringement of
its intellectual property rights by others, or prevent the loss of revenue or
other damages caused thereby. As a result of the Company offering new products,
utilizing new trademarks, and selling its products in foreign countries, the
Company is in the process of expanding its intellectual property rights. There
can be no assurance that such efforts will be successful or that others will
not resist such efforts or seek to block sales of the Company's products as
violative of their trademark and proprietary rights. In addition, the laws of
certain foreign countries do not protect proprietary rights to the same extent
as do the laws of the United States. See "Business--Trademarks."
13
<PAGE>
FASHION AND APPAREL INDUSTRY RISKS
The Company believes that its success depends in substantial part on its
ability to originate and define fashion trends as well as to anticipate and
react to changing consumer demands in a timely manner. There can be no
assurance that the Company will continue to be successful in this regard. The
Company attempts to reduce the risks of changing fashion trends and product
acceptance by contracting for the production of the bulk of its apparel
products only after receiving a significant portion of the anticipated orders
for such products. Nevertheless, if the Company misjudges the market for its
collections, it may be faced with a significant amount of unused fabrics and
yarns, which could have a material adverse effect on the Company.
The apparel industry is cyclical. Purchases of apparel and related
merchandise tend to decline during recessionary periods and also may decline
at other times. The increase in the Company's sales in each of 1993, 1994, and
1995 was in contrast to general apparel industry trends and the difficult
retail environment. There can be no assurance that the Company will be able to
maintain its historical rate of growth in revenues and earnings, or remain
profitable, particularly if the retail environment remains stagnant or
declines. Further, a recession in the general economy or uncertainties
regarding future economic prospects could affect consumer spending habits and
have an adverse effect on the Company's results of operations.
Competition is strong in the segments of the fashion industry in which the
Company operates. The Company competes with numerous designers and
manufacturers of apparel and accessory products, domestic and foreign, none of
which accounts for a significant percentage of total industry sales, but some
of which are significantly larger and have substantially greater resources
than the Company. In addition, with substantial financial backing, talented
designers can become competitors within several years of establishing a new
label. The Company's business depends, in part, on its ability to shape and
stimulate consumer tastes and demands by producing innovative, attractive, and
exciting fashion products, as well its ability to remain competitive in the
areas of design and quality. See "Business--Products" and "--Competition."
CHANGES IN THE RETAIL INDUSTRY
The retail industry periodically has experienced consolidation and other
ownership changes. In addition, some of the Company's customers have operated
under the protection of the federal bankruptcy laws. In January 1996, Barneys,
Inc. and Barneys America, Inc. (together, "Barneys") and certain affiliated
entities filed for protection under the Federal bankruptcy laws. Barneys
accounted for 2.3% of the Company's gross revenues during 1995, and the
Company estimates that its maximum uninsured loss as a result of Barneys'
bankruptcy will be approximately $2.0 million, which amount has been reserved
for at December 31, 1995. In the future, other retailers in the United States
and in foreign markets may consolidate, undergo restructurings or
reorganizations, or realign their affiliations, any of which could decrease
the number of stores that carry the Company's products or increase the
ownership concentration within the retail industry. While such changes in the
retail industry to date have not had a material adverse effect on the
Company's business or financial condition, there can be no assurance as to the
future effect of any such changes. See "Business--Management Information
Systems; Inventory and Credit Control."
RISKS OF GROWTH STRATEGIES
As part of the Company's growth strategy, the Company plans to increase
sales by increasing the number of domestic doors through which its more
recently-introduced products will be sold and by further increasing the number
of international doors through which its products are sold. The Company also
plans to grow its sales through distribution to free-standing International
Retail Stores and is considering a strategy for the opening of full-price,
free-standing retail stores in select locations in the United States. There
can be no assurance that these strategies will be successful or that the
Company's overall net revenues will increase as a result of an increase in the
number of its doors or as a result of sales to full-price, free-standing
retail stores. See "Business--Customers" and "--International Business."
In addition, the Company's plan has been and continues to be to segment and
extend its existing collections, as well as to increase its customer base by
adding new luxury products in lower price categories than its apparel
14
<PAGE>
products, such as beauty products and accessories. There can be no assurance
that certain of the Company's collections or any new products or collections
that it may add in the future will achieve the same degree of success as that
achieved by the Donna Karan New York(R) collections of men's and women's
apparel and by the DKNY(R) collections of men's and women's apparel, or that
such collections or products will be profitable. The introduction of new
collections and products generally is characterized by relatively high start-
up costs, as well as production, distribution, and marketing inefficiencies
associated with the initial limited distribution of such collections and
products. Further, the introduction of new products at lower prices may dilute
the Company's brand image, and as a result, may lower the appeal of the
Company's existing products and collections. There can be no assurance that
any collection or product which the Company has or may introduce will achieve
sales levels sufficient to enable it to generate profits or positive cash
flow. Expansion of the Company's operations or of its collections or products
also could require capital beyond that provided by the Offering and the
Company's credit facility. There can be no assurance that such capital will be
available to the Company, or, if available, that it will be available on terms
the Company considers reasonable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company continually evaluates the markets for its products and whether
it would be more advantageous to the Company to license, joint venture, or
otherwise dispose of certain of its product lines. For example, although the
Company initially contracted for the manufacture of and distributed hosiery as
part of its Donna Karan New York(R) Collection for women, the Company
determined for business and financial considerations that a license of such
hosiery business would be more appropriate. Accordingly, the Company entered
into a license agreement with Hanes Hosiery, a division of Sara Lee
Corporation, which currently provides for the manufacture and worldwide
distribution of hosiery bearing certain of the Licensed Marks. See "Business--
Licensed Products." However if the Company determines to license, joint
venture, or otherwise dispose of any of such product lines, there can be no
assurance that the Company will be able to do so on commercially reasonable
terms or at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON CERTAIN CUSTOMERS AND LICENSEES
Certain of the Company's customers, including some under common ownership,
have accounted for significant portions of the Company's gross revenues.
During 1995, Bloomingdale's, Macy's, and affiliated stores owned by Federated
Department Stores together accounted for approximately 12.3% of the Company's
gross revenues; Saks Fifth Avenue stores accounted for approximately 9.8% of
the Company's gross revenues; Neiman Marcus stores and Bergdorf Goodman
stores, owned by The Neiman Marcus Group, Inc., together accounted for
approximately 7.8% of the Company's gross revenues; and Nordstrom stores
accounted for approximately 7.1% of the Company's gross revenues. Sales to
entities affiliated with HPL, including Donna Karan Japan, the Company's
distributor in Japan in which the Company has a 30% equity interest, and
certain free-standing International Retail Stores, accounted for approximately
11.1% of the Company's gross revenues for 1995. See "Business--Customers" and
"--International Business." The Company's 10 largest customers accounted for
approximately 60.8% of the Company's gross revenues during 1995. A decision by
the controlling owner of a group of stores or any substantial customer,
whether motivated by fashion concerns, financial difficulties, or otherwise,
to decrease the amount of merchandise purchased from the Company or to cease
carrying the Company's products could materially adversely affect the Company.
FOREIGN OPERATIONS AND SOURCING; IMPORT RESTRICTIONS
During 1995, approximately 46.6% of the Company's direct purchases of raw
materials, labor and finished goods for its apparel, accessories, shoes, and
beauty products were produced in Hong Kong, Taiwan, South Korea, and other
Asian countries; approximately 28.1% were produced in the United States;
approximately 22.9% were produced in Europe; and approximately 2.4% were
produced elsewhere, all through arrangements with independent contractors. In
addition, the Company has been increasing its international sales and, in
1995, approximately 33.9% of the Company's net revenues (excluding net
revenues generated from outlet stores and licensing) were to customers in
international markets. As a result, the Company's operations may be affected
adversely by political instability resulting in the disruption of trade from
the countries in which the Company's
15
<PAGE>
contractors, suppliers, or customers are located, the imposition of additional
regulations relating to imports, the imposition of additional duties, taxes,
and other charges on imports, significant fluctuations of the value of the
dollar against foreign currencies, or restrictions on the transfer of funds.
The Company currently hedges its exposure to certain foreign currency
fluctuations. The inability of a contractor to ship orders of the Company's
products in a timely manner could cause the Company to miss the delivery date
requirements of its customers for those items, which could result in
cancellation of orders, refusal to accept deliveries, or a reduction in sales
prices. Further, since the Company is unable to return merchandise to its
suppliers, it could be faced with a significant amount of unsold merchandise,
which could have a material adverse effect on the Company. See "Business--
Sourcing and Product Development."
Sovereignty over Hong Kong is scheduled to be transferred from the United
Kingdom to The People's Republic of China effective July 1, 1997. If the
business climate in Hong Kong were to experience an adverse change as a result
of the transfer, the Company believes it could relocate its production and
sourcing facilities outside Hong Kong and replace the merchandise currently
produced in Hong Kong with merchandise produced elsewhere without a material
adverse effect on the Company. Nevertheless, there can be no assurance that
the Company would be able to do so.
The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and a number of foreign
countries, including Taiwan, South Korea, and Hong Kong. These agreements,
which have been negotiated bilaterally either under the framework established
by the Arrangement Regarding International Trade in Textiles, known as the
Multifiber Agreement, and other applicable statutes, impose quotas on the
amounts and types of merchandise which may be imported into the United States
from these countries. These agreements also allow the United States to impose
restraints at any time on the importation of categories of merchandise that,
under the terms of the agreements, are not currently subject to specified
limits. The Company's imported products are also subject to United States
customs duties which comprise a material portion of the cost of the
merchandise. A substantial increase in customs duties could have an adverse
effect on the Company's operating results. The United States and the countries
in which the Company's products are produced or sold may, from time to time,
impose new quotas, duties, tariffs, or other restrictions, or adversely adjust
prevailing quota, duty, or tariff levels, any of which could have a material
adverse effect on the Company.
CONFLICTS OF INTEREST
Ms. Karan, Mr. Weiss, and the KW Trusts are the sole shareholders of
Gabrielle Studio. The Company will license from Gabrielle Studio the right to
use and sublicense the Licensed Marks pursuant to the License Agreement. In
connection with the License Agreement, the Company will make a one-time
payment to Gabrielle Studio of approximately $5.0 million. The Company will
also pay an annual royalty to Gabrielle Studio based on the Company's net
sales (as defined in the License Agreement). In addition, Mr. Weiss is the
owner of the designs of the bottles in which the Beauty Division products
currently are packaged. Upon the closing of the Offering, Mr. Weiss will grant
to the Company an exclusive, royalty-free, worldwide license for the use of
the designs for the bottles and a non-exclusive, royalty-free, worldwide
license for use of the utility patents for the bottles. Mr. Weiss will receive
approximately $400,000, representing his out-of-pocket costs incurred in the
development of the bottles and the issuance of the patents thereon, upon the
grant of these licenses to the Company. Such expenses are comprised
substantially of outside legal fees incurred in connection with the
registration and maintenance of such patents around the world.
Ms. Karan is the Company's Chairman of the Board of Directors, Chief
Executive Officer, and Chief Designer. In addition, upon completion of the
Offering, Ms. Karan, Mr. Weiss, the KW Trusts and Gabrielle Studio, considered
as a group (the "Karan/Weiss Group"), will beneficially own in the aggregate
approximately 24.7% of the outstanding Common Stock, assuming no exercise of
the Underwriters' over-allotment option. As a result of Ms. Karan's and Mr.
Weiss' interests in Gabrielle Studio (the Licensor under the License
Agreement), their positions at the Company, and their ownership of the
Company's Common Stock, various conflicts of interest may arise upon
completion of the Offering. The Bylaws, however, provide that Donna Karan and
Stephan Weiss shall not participate in any vote of the Board of Directors
regarding any transaction by the Company with Gabrielle Studio, including
transactions related to the License Agreement. See "Certain Relationships and
Related Transactions."
16
<PAGE>
MATERIAL BENEFITS TO PRINCIPAL STOCKHOLDERS AND KEY PERSONNEL
The Company intends to use the net proceeds of the Offering as follows: (i)
to pay approximately $58.0 million to Mr. Tomio Taki, Mr. Frank R. Mori,
Takihyo Inc., and certain affiliates of Messrs. Taki and Mori (collectively,
the "Takihyo Group"), and approximately $58.0 million to Ms. Karan, Mr. Weiss,
and the KW Trusts, in satisfaction of the Distribution Notes previously issued
(including accrued interest thereon), representing cumulative undistributed
taxable income on which taxes previously have been paid; (ii) to pay
approximately $80.0 million to the Company's lenders in satisfaction of the
term loans and the revolving line of credit under the Company's Credit
Agreement, which amount represents the estimated outstanding balance at June
10, 1996; (iii) to pay $5.0 million to the President of the Company
representing a one-time payment pursuant to his employment agreement; (iv) to
pay approximately $5.0 million to Gabrielle Studio, representing a one-time
payment made in connection with the License Agreement; and (v) for general
corporate purposes. In addition, as part of the Reorganization the Karan/Weiss
Group and the Takihyo Group will receive shares of Common Stock. In
consideration of the Company repaying amounts outstanding under the Credit
Agreement, the Company's lenders will release certain liens held by them on
the license agreement between Ms. Karan and Gabrielle Studio and the current
license agreement between Gabrielle Studio and the Company. Gabrielle Studio,
wholly-owned by Ms. Karan, Mr. Weiss, and the KW Trusts, will commence
receiving royalties after the closing of the Offering pursuant to the License
Agreement. See "Certain Relationships and Related Transactions--License
Agreement for Principal Trademarks" for the royalties to be received by
Gabrielle Studio. See also "Reorganization," "Use of Proceeds," and
"Capitalization."
CONTROL BY PRINCIPAL STOCKHOLDERS; CERTAIN ANTI-TAKEOVER PROVISIONS
Upon completion of the Offering, each of the Karan/Weiss Group and the
Takihyo Group will beneficially own, in the aggregate, approximately 24.7% of
the outstanding Common Stock, (23.0% if the Underwriters' over-allotment
option is exercised in full). As a result of the beneficial ownership of their
stock, the Karan/Weiss Group and the Takihyo Group will have sufficient voting
power to control the election of the entire Board of Directors of the Company
and, subject to their fiduciary duties, the operations and policies of the
Company. Pursuant to a stockholders agreement, the Takihyo Group will be
entitled to designate two members of the Board of Directors of the Company
until such time as the Takihyo Group sells any shares of Common Stock (other
than shares distributed to stockholders of Takihyo) and, thereafter, has the
right to designate one member of the Board of Directors, so long as the
Takihyo Group continues to own a certain percentage of Common Stock, and Ms.
Karan and Mr. Weiss will be entitled to designate one member of the Board of
Directors of the Company, in addition to themselves, until such time as the
Karan/Weiss Group owns less than 20% of the then outstanding Common Stock. The
Karan/Weiss Group on the one hand, and the Takihyo Group on the other hand,
have agreed to vote the shares of Common Stock owned by them for each other's
designees (and, in the case of the Takihyo Group, for Ms. Karan and Mr. Weiss)
as directors. See "Management--Board of Directors."
Each of the Karan/Weiss Group and the Takihyo Group may have the ability, by
virtue of their stock ownership, to prevent or cause a change in control of
the Company. Certain provisions of the Company's Restated Certificate of
Incorporation and material agreements, including the License Agreement with
Gabrielle Studio and the employment agreement with Ms. Karan, may be deemed to
have the effect of discouraging a third party from pursuing a non-negotiated
takeover of the Company and preventing certain changes in control of the
Company. In addition, the Company's 1996 Stock Incentive Plan and 1996 Non-
Employee Director Stock Option Plan provide for accelerated vesting of stock
options upon a "change in control" of the Company. See "Management--
Compensation Arrangements," "--Board of Directors," "--The 1996 Stock
Incentive Plan," "--The 1996 Non-Employee Director Stock Option Plan,"
"Certain Relationships and Related Transactions--License Agreement for
Principal Trademarks," and "Description of Capital Stock."
CHANGE IN ORGANIZATIONAL STRUCTURE; RESIGNATIONS OF MESSRS. TAKI AND MORI
Until completion of the Reorganization, the Company will continue to consist
of the DK Companies, a series of affiliated partnerships and corporations. The
policies of the DK Companies currently are determined by
17
<PAGE>
Ms. Karan and Mr. Weiss and Messrs. Taki and Mori, acting on behalf of their
affiliates. Ms. Karan, as chief executive officer of the DK Companies, and
other key management executives are responsible for the day-to-day
implementation of the DK Companies' strategies. Pursuant to the
Reorganization, the interests of Ms. Karan, Mr. Weiss, Mr. Taki, and Mr. Mori
(collectively, the "Principals") and their affiliates in the DK Companies will
be consolidated into the Company, and thereafter the Company's business will
be subject to the direction and control of the Board of Directors of the
Company. Immediately prior to the closing of the Offering, Messrs. Taki and
Mori will resign from the Board of Directors, upon the advice of counsel, to
avoid the appearance of a conflict of interest due to their associations with
the Company and Anne Klein & Company, an affiliate of Takihyo Inc. (with which
Messrs. Taki and Mori are affiliated). Pursuant to a stockholders agreement,
the Takihyo Group has the right to designate two members of the Board of
Directors until such time as the Takihyo Group sells any shares of Common
Stock (other than shares distributed to stockholders of Takihyo) and,
thereafter, has the right to designate one member of the Board of Directors,
so long as the Takihyo Group continues to own a certain percentage of Common
Stock. There can be no assurance that the change in organizational structure
or the resignation from the Board of Directors of Messrs. Taki and Mori will
not have a material adverse effect on the Company. See "Management--Board of
Directors."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock will be determined by
negotiation among the Company, the Principals, and the representatives of the
Underwriters (the "Representatives"). The Company's Common Stock has been
approved for listing on the New York Stock Exchange, subject to official
notice of issuance; however, there can be no assurance that an active trading
market will develop for the Common Stock or that the Common Stock will trade
in the public market at or above the initial public offering price. See
"Underwriters."
The stock market has from time to time experienced extreme price and volume
volatility. In addition, the market price of the Company's Common Stock, like
that of other apparel industry stocks, may be highly volatile due to certain
risks inherent in the apparel industry. Factors such as quarter-to-quarter
variations in the Company's revenues and earnings could cause the market price
of the Common Stock to fluctuate significantly. Further, due to the volatility
of the stock market and the prices of stocks of apparel companies generally,
the price of the Common Stock could fluctuate for reasons unrelated to the
operating performance of the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 21,487,934 shares of
Common Stock outstanding (23,100,434 shares if the Underwriters' over-
allotment option is exercised in full). The 10,750,000 shares sold in this
Offering will be freely tradeable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), except
for any shares held by an "affiliate" of the Company. The 10,612,934 shares
owned by the Karan/Weiss Group and the Takihyo Group are deemed to be
"restricted securities," as that term is defined in Rule 144 under the
Securities Act ("Rule 144"), in that such shares were issued in private
transactions not involving a public offering. None of such shares will be
eligible for sale under Rule 144 prior to the second anniversary of the
closing of the Offering. For a description of the requirements of Rule 144,
see "Shares Eligible for Future Sale." The Company intends to file Forms S-8
with respect to the shares under its 1996 Stock Incentive Plan and its 1996
Non-Employee Director Stock Option Plan, including the 125,000 shares of
Common Stock which the Company expects to award to certain employees pursuant
to its 1996 Stock Incentive Plan.
Upon completion of the Offering, the Karan/Weiss Group and the Takihyo Group
will beneficially own an aggregate of 10,612,934 shares of restricted Common
Stock. All existing stockholders of the Company have entered into lock-up
agreements with the Representatives wherein they have agreed not to sell any
of their shares for a period of 180 days after the date of the Prospectus
without the prior written consent of Morgan Stanley & Co. Incorporated on
behalf of the Underwriters. See "Underwriters."
18
<PAGE>
The Company has granted to members of the Takihyo Group (other than the
Intermediate Entities) the right to demand, on an aggregate of two occasions,
registration under the Securities Act, at the Company's expense, of all or a
portion of the shares which they will beneficially own upon completion of the
Offering, subject to a minimum demand of 5% of the then outstanding shares of
Common Stock. The first such demand cannot be made earlier than six months
after the effective date of the Offering (the "Effective Date") and the second
such demand cannot be made earlier than 12 months after the effective date of
any subsequent offering. In addition, the Takihyo Group, and in certain
circumstances the Karan/Weiss Group, will have the right to join ("piggyback")
in any registration statement filed by the Company with respect to an offering
of any of its securities by it or on behalf of any of its securityholders. If
a member of the Takihyo Group makes a demand for the registration of its
shares at any time prior to the first anniversary of the Effective Date, the
Company may not include in such offering any of the Company's shares or any
shares owned by any other securityholder of the Company if, in the good faith
judgment of the managing underwriter of such offering, the inclusion of such
shares would adversely affect the success of such offering or interfere with
the successful marketing of, or require the exclusion of any portion of, the
shares to be registered pursuant to the Takihyo Group's demand. If a demand is
made by a member of the Takihyo Group more than one year from the Effective
Date, the Company may elect to proceed with an offering of the Company's own
shares, in which event each member of the Takihyo Group, together with the
members of the Karan/Weiss Group, may elect to include certain of their shares
in the Company's offering, subject to certain limitations, and such offering
will not be deemed to have been made as a result of a demand by the Takihyo
Group. If the Company does not so elect, the members of the Karan/Weiss Group
may elect to include certain of their shares in the Takihyo Group's offering,
subject to certain limitations. If, more than one year after the Effective
Date, a member of the Karan/Weiss Group requests that the Company register
shares owned by the Karan/Weiss Group, the Company may (but is not obligated
to) elect to distribute its own shares to the public, in which event the
members of the Karan/Weiss Group, together with the members of the Takihyo
Group, may elect to include certain of their shares in the Company's offering,
subject to certain limitations. If the Company does not so elect, the Company
may (but is not obligated to) permit the members of the Karan/Weiss Group to
proceed with an offering of certain of their shares in which event the members
of the Takihyo Group may elect to include certain of their shares in the
offering of the members of the Karan/Weiss Group, subject to certain
limitations. See "Certain Relationships and Related Transactions--Registration
Rights Agreement" and "Underwriters."
DIVIDENDS
The Company anticipates that all of its earnings in the foreseeable future
will be retained to finance the continued growth and expansion of its business
and has no current intention to pay cash dividends. The Company's existing
credit agreement limits, and it is expected that the credit facility which the
Company will enter into shortly following the consummation of the Offering
will limit, the amount of cash dividends the Company may pay to its
stockholders. See "Dividend Policy."
DILUTION
Purchasers of Common Stock in the Offering will experience immediate
dilution of $12.41 per share in the net tangible book value of the Common
Stock from the public offering price. See "Dilution."
19
<PAGE>
REORGANIZATION
In December 1984, Ms. Karan, Mr. Weiss, Mr. Taki, Mr. Mori, and Takihyo Inc.
formed The Donna Karan Company, a New York general partnership, to design,
contract for the production of, and distribute the Donna Karan New York(R)
Collection for women. Since that time, Ms. Karan, Mr. Weiss, Mr. Taki, Mr.
Mori, and Takihyo Inc. have formed additional partnerships and corporations to
engage in various aspects of the Company's business, each of which is
ultimately owned one-half by Ms. Karan, Mr. Weiss, and the KW Trusts and one-
half by members of the Takihyo Group. Such partnerships and corporations are
referred to herein as the "DK Companies." Donna Karan International Inc., the
issuer of the Common Stock offered hereby, was formed on April 10, 1996 to
acquire and continue the various businesses conducted by the DK Companies.
Prior to the consummation of the Reorganization, Donna Karan International
Inc. conducted no business and held no assets or liabilities.
Prior to the consummation of the Reorganization, Donna Karan International
Inc. had authorized and outstanding only a nominal number of shares of common
stock, which consisted of nine shares of Class A Common Stock held by Ms.
Karan, nine shares of Class A Common Stock held by Mr. Weiss, and one share of
Class B Common Stock held by Mr. Taki and one share of Class B Common Stock
held by Mr. Mori. On and after the closing date of the Offering, in addition
to the Class A Common Stock and Class B Common Stock, the Company will also
have 35,000,000 shares of Common Stock authorized. Unless otherwise indicated,
the information in this Prospectus relating to ownership of Common Stock by
the Karan/Weiss Group and the Takihyo Group after the Offering excludes such
group's beneficial ownership of 18 shares of Class A Common Stock and two
shares of Class B Common Stock, respectively, which will remain outstanding
after the Offering. See "Description of Capital Stock."
Simultaneously with the closing of the Offering, Ms. Karan, Mr. Weiss, and
the KW Trusts will contribute to Donna Karan International Inc. all the
outstanding shares of the various corporations which hold their interests in
the DK Companies, except for their shares in Gabrielle Studio. Gabrielle
Studio will contribute to the Company its partnership interest in the Donna
Karan Studio, one of the DK Companies, representing the balance of the
Karan/Weiss Group's interests in the DK Companies. Messrs. Taki and Mori and
Mr. Mori's children (who own a small portion of indirect equity interests in
one of the Intermediate Entities attributed to Mr. Mori herein) will
contribute to Donna Karan International Inc. all the outstanding shares of the
various corporations which hold their interests in the DK Companies, and
Takihyo Inc. will contribute to Donna Karan International Inc. the partnership
interests representing the balance of the Takihyo Group's interest in the DK
Companies. The foregoing contributions of stock and partnership interests will
be made pursuant to the terms of the contribution agreement (the "Contribution
Agreement") among the Company, Ms. Karan, Mr. Weiss, the KW Trusts, Mr. Taki,
Mr. Mori, Mr. Mori's children, Takihyo Inc., and Gabrielle Studio, and such
contributions are referred to collectively as the "Reorganization." In
addition, upon the closing of the Offering, Gabrielle Studio and the Company
will enter into the License Agreement. From and after the closing date of the
Offering, all assets currently owned by the DK Companies and all businesses
conducted by the DK Companies will be owned and conducted by the Company. See
"Certain Relationships and Related Transactions."
The consideration to be received by the Karan/Weiss Group and the Takihyo
Group pursuant to the Contribution Agreement was determined by negotiation
among the Principals. Because all the interests of the Karan/Weiss Group and
the Takihyo Group in the DK Companies are held by various partnerships and
corporations (the "Intermediate Entities") ultimately owned by Ms. Karan, Mr.
Weiss, the KW Trusts, Gabrielle Studio (which in turn, is owned by Ms. Karan,
Mr. Weiss, and the KW Trusts), and the members of the Takihyo Group, all
distributions by the DK Companies are made to the Intermediate Entities which,
in turn, make payments and distributions to their respective owners. For
purposes of the discussion herein, the Intermediate Entities will be
disregarded and all distributions and payments will be attributed to the
members of the Karan/Weiss Group and the Takihyo Group, as the case may be.
As consideration for the contribution of their interests in the DK
Companies, Ms. Karan, Mr. Weiss, the KW Trusts, and Gabrielle Studio will
receive an aggregate of 5,306,467 shares of Common Stock. References in this
Prospectus to the shares of Common Stock beneficially owned by Ms. Karan, Mr.
Weiss, and the KW Trusts are deemed to include the shares held by Gabrielle
Studio.
20
<PAGE>
As consideration for the contribution of their interests in the DK
Companies, members of the Takihyo Group will receive an aggregate of 5,306,467
shares of Common Stock. All consideration received by members of the Takihyo
Group will be allocated 60.0% to Takihyo Inc., 20.0% to Mr. Taki, and 20.0% to
Mr. Mori. References in this Prospectus to the shares of Common Stock
beneficially owned by Mr. Mori are deemed to include the shares held by his
children.
The policies and directions of the Company currently are determined in
accordance with the 1984 partnership agreement of The Donna Karan Company.
Pursuant thereto, the Principals, acting on behalf of their respective
affiliates, agree upon an annual business plan and budget for the DK Companies
and meet periodically to review and monitor the DK Companies' performance. Ms.
Karan, as chief executive officer of the DK Companies, is responsible for the
implementation of the agreed upon business plan. Any determination to amend
the business plan and budget requires the unanimous consent of the Principals.
Upon the consummation of the Reorganization, the Company's policies and
direction will be determined by the Board of Directors of the Company.
The closing of the Offering is conditioned upon, among other things, the
consummation of the Reorganization. The approval of the banks under the Credit
Agreement to the Reorganization and the Offering is conditioned upon, among
other things, the Company's receipt of a minimum amount of net proceeds and
certain specified uses of proceeds.
21
<PAGE>
The following chart illustrates the organizational structure of the Company
before the Reorganization.
[INSERT CHARTS]
22
<PAGE>
The following chart illustrates the organizational structure of the Company
after the Reorganization.
[INSERT CHARTS]
23
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering, assuming
an initial public offering price of $21.50 per share, are estimated to be
approximately $213 million (approximately $246 million if the Underwriters'
over-allotment option is exercised in full) after deducting underwriting
discounts and commissions and estimated offering expenses. The Company intends
to use such proceeds as follows: (i) to pay approximately $116.0 million to
members of the Takihyo Group and of the Karan/Weiss Group in satisfaction of
the Distribution Notes previously issued (including accrued interest thereon),
representing cumulative undistributed taxable income on which taxes previously
have been paid; (ii) to pay approximately $80.0 million to the Company's
lenders in satisfaction of the term loans and the revolving line of credit
under the Company's Credit Agreement, which amount represents the outstanding
balance as of June 10, 1996; (iii) to pay $5.0 million to Stephen L. Ruzow,
the President of the Company, representing a one-time payment pursuant to his
employment agreement; (iv) to pay approximately $5.0 million to Gabrielle
Studio, representing a one-time payment made in connection with the License
Agreement (which by its terms will amend previously existing licensing
arrangements that in certain circumstances, including the Offering, could
provide for higher royalty payments to Gabrielle Studio than those under the
License Agreement); and (v) for general corporate purposes. The Company's
credit facility matures on December 31, 1998. At March 31, 1996, of the
Company's term loans, $23.1 million bears interest at 2.75% above the London
Interbank Offered Rate ("LIBOR") (8.063%), and $20.0 million bears interest at
3.25% above LIBOR (8.563%). Amounts outstanding under the Company's revolving
line of credit bear interest at a rate of 1.5% over the lead bank's prime rate
(9.75%). The Company's average weighted interest cost was 8.9% at March 31,
1996. This indebtedness was used for working capital and capital expenditures.
See "Capitalization--Distributions" for a description of the terms of the
Distribution Notes, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a description of the terms of the
Company's Credit Agreement, "Management--Compensation Arrangements" for a
description of Mr. Ruzow's employment agreement, and "Certain Relationships
and Related Transactions--License Agreement for Principal Trademarks" for a
description of the License Agreement with Gabrielle Studio. See also "Pro
Forma Combined Financial Information."
DIVIDEND POLICY
The Company anticipates that all of its earnings in the foreseeable future
will be retained to finance the continued growth and expansion of its business
and it has no current intention to pay cash dividends. The Company's future
dividend policy will depend on the Company's earnings, capital requirements,
financial condition, requirements of the financing agreements to which the
Company is a party, and other factors considered relevant by the Board of
Directors. The Company's existing credit agreement limits, and it is expected
that the credit facility which the Company will enter into shortly following
the consummation of the Offering will limit, the amount of cash dividends
which the Company may pay to its stockholders. For certain information
regarding distributions made by the Company prior to the date hereof, see
"Reorganization," "Capitalization," and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
24
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at
March 31, 1996, (ii) the pro forma capitalization of the Company as of such
date, as adjusted to give effect to the Reorganization, the issuance of the
Distribution Notes, the recording of a deferred tax assets concurrent with
becoming subject to Federal and additional state and local income taxes, and
(iii) the sale of the shares of Common Stock offered by the Company hereby at
an assumed initial public offering price of $21.50 per share, the application
of the estimated net proceeds received by the Company therefrom as described
under "Use of Proceeds," the non-recurring pre-tax charge of approximately
$20.3 million (approximately $11.6 million on an after-tax basis) which the
Company expects to accrue immediately following the closing of the Offering,
relating to (a) the anticipated consolidation of the Company's warehouse
facilities ($5.0 million), (b) a one-time payment to the President of the
Company pursuant to his employment agreement ($5.0 million), (c) a one-time
payment to Gabrielle Studio in connection with the License Agreement
(approximately $5.0 million), (d) the write-off of deferred financing costs
related to the Company's Credit Agreement ($2.7 million) and (e) a one-time
charge of approximately $2.7 million in connection with the award of 125,000
shares of Common Stock to certain employees pursuant to the Company's 1996
Stock Incentive Plan. The table should be read in conjunction with the
Predecessor Combined Financial Statements of the Company and the related notes
thereto included elsewhere in this Prospectus. See "Pro Forma Combined
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------
PRO FORMA,
AS ADJUSTED(3)
ACTUAL(L) PRO FORMA(2) (UNAUDITED)
--------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current debt:
Current portion of long-term debt...... $ 7,759 $ 7,759 $ 259
Distribution Notes..................... -- 114,484 --
-------- -------- --------
Total current debt................... $ 7,759 $122,243 $ 259
======== ======== ========
Long-term debt........................... $ 64,965 $ 64,965 $ 255
Stockholders' equity and partners'
capital:
Preferred stock, $.01 par value;
1,000,000 shares authorized;
none issued and outstanding........... -- -- --
Common stock, $.01 par value;
35,000,000 shares authorized;
21,487,934 shares outstanding
proforma, as adjusted(4)(5)........... -- 106 214
Common stock of Intermediate Entities.. 1,146 -- --
Additional paid-in capital............. -- (7,257) 195,620
Retained earnings and partners' capital
(deficit)............................. 90,687 -- --
Cumulative translation adjustment...... (42) (42) (42)
-------- -------- --------
Total stockholders' equity(6)........ 91,791 (7,193) 195,792
-------- -------- --------
Total capitalization................. $156,756 $ 57,772 $196,047
======== ======== ========
</TABLE>
- --------
(1) Reflects the actual short-term and long-term indebtedness and
capitalization of the Company without giving effect to the Reorganization
or the consummation of the Offering. Prior to the Reorganization, the
Company consisted of a related group of S corporations and partnerships.
See "Reorganization."
(2) Reflects the pro forma short-term and long-term indebtedness and
capitalization of the Company after giving effect to the issuance of the
Distribution Notes and to the Reorganization and the recording of a
deferred tax asset concurrent with becoming subject to Federal and
additional state and local income taxes.
(3) Reflects the pro forma short-term and long-term indebtedness and
capitalization of the Company as adjusted for the Reorganization, the
issuance of the Distribution Notes, the sale of the shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $21.50 per share and with no exercise of the Underwriters' over-
allotment option, the application of the estimated net proceeds as
described under "Use of Proceeds," and the non-recurring charge and
deferred tax asset described above.
25
<PAGE>
Based on the outstanding balance as of June 10, 1996, the Company
anticipates using approximately $80.0 million of the proceeds to repay
short-term and long-term indebtedness. Shortly following the Offering, the
Company expects to enter into a new credit facility, which the Company
anticipates will have terms more favorable to the Company than those of its
existing credit facility.
(4) Includes 125,000 shares of Common Stock which the Company expects to award
to certain employees pursuant to the Company's 1996 Stock Incentive Plan
on the effective date of the Offering. Excludes an aggregate of 1,475,000
shares of Common Stock reserved for issuance under the Company's 1996
Stock Incentive Plan. The Company expects to grant options for shares
of Common Stock to certain employees of the Company at an exercise price
equal to the initial public offering price on the effective date of the
Offering. Also excludes an aggregate of 100,000 shares of Common Stock
reserved for issuance under the Company's 1996 Non-Employee Director Stock
Option Plan. See "Management--1996 Stock Incentive Plan" and "--1996 Non-
Employee Director Stock Option Plan." Excludes 18 shares of Class A Common
Stock and two shares of Class B Common Stock held by members of the
Karan/Weiss Group and members of the Takihyo Group, respectively, which
will be outstanding after the Offering. See "Reorganization" and
"Description of Capital Stock."
(5) Excludes an aggregate of 1,612,500 shares of Common Stock that may be sold
by the Company pursuant to the Underwriters' over-allotment option.
(6) Actual amounts include partners' capital.
DISTRIBUTIONS
Prior to the closing date of the Offering, the interests of the Principals
in the DK Companies were held through the Intermediate Entities. Each of the
Intermediate Entities that is a corporation has been 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 Principals and their
affiliates have been obligated to pay Federal and certain state income taxes
on their allocable portion of the income of the DK Companies. The DK Companies
have made various distributions to the Intermediate Entities which, in turn,
have made various payments or distributions to the Principals and their
affiliates which have enabled the Principals and their affiliates to pay their
income taxes on their allocable portions of the income of the DK Companies.
The DK Companies will continue to make distributions to the Intermediate
Entities, which will make payments and distributions to provide the Principals
and their affiliates with funds to pay income taxes on the taxable income of
the DK Companies through the closing date of the Offering.
The Company and certain of the Intermediate Entities issued to Takihyo Inc.
and the Principals or their affiliates promissory notes (the "Distribution
Notes") on April 16, 1996 in the aggregate principal amount of $114.5 million,
which amount was divided equally between certain members of the Takihyo Group,
on the one hand, and Ms. Karan, Mr. Weiss, and the KW Trusts, on the other
hand. The aggregate principal amount of the Distribution Notes is an estimate
of the cumulative undistributed taxable income (on which taxes previously have
been paid) of the DK Companies since their inception through the anticipated
closing date of the Offering (as computed for Federal income tax purposes),
net of approximately $1.1 million representing an estimate of such cash
distributions as may be made from April 16, 1996 through the anticipated
closing date of the Offering. The Distribution Notes bear interest at the rate
of 8% per annum. No adjustment will be made if the amount of the Distribution
Notes is greater or less than the cumulative undistributed taxable income of
the DK Companies (on which taxes previously have been paid) through the
closing date of the Offering. By their terms, the Distribution Notes are due
and payable on April 9, 2003 (the "Maturity Date"), and cannot be prepaid in
whole or in part prior to the Maturity Date without the prior written consent
of the lenders under the Company's existing credit facility. Although the
lenders have consented to the prepayment of the Distribution Notes on the
closing date of the Offering using proceeds of the Offering, such consent is
conditioned upon, among other things, the Company's receipt of a minimum
amount of net proceeds and certain specified uses of proceeds. See "Use of
Proceeds."
26
<PAGE>
DILUTION
The net tangible book value of the Company at March 31, 1996 was
approximately $88.8 million. Although only a nominal number of shares in Donna
Karan International Inc. will be outstanding prior to the completion of the
Reorganization, for purposes of the computation of dilution, the interests of
Ms. Karan, Mr. Weiss, the KW Trusts, and the Takihyo Group in the DK Companies
prior to the Reorganization and consummation of the Offering have been deemed
to be equivalent to 10,612,934 shares of Common Stock. Assuming such number of
shares were outstanding as of March 31, 1996, the net tangible book value of
the Company as of such date would have been approximately $8.37 per share.
After giving effect to the issuance of the Distribution Notes and the
recording of a deferred tax asset concurrent with becoming subject to Federal
and additional state and local taxes, the net tangible book value deficit of
the Company at March 31, 1996 would have been ($10.2 million). Net tangible
book value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of Common Stock then outstanding.
Without taking into account any changes in net tangible book value
attributable to operations after March 31, 1996, after giving effect to the
Reorganization, the issuance of the Distribution Notes, the sale of the Common
Stock offered hereby at an assumed initial public offering price of $21.50 per
share, the application of the estimated net proceeds as described under "Use
of Proceeds," the non-recurring pre-tax charge of approximately $20.3 million
(approximately $11.6 million on an after-tax basis) which the Company expects
to accrue immediately following the closing of the Offering, and a deferred
tax asset of approximately $15.5 million, net of certain state and local
deferred tax assets recorded on a historical basis, which the Company will
record concurrently with becoming subject to Federal and additional state and
local income taxes, the pro forma net tangible book value as adjusted at March
31, 1996 would have been $195.4 million, or $9.09 per share of Common Stock.
This represents an immediate increase in pro forma net tangible book value as
adjusted of $10.05 per share of Common Stock to existing stockholders and an
immediate dilution of $12.41 per share of Common Stock to purchasers of Common
Stock in the Offering. The following table illustrates such per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price............................ $21.50
Net tangible book value per share at March 31, 1996(1)......... $8.37
=====
Pro forma net tangible book value deficit per share at March
31, 1996, after giving effect to the issuance of the
Distribution Notes and the recording of a deferred tax asset.. (.96)
Increase in net tangible book value per share attributable to
completion of the Reorganization and the Offering............. 10.05
-----
Pro forma net tangible book value as adjusted per share after
giving effect to the Reorganization and the Offering(2)(3)(4)... 9.09
------
Dilution per share to purchasers in the Offering(5).............. $12.41
======
</TABLE>
- --------
(1) Net tangible book value per share at March 31, 1996 is determined by
dividing net tangible book value of the Company (tangible assets less
liabilities), by 10,612,934 shares. Prior to the completion of the
Offering, all the equity interests in the Company were ultimately owned
one-half by Ms. Karan, Mr. Weiss, and the KW Trusts and one-half by
members of the Takihyo Group. Upon completion of the Offering and the
consummation of the Reorganization, each of the Karan/Weiss Group and the
Takihyo Group will own beneficially 5,306,467 shares of Common Stock.
(2) Pro forma net tangible book value as adjusted per share is determined by
dividing net tangible book value of the Company assuming the
Reorganization had taken place on March 31, 1996, after giving effect to
the receipt of the estimated net proceeds of the Offering and the
application of such proceeds as described in "Use of Proceeds," by the
number of shares of Common Stock outstanding after giving effect to the
Offering.
(3) Reflects an aggregate of 21,487,934 shares of Common Stock that will be
outstanding as of the Offering, including 125,000 shares of Common Stock
which the Company expects to award to certain employees pursuant to the
Company's 1996 Stock Incentive Plan on the effective date of the Offering.
See "Management--1996 Stock Incentive Plan." Excludes an aggregate of
1,612,500 shares of Common Stock that may be sold by the Company pursuant
to the Underwriters' over-allotment option. Also excludes 18 shares of
Class A Common Stock and two shares of Class B Common Stock held by
members of the Karan/Weiss Group and members of the Takihyo Group,
respectively, which will be outstanding after the Offering. See
"Reorganization" and "Description of Capital Stock."
27
<PAGE>
(4) Excludes an aggregate of 1,475,000 shares of Common Stock reserved for
issuance under the Company's 1996 Stock Incentive Plan. The Company
expects to grant options for shares of Common Stock to certain
employees of the Company at an exercise price equal to the initial public
offering price on the effective date of the Offering. The exercise of such
options would not result in further dilution in book value to purchasers
in the Offering. Also excludes an aggregate of 100,000 shares of Common
Stock reserved for issuance under the Company's 1996 Non-Employee Director
Stock Option Plan. See "Management--1996 Stock Incentive Plan" and "--1996
Non-Employee Director Stock Option Plan."
(5) Dilution is determined by subtracting pro forma net tangible book value
per share assuming the Reorganization had taken place on March 31, 1996,
and after giving effect to the receipt of the net proceeds of the Offering
and the application of such proceeds as described in "Use of Proceeds,"
from the assumed initial public offering price paid by purchasers in the
Offering for a share of Common Stock.
The following table summarizes on a pro forma basis as of March 31, 1996 the
differences between the number of shares of Common Stock purchased from the
Company, the total consideration paid, and the average price per share paid by
the existing stockholders and by the purchasers of Common Stock in the
Offering at an assumed initial public offering price of $21.50 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ----------------------- PRICE
NUMBER(1) PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 10,737,934 50% $ 0(2) 0% $ 0.00
New investors............. 10,750,000 50% $231,125,000 100% $21.50
---------- --- ------------ ---
Total................. 21,487,934 100% $231,125,000 100%
========== === ============ ===
</TABLE>
- --------
(1) Includes 125,000 shares of Common Stock which the Company expects to award
to certain employees pursuant to the Company's 1996 Stock Incentive Plan
on the effective date of the Offering. Excludes 18 shares of Class A
Common Stock and two shares of Class B Common Stock held by members of the
Karan/Weiss Group and members of the Takihyo Group, respectively, which
will be outstanding after the Offering. See "Reorganization" and
"Description of Capital Stock."
(2) The cash consideration paid by the members of the Karan/Weiss Group and of
the Takihyo Group has been reduced by distributions previously made to the
members of the Karan/Weiss Group and of the Takihyo Group and certain
distributions to be received by the members of the Karan/Weiss Group and
of the Takihyo Group out of the net proceeds of the Offering. See "Use of
Proceeds."
28
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial 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. The unaudited pro forma combined balance sheet gives effect to the
issuance of the Distribution Notes. The unaudited pro forma combined balance
sheet, as adjusted, gives further effect to the Reorganization, the Offering
at an assumed initial public offering price of $21.50 per share, the
application of the estimated net proceeds received by the Company therefrom as
described under "Use of Proceeds," and certain other adjustments as if they
had occurred on March 31, 1996 and the recording of certain non-recurring
charges and assets as if such charges and assets had been recorded on March
31, 1996. See "Reorganization," "Use of Proceeds," "Capitalization," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable under the circumstances.
The unaudited pro forma combined financial information should be read in
conjunction with the Predecessor Combined Financial Statements of the Company
and related notes, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and other financial information included
elsewhere in this Prospectus. This pro forma combined financial information is
provided for informational purposes only and does not purport to be indicative
of the results which would have been obtained had the Reorganization, the
issuance of the Distribution Notes, the Offering, and the other adjustments
been completed on the dates indicated or which may be expected to occur in the
future.
29
<PAGE>
PRO FORMA COMBINED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31, 1995
------------------------------------
ACTUAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
-------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues............................ $510,126 ($5,521)(a) $ 504,605
Gross profit............................ 179,437 (6,814)(a) 159,817
(12,806)(b)
Selling, general, and administrative
expenses............................... 136,906 (4,828)(a) 129,761
(2,317)(c)
-------- ----------
Operating income........................ 42,531 30,056
Equity in earnings of affiliate......... 2,519 394 (a) 2,913
Interest expense........................ (7,650) 6,237 (d) (839)
574 (e)
Gain on sale of interests in affiliate.. 18,673 (18,673)(a) --
-------- ----------
Income before provision for income
taxes.................................. 56,073 32,130
Provision for income taxes.............. 2,398 11,307 (f) 13,705
-------- ----------
Net income.............................. $ 53,675 $ 18,425
======== ==========
Pro forma per share information(g)...... $ .88
==========
Number of common shares assumed
outstanding(g)......................... 16,584,708
==========
</TABLE>
- --------
(a) 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.
Accordingly, a gain of $18.7 million has been excluded, and 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 through March 31, 1995, the
date of the sale. These adjustments also include (i) a decrease of $5.5
million in net revenues, which reflects the difference between net
revenues from Donna Karan Japan to its customers and those net revenues of
the Company derived from Donna Karan Japan (as if Donna Karan Japan were a
customer of the Company), (ii) a decrease of $6.8 million in gross
profits, and (iii) a decrease of $4.8 million in selling, general, and
administrative expenses, 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 9 to Notes to Predecessor Combined
Financial Statements.
(b) Royalties of $12.8 million payable to Gabrielle Studio pursuant to the
License Agreement. See "Certain Relationships and Related Transactions--
License Agreement for Principal Trademarks."
(c) Decrease in aggregate compensation from $4.3 million to $2.0 million for
two of the Company's executives pursuant to their employment agreements.
See "Management--Compensation Arrangements."
(d) Reduction in interests costs of $6.2 million assuming the application of
up to $75.7 million (which amount represents the maximum amount
outstanding during the year) of the proceeds from the Offering to reduce
the actual outstanding indebtedness under the Credit Agreement. Shortly
following the Offering, the Company will enter into a new credit facility,
which the Company anticipates will have terms more favorable to the
Company than those of its existing credit facility. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(e) Reduction of $0.6 million in amortization of deferred financing costs,
which costs would have been written off in connection with repayment of
outstanding indebtedness under the Credit Agreement.
(f) Increase of $11.3 million for income taxes based upon pro forma pre-tax
income as if the Company had been subject to Federal and additional state
income taxes. See Note 13 to Notes to Predecessor Combined Financial
Statements.
(g) Pro forma per share information is based on 10,612,934 shares of Common
Stock outstanding prior to the Offering, increased by (i) the sale of
5,846,774 shares of Common Stock assuming an offering price of $21.50 per
share ($19.84, net of expenses), the proceeds of which would be necessary
to pay approximately $116.0 million in satisfaction of the Distribution
Notes, and (ii) 125,000 shares of Common Stock which the Company expects
to award to certain employees pursuant to the Company's 1996 Stock
Incentive Plan on the effective date of the Offering. The net income used
in the calculation of pro forma per share information excludes the
reduction of interest costs of $6.2 million noted in (d) above and the
reduction in amortization of deferred financing costs of $0.6 million
noted in (e) above, and the related tax effect of $2.9 million.
Supplementary pro forma per share information for the year ended December
31, 1995 is $.91 based on 10,612,934 shares of Common Stock outstanding
prior to the Offering, increased by (i) the sale of 5,846,774 shares of
Common Stock assuming an offering price of $21.50 per share ($19.84, net of
expenses), the proceeds of which would be necessary to pay approximately
$116.0 million in satisfaction of the Distribution Notes, (ii) the sale of
3,639,113 shares of Common Stock assuming an offering price of $21.50 per
share ($19.84, net of expenses), the proceeds of which would be necessary
to repay approximately $72.2 million, the amount outstanding under the
Company's Credit Agreement at March 31, 1996, and (iii) 125,000 shares of
Common Stock which the Company expects to award to certain employees
pursuant to the Company's 1996 Stock Incentive Plan on the effective date
of the Offering. The net income used in the calculation of supplementary
pro forma per share information is $18.4 million.
30
<PAGE>
PRO FORMA COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 1996
----------------------------------
ACTUAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
-------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues.............................. $159,585 $ 159,585
Gross profit.............................. 52,861 (4,162)(a) 48,699
Selling, general, and administrative ex-
penses................................... 39,411 (750)(b) 38,661
-------- ----------
Operating income.......................... 13,450 10,038
Equity in earnings of affiliate........... 988 988
Interest expense.......................... (2,047) 1,633 (c) (94)
320 (d)
-------- ----------
Income before provision for income taxes.. 12,391 10,932
Provision for income taxes................ 690 4,031 (e) 4,721
-------- ----------
Net income................................ $ 11,701 $ 6,211
======== ==========
Pro forma per share information(g)........ $.31
====
Number of common shares assumed
outstanding(g)........................... 16,584,708
==========
<CAPTION>
QUARTER ENDED APRIL 2, 1995
----------------------------------
ACTUAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
-------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues.............................. $120,693 (5,521)(f) $ 115,172
Gross profit.............................. 44,203 (6,814)(f) 34,468
(2,921)(a)
Selling, general, and administrative ex-
penses................................... 33,041 (4,828)(f) 27,634
(579)(b)
-------- ----------
Operating income.......................... 11,162 6,834
Equity in earnings of affiliate........... 394 (f) 394
Interest expense.......................... (1,701) 1,525 (c) (32)
144 (d)
Gain on sale of interests in affiliates... 18,673 (18,673)(f)
-------- ----------
Income before provision for income taxes.. 28,134 7,196
Provision for income taxes................ 1,408 1,700 (e) 3,108
-------- ----------
Net income................................ $ 26,726 $ 4,088
======== ==========
Pro forma per share information(g)........ $.19
====
Number of common shares assumed
outstanding(g)........................... 16,584,708
==========
</TABLE>
- --------
(a) Royalties of $2.9 million and $4.2 million in 1995 and 1996, respectively,
payable to Gabrielle Studio pursuant to the License Agreement.
(b) 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.
(c) Reduction in interest costs of $1.5 million and $1.6 million in 1995 and
1996, respectively, assuming the application of up to $73.2 million and
$87.4 million in 1995 and 1996, respectively, (which amounts represent the
maximum amount outstanding during the periods) of the proceeds from the
Offering to reduce the actual outstanding indebtedness under the Credit
Agreement.
(d) 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
Credit Agreement.
(e) Increase of $1.7 million and $4.0 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.
(f) 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
31
<PAGE>
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.
(g) Pro forma per share information is based on 10,612,934 shares of Common
Stock outstanding prior to the Offering, increased by (i) the sale of
5,846,774 shares of Common Stock assuming an offering price of $21.50 per
share ($19.84, net of expenses), the proceeds of which would be necessary
to pay approximately $116.0 million in satisfaction of the Distribution
Notes, and (ii) 125,000 shares of Common Stock which the Company expects
to award to certain employees pursuant to the Company's 1996 Stock
Incentive Plan on the effective date of the Offering. The net income used
in the calculation of pro forma per share information excludes the
reduction of interest costs of $1.5 million and $1.6 million in 1995 and
1996, respectively, in (c) above, and the reduction in amortization of
deferred financing costs of $0.1 million and $0.3 million in 1995 and
1996, respectively, in (d) above, and the related tax effect of $0.7
million and $0.8 million in 1995 and 1996, respectively.
Supplementary pro forma per share information for the quarters ended April
2, 1995 and March 31, 1996 is $.20 and $.31, respectively, based on
10,612,934 shares of Common Stock outstanding prior to the Offering,
increased by (i) the sale of 5,846,774 shares of Common Stock assuming an
offering price of $21.50 per share ($19.84, net of expenses), the proceeds
of which would be necessary to pay approximately $116.0 million in
satisfaction of the Distribution Notes, (ii) the sale of 3,639,113 shares of
Common Stock assuming an offering price of $21.50 per share ($19.84, net of
expenses), the proceeds of which would be necessary to repay approximately
$72.2 million of the amounts outstanding under the Company's Credit
Agreement at March 31, 1996, and (iii) 125,000 shares of Common Stock which
the Company expects to award to certain employees pursuant to the Company's
1996 Stock Incentive Plan. The net income used in the calculation of
supplementary pro forma per share information for the quarters ended April
2, 1995 and March 31, 1996 is $4.1 million and $6.2 million, respectively.
32
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------------------------------------------
ISSUANCE OF
DISTRIBUTION
ACTUAL NOTES AND PRO FORMA PRO FORMA
COMBINED REORGANIZATION COMBINED ADJUSTMENTS AS ADJUSTED
-------- -------------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash.................. $ 7,405 $ 7,405 $ 213,380 (b) $ 22,575
(116,000)(c)
(72,210)(d)
(10,000)(f)
Accounts receivable... 87,014 87,014 87,014
Inventories........... 82,771 82,771 82,771
Prepaid expenses and
other current
assets............... 11,087 $ 12,200 (g) 23,287 23,287
-------- -------- -------- --------- --------
Total current as-
sets............... 188,277 12,200 200,477 15,170 215,647
Property and equipment.. 25,338 25,338 25,338
Deposits and other
noncurrent assets...... 12,652 3,300 (g) 15,952 (2,660)(h) 13,292
-------- -------- -------- --------- --------
$226,267 $ 15,500 $241,767 $ 12,510 $254,277
======== ======== ======== ========= ========
Current liabilities:
Accounts payable...... $ 38,998 $ 38,998 $ 38,998
Accrued expenses and
other current
liabilities.......... 22,754 22,754 $ 5,000 (i) 18,973
(8,781)(j)
Current portion of
long-term debt....... 7,759 7,759 (7,500)(d) 259
Distribution Notes.... $114,484 (a) 114,484 (114,484)(c) --
-------- -------- -------- --------- --------
Total current lia-
bilities........... 69,511 114,484 183,995 (125,765) 58,230
Long-term debt.......... 64,965 64,965 (64,710)(d) 255
Stockholders' equity and
partners' capital:
Common stock of Inter-
mediate Entities..... 1,146 (1,146)(k) -- --
Common Stock.......... -- 106 (k) 106 107 (b) 214
1 (e)
Additional paid-in
capital.............. -- (23,797)(a) (7,257) 213,273 (b) 195,620
-- (8,880)(j)
15,500 (g) (1,516)(c)
1,040 (k)
Retained earnings and
partners' capital
(deficit)............ 90,687 (90,687)(a) -- --
Cumulative translation
adjustment........... (42) (42) (42)
-------- -------- -------- --------- --------
Total stockholders'
equity and part-
ners' capital(f)... 91,791 (98,984) (7,193) 202,985 195,792
-------- -------- -------- --------- --------
$226,267 $ 15,500 $241,767 $ 12,510 $254,277
======== ======== ======== ========= ========
</TABLE>
- --------
(a) Represents the Distribution Notes issued on April 16, 1996 to Takihyo Inc.
and the Principals or their affiliates . The aggregate principal amount of
the Distribution Notes is an estimate of the cumulative undistributed
taxable income (on which taxes have been previously paid) of the DK
Companies through the closing date, net of approximately $1.1 million
representing an estimate of cash distributions as may be made from April
16, 1996 through the anticipated closing date of the Offering.
(b) Represents the estimated net proceeds of the sale of shares of Common
Stock offered by the Company hereby at an assumed initial public offering
price of $21.50 per share.
(c) Represents the repayment of the Distribution Notes, including accrued
interest thereon.
(d) Represents the repayment of the term loans under the Company's Credit
Agreement and the reduction of the Company's revolving line of credit.
(e) Represents the award of 125,000 shares of Common Stock to certain
employees pursuant to the Company's 1996 Stock Incentive Plan on the
effective date of the Offering, which will be recorded as a one-time
charge of approximately $2.7 million.
(f) Represents a one-time payment of $5 million to the President of the
Company, pursuant to his employment, agreement, and a one-time payment to
Gabrielle Studio of approximately $5 million in connection with the
License Agreement.
(g) Represents a deferred tax asset of approximately $15.5 million, in
addition to approximately $1.7 million certain state and local deferred
tax assets previously recorded, which the Company will record concurrently
with becoming subject to Federal and additional state and local income
taxes. The deferred income taxes will reflect the net tax effect of
temporary differences, primarily depreciation, allowance for doubtful
accounts and other book accruals, between the carrying amounts of assets
and liabilities for pro forma financial reporting and the amounts used for
income tax purposes.
(h) Represents a write-off of deferred financing costs relating to the
Company's Credit Agreement
(i) Represents a charge related to the anticipated consolidation of the
Company's warehouse facilities.
(j) Represents the tax benefit and the net effect on additional paid-in
capital for the adjustments noted in (e), (f), (h), and (i) above.
(k) Represents the issuance of shares of Common Stock in exchange for the
common stock of the Intermediate Entities in connection with the
Reorganization.
33
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The following selected combined financial data should be read in conjunction
with the Company's Predecessor Combined Financial Statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. The statement of income data
for the years ended January 2, 1994, January 1, 1995, and December 31, 1995
and the balance sheet data as of January 1, 1995 and December 31, 1995 are
derived from the Predecessor Combined Financial Statements of the Company that
have been audited by Ernst & Young LLP, independent auditors, and are included
elsewhere in this Prospectus. The statement of income data for the years ended
December 28, 1991 and January 2, 1993 and the balance sheet data as of
December 28, 1991, January 2, 1993, and January 2, 1994, are derived from
financial statements of the Company audited by Ernst & Young LLP that are not
included herein. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
FISCAL QUARTER
FISCAL YEAR ENDED ENDED
---------------------------------------------------------- -------------------
DECEMBER 28, JANUARY 2, JANUARY 2, JANUARY 1, DECEMBER 31, APRIL 2, MARCH 31,
1991(1) 1993 1994 1995 1995 1995 1996
------------ ---------- ---------- ---------- ------------ -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net revenues............ $196,570 $259,947 $364,705 $420,164 $510,126 $120,693 $159,585
Gross profit............ 64,496 92,309 130,475 148,992 179,437 44,203 52,861
Selling, general, and
administrative
expenses............... 54,544 63,933 102,748 119,995 136,906 33,041 39,411
-------- -------- -------- -------- -------- -------- --------
Operating income........ 9,952 28,376 27,727 28,997 42,531 11,162 13,450
Equity in earnings of
affiliate(2)........... -- -- -- -- 2,519 -- 988
Interest expense, net... (82) (892) (4,063) (8,862) (7,650) (1,701) (2,047)
Other expense(3)........ -- -- (2,980) (2,651) -- -- --
Gain on sale of
interests in
affiliate(2)........... -- -- -- -- 18,673 18,673 --
-------- -------- -------- -------- -------- -------- --------
Income before provision
for certain state,
local, and foreign
income taxes........... 9,870 27,484 20,684 17,484 56,073 28,134 12,391
Provision for certain
state, local, and
foreign income taxes... 2,187 3,522 1,312 1,139 2,398 1,408 690
-------- -------- -------- -------- -------- -------- --------
Net income.............. $ 7,683 $ 23,962 $ 19,372 $ 16,345 $ 53,675 $ 26,726 $ 11,701
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 2, JANUARY 2, JANUARY 1, DECEMBER 31, MARCH 31,
1991 1993 1994 1995 1995 1996
------------ ---------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (DOLLARS IN THOUSANDS)
Working capital......... $ (54) $25,521 $ 11,592 $52,289 $ 92,635 $118,766
Total assets............ 54,739 89,035 137,129 157,004 203,975 226,267
Total long-term debt,
including current
portion................ -- 17,450 1,044 51,426 53,538 72,724
Stockholders' equity and
partners' capital...... 10,837 30,809 42,329 47,837 80,846 91,791
</TABLE>
- --------
(1) Selling, general, and administrative expenses for 1991 included payments
of and accruals for consulting fees to the Principals of $14.0 million in
addition to amounts paid to certain executives pursuant to their then
existing employment arrangements. Excluding these consulting fees,
operating income and net income would have been $24.0 million and $21.7
million, respectively.
(2) On March 31, 1995, the Company sold 70% of its interest in the operations
of Donna Karan Japan to a nonaffiliated party. The Company recognized a
gain on this transaction, net of transaction costs, of $18.7 million.
Subsequent to the sale, the Company has accounted for its remaining 30%
interest in the operations of Donna Karan Japan using the equity method of
accounting. Equity in earnings of affiliate amounted to $2.5 million and
$1.0 million for the year ended December 31, 1995 and the quarter ended
March 31, 1996, respectively. See Note 9 to Notes to Predecessor Combined
Financial Statements.
(3) Other expenses represent charges, primarily legal and other professional
fees, related to a proposed initial public offering in 1993 amounting to
$3.0 million and a proposed debt offering in 1994 amounting to $2.7
million.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company has generated increased net revenues each year since its
inception and has operated profitably each year since 1987. Net revenues
increased from $19.0 million in 1986 to $510.1 million in 1995, a compound
annual growth rate of 44.1%, and operating income increased from $54,000 in
1986 to $42.5 million in 1995. The Company's growth reflects annual increases
in sales of its existing collections, successful extensions of its existing
collections, introductions of new collections, and expansion of its domestic
and international distribution. The Company intends to continue to grow
principally by increasing the number of doors (a "door" is a single retail
outlet) through which its products are sold, increasing the number of free-
standing retail stores operated by third parties, continuing product
segmentation and expansion, broadening its customer base, and selectively
granting new licenses.
As part of its strategy of introducing new products and collections, during
the past five years, the Company has expanded its product offerings to include
the Donna Karan New York(R) Essentials and DKNY(R) Essentials collections for
women, the Donna Karan New York(R) and DKNY(R) collections for men, the
DKNY(R) jeans and petite collections for women, DK Men(TM) and Donna Karan New
York(TM) men's and women's beauty products, respectively, and DKNY(R) men's
and women's shoes. The introduction of new products and collections requires
significant investments, such as costs related to advertising, infrastructure,
and design, as well as additional inventory requirements. As a result, new
products and collections have an adverse impact on the Company's overall
operating profit margins until such products and collections achieve a
sufficient sales level to offset such costs. For example, the Company's Donna
Karan New York(R) men's division, which was established in 1991, did not
provide a positive contribution to the Company's operating profit until 1994,
and in 1995, this division continued the trend of increased net revenue and
operating profitability. The Company expects that future products and
collections will similarly impact the Company's overall operating
profitability. In addition, the Beauty Division, which has experienced an
increase in net revenues each year since its introduction in 1992, did not
provide a positive contribution prior to allocation of corporate expenses
until 1995. However, after such allocations, the Beauty Division has not yet
been profitable.
In addition, the Company's strategy of broadening its product offerings has
affected and will continue to affect its overall gross margin. For example,
the Company's men's collections have slightly lower gross margins than its
women's collections. The Company's beauty products have significantly higher
gross margins than its apparel collections and significantly higher sales and
advertising expenditures.
The following table sets forth net revenues generated by the Company's
collections, beauty products, and outlet stores and licensing.
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Donna Karan New York(R) collections for women (1).......... $ 75 $ 79 $ 77
DKNY(R) collections for women (1).......................... 193 232 271
Donna Karan New York(R) collections for men (1)............ 18 28 40
DKNY(R) collections for men (1)............................ 22 18 37
Beauty products............................................ 8 17 30
Outlet stores and licensing (2)............................ 49 46 55
---- ---- ----
$365 $420 $510
==== ==== ====
</TABLE>
- --------
(1) Includes apparel, accessory, and shoe collections.
(2) The Company was operating 24, 29, and 31 outlet stores at the end of 1993,
1994, and 1995, respectively. Also includes children's apparel for 1993.
The Company conducts operations in Japan through Donna Karan Japan. On March
31, 1995, the Company sold 70% of its interest in the operations of Donna
Karan Japan to HPL and a corporation owned by a private
35
<PAGE>
investor with a substantial interest in HPL, and entered into an agreement
with Donna Karan Japan which provides for a management fee payable to the
Company based upon net sales of Donna Karan Japan. Subsequent to such sale,
the Company has accounted for its remaining 30% interest in the operations of
Donna Karan Japan using the equity method of accounting and has included the
management fee income as an offset against selling, general, and
administrative expenses. See Note 9 to Notes to Predecessor Combined Financial
Statements.
Immediately following the Offering, the Company will accrue a non-recurring
pre-tax charge of approximately $20.3 million (approximately $11.6 million on
an after-tax basis) relating to (i) the anticipated consolidation of the
Company's warehouse facilities ($5.0 million), (ii) a one-time payment to the
President of the Company pursuant to his employment agreement ($5.0 million),
(iii) a one-time payment to Gabrielle Studio made in connection with the
License Agreement (approximately $5.0 million), (iv) the write-off of deferred
financing costs relating to the Company's Credit Agreement (approximately $2.7
million), and (v) the one-time charge of $2.7 million in connection with the
award of 125,000 shares of Common Stock to certain employees pursuant to the
Company's 1996 Stock Incentive Plan. In addition, the Company will record a
deferred tax asset of approximately $15.5 million, net of certain state and
local deferred tax assets recorded on a historical basis, concurrent with
becoming subject to Federal and additional state and local income taxes in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes" effective January 3, 1993.
RESULTS OF OPERATIONS
The following discussion provides information and analysis of the Company's
results of operations from 1993 through 1995 and for the first quarters of
1995 and 1996 and its liquidity and capital resources, and should be read in
conjunction with the audited Predecessor Combined Financial Statements and
notes thereto and Selected Combined Financial Data included elsewhere in this
Prospectus. The Company utilizes a 52- or 53- week fiscal year ending on the
Sunday nearest December 31. Accordingly, the years 1993, 1994, and 1995 ended
January 2, 1994, January 1, 1995, and December 31, 1995, respectively, and the
first quarters of 1995 and 1996 ended April 2, 1995 and March 31, 1996,
respectively. 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.
COMPARISON OF FIRST QUARTER 1996 TO FIRST QUARTER 1995
<TABLE>
<CAPTION>
1995 1996
------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenues.................................... $120.7 100.0% $159.6 100.0%
Gross profit.................................... 44.2 36.6 52.9 33.1
Selling, general, and administrative expenses... 33.0 27.4 39.4 24.7
Operating income................................ 11.2 9.3 13.5 8.4
Equity in earnings of affiliate................. -- -- 1.0 0.6
Net income...................................... 26.7 22.1 11.7 7.3
</TABLE>
Net revenues were $159.6 million in the first quarter of 1996, an increase
of 32.2% from the net revenues of $120.7 million recorded in the first quarter
of 1995. The increase was due primarily to a $19.6 million, or 27.8%, increase
in the DKNY (R) women's collections; a $12.3 million, or 185.7%, increase in
the DKNY (R) men's collections; a $2.6 million, or 28.8%, increase in the
Donna Karan New York (R) collections for men; a $1.3 million, or 39.5%,
increase in beauty products; and a $3.0 million, or 28.7%, increase in outlet
stores and licensing. Donna Karan New York (R) Collections for women net
revenues were unchanged from first quarter 1995. Subsequent to the sale of 70%
of the Company's interest in the operations of Donna Karan Japan in March
1995, the Company no longer consolidated Donna Karan Japan, but rather
accounted for its 30% interest in Donna Karan Japan using the equity method of
accounting. As a result, product sales to Donna Karan Japan are reflected as
revenues of the Company's divisions. If the interest in the operations of
Donna Karan Japan had been sold at the beginning of 1995, pro forma net
revenues for 1995 would have been $115.2 million in the first quarter.
The increase in the DKNY (R) women's collections resulted from earlier
shipments in 1996 relative to 1995 due to earlier production of the
collections, and, to a lesser extent, an increase in the number of
international doors. The increase in the DKNY (R) men's collections resulted
from significant growth in international sales, as
36
<PAGE>
well as continued domestic growth. The increase in the Donna Karan New
York (R) collections for men primarily resulted from an increase in doors
domestically, as well as growth internationally. The increase in the Beauty
Division is primarily due to the expanded product offering in 1996 compared to
1995.
Gross profit as a percent of sales was 33.1% and 36.6% in the first quarter
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 Japan's inventory, as well as a
reduction in the consolidated margin in 1996 since Donna Karan Japan was
accounted for on the equity basis. Without the nonrecurring credit and
accounting for Donna Karan Japan under the equity method of accounting, the
1995 first quarter net revenues would have been $115.2 million, the gross
profit would have been $37.4 million, and the gross margin would have been
32.5%. The improvement in the gross margin percentage for the first quarter of
1996 compared with the pro forma gross margin percentage for the first quarter
of 1995 was primarily attributable to leveraging relatively fixed production
costs for the apparel division as a result of increased sales volume.
Selling, general, and administrative expenses decreased to 24.7% of net
revenues in the first quarter of 1996 from 27.4% of net revenues for the same
period of 1995. This decrease is primarily due to the leverage obtained from
the increased net revenue base, the $0.5 million of management fees received
from Donna Karan Japan, and the difference in the product mix resulting in a
lower percentage of beauty products, which have higher selling, general, and
administrative expenses as a percent of net revenues.
Operating income increased to $13.5 million (8.4% of net revenues) in the
first quarter of 1996 from $11.2 million (9.3% of net revenues) in the same
period in 1995.
Interest expense increased to $2.0 million in the first quarter of 1996 from
$1.7 million in the same period in 1995 primarily due to higher average
borrowings.
Equity in earnings of affiliate/gain on sale of interests in affiliate. The
gain on sale of interests in affiliate, net of transaction costs, amounted to
$18.7 million in 1995, resulting from the Company's sale of 70% of its
interest in the operations of Donna Karan Japan. Subsequent to the sale, the
Company has accounted for its remaining 30% interest in the operations of
Donna Karan Japan using the equity method. Equity in earnings of Donna Karan
Japan was $1.0 million in the first quarter of 1996.
Provision for certain state, local, and foreign income taxes decreased to
$0.7 million in the first quarter of 1996 from $1.4 million in the same period
in 1995, primarily due to lower pre-tax income in 1996 compared to 1995.
Net income decreased to $11.7 million in the first quarter of 1996 from
$26.7 million in the same period in 1995 primarily due to the gain on sale of
interests in affiliate recognized in first quarter 1995, somewhat offset by
higher operating income in the first quarter of 1996 compared to 1995 and
other factors as described above.
COMPARISON OF 1995 TO 1994
<TABLE>
<CAPTION>
1994 1995
------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenues....................................... $420.2 100.0% $510.1 100.0%
Gross profit....................................... 149.0 35.5 179.4 35.2
Selling, general, and administrative expenses...... 120.0 28.6 136.9 26.8
Operating income................................... 29.0 6.9 42.5 8.3
Equity in earnings of affiliate.................... -- -- 2.5 0.5
Net income......................................... 16.3 3.9 53.7 10.5
</TABLE>
Net revenues were $510.1 million in 1995, an increase of 21.4% from the
$420.2 million of net revenues recorded in 1994. The increase was due
primarily to a $38.1 million, or 16.4%, increase in the DKNY(R) women's
collections; a $19.0 million, or 107.8%, increase in the DKNY(R) men's
collections; a $12.0 million, or 43.1%, increase in the Donna Karan New
York(R) collections for men; and a $13.1 million, or 78.3%, increase in beauty
products. These increases were offset in part by a decrease of $2.3 million,
or 2.9%, in the Donna Karan New York(R) Collection for women. Subsequent to
the sale of 70% of the Company's interest in the operations of Donna
37
<PAGE>
Karan Japan in March 1995, the Company no longer consolidates Donna Karan
Japan, but rather has accounted for its interest in Donna Karan Japan using
the equity method of accounting. As a result, product sales to Donna Karan
Japan are reflected as revenues by the Company's divisions. If the interest in
the operations of Donna Karan Japan had been sold at the beginning of 1995,
pro forma net revenues would have been $504.6 million.
The increase in the DKNY(R) women's collections resulted from increased
penetration of existing domestic doors, and, to a lesser extent, an increase
in the number of international doors. Net revenues of DKNY(R) women's
collections through free-standing International Retail Stores increased 73.0%
to $18.2 million in 1995. The increase in the DKNY(R) men's collections
resulted from significant growth in international sales, as the collections
were able to leverage the success of the DKNY(R) women's collections'
international penetration, as well as to continue its domestic growth. The
increase in the Donna Karan New York(R) collections for men primarily resulted
from a significant increase in doors domestically, as well as continued growth
internationally. The increase in the Beauty Division resulted from continued
expansion of the Company's product offerings, primarily a collection of
fragrance and grooming products for men which was launched in October 1994,
and continued growth of its women's fragrance collection.
Gross profit as a percentage of sales was 35.2% and 35.5% in 1995 and 1994,
respectively. Although gross margin on individual collections may change over
time, in the aggregate, consolidated gross margins have remained relatively
constant.
Selling, general, and administrative expenses decreased to 26.8% of net
revenues in 1995 from 28.6% of net revenues in 1994. The decrease in selling,
general, and administrative expenses as a percent of net revenues in 1995
compared to 1994 is due primarily to the leverage obtained from the increased
net revenue base and the $1.1 million of management fees received from Donna
Karan Japan. The decrease was offset in part by a $2.0 million increase in bad
debt expense relating to bankruptcy proceedings of a significant customer. See
"Risk Factors--Changes in the Retail Industry."
Operating income increased 46.7% to $42.5 million (8.3% of net revenues) in
1995 from $29.0 million (6.9% of net revenues) in 1994. The increase in
operating income as a percentage of net revenues is attributable to leveraging
costs over higher sales.
Interest expense decreased to $7.7 million in 1995 from $8.9 million in
1994, primarily due to lower financing fees.
Other expense was $2.7 million in 1994, consisting primarily of legal and
other professional fees related to a proposed debt offering in 1994.
Equity in earnings of affiliate/gain on sale of interests in affiliate. The
gain on sale of interests in affiliate, net of transaction costs, amounted to
$18.7 million in 1995, resulting from the Company's sale of 70% of its
interest in the operations of Donna Karan Japan. Subsequent to the sale, the
Company has accounted for its remaining 30% interest in the operations of
Donna Karan Japan using the equity method of accounting resulting in earnings
of $2.5 million in 1995.
Provision for certain state, local, and foreign income taxes increased to
$2.4 million in 1995 from $1.1 million in 1994, primarily due to higher pre-
tax income in 1995 compared to 1994.
Net income increased 228.4% to $53.7 million in 1995 from $16.3 million in
1994. This increase was primarily due to higher operating income and the gain
on sale of interests in an affiliate.
COMPARISON OF 1994 TO 1993
<TABLE>
<CAPTION>
1993 1994
------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenues....................................... $364.7 100.0% $420.2 100.0%
Gross profit....................................... 130.5 35.8 149.0 35.5
Selling, general, and administrative expenses...... 102.7 28.2 120.0 28.6
Operating income................................... 27.7 7.6 29.0 6.9
Net income......................................... 19.4 5.3 16.3 3.9
</TABLE>
38
<PAGE>
Net revenues were $420.2 million in 1994, an increase of 15.2% from $364.7
million of net revenues recorded in 1993. The increase was due to a $39.6
million, or 20.5%, increase in the DKNY(R) women's collections; a $10.3
million, or 58.8%, increase in the Donna Karan New York(R) collections for
men; a $9.0 million, or 115.4%, increase in the Company's Beauty Division; and
a $4.1 million, or 5.4%, increase in the Donna Karan New York(R) Collection
for women. Approximately $18.5 million of the increase in net revenues in the
DKNY(R) women's collections resulted from the December 1993 acquisition of the
50% of the Donna Karan Shoe Company which the Company did not previously own.
The remainder of the increase was due to growth in international sales. Net
revenues for the Donna Karan New York(R) collections for men increased
primarily due to higher penetration of its Donna Karan New York(R) collections
in new and existing domestic doors. Beauty Division net revenues increased
primarily from the increased growth of Bath & Body Mist, which was introduced
in the second half of 1993, as well as the introduction of the DK Men(TM)
collection of fragrance and grooming products in the second half of 1994.
These net revenues increases were offset somewhat by a decrease in net
revenues in the Company's DKNY(R) men's collections. During 1994, the Company
restructured the DKNY(R) men's collections in order to focus on a more
targeted consumer need.
Gross profit as a percentage of sales was 35.5% and 35.8% in 1994 and 1993,
respectively. Although gross margin on individual collections may change over
time, in the aggregate, consolidated gross margins have remained relatively
constant.
Selling, general, and administrative expenses increased to $120.0 million
(28.6% of revenues) in 1994 from $102.7 million (28.2% of net revenues) in
1993. This increase was primarily due to the investment in the additional
infrastructure necessary to support new product introductions and penetration
into international markets, particularly Japan. In addition, approximately
$3.2 million of the increase was caused by the acquisition of the 50% of the
Donna Karan Shoe Company which the Company did not previously own.
Operating income increased 4.6% to $29.0 million (6.9% of net revenues) in
1994 from $27.7 million (7.6% of net revenues) in 1993.
Interest expense increased to $8.9 million in 1994 from $4.1 million in
1993, due to higher average borrowings resulting from planned capital
expenditures and working capital requirements resulting from increased sales.
Other expense was $2.7 million in 1994 and $3.0 million in 1993 consisting
primarily of legal and other professional fees related to a proposed debt
offering in 1994 and a proposed initial public offering in 1993.
Provision for certain state, local, and foreign income taxes decreased to
$1.1 million in 1994 from $1.3 million in 1993.
Net income decreased 15.6% to $16.3 million in 1994 from $19.4 million in
1993. This decrease was primarily due to increased interest expense
attributable to debt incurred for working capital needs to support the
Company's growth.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's principal needs 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 term loans for its capital requirements.
Subsequent to the consummation of the Offering the Company's cash flow needs
will change 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 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 partners and stockholders of the Intermediate Entities.
Offsetting such changes will be the need to apply funds to the payment of
Federal and additional state and local income taxes and
39
<PAGE>
royalties to Gabrielle Studio pursuant to the License Agreement. See "Pro
Forma Combined Financial Information." Any net use of cash for such changes is
expected to be funded through operations.
At March 31, 1996, the Company had working capital of $118.8 million,
compared to $92.6 million at December 31, 1995. Changes in working capital
included an increase in accounts receivable of $24.8 million due to revenue
growth which is influenced by seasonality. See "Seasonality of Business"
below. This increase was partially offset by lower inventories of $2.9
million. The net increase in current assets of $18.3 million was financed
primarily through borrowings of $20.9 million under the Credit Agreement.
The Company's current credit agreement (the "Credit Agreement"), provides
for term loans, of which $43.1 million were outstanding at March 31, 1996, and
a revolving line of credit for the issuance of letters of credit, acceptances,
or direct borrowings of $105.0 million. Direct borrowings under the revolving
line of credit bear interest at 1.5% over the lead bank's prime rate (9.75% at
March 31, 1996) and are limited to a borrowing base calculated on eligible
accounts receivable, inventory, and letters of credit. The term loan consists
of term loan A, term loan B, and term loan C. The Credit Agreement provides
for various borrowing rate options including borrowing rates based on a fixed
spread over LIBOR. At March 31, 1996, $10.0 million of term loan C bears
interest at 2.75% above LIBOR (8.063%), $13.1 million of term loan A bears
interest at 2.75% above LIBOR (8.063%), and $20.0 million of term loan B bears
interest at 3.25% above LIBOR (8.563%). Both the revolving credit facility and
the term loans are secured by accounts receivable, inventory, and intangibles
(including an interest in certain licensed trademarks), as well as certain
intangibles of an affiliated company. Letters of credit and acceptances
outstanding under the Credit Agreement were approximately $22.9 million and
$33.9 million at March 31, 1996 and December 31, 1995, respectively. Direct
borrowings outstanding under the Credit Agreement were approximately $72.2
million and $53.0 million at March 31, 1996 and December 31, 1995,
respectively.
The Company has received a commitment letter (the "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 acceptances and a $30.0 million subfacility for loans in
Italian lira to the extent available. Borrowings under the New Credit Facility
would bear interest at the lead bank's prime rate (8.25% at March 31, 1996)
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 would
be required to be paid down below a specified level for 45 days each year. The
Commitment Letter provides that the New Credit Facility would be secured by
accounts receivable, inventory, and certain intangibles of the Company. 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. See
"Use of Proceeds." The Commitment Letter provides that 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 on the terms herein
described or at all.
Capital expenditures, primarily for equipment, machinery, computers, office
furniture, leasehold improvements, and outlet stores, were approximately $4.1
million, $4.3 million, and $3.4 million in the three months ended March 31,
1996, in fiscal 1995, and in fiscal 1994, respectively. The Company
anticipates capital expenditures to support the Company's growth to be
approximately $3.9 million for the remainder of 1996. Furthermore, the Company
may invest additional amounts in 1996 and 1997 in connection with its planned
warehouse consolidation. It is expected that consolidation of the distribution
facility will not be completed until 1997 and that the funds needed to
accomplish such consolidation, including capital expenditures to improve the
new warehouse, will be available from the Company's then existing credit
agreement or lease financing arrangements.
The Company extends credit to its customers including those which have
accounted for significant portions of the Company's gross revenues.
Accordingly, the Company may have significant exposure for accounts receivable
from its customers, or group of customers under common ownership. The Company
has credit policies
40
<PAGE>
and procedures which it uses to manage its credit risk. To further manage its
credit risk, the Company insures its accounts receivable under credit risk
insurance policies, subject to certain limitations.
In January 1996, one of the Company's customers and certain of its
affiliated entities, which accounted for 2.3% of the Company's gross revenues
in 1995, filed for protection under the Federal bankruptcy laws. The Company
has filed a claim with its insurance carrier for recovery and has accrued for
its loss, net of expected insurance recovery, in 1995. See "Risk Factors--
Changes in the Retail Industry" and Selling, general, and administrative
expenses in the "Comparison of 1995 to 1994" and Note 1 of the Notes to
Predecessor Combined Financial Statements above.
The Company enters into forward exchange contracts as hedges relating to
identifiable currency positions. These financial instruments are designed to
minimize exposure and reduce risk from exchange rate fluctuations in the
regular course of business. The Company does not engage in speculation.
Historically, gains and losses on foreign exchange contracts have not been
material.
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.
SEASONALITY OF BUSINESS
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 the 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 variations 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 and operating
income 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.
ANTICIPATED SECOND QUARTER RESULTS
Net revenues in the 1996 second quarter are expected to exceed net revenues
in the comparable 1995 quarter. However, the Company does not expect the rate
of growth of net revenues to equal the 32% net revenue increase in the first
quarter of 1996 over the first quarter of 1995. Early shipments in the first
quarter of 1996, the impact of seasonality on the second quarter as discussed
above, and an increase in selling, general, and administrative expenses due in
large part to an anticipated annual increase in net revenues are expected to
have an adverse impact on operating income and net income in the 1996 second
quarter. Net revenues and operating income for the first half of 1996 are
expected to exceed the comparable amounts for 1995.
OTHER MATTERS
In connection with the Offering, the Company will become subject to Federal
and additional state and local income taxes. As discussed in Note 1 of Notes
to Predecessor Combined Financial Statements, the Company has adopted the
provisions of SFAS No. 109, "Accounting for Income Taxes" effective January 3,
1993. 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 its statement of income in accordance with the provisions of SFAS
No. 109. Had such amount been recorded as of December 31, 1995, the effect
would have been approximately $14.8 million inclusive of certain state and
local deferred tax assets recorded on a historical basis. See Note 13 of Notes
to Predecessor Combined Financial Statements.
41
<PAGE>
BUSINESS
GENERAL
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(TM) and Donna Karan New York(TM) 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. In 1995, the Company's net revenues were $510.1
million and its operating income was $42.5 million, representing a 21.4% and
46.7% increase, respectively, over 1994 net revenues and operating income. The
Company's net income in 1995 was $53.7 million. On a pro forma basis, after
giving effect to the Reorganization, the Offering, and certain other
adjustments, the Company's net revenues were $504.6 million, its operating
income was $30.1 million, and its net income was $18.4 million for 1995. The
Company's products have significant international appeal, and in 1995,
approximately 33.9% of the Company's net revenues (excluding net revenues
generated from outlet stores and licensing) were to customers in international
markets.
OPERATING STRATEGY
The Company has achieved its success through the implementation of the
following operating strategies:
. BUILDING GLOBAL NAME AND IMAGE. The Company has employed a strategy of
building the global name recognition and distinctive brand image of
Donna Karan New York(R) in the exclusive designer market and the DKNY(R)
brand in the larger bridge market. The Company has in turn been able to
capitalize on its fashion leadership in both of these segments through
additional product introductions.
. BRAND LEVERAGING. The Company has employed a strategy of establishing
successful designer collections and then leveraging the success of those
collections and the depth of its design talent in the larger bridge
market. The Company first utilized this approach with its DKNY(R)
women's apparel division to successfully address the market opportunity
afforded by the larger bridge market thereby increasing its customer
base and range of products. Subsequently, the Company has successfully
implemented this approach in the men's apparel division and the shoe
division and intends to implement this same approach in the beauty
division.
. WORLDWIDE GROWTH. Since its inception, the Company has been expanding on
a worldwide basis, including in the United States, Europe and the Middle
East, Japan, and other parts of Asia. Due to the global recognition of
the Donna Karan New York(R) and DKNY(R) brands, the Company has been
able to expand its sales internationally through its commitment to
developing the necessary infrastructure to support the increase in sales
and through the further licensing of free-standing retail stores in
international markets.
. MAINTAINING BRAND EXCLUSIVITY. The Company maintains the exclusivity of
its brand image through coordinated global advertising and marketing,
selective licensing arrangements, and controlled retail distribution.
All worldwide advertising, public relations, and marketing programs are
managed on a centralized basis through the Company's Creative Services
and Public Relations Departments in New York, which promote a consistent
global image. To reinforce its exclusive image and appeal, the Company
sells through a limited number of stores, including better department
and large specialty stores, such as Bloomingdale's, Macy's, Saks Fifth
Avenue, Neiman Marcus, and Nordstrom, and better boutiques catering to
fashion-conscious customers. Consistent with its operating philosophy,
the Company has been very selective in pursuing licensing opportunities
and has maintained strict control over design, quality, advertising,
marketing, and distribution in its five existing product licensing
arrangements.
. ""HEAD-TO-TOE" DRESSING. The Company offers a "head-to-toe" assortment
of complementary luxury product categories designed to satisfy the
lifestyle needs of its customers. During the past five
42
<PAGE>
years, the Company has expanded its product offerings to include the
Donna Karan New York(R) Essentials and DKNY(R) Essentials collections
for women, the Donna Karan New York(R) Signature collection for men, the
DKNY(R) jeans and petite collections for women, DK Men(TM) and Donna
Karan New York(TM) men's and women's beauty products, respectively, as
well as DKNY(R) men's and women's shoes.
GROWTH STRATEGY
The Company's goals are to continue to leverage its strong brand name and
image by expanding its current product offerings and to increase its presence
in domestic and international markets. The principal elements of the Company's
growth strategy are to:
. INCREASE NUMBER OF DOORS. During 1996, the Company expects selectively
to increase the number of domestic doors through which its more
recently-introduced products, including its beauty products and men's
apparel, will be sold and to increase the number of international doors
through which the Company's products are sold.
. INCREASE NUMBER OF FREE-STANDING RETAIL STORES. The Company anticipates
that 10 additional free-standing International Retail Stores will be
opened in 1996 (including five stores to be opened under the Retail
Agreement with HPL) and currently is considering a strategy for the
opening of full-price, free-standing retail stores by or in arrangements
with third parties in select locations in the United States.
. CONTINUE PRODUCT SEGMENTATION AND EXPANSION. By continuing to segment
and expand its collections, the Company provides a greater "head-to-toe"
product assortment to better satisfy the lifestyle needs of existing
customers and to appeal to new customers. The Company intends to launch
a new women's fragrance under the Donna Karan New York(R) brand name in
the second half of 1996, to add casual sportswear to its Donna Karan New
York(R) men's collection, and to expand the range of the current
activewear offerings included within its DKNY(R) women's collection for
spring 1997. In addition, the Company intends to increase the product
range of its Donna Karan New York(R) Essentials collection for women
under its new Donna Karan New York(R) Signature label for spring 1997.
. BROADEN CUSTOMER BASE. The Company plans to target broader market
opportunities at lower prices than its apparel products with additional
luxury products in categories such as beauty and accessories.
. EXPAND LICENSING EFFORTS. Having successfully established its brands
worldwide, the Company now intends to expand its licensing efforts
through the selective granting of new product licenses.
PRODUCTS
The apparel products sold by the Company are organized into two broad
categories: fashion-forward designer apparel sold under the Donna Karan New
York(R) brand name, and bridge apparel sold under the DKNY(R) brand name. The
women's ready-to-wear apparel market in the United States is divided into five
price levels, ranging from lowest to highest, as follows: "budget,"
"moderate," "better," "bridge," and "designer".
The approximate suggested retail price ranges for the Company's apparel
products set forth below are indicative of individual item price ranges:
<TABLE>
<CAPTION>
DRESSES
SKIRTS AND SHIRTS AND (OTHER THAN
WOMEN'S JACKETS PANTS BODYSUITS EVENING WEAR)
- ------- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C>
Donna Karan New York(R)
Collection.............. $1,200-1,800 $400-900 $300-600 $650-1,200
Essentials.............. 750-1,100 300-600 200-400 500-950
DKNY(R)................... 265-1,250 125-600 85-725 200-550
<CAPTION>
MEN'S SUITS SPORTSCOATS TROUSERS
- ----- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Donna Karan New York(R)
Collection ("black la-
bel").................. $1,100-1,750 $950-1,750 $300-400
Signature ("gold la-
bel").................. 875-995 595-750 225-275
DKNY(R)................... 550-1,200 250-450 65-290
</TABLE>
43
<PAGE>
The Company sells collections of men's and women's fragrance, bath and body,
and treatment products under the DK Men(TM) and Donna Karan New York(TM) brand
names, respectively. The beauty products generally have retail prices in the
$15 to $375 range, although most products are priced in the $85 and under
range. In addition, the Company sells collections of women's accessories and
men's and women's shoes under both of its brand names. Accessories for women
marketed under the Donna Karan New York(R) brand name generally have retail
price ranges from $350 to $850 for handbags, $80 to $250 for belts, $200 to
$800 for jewelry, and $75 to $200 for small leather goods. Accessories for
women marketed under the DKNY(R) brand name generally have retail price ranges
from $30 to $575 for handbags, $15 to $175 for hats, and $15 to $150 for small
leather goods. Shoes marketed under the Donna Karan New York(R) and DKNY(R)
brand names generally have retail price ranges from $110 to $700 and $50 to
$400, respectively, for women's shoes, and from $275 to $600 and $75 to $295,
respectively, for men's shoes.
Net revenues represented by each of the Company's major operating units for
each of the last three years are set forth below:
<TABLE>
<CAPTION>
1993(2) 1994 1995
------- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Donna Karan New York(R)(1)................................... $93 $107 $117
DKNY(R)(1)................................................... 215 250 308
Beauty products.............................................. 8 17 30
Outlet stores and licensing(3)............................... 49 46 55
---- ---- ----
$365 $420 $510
==== ==== ====
</TABLE>
- --------
(1) Includes apparel, accessory, and shoe collections.
(2) Revenues of the Company's shoe collections (the "Shoe Division") were
combined with the Company's sales commencing December 1993, at which time
the Company bought out its then joint venture partner.
(3) The Company was operating 24, 29, and 31 outlet stores, respectively, at
the end of each of 1993, 1994, and 1995. Also includes children's apparel
for 1993.
DONNA KARAN NEW YORK(R) DESIGNER COLLECTIONS
The Donna Karan New York(R) designer collections include men's and women's
apparel, women's accessories, and men's and women's shoes (the "Designer
Collections").
WOMEN'S APPAREL
Since its inception, a primary focus of the Company has been to establish
and maintain itself as an internationally recognized fashion design house. To
this end, the Company has established two designer collections of women's
apparel under the Donna Karan New York(R) brand name: Collection and
Essentials. The original Donna Karan New York(R) Collection for women was
based upon Ms. Karan's concept of "seven easy pieces"--a collection of
bodysuits and tights, dresses, skirts, blouses, jackets, pants, and
accessories that when layered in combinations achieved a varied, but
consistent, high fashion look, with an emphasis on comfort and fit. The Donna
Karan New York(R) Collection for women represents high fashion apparel, made
primarily with exclusively-developed, luxury fabrics and designed with an
emphasis on comfort and fit. Today, the Donna Karan New York(R) Collection for
women is recognized worldwide as one of the premier women's designer
collections. Each of the spring and fall collections is introduced at major
fashion shows which generate extensive press coverage in the domestic and
international fashion press, as well as in the general media.
The Donna Karan New York(R) Essentials collection focuses on the lifestyle
of the working woman and provides a modern, sensual, yet classic, collection
of apparel for all aspects of a woman's life. The Donna Karan New York(R)
Essentials collection, introduced in 1992, includes updated and redesigned
versions of the Company's most successful silhouettes (styles), as well as
newly-designed, classic, signature styles of Ms. Karan and her design teams.
As a result, the Donna Karan New York(R) Essentials collection is fashionable
while maintaining consistent and timeless qualities.
44
<PAGE>
As part of its growth strategy, the Company intends to increase its
offerings of its Donna Karan New York(R) Essentials collection of products
under its new Donna Karan New York(R) Signature label, geared to the executive
woman's lifestyle. The Donna Karan New York(R) Signature collection will be
introduced in fall 1996 for delivery in spring 1997 at slightly lower prices
than the current Donna Karan New York(R) Essentials collection to appeal to a
wider group of consumers. The Company intends to convert all of its Donna
Karan New York(TM) Essentials doors and certain of its existing Donna Karan
New York(R) Collection doors to Donna Karan New York(R) Signature doors. The
Donna Karan New York(R) Collection will be offered for limited distribution in
key markets to retailers which the Company considers to be high-end, luxury
retailers. In addition, the Company intends to increase the number of doors in
which the Donna Karan New York(R) Signature collection products will be sold,
including international doors.
The following table sets forth certain information concerning the
approximate number and location of doors through which the Company's Designer
Collections of women's apparel were sold as of December 31, 1995 and are
expected to be sold by the end of 1996:
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF DOORS
-------------------------------------------------------------------
1995 1996
--------------------------------- ---------------------------------
UNITED STATES INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
------------- ------------- ----- ------------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Donna Karan New York(R)
Collection............. 102 117 219 103 112 215
Donna Karan New York(R)
Essentials............. 124 73 197 133 55 188
</TABLE>
MEN'S APPAREL
Consistent with its operating philosophy and leveraging its name recognition
and its strengths in design, sourcing, and distribution, the Company
established two designer collections of men's apparel: Donna Karan New York(R)
(black label) and Donna Karan New York(R) Signature (gold label). The
introduction of the men's collections expanded the Company's customer base and
increased its opportunities for additional product lines. Additionally, the
men's collections increased the Company's in-store visibility by adding more
departments within each store that carries the Company's products. The Donna
Karan New York(R) black label collection was introduced in fall 1991 at one
specialty store in New York where it was sold on an exclusive basis through
fall 1992, at which time the Company expanded distribution to approximately 75
doors. In recognition of the Donna Karan New York(R) black label collection,
Ms. Karan received the Council of Fashion Designers of America's Menswear
Designer of the Year Award for 1992. In 1994, Ms. Karan became the first
American fashion designer to be invited to show the Company's men's collection
at one of the premier European menswear fashion shows in Florence, Italy.
The Donna Karan New York(R) black label collection is marketed in three
categories: Donna Karan New York(R) Couture, Donna Karan New York(R)
Sartoriale, and Donna Karan New York(R). The Donna Karan New York(R) Couture
category provides hand-tailored clothing made in the United States, using a
limited range of fabrications and new silhouettes for select distribution. The
Donna Karan New York(R) Sartoriale category provides hand-made garments made
in Italy using a variety of exclusively-developed fabrications and specially-
designed silhouettes for the European and Asian markets. The Donna Karan New
York(R) category provides a full collection of suits, sportscoats, trousers,
sportswear, and furnishings made from luxury fabrics primarily in the United
States and Italy and is more widely distributed than the other categories of
the black label collection.
The Donna Karan New York(R) Signature collection (gold label), was
introduced in fall 1993 as the Company's second designer collection of men's
apparel and includes designer suits, sportscoats, trousers, sportswear,
outerwear, and furnishings. Targeting a broader audience, this collection is
priced below the Donna Karan New York(R) black label collection but maintains
a similar dedication to quality and design, while using lower cost
fabrications and more commercial production techniques. The Donna Karan New
York(R) Signature
45
<PAGE>
collection is comprised of the basic, essential pieces of a man's wardrobe for
the more conservative yet modern man, in styles similar to the styles of the
Company's Donna Karan New York(R) black label collection. By having both
collections, the Company competes in two distinct market segments.
Net revenues of the men's division increased 43.1% from 1994 to 1995. The
following table sets forth certain information concerning the approximate
number and location of doors through which the Company's Designer Collections
of men's apparel were sold as of December 31, 1995 and are expected to be sold
by the end of 1996:
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF DOORS
-------------------------------------------------------------------
1995 1996
--------------------------------- ---------------------------------
UNITED STATES INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
------------- ------------- ----- ------------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Donna Karan New York(R)
black label
collection............. 104 106 210 113 127 240
Donna Karan New York(R)
Signature collection... 158 98 256 221 134 355
</TABLE>
ACCESSORIES
The designer collection of women's accessories marketed under the Donna
Karan New York(R) brand name includes handbags, belts, jewelry, small leather
goods, hats, gloves, and scarves. In accordance with its strategy of
controlling distribution, the Company designs, contracts for the production
of, and controls the distribution of its accessories.
The Company is in the process of refocusing its Donna Karan New York(R)
accessory business from a collection-coordinated accessory line to a more
expanded "main floor" accessory line which reflects the taste and
sophistication of the Designer Collections of women's apparel. As part of this
strategy, the Company expects to begin implementing the accessory concept
through a more select group of retailers than its current accessory
distribution. The Company also intends to launch a separate collection of
Donna Karan New York(R) men's accessories in the fourth quarter of 1996. This
collection initially is expected to consist primarily of belts retailing from
$80 to $500 and small leather goods retailing from $75 to $200.
The following table sets forth certain information concerning the
approximate number and location of doors through which the Company's women's
accessories collection was sold as of December 31, 1995 and is expected to be
sold by the end of 1996:
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF DOORS
-------------------------------------------------------------------
1995 1996
--------------------------------- ---------------------------------
UNITED STATES INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
------------- ------------- ----- ------------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
147 147 294 124 134 258
</TABLE>
SHOES
The Donna Karan New York(R) collections of men's and women's shoes are high
priced, sophisticated collections of shoes, made with luxurious and expensive
materials. The women's collection includes sport and dress shoes, boots, and
sandals, casual shoes, and evening shoes. The limited men's collection
includes sport and classic dress shoes and boots and casual shoes. Segments of
the Donna Karan New York(R) shoe collections are designed to complement the
Donna Karan New York(R) apparel collections.
In 1995, the Company conducted a test program to expand its distribution of
women's shoes to additional department store doors and specialty shops
emphasizing ready-to-wear apparel. Consistent with the strategy for the Donna
Karan New York(R) Collection for women, in 1996 the Donna Karan New York(R)
women's shoe collection will be offered to select retailers for limited
distribution in key markets.
46
<PAGE>
The following table sets forth certain information concerning the
approximate number and location of doors through which the Company's Donna
Karan New York(R) men's and women's shoe collections were sold as of December
31, 1995 and are expected to be sold by the end of 1996:
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF DOORS
-------------------------------------------------------------------
1995 1996
--------------------------------- ---------------------------------
UNITED STATES INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
------------- ------------- ----- ------------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Donna Karan New York(R)
women's shoe
collection............ 144 78 222 106 72 178
Donna Karan New York(R)
men's shoe
collection*........... 30 14 44 21 14 35
</TABLE>
- --------
* Introduced in spring 1995.
OVERVIEW OF DESIGNER MARKET
In the designer segment of the apparel market, competitors of the Donna
Karan New York(R) Collection for women include Armani Borgonuovo, Jil Sander,
and Escada, and competitors of the Donna Karan New York(R) Essentials
collections for women include Armani Le Collezione, Calvin Klein, and Michael
Kors. The Donna Karan New York(R) black label and the Donna Karan New York(R)
Signature collections for men compete with Giorgio Armani, Hugo Boss, Calvin
Klein, Valentino, Vestimenta, and Ermenegildo Zegna. Competitors of the Donna
Karan New York(R) women's accessories collection include Prada, Bottega
Veneta, and Calvin Klein. The Donna Karan New York(R) women's shoe collection
competes with Giorgio Armani, Gucci, Prada, Calvin Klein, and Robert
Clergerie, and the Donna Karan New York(R) men's shoe collection competes with
Dolce & Gabbana, Giorgio Armani, Gucci, Fenestria, and Ralph Lauren.
DKNY(R) COLLECTIONS
The DKNY(R) collections include men's and women's apparel, women's
accessories, and men's and women's shoes.
WOMEN'S APPAREL
The initial success of the Donna Karan New York(R) Collection for women made
possible the launch of the DKNY(R) bridge collection of women's apparel and
accessories in 1989. DKNY(R) was established as a separate brand name to
create a distinct and more casual fashion identity at lower prices while
retaining an association with the Donna Karan New York(R) designer image.
Moreover, the Company was able to significantly leverage the depth within its
design team, as well as its sourcing capabilities and distribution strength to
successfully address the market opportunity afforded in the larger bridge
market, thereby increasing its customer base and range of products. The
designs of the DKNY(R) brand can be considered on the "cutting edge" within
the bridge market. Today, the women's apparel, accessory, and shoe collections
sold under the DKNY(R) brand name constitute the Company's largest division,
representing 53.1% of net revenues in 1995.
To increase its sales to existing doors, the Company has segmented its
DKNY(R) women's apparel collection into three lines, which are often sold to
or through different departments. The DKNY(R) women's collection is a
spirited, lifestyle, and item-driven collection of skirts, blouses, bodysuits,
dresses, jackets, vests, pants, jeans, denimwear, outerwear, and activewear
which complements all aspects of a woman's lifestyle. As part of the DKNY(R)
women's collection, the Company markets a collection of women's apparel under
the DKNY(R) Essentials label which offers a collection of core pieces, from
jackets to underpinnings. The DKNY(R) Essentials collection addresses all
aspects of a woman's lifestyle, from casual to work, and provides women with
pieces that easily can be used to update and replenish their wardrobes.
The Company has further increased its consumer base by addressing consumer
demand for casual clothing through its DKNY(R) jeans division. The DKNY(R)
jeans division, which the Company established in 1991,
47
<PAGE>
addresses the consumer demand for more casualwear. The DKNY(R) jeans division
offers a collection of jeans, activewear, outerwear, and related sportswear
under the DKNY(R) brand name, made from a variety of fabrications. During
1995, the DKNY(R) jeans division accounted for approximately 43.2% of the net
revenues of the DKNY(R) women's apparel division.
The Company's DKNY(R) petite division, which was established in 1994 as part
of the Company's strategy of expanding its existing collections, offers a
selection of styles from those offered by the DKNY(R) women's apparel
division, but the garments are sized for the petite woman. Approximately 30%
of the DKNY(R) women's apparel styles are offered in petite sizing.
The following table sets forth certain information concerning the
approximate number and location of doors through which the Company's DKNY(R)
women's apparel collections were sold as of December 31, 1995 and are expected
to be sold by the end of 1996:
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF DOORS
-------------------------------------------------------------------
1995 1996
--------------------------------- ---------------------------------
UNITED STATES INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
------------- ------------- ----- ------------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
DKNY(R) apparel
collections (other than
the jeans and petite
collections)........... 413 277 690 392 347 739
DKNY(R) jeans collec-
tion................... 522 289 811 554 358 912
DKNY(R) petite collec-
tion................... 114 -- 114 145 -- 145
</TABLE>
MEN'S APPAREL
In 1992, the Company introduced a limited selection of men's apparel under
the DKNY(R) brand name. In 1994, the Company determined it could expand upon
its opportunities in menswear by focusing its DKNY(R) men's collection on a
more targeted consumer need. As a result, the DKNY(R) men's collection changed
from a more casual collection of apparel to a more modern, sophisticated, yet
youthful, lifestyle collection. The DKNY(R) men's collection is an innovative,
but not overly designed, collection of shirts, pants, jackets, jeans,
sweaters, outerwear, activewear, and furnishings made of modern, lightweight,
tactile fabrics. Approximately 30% of the DKNY(R) men's collection consists of
new, modern basic styles which are available on a reorderable basis.
The following table sets forth certain information concerning the
approximate number and location of doors through which the Company's DKNY(R)
men's collection was sold as of December 31, 1995 and is expected to be sold
by the end of 1996:
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF DOORS
---------------------------------------------------------------------
1995 1996
---------------------------------------------------------------------
UNITED STATES INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
------------- ------------- ----- ------------- ------------- -----
<S> <C> <C> <C> <C> <C>
256 132 388 271 212 483
</TABLE>
ACCESSORIES
The collection of women's accessories marketed under the DKNY(R) brand name
includes handbags, belts, fashion jewelry, small leather goods, hats, belts,
gloves, scarves, and umbrellas. Consistent with its operating strategy, the
Company designs, contracts for the production of, and controls the
distribution of its accessories.
48
<PAGE>
The following table sets forth certain information concerning the
approximate number and location of doors through which the Company's DKNY(R)
women's accessories collection was sold as of December 31, 1995 and is
expected to be sold by the end of 1996:
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF DOORS
---------------------------------------------------------------------
1995 1996
---------------------------------------------------------------------
UNITED STATES INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
------------- ------------- ----- ------------- ------------- -----
<S> <C> <C> <C> <C> <C>
706 281 987 712 344 1,056
</TABLE>
SHOES
The collections of men's and women's shoes marketed under the DKNY(R) brand
name offer lower-priced, trendier, sportier, and more casual shoes than the
Donna Karan New York(R) shoe collections, in a wider range of styles and
constructions. The DKNY(R) women's shoe collection includes sport and dress
shoes and boots, weather shoes and boots, sneakers (fashion and athletic), and
casual shoes. The limited men's collection includes sport and classic dress
shoes, boots, and sandals, weatherboots, and sneakers (fashion and athletic).
Segments of the DKNY(R) shoe collections are designed to complement the
DKNY(R) apparel collections.
The following table sets forth certain information concerning the
approximate number and location of doors through which the Company's DKNY(R)
men's and women's shoe collections were sold as of December 31, 1995 and are
expected to be sold by the end of 1996:
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF DOORS
-------------------------------------------------------------------
1995 1996
--------------------------------- ---------------------------------
UNITED STATES INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
------------- ------------- ----- ------------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
DKNY(R) women's shoe
collection............. 350 196 546 348 241 589
DKNY(R) men's shoe
collection*............ 18 20 38 34 37 71
</TABLE>
- --------
* Introduced in fall 1995.
OVERVIEW OF BRIDGE MARKET
In the bridge segment of the apparel market, the DKNY(R) women's apparel
collections compete with CK by Calvin Klein, Polo/Ralph Lauren, Dana Buchman,
Ellen Tracy, Emmanuel, and Anne Klein II. The DKNY(R) men's collection
competes with labels such as CK by Calvin Klein, Guess, Mondo, Nautica,
Polo/Ralph Lauren, Tommy Hilfiger, and Versace Classic V2. Competitors of the
DKNY(R) women's accessories collection include By Paloma, Coach, Dooney &
Bourke, and Ferragamo. The DKNY(R) women's shoe collection competes with Anne
Klein II, Bis (Charles Jourdan), Freelance, Polo/Ralph Lauren, and VS (Via
Spiga), as well as certain private labels, and the DKNY(R) men's shoe
collection competes with Cole Haan, Kenneth Cole, Paraboot, and Polo/Ralph
Lauren.
BEAUTY DIVISION
To further leverage its strong brand name and image, the Company created its
Beauty Division in 1992 to provide consumers with beauty products consistent
with the Donna Karan New York(R) "head-to-toe" philosophy. To ensure that its
beauty products are of the highest quality and to best manage the brand, the
Company controls all aspects of its Beauty Division, including product
development, package design, production, marketing, and distribution. By
developing its Beauty Division, the Company has positioned itself to benefit
from the higher gross margins associated with the beauty business, as well as
its comparative stability relative to the apparel business. In turn, the
Beauty Division has benefited considerably from the advertising and promotion
efforts associated with the building of the Donna Karan New York(R) apparel
brand franchise. The success of the Company's Beauty Division is illustrated
by the division's compounded annual growth in sales of 96% from $8 million in
1993 to $30 million in 1995.
49
<PAGE>
In September 1992, the Company launched the Donna Karan New York(R)
collection of women's fragrance products. Packaged in distinctive bottles and
dispensers, the fragrance collection was introduced in select Bloomingdale's
stores. The Donna Karan New York(R) fragrance products currently consist of a
perfume in 1/2 oz. and 1 oz. bottles, an eau de parfum in 50 ml. and 100 ml.
spray dispensers, a 100 ml. splash, and a 1/2 oz. purser. The Beauty Division
products were expanded in 1993 to include a variety of bath and body and
treatment products, including a cleansing lotion, body cream, body lotion,
talc, and bar soap. A second fragrance for women called "Bath & Body Mist" was
introduced in the second half of 1993. The success of the Company's fragrance
products is evidenced by the continued annual sales growth of each such
product since its launch.
In 1994, the Company launched DK Men(TM), a collection of fragrance and
grooming products for men. The collection includes 2.5 oz. colognes in spray
and pour, 4 oz. after shave skin conditioner, a combination
antiperspirant/deodorant, soap, and hair and body shampoo. Following the
successful launch of DK Men(TM), the Company launched "Unleaded(TM)," a
version of the DK Men(TM) fragrance, as a light after shower overall spray
product.
In 1992, the Company won the "Best Women's Fragrance in Exclusive
Distribution" and "Best Women's Advertising Campaign" Awards at the Fragrance
Foundation Awards for its Donna Karan New York(R) women's fragrance. In 1994,
the Company won the "Best Men's Fragrance in Exclusive Distribution" for its
DK Men(TM) fragrance at the Fragrance Foundation Awards.
Part of the Company's long-term strategy is to increase its consumer base by
expanding its limited product offerings through the introduction of new
products and collections. New beauty products under the Donna Karan New
York(TM) brand name are expected to include a new women's fragrance in 1996,
new treatment products in 1996 and 1997, and a limited number of color
products in 1996 and 1997. Furthermore, the Company anticipates launching new
collections of women's and men's beauty products in 1998 and 1999,
respectively, under the DKNY(TM) brand name which are intended to be carried
in significantly more stores than the Donna Karan New York(TM) collections of
beauty products.
The Company has been able to leverage the success of its apparel business
and the brand recognition created through its advertising and marketing
programs to obtain better positioning in the stores in which its beauty
products are distributed. The Company believes that its Beauty Division
products, taken as a whole, are currently in the top 10 selling brands of
beauty products sold by stores in which Beauty Division products are
distributed. Competitors of the Company's Beauty Division include Chanel,
Calvin Klein, Giorgio Armani, Boucheron, Issey Miyake, and Tiffany.
The Company distributes its Beauty Division products directly in the United
States. To build its international distribution network, as of March 1, 1996,
the Company had entered into 10 agreements for the distribution of its Beauty
Division products in certain locations in Europe, Asia, the Middle East,
Central America, South America, and Australia. The Company's distribution
agreements require its distributors to make substantial investments in
advertising and marketing. Generally, the distributor agrees to spend on
advertising and marketing during each year an amount equal to a stated
percentage of its sales during that year, with a minimum advertising and
marketing obligation based upon that same percentage of its minimum sales
requirement for that year.
Certain of the Company's Beauty Division products are packaged in bottles
designed by Stephan Weiss. Upon the closing of the Offering, Mr. Weiss will
grant to the Company, an exclusive royalty-free worldwide license on the use
of the designs for the bottles and a non-exclusive, royalty free worldwide
license for the use of the utility patents for the bottles. For additional
information regarding the license, see "Certain Relationships and Related
Transactions--License Agreement for Perfume Bottles."
The following table sets forth certain information concerning the
approximate number and location of doors through which the Company's Donna
Karan New York(R) beauty products were sold as of December 31, 1995 and are
expected to be sold by the end of 1996:
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF DOORS
---------------------------------------------------------------------
1995 1996
---------------------------------------------------------------------
UNITED STATES INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
------------- ------------- ----- ------------- ------------- -----
<S> <C> <C> <C> <C> <C>
617 2,079 2,696 752 2,624 3,376
</TABLE>
50
<PAGE>
LICENSED PRODUCTS
A principal goal of the Company is to maintain the integrity of the
trademarks under which it markets its products. The Company strives to provide
the consumer with high quality products and to maintain a consistent image in
all its advertising and marketing programs. The Company, from time to time,
selectively has entered into license or joint venture agreements with third
parties. In entering into such arrangements, the Company seeks to preserve the
integrity of the brand names by controlling the design and quality of the
products manufactured by the licensees. In addition, the Company seeks to
control the manner in which such products are advertised, marketed, and
distributed and, in most cases, obtains from the licensee or joint venture
partner a commitment for a minimum level of sales and advertising. To ensure
that products sold by its licensees meet the Company's design and quality
standards, the Company takes an active role in the design, quality control,
advertising, marketing, and distribution of each licensed product.
To profit further from the Company's brand recognition and the quality and
design standards which it successfully has established over the past 10 years,
in addition to those material arrangements which currently are in place
(described below), the Company is now more aggressively pursuing licensing as
a way to continue to grow its brands with products for which it does not wish
to develop the expertise in manufacturing and distribution. The Company
intends to enter into other licensing or joint venture arrangements when it
believes such arrangements will allow products sold under its brands to be
manufactured with the highest quality and marketed and distributed most
effectively. In determining whether to bring a new product to market on its
own or through a joint venture or license, the Company considers various
factors, including the Company's desire to bring a product to market at a
particular time, the potential profit to be earned, and the capital and
management resources available to the Company at such time.
The Company currently has license agreements with the following licensees
providing for the manufacture and distribution of the categories of products
listed below under the trademarks and in the territories specified:
<TABLE>
<CAPTION>
LICENSEE PRODUCTS LICENSED MARKS TERRITORY
-------- -------- -------------- ---------
<S> <C> <C> <C>
Hanes Hosiery, a Women's pantyhose, knee- Donna Karan New York(TM) Worldwide
division of Sara Lee high stockings, tights, DKNY(R)
Corp. and socks
Wacoal America, Inc. Women's intimate apparel Donna Karan New York(TM) United States and
Canada (1)
The Lantis Corporation Sunglasses, optical Donna Karan New York(TM) Worldwide
frames, magnifiers, and DKNY(R)
eyewear accessories
Albert S.A. Children's apparel DKNY(R) Europe and
DKNY(R) KIDS the Middle East
Butterick Company, Inc. Paper patterns and Donna Karan New York(TM) Worldwide
(Vogue Patterns) knitting patterns DKNY(R)
</TABLE>
- --------
(1) This license provides that the licensee may sell its products to customers
of the Company outside of the United States and Canada under certain
circumstances.
Effective in late 1995, the Company granted a license for the manufacture
and distribution of children's apparel under the DKNY(R) brand name to Albert
S.A. The Company previously test marketed children's apparel in 1992 in a
limited number of doors in the United States. The Company subsequently
determined that it would be more profitable to enter into a license for
children's apparel with a licensee that had greater experience in
manufacturing children's apparel. The Company has retained the right to
manufacture and distribute, or license the right to manufacture and
distribute, DKNY(R) children's apparel in all markets outside Europe and the
Middle East. The Company currently is negotiating a non-exclusive supply
agreement with Albert S.A. with respect to the supply of DKNY(R) children's
apparel for those markets. The Company plans to begin distribution in certain
territories outside of Europe and the Middle East in 1997. The Company also
plans to introduce a full range of home furnishings starting in 1997.
51
<PAGE>
DESIGN
The Company was founded upon the marketing and design talents of Ms. Donna
Karan, and its success to date is largely attributable to her vision and
creative talent. The Company believes that its future success will depend in
substantial part on its ability to continue to originate and define fashion
trends, as well as to anticipate and react to changing consumer demands in a
timely manner. Ms. Karan, who has been designing high fashion apparel for over
25 years, ultimately is responsible for the Company's creative inspiration,
strategic planning, marketing, and overall fashion direction. In addition to
Ms. Karan, as of May 8, 1996, the Company employed a design staff of 115
people, several of whom have assumed substantial design responsibilities under
Ms. Karan's supervision. The Company has 11 design teams, each with a head
designer, responsible for the creation, development, and coordination of the
fabrications and silhouettes of the Company's collections. The Company
encourages originality in its designers, and management believes that one of
the keys to the growth of the Company has been not only Ms. Karan's individual
talents, but also her willingness to delegate design responsibility to the
various design teams and the ability of such teams to respond with creative
and innovative designs.
In recognition of the importance of maintaining a staff of highly qualified
designers, Ms. Karan and other head designers constantly review the designs of
independent young designers to find new talent. One element of the search for
qualified designers is Ms. Karan's service as a member of the Board of
Governors of the Parsons School of Design, a division of The New School.
The Company's design teams constantly monitor fashion trends and search for
new inspiration. The Company seeks to assist its designers in developing new
ideas through various means. These include frequent meetings of the design
teams to discuss current fashion trends, review of the fashion library, which
includes over 94,000 items from the Company's past collections and antique
garments and accessories assembled by the Company, and installation of a
computer-aided design system which allows a designer to view and modify two-
and three-dimensional images of a new design on a computer screen. See
"Management Information Systems; Inventory and Credit Control" below in this
section.
INTERNATIONAL BUSINESS
During 1995, 66.1% of the Company's net revenues (excluding net revenues
generated from outlet stores and licensing) were derived from within the
United States and 33.9% were derived from outside the United States. The
Company views international distribution as a major opportunity for future
sales growth of the Company's products. To service an international clientele,
the Company has established a separate international division staffed by a
multilingual sales and customer service staff in its New York headquarters and
in its customer service and distribution centers in Hong Kong, Tokyo, The
Netherlands, Toronto, and New Jersey. As an added convenience for its
customers, the majority of the Company's products sold internationally are
sold at prices which include all shipping and handling charges and duties. See
"Warehouse and Distribution Centers" below in this section.
The following table shows the net revenues derived by the Company in each of
the geographic areas listed below during each of the past five years:
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
United States(1)................................... $158 $195 $260 $268 $301
Japan.............................................. 17 16 31 51 64(2)
Europe and Middle East............................. 4 10 20 38 57
Asia (excluding Japan)............................. 4 7 11 16 23
Other markets...................................... 2 3 5 5 10
</TABLE>
- --------
(1) Excludes in the United States $12 million, $29 million, $38 million, $42
million, and $55 million of net revenues from outlet stores and licensing
for 1991, 1992, 1993, 1994, and 1995, respectively.
(2) As of March 31, 1995, the Company sold 70% of its interest in the
operations of Donna Karan Japan. After the first quarter, sales are
reflected as made from the Company's divisions directly to Donna Karan
Japan.
52
<PAGE>
DISTRIBUTION ARRANGEMENTS
The Company sells its products in Japan through Donna Karan Japan, a
Japanese corporation in which the Company has a 30% equity interest. In March
1995, the Company sold 52.5% of its interest in the operations of Donna Karan
Japan to HPL and 17.5% of its interest in the operations of Donna Karan Japan
to a corporation owned by a private investor with a substantial interest in
HPL. In connection with the sale to HPL, the Company entered into an agreement
with HPL and the private investor which provides that Donna Karan Japan will
be the exclusive distributor of the Company's products in Japan, subject to
certain limited exceptions. The agreement also provides that the Company, for
a management fee based on the net sales of Donna Karan Japan, will manage the
day-to-day operations of Donna Karan Japan, for an initial term through
December 31, 2000. The term is renewed automatically for successive five-year
terms thereafter, subject to certain conditions. The Company believes that by
selling its products in Japan through Donna Karan Japan, it can provide its
Japanese customers with a higher level of customer service than that provided
by the distributors of its competitors' products and can maintain greater
control over its distribution policies and expenses. To reinforce its
exclusive image and the uniqueness and appeal of its products, the Company's
products are distributed in Japan only through better department stores and
specialty stores. In addition, the Company plans to distribute products in
Japan through four free-standing International Retail Stores which are
scheduled to be opened by HPL by the year 1999 in accordance with the Retail
Agreement (as defined herein). See below in this section for a description of
the Company's Retail Agreement with HPL.
FREE-STANDING INTERNATIONAL RETAIL STORES
As part of the Company's growth strategy, the Company has entered into
license arrangements and strategic alliances for the opening of free-standing
International Retail Stores in a number of international markets under the
Donna Karan New York(TM), DKNY(TM), or Donna Karan(TM) names. The free-
standing International Retail Stores operated under these names carry the
corresponding product lines exclusively. As of March 1, 1996, there were 29
free-standing International Retail Stores owned by third parties unaffiliated
with the Company operating under the following names and located in the
following countries:
<TABLE>
<CAPTION>
DONNA KARAN NEW YORK(TM)* DKNY(TM)* DONNA KARAN(TM)*
- ------------------------- ----------------------------------------- -----------------
<S> <C> <C> <C>
Israel(1) Belgium(1) The Philippines(1) Saudi Arabia(2)**
Malaysia(1) England(1) Singapore(1)
Singapore(1) Greece(2) Switzerland(3)
Switzerland(2) Hong Kong(5) Taiwan(1)
United Arab Emir-
ates(1) Indonesia(1) Thailand(1)
Malaysia(1) Turkey(1)
The Netherlands(1) United Arab Emirates(1)
</TABLE>
- --------
* The numbers in parentheses indicate the number of stores opened in the
particular country. Each Donna Karan New York(TM) free-standing
International Retail Store exclusively carries Donna Karan New York(R) brand
name products and each DKNY(TM) free-standing International Retail Store
exclusively carries DKNY (R) brand name products.
** In Saudi Arabia there are two stores which carry only women's products
under both of the Company's brand names.
The Company anticipates that 10 additional free-standing International
Retail Stores will be opened in 1996 (including five stores to be opened under
the Retail Agreement with HPL). These stores are anticipated to be located in
England, Hong Kong, Indonesia, South Korea, Lebanon, Norway, Saudi Arabia, and
Taiwan.
As part of the Company's strategy of opening additional, free-standing
International Retail Stores, in March 1995, the Company entered into a retail
agreement (the "Retail Agreement") with HPL and a corporation owned by the Ong
family, which also has a substantial interest in HPL, providing for the
establishment by HPL of an aggregate minimum, subject to certain exceptions,
of 29 free-standing International Retail Stores in Hong Kong, The People's
Republic of China, The Philippines, South Korea, Taiwan, and Japan (the
"Territories") by
53
<PAGE>
December 31, 2000. The first free-standing International Retail Store under
the Retail Agreement was opened in Hong Kong in January 1996, and the Company
anticipates that approximately five additional, free-standing International
Retail Stores will be opened in accordance with the Retail Agreement by the
end of 1996. The Retail Agreement, which has an initial term through December
31, 2005, provides for minimum purchases by HPL of the Company's products. HPL
has the right to sell all apparel, accessories, and shoes which are
manufactured by the Company at the time of sale in its free-standing
International Retail Stores in the Territories. If the Company enters into a
license for the distribution of any of its products or determines to
distribute shoes or non-apparel products, HPL may have certain distribution
rights in the Territories with respect to those products. During the term of
the Retail Agreement, except under limited circumstances, the Company is not
entitled to distribute or sell its products (other than its beauty products)
in the Territories (other than Japan) except through the free-standing
International Retail Stores in the Territories.
The Company intends to enter into additional licenses or strategic alliances
with corporate partners for the opening of additional, free-standing
International Retail Stores. The Company believes that this strategy will
enable it to penetrate the international market more effectively, particularly
in Europe, where most of the retail apparel business is conducted through
smaller retail boutiques.
CUSTOMERS
The Company's customers consist of a limited number of better department and
large specialty stores, including Bloomingdale's, Macy's, Saks Fifth Avenue,
Neiman Marcus, Bergdorf Goodman, and Nordstrom, Donna Karan Japan, the
Company's 30%-owned distributor in Japan, free-standing International Retail
Stores, and boutiques.
Certain of the Company's customers, including some under common ownership,
have accounted for significant portions of the Company's gross revenues.
During 1995, Bloomingdale's, Macy's, and affiliated stores, owned by Federated
Department Stores, together accounted for approximately 12.3% of the Company's
gross revenues. Saks Fifth Avenue stores accounted for approximately 9.8% of
gross revenues; Neiman Marcus stores and Bergdorf Goodman stores, owned by The
Neiman Marcus Group, Inc., together accounted for approximately 7.8% of the
Company's gross revenues; and Nordstrom stores accounted for approximately
7.1% of the Company's gross revenues. Sales to entities affiliated with HPL,
including Donna Karan Japan, the Company's 30%-owned distributor in Japan, and
certain free-standing International Retail Stores, accounted for approximately
11.1% of the Company's gross revenues for 1995. The Company's 10 largest
customers accounted for approximately 60.8% of the Company's gross revenues
during 1995.
The Company is considering a strategy for the opening of full-price, free-
standing retail stores in select locations in the United States under a
license or franchise program, joint venture, or other arrangement. The Company
believes that free-standing retail stores will provide a retail environment,
fully coordinated with the Company's brand image and apparel collections.
The Company has entered into license arrangements and strategic alliances
for the opening of free-standing International Retail Stores. See
"International Business" above in this section.
OUTLET STORES
As of May 1, 1996, the Company operated 34 outlet stores in 21 states: six
in California; four in Florida; three in New York; two each in Maine, New
Jersey, and Pennsylvania; and one each in Colorado, Georgia, Hawaii, Indiana,
Massachusetts, Michigan, New Hampshire, New Mexico, Ohio, South Carolina,
Texas, Vermont, Virginia, Washington, and Wisconsin. The Company established
its outlet stores to dispose of the excess inventory in a manner which does
not adversely impact upon its department and specialty store customers. The
outlet stores also carry a limited amount of the Company's licensed products.
The Company's policy has been to make a style available in its outlet stores
after its customers have taken their first markdown on that style. Sales in
the Company's outlet stores accounted for approximately 9.6% of the Company's
net revenues for 1995. The Company currently anticipates that it will have
approximately 36 outlet stores in operation by the end of 1996.
54
<PAGE>
SALES
As of May 8, 1996, the Company had a sales force of 117 people, all of whom
were based in the Company's New York showrooms. Each division employs a
separate sales force, managed by a vice president of sales. All sales
personnel are salaried, other than the Beauty Division sales personnel who
receive commissions. Each spring and fall season's men's and women's Designer
Collections and DKNY(R) collections are introduced first to the press and
retailers at fashion shows which generally are held three to six months in
advance of shipping of the spring and fall merchandise.
The Company maintains a staff of 18 apparel merchandise coordinators and 25
Beauty Division account executives who service the stores carrying its
collections, as well as three Beauty Division regional managers who supervise
the Beauty Division account executives. Merchandise coordinators visit each of
the stores carrying the Company's products several times a year, depending on
the store's volume, to provide assistance in displaying the products, as well
as conducting training seminars. The Beauty Division account executives call
on all doors at least once every 30 days to train, motivate, schedule, and
execute in-store events, hire rotators (sell-through personnel), and write
orders. Beauty Division account executives also coordinate in-store training
and events with all other Company product lines carried in each store.
DISTRIBUTION
The Company has sought to maintain the uniqueness of, and consumer demand
for, its products by distributing its products through better department and
specialty stores and boutiques, and more recently through the free-standing
International Retail Stores operated under the Donna Karan New York(TM),
DKNY(TM), or Donna Karan(TM) brand name, all of which cater to fashion-
conscious consumers, and by being attuned to its consumers' desires through an
interactive, consumer-responsive approach to the design and quality of its
products. The Company seeks to assist its retail customers to achieve a high
sell-through of products at full price by limiting the number of stores that
carry its products and working closely with its retail accounts to determine
the mix and quantity of products in its orders, and by providing retailers
with the services of the Company's account executives, who interact with the
store's staff and assist the retailer's customers. The Company also constantly
targets its retail customer base with various marketing programs and material,
including outreach programs, trunk shows, mailers, and catalogs. In addition,
the Company believes that its strategies of creating different brands
positioned to appeal to different segments of the market and creating new
products within existing brands support its marketing efforts, attract new
customers, and generate additional sales.
Each retail customer that carries one or more of the Company's collections
was selected on the basis of its ability to display and promote those
collections effectively. Retailers carrying the Company's collections stock
and display the merchandise in accordance with the Company's standards, which
may include creating a dedicated boutique within the store, or providing
special signs, display cases, and display racks, depending on the collection.
The Company believes that the profitability of the Company's collections for
its retail customers encourages them to locate the Company's products in high
traffic areas within their stores and to provide attractive displays for the
Company's products. It also enables the Company to work closely with the store
buyers to ensure that each store carries a representative cross-section of the
complete collection for each season.
When the Company launches a new collection, it typically does so at either a
single retail store or at a limited group of retail stores. For example, the
Donna Karan New York(R) Collection for men initially was sold exclusively at
one specialty store in New York for an entire year, and the Donna Karan New
York(R) women's fragrance was launched only in select Bloomingdale's stores
during the third and fourth quarters of 1992. The Company's experience has
demonstrated that limiting the initial distribution of a collection encourages
active promotional participation by the retailers involved in the launch and
increases consumer demand for the product. The Company believes that, as a
result of the success which its department and specialty store customers have
experienced in selling the Company's products, it has received significant
support for each of the new collections it has introduced.
55
<PAGE>
ADVERTISING, PUBLIC RELATIONS, AND MARKETING
All worldwide advertising, public relations programs, and marketing programs
are managed on a centralized basis through the Company's Creative Services and
Public Relations Departments located in New York. Centralization of the
Company's advertising, public relations, and marketing programs enables the
Company to promote a consistent global image for the Company and its products.
In addition to expenditures by its product licensees, expenditures by the
Company on advertising, public relations, and marketing totaled $33.8 million
in 1995 (and cumulatively, $101.8 million since 1993).
ADVERTISING
The Company supports the marketing of its products with extensive image
advertising designed to appeal to a specific target group of customers. The
Donna Karan New York(R) brand focuses on the international sophistication and
urban lifestyle of affluent customers with an appreciation for luxury
products, and the DKNY(R) brand focuses on customers who have a more casual,
relaxed, and active lifestyle. The Company advertises principally in print and
outdoor advertising media, but also makes extensive use of video for point-of-
purchase displays, as well as mailers and catalogs. The Company's advertising
efforts, as well as the efforts of its licensees, are coordinated through the
Company's Creative Services Department which it established in 1993. The
Company believes that having its own Creative Services Department enables it
better to control advertising, media placement, and production costs.
The Company's Creative Services Department is responsible for the worldwide
consistency of and the creation of the advertising campaigns, mailers, and
catalogs for the Company and its licensees. The Creative Services Department
also is responsible for the media placement of such advertising, and is
available to assist each division of the Company with a variety of projects,
including the design and production of fashion shows, corporate presentations,
and archival maintenance. Additionally, the Creative Services Department
assists the other divisions of the Company with the marketing, graphic design,
and production of collateral materials, such as point-of-purchase displays,
in-store video displays, and boutique design. The Creative Services Department
maintains constant contact with the Company's divisions which enables it to
anticipate the advertising needs of each of the divisions. To assist its
Creative Services Department in performing its various functions, the Company
has provided it with a state-of-the-art computer-aided design system in its
New York headquarters which can be used to create two-dimensional graphics and
three-dimensional images for use in creating advertising and marketing pieces.
The system is also used by the Company's designers in the development of new
products. Additionally, when appropriate, the Creative Services Department
utilizes specialized computer-aided design systems, such as stereolithography.
As of May 8, 1996, the Company's Creative Services Department consisted of 27
full-time personnel.
PUBLIC RELATIONS
The Company's Public Relations Department is responsible for the worldwide
coordination and communication for each of the Company's divisions with the
industry and general press and media and offers up-to-date information on the
Company's products and activities. The Public Relations Department consisted
of 30 full-time employees as of May 8, 1996.
MARKETING
Ms. Karan, the Company's Chief Designer, is an integral part of the
marketing process. As a result of her professional accomplishments, she enjoys
celebrity status and garners international recognition. Furthermore, she has
been the subject of numerous newspaper and magazine articles and has appeared
frequently on broadcast media. Ms. Karan's personal appearances, done for key
store launches, "trunk shows," and major events, and her in-store videos in
which she communicates with the consumer about the Company's seasonal fashion
point-of-view, and her other appearances in public and the media, serve to
support and institutionalize all the Company's brands. See "Risk Factors--
Dependence on Key Personnel."
The Company utilizes various means of advertising and marketing, such as
corporate mailers, videos, catalogues, newsletters, and consumer awareness
programs. For example, the Company markets its Donna Karan
56
<PAGE>
New York(R) brand name and image through its Woman to Woman(TM) newsletter
which is a dialogue between the Company, the designer, and the consumers. The
Woman to Woman(TM) newsletter offers a toll-free number to answer consumer
questions and open dialogue with consumers and to improve and focus the
Company's marketing programs; informs consumers of new products in all areas
of the Company; and discusses new fashion trends, among other topics.
The Company further strengthens awareness by sponsoring special events, such
as its sponsorship of two drivers of a racing car team for the 1996 Indy Car
race season, and through the House of Donna Karan which can be accessed
through the Company's Internet site on the World Wide Web.
SOURCING AND PRODUCT DEVELOPMENT
The Company sources products through its established relationships with
leading contractors. The Company seeks to achieve the most efficient means for
the timely delivery of its high quality products. The Company continues to
rebalance its sourcing by region in response to increasing demand within each
region.
The Company works with fabric mills in the United States, Europe, and the
Far East to develop woven and knitted fabrics that enhance the comfort,
design, and look of its products. The Company employs fabric specialists in
the United States, Italy, and Hong Kong who perform this function.
The lead times for the various stages of the Company's operations from
sourcing to delivery of finished goods differ for each of the Company's
divisions and for the various selling seasons. Fabric acquisition for a
substantial portion of the Company's apparel products takes place generally
four to five months prior to the corresponding selling season, although the
Company may begin to acquire fabric for certain products up to a year in
advance of the corresponding selling season. Apparel production (cut,
manufacture, and trim) generally begins after the Company has received
customer orders, approximately 90 to 120 days prior to delivery of finished
goods to customers.
The Company engages both domestic and foreign contractors for the production
of its products. During 1995, approximately 46.6% of direct purchases of raw
materials, labor, and finished goods in its apparel, accessories, shoes, and
beauty products were produced in Hong Kong, Taiwan, South Korea, and other
Asian countries, approximately 28.1% were produced in the United States,
approximately 22.9% were produced in Europe, and approximately 2.4% were
produced elsewhere. The production and sourcing staff in New York oversees all
aspects of fabric acquisition, apparel manufacturing, quality control, and
production, as well as researching and developing new sources of supply. The
Company operates product sourcing and quality control offices in Hong Kong and
Milan. Approximately 150 people are employed in Hong Kong and approximately 40
people are employed in Milan, Italy. Finished goods production, quality
control, and delivery are monitored through an exclusive agent in Seoul, South
Korea and fabric production, quality control, and delivery are monitored
through an exclusive agent in Prato, Italy.
The Company does not own any production facilities. The Company's apparel
products are produced for the Company by approximately 500 different
contractors. None of the contractors engaged by the Company accounted for more
than 10% of the Company's total production during 1995. Although the Company
has a written agreement with only one of its contractors, it has had long-term
relationships with many of them. The Company uses a variety of raw materials,
principally consisting of woven and knitted fabrics and yarns. During 1995,
approximately 35% of the Company's raw materials were purchased by the Company
directly from suppliers and sent to contractors to be cut and sewn or
assembled. The rest of the raw materials used in the Company's products were
purchased by contractors from mills designated by the Company. In some cases,
the Company must commit to purchase fabric from a mill before it will begin
production. Although the Company must make commitments for a portion of its
fabric purchases well in advance of sales, the Company's risk is not material,
because the Company cuts the majority of its garments only to fill actual
customer orders. If the Company overestimates the demand for a particular
fabric or yarn, it frequently can utilize the excess in garments made for
subsequent seasons or made into past season's silhouettes for distribution in
its outlet stores. See "Outlet Stores" above in this section.
57
<PAGE>
QUALITY CONTROL
The Company monitors the quality of its fabrics prior to the production of
garments and inspects prototypes of each product before production runs are
commenced. The Company also performs random in-line quality control checks
during and after production before the garments leave the contractor. Final
random inspections occur when the garments are received in the Company's
distribution centers. The Company currently has 19 full-time personnel engaged
in quality control located in its Hong Kong office, 14 located in New
Jersey/New York, nine located in South Korea, and six Donna Karan Japan
personnel in Japan. The Company believes that its policy of inspecting its
products at its distribution centers and at the contractors' facilities is
important in maintaining the quality and reputation that its garments enjoy.
The Company permits defective garments to be authorized for return for
credit by the purchasers. Less than one percent of the garments shipped by the
Company during each of the last three years has been returned under this
policy.
WAREHOUSE AND DISTRIBUTION CENTERS
To facilitate the distribution of its apparel products, the Company utilizes
distribution centers at five strategically located sites. Two of the
distribution centers are operated by the Company and three are operated by
independent contractors. Distribution of the Company's apparel and accessory
products in the United States is centralized in a Carlstadt, New Jersey
facility operated by the Company. The Company also operates a distribution
center in Hong Kong, which services the Pacific rim, other than Japan. The
Company utilizes a warehouse operator in The Netherlands that services the
European market and a warehouse operator in Toronto that services the Canadian
market, and Donna Karan Japan utilizes an independent warehouse operator in
Tokyo, Japan that services the Japanese market.
To facilitate the distribution of the Beauty Division products, the Company
utilizes the services of a public warehouse located in New Jersey. This
facility is used to distribute the Company's products throughout the United
States, and to consolidate and ship its products internationally. All
administrative functions associated with distribution are performed at the
Company's Carlstadt warehouse facility.
The Company currently intends to close most of its operations at the
buildings comprising its Carlstadt facility and to relocate its apparel and
shoe operations to a single facility in another location. The Company
anticipates that such relocation will not be complete until the first half of
1997 at the earliest. Immediately following the closing of the Offering, the
Company will accrue a non-recurring pre-tax charge of approximately $5.0
million, representing the anticipated costs of the relocation of its warehouse
facilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
To try to ensure that each of its retail customers receives the merchandise
ordered in satisfactory condition, substantially all apparel and accessories
produced for the Company are processed through one of the Company's
distribution centers before delivery to the retail customer. In general,
merchandise is not drop shipped directly from the contractor to the customer.
Each customer is assigned to one of the Company's distribution centers,
depending on the customer's geographical location. Products are shipped to the
customer from the assigned distribution center on hangers or in cartons. The
Company's distribution centers are linked by computer to the Company's
executive offices, enabling the Company to maintain up-to-date information on
the availability of merchandise at all locations.
MANAGEMENT INFORMATION SYSTEMS; INVENTORY AND CREDIT CONTROL
The Company believes that advanced information processing is important to
maintain its competitive position. Consequently, the Company has invested in
computer mainframe and network systems and software (i) to enhance the speed
and efficiency of certain aspects of its business, such as product design,
order entry, distribution, product control, and financial reporting, (ii) to
improve the efficiency and integration of its international operations, and
(iii) to provide timely inventory information. All the Company's international
and domestic operations are networked to provide the Company with worldwide
customer service, production and inventory control, and electronic mail
capabilities. The Company's worldwide information processing system operates
24 hours a day.
58
<PAGE>
The Company's Creative Services Department has an advanced computer-aided
design system. The Company also has invested in a computerized marker and
grading system which can be used by its personnel in New York to print
patterns and markers locally and to transmit them electronically to its
international offices for delivery to contractors to improve the Company's
fabric utilization ratio and maintain the quality of its garments.
The Company has a retail management software system which is used in all of
its outlet stores. The system is used for point-of-sale transactions and
information, as well as office management, including inventory control. The
Company also has both a financial information software management system and
an apparel company management software system. The Company's inventory is
reviewed on an ongoing basis, and the division presidents constantly review
their divisions' inventory positions, production, receiving, and shipping
schedules to ensure that all orders are filled timely. Senior management also
reviews the Company's inventory positions, open order positions, and
production and shipping schedules at biweekly operations meetings. To date, it
has been the Company's policy to dispose of all seasonal items, either through
sale through its outlet stores or, if necessary, off-price retailers, once its
major department store customers have marked down such items.
The Company manages all its own credit and collection functions. The Company
does not factor its accounts receivable and maintains credit insurance to
manage the risk of bad debts. The Company's bad debt write-offs were less than
1% of sales for 1995. In January 1996, Barneys commenced bankruptcy
proceedings under Chapter 11 of the United States Bankruptcy Code. Barneys
accounted for 2.3% of the Company's gross revenues during 1995, and the
Company estimates that its maximum uninsured loss as a result of Barneys'
bankruptcy will be approximately $2.0 million, which amount has been reserved
for at December 31, 1995. The Company does not believe that Barneys'
bankruptcy will have a material adverse effect on the Company.
COMPETITION
Competition is strong in the segments of the fashion industry in which the
Company operates. The Company competes with numerous designers and
manufacturers, domestic and foreign, none of which accounts for a significant
percentage of total industry sales, but some of which are significantly larger
and have substantially greater resources than the Company. Further, with
sufficient financial backing, talented designers can become competitors within
several years of establishing a new label. See "Products" above in this
section for the Company's competitors.
The Company competes primarily on the basis of fashion, quality, and
service. The Company's business depends on its ability to shape and stimulate
consumer tastes and demands by producing innovative, attractive, and exciting
fashion products, as well as on its ability to remain competitive in the areas
of quality and price. The Company believes that retailer and consumer
acceptance and support of its products depends to a great extent on its well-
recognized designer name and proprietary labels. The Company believes that
future growth will be achieved by utilizing the high consumer recognition of
its brand names and designer image to expand its existing business into
international markets and by adding other collections and brands in those
markets in which the Company is established and successful.
BACKLOG
The Company generally receives orders for apparel, accessory, and shoe
products approximately three to five months prior to the time the products are
delivered to stores. All such orders are subject to cancellation for late
delivery. At March 31, 1996 backlog was $158.0 million, as compared to $145.9
million at April 2, 1995. The Company's backlog depends upon a number of
factors, including the timing of the market weeks for each of the Donna Karan
New York(R) and DKNY(R) brand seasons, during which a significant percentage
of the Company's orders are received. As a consequence, a comparison of
backlog from period to period is not necessarily meaningful and may not be
indicative of eventual shipments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
59
<PAGE>
TRADEMARKS
The principal trademarks used by the Company to distinguish its brands are
Donna Karan New York(R) and DKNY(R). Under these brands the Company also uses
the following trademarks: DK(R), Donna Karan(R), DK Men(TM), a logo consisting
of the block letters DKNY and the words Donna Karan New York (with dots below
each word), DKNY Jeans and design graphics(R), and DKNY Coverings and design
graphics(R). In connection with the Reorganization and upon the closing of the
Offering, Gabrielle Studio will grant to the Company an exclusive worldwide
license in perpetuity to use and sublicense the right to use the Licensed
Marks, and to use and sublicense the right to use the name and likeness of Ms.
Karan, in connection with the sale of all products and store services, other
than those products and specified services for which Gabrielle Studio has
retained the right to use or license such trademarks. See "Certain
Relationships and Related Transactions--License Agreement for Principal
Trademarks" for a more complete description of the terms of this license and
the royalties payable thereunder.
These trademarks are the subject of registrations and pending applications
throughout the world filed by the Company on behalf of Ms. Karan, for use on a
variety of items of apparel, apparel-related products, and beauty products, as
well as in connection with retail services, and the Company continues to
expand its worldwide usage and registration of related trademarks. The Company
regards the license to use the trademarks and its other proprietary rights in
and to the trademarks as valuable assets in the marketing of its products, and
on a worldwide basis, vigorously seeks to protect them against infringement.
EMPLOYEES
As of May 8, 1996, the Company had approximately 1,570 employees, including
1,310 in the United States and 260 in foreign countries. Of the total,
approximately 310 employees hold executive and administrative positions, 115
are engaged in design, 210 are engaged in production, 460 are engaged in sales
(including the equivalent of 275 full-time sales personnel at the various
retail outlet stores), 285 are engaged in distribution, 130 are engaged in
merchandising activities, and 60 are engaged in creative services, media, and
public relations. Approximately 245 of the Company's United States production,
design, and distribution employees are members of three locals of the Union of
Needletrades, Industrial & Textile Employees, which operates under a
collective bargaining agreement. The Company considers its relations with its
employees to be satisfactory and has not experienced any job actions or labor
stoppages since its inception.
PROPERTIES
Certain information concerning the Company's principal facilities, all of
which are leased, is set forth below:
<TABLE>
<CAPTION>
APPROXIMATE AREA IN
LOCATION USE SQUARE FEET
-------- --- -------------------
<C> <S> <C>
550 Seventh Avenue
New York, New York.... Principal executive and 67,000
administrative offices; Designer
Collections design facilities,
sales offices, and showrooms;
menswear, accessories, beauty,
and shoe division offices
240 West 40th Street
250 West 40th Street
New York, New York.... DKNY(R) executive and 150,000
administrative offices,
including its design facilities,
sales offices, showrooms, and
the Company's library of design
items
Carlstadt, New Jersey.. Distribution and warehouse 351,000
facility; management information
systems and credit, and finance
operations
Kowloon, Hong Kong..... Distribution and warehouse 63,000
facility; production control,
sourcing, and quality control
Milan, Italy........... Production control, sourcing, 4,500
and quality control
</TABLE>
60
<PAGE>
The leases for these offices expire between 1996 and 2008. The leases for
the Company's New York offices provide for aggregate annual rentals of $5.4
million in 1996. The leases for the Company's other facilities provide for
aggregate annual rentals of $2.8 million in 1996. The Company anticipates that
it will be able to extend those leases which expire in the near future on
terms satisfactory to the Company or, if necessary, locate substitute
facilities on acceptable terms. In addition, the Company intends to close most
of its operations at the seven buildings comprising its Carlstadt, New Jersey
facility and to relocate its apparel and shoe operations to a single facility
in another location. The Company anticipates that such relocation will not be
complete until the first half of 1997 at the earliest. As to a related non-
recurring pre-tax charge, see "Warehouse and Distribution Centers" above in
this section. The Company also has engaged a consultant to conduct a
cost/benefit analysis of consolidating its New York City facilities.
As of May 1, 1996, the Company operated 34 retail outlet stores in leased
premises. See "Outlet Stores" above in this section. The outlet stores range
in size from approximately 2,100 square feet to 7,200 square feet. The leases
for these stores expire between 1996 and 2006 and provide for aggregate
minimum-guaranteed annual rentals of approximately $2.9 million in 1996, as
well as an additional amount based upon the aggregate annual sales of such
stores. The Company expects to renew, for the applicable renewal option
period, those leases which expire in 1996.
The Company believes that its existing facilities are well maintained and in
good operating condition and are adequate for its present level of operations.
GOVERNMENT REGULATIONS
The Company and its products are subject to regulation by the Federal Trade
Commission in the United States, and its Beauty Division products also are
subject to regulation by the Food and Drug Administration, as well as various
other federal, state, local, and foreign regulatory authorities. Such
regulations relate principally to the labelling of the Company's products and
the ingredients, labelling, packaging, and marketing of the Company's Beauty
Division products. The Company believes that it is in substantial compliance
with such regulations, as well as applicable federal, state, local, and
foreign rules and regulations governing the discharge of materials hazardous
to the environment. There are no significant capital expenditures for
environmental control matters either estimated in the current year or expected
in the near future.
LEGAL PROCEEDINGS
The Company is involved from time to time in routine legal matters
incidental to its business. In the opinion of the Company's management, the
resolution of such matters will not have a material effect on its financial
position or results of operations.
61
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names of the directors and executive officers of the Company and their
respective ages and positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Donna Karan............. 47 Chairman of the Board, Chief Designer, and Chief Executive Officer
Stephan Weiss........... 57 Vice Chairman and Director
Stephen L. Ruzow........ 52 President, Chief Operating Officer, and Director
Tomio Taki.............. 61 Director
Frank R. Mori........... 55 Director
Lee Goldenberg.......... 45 Executive Vice President--Operations
Joseph B. Parsons....... 43 Executive Vice President, Chief Financial Officer, and Treasurer
Louis Praino............ 52 Executive Vice President--Worldwide Production
Julius Stern............ 71 Executive Vice President
David L. Bressman....... 45 Vice President, General Counsel, and Secretary
</TABLE>
Donna Karan founded the Company along with Stephan Weiss, Tomio Taki, Frank
Mori, and Takihyo Inc. in 1984. Ms. Karan has served as Chief Designer and
Chief Executive Officer of the Company from the date of its formation.
Immediately prior to the formation of the Company, Ms. Karan was the head of
design at Anne Klein & Company. Ms. Karan is a member of the Board of
Directors of the Council of Fashion Designers of America ("CFDA"), the Design
Industries Foundation for AIDS, and the Martha Graham Center of Contemporary
Dance. Ms. Karan also serves as a member of the Board of Governors of the
Parsons School of Design, a division of The New School. Ms. Karan was honored
as the CFDA's Designer of the Year in 1985 and 1990 and as its Menswear
Designer of the Year in 1992. Ms. Karan has served on the Board of Directors
of the Company since April 15, 1996, and, upon the completion of the
Reorganization, will serve as Chairman of the Board, Chief Executive Officer,
and Chief Designer of the Company.
Stephan Weiss served as the Operating Principal of the Company from 1985 to
1992. Mr. Weiss has served the Company in various capacities, including having
direct supervisory responsibility for the legal department, licensing, new
business ventures, such as the Beauty Division and the Shoe Division, and
developing the Creative Services Department. Mr. Weiss has been receiving
compensation for his services with the Company since 1989. Mr. Weiss served as
Co-Chief Executive Officer of the Company from 1993 to December 31, 1995. Mr.
Weiss has served on the Board of Directors since April 15, 1996, and, upon the
completion of the Reorganization, will serve as Vice Chairman. Mr. Weiss will
consult with the Chief Executive Officer on strategic planning and will be
responsible for the Company's Beauty Division and legal department. Mr. Weiss'
office will not necessarily be a full-time position, but he will spend a
substantial amount of time as Vice Chairman.
Stephen L. Ruzow has served as President and Chief Operating Officer of the
Company since April 1989, and has served on the Board of Directors of the
Company since April 15, 1996. Prior to joining the Company, Mr. Ruzow was
employed by Warnaco Inc., a publicly-traded apparel company, as the President
and Chief Executive Officer of its Activewear Division from November 1987 to
July 1988 and as President and Chief Executive Officer of its Activewear and
Women's Wear Divisions from July 1988 to April 1989.
Tomio Taki, one of the founders of the Company, has served as Chairman of
Takihyo Inc. since 1986. From 1973 to 1985, Mr. Taki served as President of
Takihyo Inc., an affiliate of Anne Klein & Company. Mr. Taki has served on the
Board of Directors of the Company since April 15, 1996. Mr. Taki is a member
of the Board of Directors of Issey Miyake USA Corp. and Wacoal U.S.A. Corp.
and is a member of the Board of the Parsons School of Design, a division of
The New School. Immediately prior to the closing of the Offering, Mr. Taki
will resign from the Board of Directors. See "Board of Directors" below in
this section and "Certain Relationships and Related Transactions."
Frank R. Mori has served as President of Takihyo Inc. since 1986. Mr. Mori
was one of the founders of the Company and has served on the Board of
Directors of the Company since April 15, 1996. From 1975 until 1986, Mr. Mori
served as President and Chief Executive Officer of Anne Klein & Co., an
affiliate of Takihyo Inc. Mr.
62
<PAGE>
Mori has served on the Educational Foundation of the Fashion Institute of
Technology, and as a board member of The Young Playwrights Inc., the Purnell
School, and The Stride Rite Corporation. Immediately prior to the closing of
the Offering, Mr. Mori will resign from the Board of Directors. See "Board of
Directors" below in this section and "Certain Relationships and Related
Transactions."
Lee Goldenberg has been employed by the Company since April 1993 and has
been Executive Vice President--Operations of the Company since November 1995.
From April 1993 to November 1995, Mr. Goldenberg held increasingly responsible
positions with the Company, such as Senior Vice President and Chief
Information and Logistics Officer. From 1985 to April 1993, Mr. Goldenberg was
employed in various management positions at Bernard Chaus Inc., most recently
as Vice President--Management Information Systems.
Joseph B. Parsons has served as Executive Vice President and Chief Financial
Officer of the Company since February 1996 and as Treasurer of the Company
since June 1996. From January 1993 to February 1996, Mr. Parsons held various
financial positions with the Company, most recently as Vice President--
Finance. From June 1990 through December 1992, Mr. Parsons was Assistant
Controller at Crystal Brands, Inc., an apparel manufacturer.
Louis Praino has been Executive Vice President--Worldwide Production of the
Company since November 1995. Since joining the Company in October 1990 until
November 1995, Mr. Praino was Senior Vice President--Worldwide Production.
Julius Stern has been Executive Vice President of the Company since October
1992. From 1985 to October 1992 he served as President of the Donna Karan New
York(R) designer collection division.
David L. Bressman has served as Vice President and General Counsel to the
Company since April 1994 and as Secretary of the Company since June 1996. From
1984 to 1994, Mr. Bressman was a member of the New York law firm of Phillips,
Nizer, Benjamin, Krim & Ballon.
Donna Karan and Stephan Weiss are married. There are no other family
relationships among the directors and executive officers.
DIVISION PRESIDENTS
George Ackerman, 46, became President of the DKNY(R) men's division in
January 1994. From April 1990 to November 1993, Mr. Ackerman was President of
Ellesse U.S.A. Inc.
Angela Ahrendts, 35, has been employed by the Company since April 1992 and
has been President of the Donna Karan New York(R) designer collections for
women since October 1992. From August 1989 to October 1991, she was President
of Carmelo Pomodoro Company.
Anna Bakst, 34, has been employed by the Company since January 1990 and has
been President of the Shoe Division since September 1994. From December 1992
to September 1994, Ms. Bakst was Managing Director of the Shoe Division. Prior
to December 1992, Ms. Bakst was the Company's Director of Licensing.
Linda Beauchamp, 49, became President of the Donna Karan New York(R)
designer collections, men's division, in June 1991. From 1985 to June 1991,
Ms. Beauchamp was employed by Saks Fifth Avenue as Vice President, Product
Development and Fashion Merchandising.
Sonja Caproni, 53, has been President of Home Furnishings Development since
January 1996 and was President of the Donna Karan New York(R) accessory
division from May 1989 through December 1995.
Betty Ende, 50, became President of the Company's outlet store division in
December 1995. From 1990 to December 1995, Ms. Ende was Vice President of such
division.
Peter Macri, 46, became President of the Donna Karan New York(R) accessory
division in January 1996. From 1988 to 1995, Mr. Macri was President of the
United States subsidiary of DeVecchi S.r.l., an Italian luxury, leather,
fashion accessory company.
Rosella Pedretti, 42, has been employed by the Company since 1991 and has
been President of the DKNY(R) accessories division since December 1995. From
1991 to December 1995, Ms. Pedretti held increasingly responsible management
positions in the DKNY(R) accessories division.
63
<PAGE>
Jane Terker, 42, became President of the Beauty Division in May 1992. From
1989 to May 1992, Ms. Terker was President of JTP Associates, a marketing and
management consulting company. From 1984 to May 1989, Ms. Terker was Vice
President, Marketing at Cosmair, Inc. Ms. Terker is on the Executive Committee
of the Fragrance Foundation and the Board of Directors of Cosmetic Executive
Women, an industry organization.
Mary Wang, 41, became President of the DKNY(R) women's division in February
1995. From February 1994 to February 1995, Ms. Wang was Vice President--
Divisional Merchandising Manager for contemporary and junior sportswear at
Bloomingdale's. Ms. Wang was Vice President--DKNY(R) Merchandising from
October 1989 to February 1994.
BOARD OF DIRECTORS
The Company intends to establish a Board of Directors of nine persons. Upon
the closing of the Offering, Messrs. Taki and Mori will resign as members of
the Board of Directors, upon the advice of counsel, to avoid the appearance of
a conflict of interest due to their associations with the Company and Anne
Klein & Company, an affiliate of Takihyo Inc. At such time, the Board will
consist of three members and will have six vacancies.
To fill the vacancies on the Board of Directors, the Board of Directors of
the Company intends to appoint two directors who are neither officers nor
employees of the Company or its affiliates, within three months following the
closing of the Offering. As described below, the two members of the Board of
Directors first designated by the Takihyo Group shall become directors
concurrent with the appointment of the fifth member of the Board. Thereafter,
the Board of Directors intends to appoint two additional directors within six
months following the Offering, one designated by the Karan/Weiss Group, as
described below, and one appointed by the Board of Directors of the Company.
Pursuant to a stockholders agreement, the Karan/Weiss Group will be entitled
to designate one member to the Board of Directors of the Company (in addition
to themselves) as long as the combined ownership of the shares of Common Stock
held by members of the Karan/Weiss Group is not less than 20% of the then
outstanding Common Stock. The Takihyo Group will be entitled to designate (a)
two members of the Board of Directors until such time after the closing of the
Offering as the Takihyo Group sells any shares of Common Stock owned by it
(other than shares distributed to stockholders of Takihyo) and (b) thereafter,
one member of the Board of Directors as long as the Takihyo Group owns not
less than 10% of the then outstanding Common Stock, except that if either Mr.
Taki or Mr. Mori is otherwise able to serve, and is serving, as the one
designee of the Takihyo Group, then such person shall be entitled to continue
to serve as a director as long as the Takihyo Group continues to own not less
than 5% of the then outstanding Common Stock. Pursuant to the stockholders
agreement, the Karan/Weiss Group, on the one hand, and the Takihyo Group, on
the other hand, have agreed to vote the shares of Common Stock owned by them
for each other's designees (and, in the case of the Takihyo Group, for Ms.
Karan and Mr. Weiss) as directors. The designees to the Board of Directors of
Ms. Karan and Mr. Weiss and of the Takihyo Group (other than Messrs. Taki or
Mori) must be reasonably satisfactory to the Company's Board of Directors.
The Company's Board of Directors is divided into three classes. Directors of
each class will be elected at the annual meeting of stockholders held in the
year in which the term for such class expires and will serve thereafter for
three years. The first class, whose term will expire at the first annual
meeting after the Offering, currently consists of Mr. Ruzow; the second class,
whose term will expire at the second annual meeting after the Offering,
currently consists of Mr. Weiss and Mr. Mori; and the third class, whose term
will expire at the third annual meeting after the Offering, currently consists
of Ms. Karan and Mr. Taki. For further information on the effect of the
classified Board of Directors, see "Description of Capital Stock--Certain
Anti-Takeover Provisions of the Company's Certificate of Incorporation and
Bylaws." Messrs. Taki and Mori will resign as members of the Board of
Directors upon the closing of the Offering.
Directors who are employees of the Company will receive no compensation, as
such, for service as members of the Board or its Committees. It is expected
that directors who are not employees of the Company will receive stock options
under the 1996 Non-Employee Director Stock Option Plan. All directors are
reimbursed for expenses incurred in connection with attendance at meetings.
See "Management--1996 Non-Employee Director Stock Option Plan."
64
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
Upon appointment of the first two additional directors, the Board of
Directors will establish an Audit Committee and a Compensation Committee. The
functions of the Audit Committee will be to recommend annually to the Board of
Directors the appointment of the independent auditors of the Company, discuss
and review in advance the scope and the fees of the annual audit and review
the results thereof with the independent auditors, review and approve non-
audit services of the independent auditors, review compliance with existing
major accounting and financial reporting policies of the Company, review the
adequacy of the financial organization of the Company, and review management's
procedures and policies relating to the adequacy of the Company's internal
accounting controls and compliance with applicable laws relating to accounting
practices.
The functions of the Compensation Committee will be to review and approve
annual salaries, bonuses, and grants of stock options pursuant to the
Company's 1996 Stock Incentive Plan for all executive officers and key members
of the Company's design teams and management staff, and to review and approve
the terms and conditions of all employee benefit plans or changes thereto.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors does not currently have a compensation committee but
anticipates establishing one within 90 days of the closing of the Offering.
Prior to the Offering, the Company's principals and senior management were
directly involved in setting compensation for the Company's executives.
EXECUTIVE COMPENSATION
The following table sets forth, for the year ended December 31, 1995, the
cash compensation paid to Ms. Karan and the Company's four most highly-paid
executive officers for services rendered in all capacities in which they
served during such year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------
SALARY/
CONSULTING FEES BONUS OTHER ANNUAL OTHER
NAME AND PRINCIPAL POSITION ($) ($) COMPENSATION($)(1) COMPENSATION($)(2)
- --------------------------- --------------- ------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Donna Karan.............. 1995 2,734,330 -- -- --
Chairman of the Board,
Chief Executive
Officer, and Chief
Designer
Stephan Weiss............ 1995 1,583,333 -- -- --
Vice Chairman
Stephen L. Ruzow......... 1995 744,230 750,000 58,485(3) 4,620
President and Chief
Operating Officer
Patrick Spainhour........ 1995 359,327 190,000 18,946(3) 146,459
Executive Vice President
and Chief Financial
Officer(4)
Louis Praino............. 1995 357,307 150,000 23,603(3) 2,214
Executive Vice
President--Worldwide
Production
</TABLE>
- --------
(1) Represents the dollar value of annual compensation not properly
categorized as salary or bonus awarded to, earned by, or paid to the persons
listed for services rendered to the Company during 1995.
(2) Includes matching contributions under the Company's 401(k) Plan in respect
of Mr. Ruzow, Mr. Spainhour, and Mr. Praino in the amounts of $4,620,
$4,065, and $2,214, respectively, which contributions vest over a five-year
period.
(3) Includes for Mr. Ruzow and Mr. Praino, $18,000 and $14,400, respectively,
for an annual automobile allowance, for Mr. Spainhour, $12,000 for an annual
travel allowance, and for Mr. Ruzow, Mr. Spainhour, and Mr. Praino, $40,485,
$6,946, and $9,203, respectively, for an annual clothing allowance.
(4) As of February 1996, Mr. Spainhour resigned from the Company. Included
under Other Compensation for Mr. Spainhour was $142,394 for reimbursement of
certain relocation expenses.
65
<PAGE>
COMPENSATION ARRANGEMENTS
Effective upon consummation of the Offering, the Company will enter into an
agreement with Ms. Karan for her employment as Chairman of the Board of
Directors, Chief Executive Officer, and Chief Designer. The agreement has an
initial three-year term which is automatically renewable for successive three-
year terms, unless otherwise terminated. The employment agreement provides for
an annual base salary of $500,000, as adjusted annually for the Consumer Price
Index, and an annual bonus of up to 100% of base salary based on the pre-tax
profits of the Company.
During the initial three-year term of the employment agreement, Ms. Karan
may terminate her employment as Chief Executive Officer without reason, and
after such initial three-year term, Ms. Karan may terminate her employment as
Chairman of the Board of Directors, Chief Executive Officer, and Chief
Designer without reason, in each case with at least four months' notice. The
employment agreement also may be terminated at any time without notice by Ms.
Karan for "good reason" if (i) Ms. Karan (without her prior written consent)
is no longer Chairman of the Board, the sole Chief Executive Officer, and the
sole Chief Designer; (ii) Ms. Karan is assigned duties and responsibilities
inconsistent with the employment agreement (without her prior written
consent); (iii) the Company fails to pay to Ms. Karan all amounts required
under the employment agreement; (iv) there is a material breach of the
employment agreement by the Company; (v) there is a Change in Control (as
defined in the Glossary), including certain changes in ownership of voting
securities, acquisition by a third party of 30% of the voting securities of
the Company, mergers, sales of assets, and changes in the composition of the
Board of Directors; (vi) there is any fundamental change to the business or
operations of the Company which are material (without her prior written
consent); or (vii) a physician of recognized skill confirms to the Board of
Directors in writing that Ms. Karan's continued employment with the Company
would have a material adverse impact on her health or have an adverse effect
on her ability to perform her duties to the Company. The employment agreement
may be terminated by the Company only for "cause."
If Ms. Karan terminates her employment with the Company for "good reason" or
upon termination as a result of Ms. Karan's death or disability, the Company
will pay to Ms. Karan (or her estate), a lump sum cash payment equal to the
sum of her current base salary and incentive bonus from the prior year for the
greater of one year or the remaining term of the employment agreement.
The employment agreement provides that for a period of one year following
the termination of Ms. Karan's agreement, Ms. Karan shall not participate or
engage in, either directly or indirectly, any business activity that is
directly competitive with the Company's then current principal product lines
and price points and could reasonably be expected to have a material adverse
effect on the Company. The employment agreement further provides that Ms.
Karan will have no obligation to mitigate the Company's financial obligations
in the event of her termination.
During the term of the employment agreement, Ms. Karan is obligated to
devote substantially all her business time and attention to the Company and,
except with regard to Gabrielle Studio, may not have an interest in or perform
any service that is in direct competition with the Company's principal product
lines and price points, which activity could reasonably be expected to have a
material adverse effect on the Company. Subject to the foregoing and provided
there is no interference with Ms. Karan's primary obligations to the Company,
Ms. Karan may engage in certain activities for her own personal benefit, such
as personal endorsements and appearances; motion pictures; television;
writing; speaking and teaching engagements; photography; the fine arts;
designing for stage, film, and other media; architectural, industrial, and
interior design (exclusive of home furnishings) and sales of limited edition
products based on such designs; and consulting services in connection with the
foregoing.
Effective upon consummation of the Offering, the Company will enter into an
agreement with Mr. Weiss for his employment as Vice Chairman of the Board of
Directors. The agreement has an initial one-year term which is automatically
renewable for successive one-year terms, unless otherwise terminated. The
employment agreement provides for an annual base salary of $500,000, as
adjusted annually for the Consumer Price Index,
66
<PAGE>
and an annual bonus of up to 100% of base salary based on the pre-tax profits
of the Company. Under the employment agreement, Mr. Weiss shall have principal
executive responsibility for strategic planning, for the operations of the
Beauty Division, and supervising the Company's legal matters. While Mr. Weiss'
office will not necessarily be a full-time position, he will spend a
substantial amount of time as Vice Chairman. Mr. Weiss' employment agreement
is in other material respects relating to termination and non-competition
similar to the employment agreement of Ms. Karan described above.
Mr. Ruzow entered into an employment agreement, dated as of December 12,
1995, providing for his employment as President and Chief Operating Officer of
the Company until December 31, 2000. Pursuant to his employment agreement, Mr.
Ruzow will be entitled to receive an annual base salary of $800,000, $850,000,
$900,000, $950,000, and $1,000,000 in 1996, 1997, 1998, 1999, and 2000,
respectively. Mr. Ruzow shall also be entitled to a maximum cash bonus each
year of up to 100% of his then current base salary which shall be based on
specified performance criteria, with a minimum cash bonus in years 1996
through 1999, of 25% of his then current base salary. In addition, Mr. Ruzow
shall be entitled to participate in the Company's benefit plans, and the
Company has agreed to maintain a term life insurance policy on the life of Mr.
Ruzow in the amount of $5,000,000, payable to Mr. Ruzow's beneficiaries.
In connection with the Offering, Mr. Ruzow shall also be entitled pursuant
to his employment agreement to the largest initial grant of options under the
Company's 1996 Stock Incentive Plan on the same terms and conditions as those
options provided to the other senior executive officers of the Company and its
subsidiaries. In addition, upon the closing of the Offering, Mr. Ruzow shall
be entitled to receive in cash an amount equal to $5.0 million.
The employment agreement with Mr. Ruzow requires six months' notice of
intent to terminate by Mr. Ruzow and three months' notice of intent to
terminate by the Company in the event Mr. Ruzow is terminated "without cause"
(as defined therein) (or a shorter period of time if terminated for "cause"
(as defined therein)). Mr. Ruzow has also agreed not to compete with the
business of the Company for a period of one year following termination of his
employment with the Company. In the event that Mr. Ruzow is terminated by the
Company "without cause," his employment terminates because he is disabled, or
he terminates the agreement for "good reason" (as defined therein), Mr. Ruzow
shall be entitled to a severance payment in the amount of $1,000,000.
INCENTIVE COMPENSATION PLAN
The purpose of the 1996 Incentive Compensation Plan is to enable dedicated
and productive employees to share in the Company's financial growth. The plan
is administered by a Committee designated by the Company's Chief Executive
Officer, which committee includes the Company's Chief Operating Officer, Chief
Financial Officer, and Vice President of Human Resources. The committee has
the exclusive power to designate which officers and employees of the Company
participate in the plan. Participants in the plan are awarded incentive
compensation under the plan based on their achievement of performance criteria
established by the committee at the beginning of the calendar year. There are
approximately 100 employees currently subject to the plan, including executive
officers (other than Ms. Karan and Mr. Weiss), Division Presidents, Vice
Presidents, and certain other key employees.
1996 STOCK INCENTIVE PLAN
The Company has adopted the 1996 Stock Incentive Plan (the "Plan") for the
benefit of certain employees (primarily executive officers and Vice
Presidents) of the Company and its subsidiaries. The purpose of the Plan is to
attract and retain executives and other key employees who are important to the
success and growth of the Company and to create a long-term mutuality of
interest between such persons and the stockholders of the Company.
Under the Plan, options to purchase an aggregate of up to 1,475,000 shares
of Common Stock (subject to certain adjustments) and awards of up to 125,000
shares of Common Stock may be granted to employees, officers, advisors, and
independent consultants of the Company or any of its subsidiaries or, as
determined by the Committee (as defined herein), any other entity in which the
Company has a direct or indirect ownership interest. Ms. Karan, Mr. Weiss, Mr.
Mori, Mr. Taki, and non-employee directors of the Company or its affiliates
are not entitled to participate in the Plan.
67
<PAGE>
The Plan provides for the grant of incentive stock options ("ISOs") to
employees and nonqualified stock options ("NQSOs") to employees, advisors and
independent consultants. In the case of ISOs, the exercise price of an option
may not be less than 100% of the fair market value of a share of Common Stock
at the time of grant (or 110% of such fair market value if the optionee owns
more than 10% of the shares of Common Stock outstanding at the time of grant).
In the case of NQSOs, the exercise price of an option may not be less than
100% of the fair market value of a share of Common Stock at the time of grant.
Options will be exercisable for a term determined by the Committee. Unless
otherwise provided in the applicable option agreement, all options granted and
not previously exercised will become vested and immediately exercisable upon a
change in control of the Company (as defined in the Plan). In general, if
options are for any reason cancelled, or expire or terminate unexercised, the
shares covered by such options shall again be available for the grant of
options. No options may be granted after 10 years from the effective date of
the Plan. It is anticipated that options held by key employees to
purchase an aggregate of shares of Common Stock at an exercise
price equal to the initial public offering price will be outstanding on the
closing date of the Offering.
The Plan provides for the grant of awards of Common Stock ("Awards") to
participants determined by the Committee, which Awards may be subject to
certain restrictions or the achievement of certain goals as determined by the
Committee. Shares subject to an Award may not be sold, assigned, transferred,
pledged, hypothecated or otherwise disposed of, except by will or the laws of
descent and distribution, for such period provided in the participant's Award
agreement. Unless otherwise provided in the applicable Award agreement, the
restrictions, if any, on an Award shall lapse upon a change in control of the
Company (as defined in the Plan). In addition to the grants of stock options
described above, it is anticipated that an aggregate of up to 125,000 shares
of Common Stock will be awarded to approximately additional employees on
the effective date of the Offering.
The Plan will be administered and interpreted by a committee (the
"Committee") appointed by the Company's Board of Directors consisting of two
or more members of the Company's Board of Directors, each of whom is intended
to be a "disinterested person" under Section 16(b) of the Securities Exchange
Act of 1934 (to the extent then required). The Committee generally is
empowered to interpret the Plan, prescribe rules and regulations relating
thereto, determine the terms of the option agreements and Award agreements,
amend them (in certain cases only with the consent of the participant),
determine the individuals to whom options or Awards are to be granted,
determine the number of shares subject to each option and the exercise price
thereto, and take all actions in connection with the Plan and the options and
Awards thereunder as the Committee, in its sole discretion, deems necessary or
desirable. The Committee may modify, suspend, or terminate the Plan; provided,
however, that certain material modifications affecting the Plan must be
approved by the stockholders, and any change in the Plan that may adversely
affect a participant's rights under an option or Award previously granted
under the Plan requires the consent of the participant.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Company will adopt the 1996 Non-Employee Director Stock Option Plan (the
"Directors' Plan") which provides for the granting of nonqualified options to
purchase shares of Common Stock to any director of the Company who is not an
active employee or officer of the Company or a subsidiary thereof and who is
not an officer, director or employee of certain affiliates of the Company
(each, an "Eligible Director"). Neither Ms. Karan or Mr. Weiss (nor Mr. Mori
or Mr. Taki, if either of them is serving as a director) is eligible to
receive options under the Directors' Plan. The Directors' Plan is designed to
provide a means of giving Eligible Directors an increased opportunity to
acquire an investment in the Company, thereby maintaining and strengthening
their desire to remain with or join the Company's Board of Directors and
stimulating their efforts on the Company's behalf.
68
<PAGE>
The Directors' Plan authorizes the issuance of up to 100,000 shares of
Common Stock, subject to adjustments in certain circumstances. No options may
be granted 10 years from the effective date of the Directors' Plan.
Eligible Directors are eligible to receive options under the Directors' Plan
in accordance with the terms thereof. Each Eligible Director, on the initial
grant date (as defined in the Directors' Plan), will be granted NQSOs to
purchase shares of Common Stock. Each year, other than with respect
to the year in which an Eligible Director receives an initial grant of
options, as of the first day of the month following the Annual Meeting of
Stockholders, each Eligible Director will receive a nonqualified option to
purchase shares of Common Stock. Upon the exercise of an option,
the purchase price paid by an Eligible Director will be 100% of the fair
market value of such share at the time of the grant of the option, or the par
value of the share, whichever is greater.
The options to purchase shares of Common Stock described above will be
exercisable on or after the first anniversary of the date of grant. In
addition, options granted and not previously exercisable will become vested
and fully exercisable immediately upon a change in control (as defined in the
Directors' Plan).
Each option will expire upon the tenth anniversary of the date of grant.
Subject to the number of shares authorized for issuance under the Directors'
Plan and the term of the Directors' Plan, the Directors' Plan shall continue
in effect without limit unless and until the Board of Directors otherwise
determines.
If an Eligible Director terminates his or her service on the Board of
Directors for any reason, including disability, death, resignation, or failure
to stand for reelection, any exercisable option which has not expired may be
exercised with respect to the number of shares of Common Stock which were
exercisable on the date the Eligible Director terminated his or her service
with the Company at any time during the earlier of (i) the one-year period
following such date, or (ii) the remaining term of the option. Any unexpired
but unexercisable option shall terminate and become null and void as of the
date the Eligible Director terminates his or her service with the Company.
The Directors' Plan is administered by the Board of Directors or a duly
appointed committee of the Board which has the full and final authority to
interpret the Directors' Plan and to adopt and amend such rules and
regulations for the administration of the Directors' Plan as the Board may
deem desirable. In addition, the Board of Directors has the right to amend or
terminate the Directors' Plan in certain circumstances; provided, however,
that unless first duly approved by the holders of Common Stock entitled to
vote thereon, no amendment or change may be made in the Directors' Plan: (i)
to increase the number of shares available for grant under the Directors'
Plan; (ii) to reduce the minimum exercise price at which any option may be
exercised; (iii) to change the requirements as to eligibility for
participation under the Directors' Plan; (iv) to change the number of options
to be granted or the date on which such options are to be granted; or (v) to
increase the benefits accruing to participants under the Directors' Plan.
69
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LICENSE AGREEMENT FOR PRINCIPAL TRADEMARKS
In connection with the Reorganization and upon the closing of the Offering,
Gabrielle Studio (with respect to the License Agreement, the "Licensor"), a
corporation wholly-owned by Ms. Karan, Mr. Weiss, and the KW Trusts, will
enter into a license agreement (the "License Agreement"), which will amend in
its entirety the licensing arrangements previously existing between the
Company and Gabrielle Studio, the terms of which could, in certain
circumstances, including the Offering, provide for higher royalty payments to
Licensor than those under the License Agreement. The License Agreement
provides for the grant of an exclusive license throughout the world to use,
and to sublicense the right to use, the trademarks "Donna Karan," "Donna Karan
New York," "DKNY," "DK," and, in addition, all variations thereof
(collectively, the "Licensed Marks") and to use and to sublicense the right to
use the name, signature and likeness of Ms. Karan (the "Name") in connection
with the design, manufacture, distribution, sale (both at retail and at
wholesale), advertising, marketing and promotion of products of any kind,
nature, or description except for certain products and other matters, such as
food products, restaurants, toys, and games and in connection with the
provision of certain share services.
The term of the License Agreement will commence on the closing of the
Offering and will continue in perpetuity unless earlier terminated as provided
in the License Agreement. The License Agreement will provide that it may be
terminated by Gabrielle Studio upon the failure of the Company to pay any
amount due within 60 days of receipt of notice of such failure, or if the
Company violates the quality control provisions of the License Agreement and
fails to initiate and thereafter pursue appropriate corrective action within
60 days after a final unappealable determination by an arbitration tribunal or
court of competent jurisdiction that such violation has occurred. The License
Agreement may be terminated by the Licensor upon the occurrence of, among
other events, a Change in Control, which includes certain changes in ownership
of voting securities, an acquisition by a third party of 30% of the voting
securities of the Company, mergers, sales of assets, and changes in the
composition of the Board of Directors. See the Glossary for a complete
description of Change in Control. All costs in connection with the transfer of
record ownership of the Licensed Marks to Licensor will be paid by the
Company.
The License Agreement will, among other things, impose certain obligations
on the Company with respect to the use of sales materials, protection of the
Licensed Marks, indemnification of the Licensor, the maintenance of public
liability insurance, and quality control of products bearing the Licensed
Marks or the Name. The License Agreement will limit the use of the Licensed
Marks in certain circumstances and in general will prohibit any transfer or
assignment of the rights under the License Agreement.
The License Agreement provides that, commencing as of the closing date of
the Offering, the Company shall pay to Licensor an annual royalty equal to
1.75% of the first $250 million of net sales (as defined in the License
Agreement, which includes products and store services) for such year, plus
2.5% of the next $500 million of net sales for such year, plus 3% of the next
$750 million of net sales for such year, plus 3.5% of all net sales for such
year in excess of $1.5 billion. The royalty payable under the License
Agreement for the period from the closing of the Offering to the end of 1996
shall be calculated based on the net sales commencing as of the closing of the
Offering through the end of 1996. For purposes of computing the annual
royalty, "net sales" includes sales by the Company, its affiliates, its
subsidiaries, and its sublicensees of products bearing any of the Licensed
Marks or the Name. If the royalty paid with respect to any year is less than
an amount equal to the greater of (a) $3.0 million as adjusted for inflation
during the term of the License Agreement plus 25% of the average annual sales
royalty payable to Licensor for the prior three years as adjusted for
inflation or (b) one-third of the average annual sales royalty payable to
Licensor over the prior three years as adjusted for inflation, Licensor may
terminate the License Agreement unless the Company pays to Licensor the amount
of such deficiency within 60 days of demand therefor. If the License Agreement
had been in effect as of the commencement of 1995, the royalties which would
have been payable for 1995 would have been $12.8 million. Out of the proceeds
of the Offering, the Company will make a one-time payment of approximately
$5.0 million to Licensor in connection with the License Agreement.
70
<PAGE>
LICENSE AGREEMENT FOR PERFUME BOTTLES
Mr. Stephan Weiss is the owner of the designs and utility patents relating
to the bottles in which the Company's Beauty Division products are packaged.
Upon the closing of the Offering, Mr. Weiss will grant to the Company, an
exclusive, royalty-free worldwide license in perpetuity on the use of the
designs for the bottles and a non-exclusive, royalty-free worldwide license in
perpetuity for the use of the utility patents for the bottles developed by Mr.
Weiss. Such license does not provide for sublicenses to independent third
parties. Additionally, this license agreement may be terminated by licensor
for material breaches of the agreement which remain uncured for a period of
180 days after notice. Mr. Weiss will receive approximately $400,000,
representing his out-of-pocket costs incurred in the development of the
bottles and the issuance of the patents thereon, upon the grant of these
licenses to the Company. Such expenses are comprised substantially of outside
legal fees incurred in connection with the registration and maintenance of
such patents around the world.
ANNE KLEIN & COMPANY
Anne Klein & Company is an affiliated business of Takihyo Inc. The Company
had from time to time purchased certain insurance policies jointly with Anne
Klein & Company or its affiliates, including Takihyo Inc. (collectively, "Anne
Klein"), which policies expired in 1994.
The Company had a lease agreement with Anne Klein for approximately 47,000
square feet of warehouse space from August 1993 through March 1994 and paid
Anne Klein $200,000 in connection therewith. In the opinion of the Company's
management, the rent and other terms and conditions of the sublease were
comparable to those which could have been obtained from a third party. The
Company does not have and does not expect to have any joint purchasing
arrangements with Anne Klein and does not purchase or expect to purchase goods
or services from Anne Klein.
REGISTRATION RIGHTS AGREEMENT
Simultaneously with the closing of the Offering, the Company, members of the
Takihyo Group, Ms. Karan, Mr. Weiss, the KW Trusts, and Gabrielle Studio will
enter into a Registration Rights Agreement. All shares of Common Stock owned
by Gabrielle Studio are beneficially owned by Ms. Karan, Mr. Weiss, and the KW
Trusts. References in this Prospectus to the shares of Common Stock of Ms.
Karan, Mr. Weiss, and the KW Trusts are deemed to include the shares held by
Gabrielle Studio. The Registration Rights Agreement will grant to members of
the Takihyo Group the right to demand on an aggregate of two occasions (the
first of which shall not be earlier than six months after the Effective Date
and the second of which shall not be earlier than 12 months after the
effective date of the registration statement pertaining to any other offering
of the Company's securities under the Securities Act) that the Company, at its
expense, register all or a portion of the shares which they own upon
completion of the Offering, subject to a minimum demand of 5% of the then
outstanding shares of Common Stock. Upon receipt of a demand from a member of
the Takihyo Group for the registration of the Company's shares, the Company
(or its designee) shall have the option of purchasing the shares at the
average of their closing market prices during the 10 trading days before and
the 10 trading days after the demand. The Registration Rights Agreement will
also grant to the Karan/Weiss Group the right to request on one occasion
(which cannot be earlier than the first anniversary of the Effective Date)
that the Company, at its expense, register all or a portion of the shares
which the members of the Karan/Weiss Group own. In addition, the Takihyo Group
and, in certain circumstances the Karan/Weiss Group, will have the right to
join ("piggyback") in any registration statement filed by the Company with
respect to an offering of any of its securities by it or on behalf of any of
its securityholders.
Pursuant to the Registration Rights Agreement, if the Takihyo Group makes a
demand for the registration of any of the Company's shares at any time prior
to the first anniversary of the Effective Date, the Company may not include in
such offering any of the Company's shares or any shares owned by any other
securityholder of the Company if, in the good faith judgment of the managing
underwriter of such offering, the inclusion of such shares would adversely
affect the success of such offering or interfere with the successful marketing
of, or require the exclusion of any portion of, the shares to be registered
pursuant to the Takihyo Group's demand. If the Takihyo Group makes a demand
for the registration of its shares on or after the first anniversary of the
71
<PAGE>
Effective Date, the Company may elect to proceed with an offering of the
Company's own shares. In such event, the demand of the Takihyo Group shall be
deemed to be a request to exercise their "piggyback" rights and they, together
with the members of the Karan/Weiss Group, will be permitted to register and
sell such number of shares (to be apportioned between the Takihyo Group and
the Karan/Weiss Group pursuant to certain agreed-upon allocations) as the
underwriter of the Company's offering determines can be sold without adversely
affecting the Company's offering. If the Company does not so elect, the
members of the Karan/Weiss Group may elect to include certain of their shares
in the Takihyo Group's offering, subject to certain limitations. If, more than
one year after the Effective Date, a member of the Karan/Weiss Group requests
that the Company register shares owned by the Karan/Weiss Group, the Company
may (but is not obligated to) elect to distribute its own shares to the
public, in which event the members of the Karan/Weiss Group , together with
the members of the Takihyo Group, may elect to include certain of their shares
in the Company's offering, subject to certain limitations. If the Company does
not so elect, the Company may (but is not obligated to) permit the members of
the Karan/Weiss Group to proceed with an offering of certain of their shares,
in which event the members of the Takihyo Group may elect to include certain
of their shares in the offering of the Karan/Weiss Group, subject to certain
limitations.
RELEASE OF SECURITY INTEREST
The Company's existing credit facility is secured by, among other
collateral, a lien on the license agreement between Gabrielle Studio and the
Company, a lien on the license agreement from Ms. Karan to Gabrielle Studio
and a lien on the ownership interests in Donna Karan Studio, one of the DK
Companies.
A portion of the net proceeds of the Offering is to be paid to the lenders
to reduce the amount outstanding under the Company's Credit Agreement. See
"Use of Proceeds." The lenders have agreed that upon receipt of such repayment
they will release their liens on the license agreement between Gabrielle
Studio and the Company, the license agreement from Ms. Karan to Gabrielle
Studio and on the ownership interests in Donna Karan Studio, one of the DK
Companies. The release of such liens may be considered a benefit to Ms. Karan,
Mr. Weiss, and the KW Trusts.
OTHER AGREEMENTS AND TRANSACTIONS
For a discussion of the voting arrangement between the members of
Karan/Weiss Group and members of the Takihyo Group, see "Management--Board of
Directors." For a discussion of the agreement between the Company and the
shareholders of Gabrielle Studio, see "Risk Factors--Dependence on Licensed
Intellectual Property Rights."
72
<PAGE>
PRINCIPAL STOCKHOLDERS
Prior to the consummation of the Reorganization and the closing of the
Offering, Donna Karan International Inc. will have outstanding only a nominal
number of shares of Common Stock, all of which will ultimately be owned one-
half by Ms. Karan and Mr. Weiss and one-half by certain members of the Takihyo
Group. The following table sets forth certain information with respect to
beneficial ownership of Common Stock of Donna Karan International Inc.
adjusted to reflect the sale of the shares of Common Stock offered hereby
(assuming no exercise of the Underwriters' over-allotment option), by (i) each
stockholder who is known by the Company to beneficially own in excess of five
percent of the outstanding shares of Common Stock, (ii) each director, (iii)
each of the executive officers named in the Summary Compensation Table, and
(iv) all directors and executive officers as a group. Except as otherwise
indicated, each stockholder listed below has sole voting and investment power
with respect to shares beneficially owned by such person.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
AFTER OFFERING(1)
---------------------
NAME AND ADDRESS SHARES(2) PERCENT(3)
---------------- ---------- ----------
<S> <C> <C>
Donna Karan(4)(5)....................................... 5,306,467 24.7%
Stephan Weiss(4)(5)..................................... 5,306,467 24.7%
Frank Mori(6)........................................... 4,245,174 19.8%
Tomio Taki(6)........................................... 4,245,174 19.8%
Takihyo Inc.(6)......................................... 3,183,881 14.8%
Stephen L. Ruzow........................................ -- --
Louis Praino............................................ -- --
Patrick Spainhour(7).................................... -- --
David L. Bressman....................................... -- --
All directors and executive officers as a group (7
persons)(3)(4)......................................... 10,612,934 49.4%
</TABLE>
- --------
(1) Beneficial ownership prior to the Offering has not been included since
prior to the consummation of the Reorganization and the closing of the
Offering, there were outstanding only a nominal number of shares of Common
Stock. Prior to the consummation of the Reorganization and the closing of
the Offering, Donna Karan International Inc. had outstanding only a
nominal number of shares of Common Stock, which consisted of nine shares
of Class A Common Stock held by Ms. Karan, nine shares of Class A Common
Stock held by Mr. Weiss, one share of Class B Common Stock held by Mr.
Taki, and one share of Class B Common Stock held by Mr. Mori. See
"Description of Capital Stock."
(2) Assuming no exercise of the Underwriters' over-allotment option.
(3) Includes an aggregate of 125,000 shares of Common Stock which the Company
expects to award to certain employees of the Company pursuant to the 1996
Stock Incentive Plan on the effective date of the Offering. Excludes an
aggregate of 1,475,000 shares of Common Stock reserved for issuance under
the Company's 1996 Stock Incentive Plan. The Company expects to grant
options for shares of Common Stock to certain employees of the Company
at the initial public offering price on the effective date of the
Offering. Also excludes an aggregate of 100,000 shares of Common Stock
reserved for issuance under the Company's 1996 Non-Employee Director Stock
Option Plan.
(4) The business address of Ms. Karan and Mr. Weiss is 550 Seventh Avenue, New
York, New York 10018. Ms. Karan and Mr. Weiss are married.
(5) The shares attributed to Ms. Karan include shares held of record by Mr.
Weiss, the KW Trusts, and Gabrielle Studio. The shares attributed to Mr.
Weiss include shares held of record by Ms. Karan, the KW Trusts, and
Gabrielle Studio. Beneficial ownership after the Offering does not include
the nine shares of Class A Common Stock held by Ms. Karan and the nine
shares of Class A Common Stock held by Mr. Weiss, all of which will remain
outstanding after the Offering. The rights of the holders of the Class A
Common Stock are identical to the holders of the Common Stock.
(6) The shares attributed to Messrs. Taki and Mori include the shares shown as
owned by Takihyo Inc. The shares attributed to Mr. Mori also include the
shares owned by Christopher Mori and Heather Mori, which shares do not
exceed one percent of the amount outstanding. Mr. Mori disclaims
beneficial ownership of such shares. The business address of Mr. Taki, Mr.
Mori, and Takihyo Inc. is 205 West 39th Street, New York, New York 10018.
Beneficial ownership after the Offering does not include the one share of
Class B Common Stock held by Mr. Taki and one share of Class B Common
Stock held by Mr. Mori, all of which will remain outstanding after the
Offering. The rights of the holders of the Class B Common Stock are
identical to the holders of the Common Stock, except the holders of Class
B Common Stock are entitled to nine votes per share.
(7) As of February 1996, Mr. Spainhour resigned from the Company.
73
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock currently consists of twenty shares
of common stock, par value $.01 per share, divided into two classes, Class A
Common Stock and Class B Common Stock, of which 18 shares of Class A Common
Stock and two shares of Class B Common Stock are outstanding. The rights of
the holders of such common stock are identical, except that the holders of
Class A Common Stock are entitled to one vote per share for the election of
directors and on all other stockholder matters and the holders of Class B
Common Stock are entitled to nine votes per share for the election of
directors and on all other stockholder matters. Effective as of the closing
date of the Offering, the Company's Certificate of Incorporation shall be
amended to also provide for authorized capital stock of 35,000,000 shares of
Common Stock, par value $.01 per share (the "Common Stock"), and 1,000,000
shares of preferred stock, par value $.01 per share ("Preferred Stock"). See
"Principal Stockholders." The rights of holders of Common Stock, Class A
Common Stock and Class B Common Stock are identical, except that the holders
of Class B Common Stock are entitled to nine votes per share for the election
of directors and on all other stockholder matters. The Company has no plans to
issue any additional shares of Class A Common Stock and Class B Common Stock
or any Preferred Stock at the present time. The following description of the
capital stock of the Company and certain provisions of the Company's Amended
and Restated Certificate of Incorporation (the "Charter") and Bylaws (the
"Bylaws") is a summary and is qualified in its entirety by the provisions of
the Company's Charter and Bylaws, to become effective as of the closing date
of the Offering, copies of which have been filed as exhibits to the Company's
Registration Statement, of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share for the election
of directors and on all other matters requiring stockholder action. Subject to
the rights of the holders of any series of Preferred Stock having a preference
over the Common Stock, holders of Common Stock are entitled to dividends,
when, as, and if declared by the Board of Directors out of funds legally
available for the payment of dividends. See "Dividend Policy." Upon any
liquidation, dissolution, or winding up of the Company, subject to the prior
liquidation rights of the holders of Preferred Stock, if any, the net assets
of the Company remaining after payment of creditors will be distributed pro
rata to the holders of Common Stock in proportion to their interests. Holders
of Common Stock are not entitled to vote cumulatively for the election of
directors (which means that the holder or holders of a simple majority of the
shares entitled to vote can elect all of the directors--see "Risk Factors"),
and have no conversion rights, preemptive rights, or rights to subscribe for
or purchase additional shares or other securities of the Company. All
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby by the Company when issued and paid for will be, fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors of the Company is authorized to issue the shares of
Preferred Stock in one or more series and, within certain limitations, to
determine the voting rights (including the right to vote as a class or series
on particular matters), dividend rates and preferences, and rights and terms
of redemption, including redemption through operation of a sinking fund and
liquidation preferences. The Board of Directors may increase or decrease the
number of shares constituting any such series subsequent to the issuance of
shares of such series (but not below the number of shares of such series then
outstanding).
The Board of Directors could issue a series of Preferred Stock with dividend
and liquidation rights more favorable than those pertaining to the Common
Stock and with voting and conversion rights that could adversely affect the
voting power and dilute the book value of the Common Stock. The issuance of
Preferred Stock with such rights and preferences could have an adverse effect
on holders of Common Stock by delaying or preventing a change in control of
the Company, making removal of the present management of the Company more
difficult, or imposing restrictions on the payment of dividends and other
distributions to the holders of Common Stock.
DELAWARE ANTI-TAKEOVER LAW
Under Section 203 of the Delaware General Corporation Law (the "Delaware
Anti-Takeover law"), certain "business combinations" are prohibited between a
Delaware corporation, the stock of which is generally publicly-traded or held
of record by more than 2,000 stockholders, and an "interested stockholder" of
such
74
<PAGE>
corporation for a three-year period following the date that such stockholder
became an interested stockholder, unless (i) the corporation has elected in
its certificate of incorporation not to be governed by the Delaware Anti-
Takeover law (the Company has not made such an election), (ii) the business
combination was approved by the board of directors of the corporation before
the other party to the business combination became an interested stockholder,
(iii) upon consummation of the transaction that made it an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the commencement of the transaction
(excluding voting stock owned by directors who are also officers or held in
employee benefit plans in which the employees do not have a confidential right
to tender or vote stock held by the plan), or (iv) the business combination
was approved by the board of directors of the corporation and ratified by 66
2/3% of the voting stock which the interested stockholder did not own. The
three-year prohibition also does not apply to certain business combinations
proposed by an interested stockholder following the announcement or
notification of certain extraordinary transactions involving the corporation
and a person who had not been an interested stockholder during the previous
three years or who becomes an interested stockholder with the approval of a
majority of the corporation's directors. The term "business combination" is
defined generally to include mergers or consolidations between a Delaware
corporation and an interested stockholder, transactions with an interested
stockholder involving the assets or stock of the corporation or its majority-
owned subsidiaries, and transactions which increase an interested
stockholder's percentage ownership of stock. The term "interested stockholder"
is defined generally as those stockholders who become beneficial owners of 15%
or more of a Delaware corporation's voting stock.
CERTAIN ANTI-TAKEOVER PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION
AND BYLAWS
The Company's Charter and Bylaws contain several provisions that may be
deemed to have the effect of making more difficult the acquisition of control
of the Company by means of a hostile tender offer, open market purchases, a
proxy contest, or otherwise.
The provisions of the Company's Charter and Bylaws discussed below are
designed to help ensure that holders of Common Stock are treated fairly and
equally in a multi-step acquisition. In addition, they are intended to
encourage persons seeking to acquire control of the Company to initiate such
an acquisition through arm's-length negotiations with the Company's Board of
Directors. The Company's Charter and Bylaws may have the effect of
discouraging a third party from making a tender offer or otherwise attempting
to obtain control of the Company, even though such an attempt might be
economically beneficial to the Company and its stockholders. In addition,
because the Company's Charter and Bylaws are designed to discourage the
accumulation of large blocks of the voting shares of the Company by purchasers
whose objective it is to have such stock repurchased by the Company at a
premium, the anti-takeover provisions of the Company's Charter and Bylaws
could tend to reduce the price of the voting shares of the Company caused by
such accumulations. In addition, these provisions may also have the effect of
precluding a contest for the election of directors.
Classified Board of Directors. The Company's Board of Directors is divided
into three classes of directors serving staggered terms. One class of
directors will be elected at each annual meeting of stockholders for a three-
year term. See "Management--Board of Directors." At least two annual meetings
of stockholders, instead of one, generally will be required to change the
majority of the Company's Board of Directors.
Stockholder Meetings. Subject only to the rights of holders of preferred
stock, only a majority of the Company's Board of Directors (excluding those
directors affiliated with or elected by an interested stockholder), the
Chairman, Vice Chairman, or the Chief Executive Officer or a Co-Chief
Executive Officer will be able to call an annual or special meeting of
stockholders. In addition, subject only to the rights of holders of preferred
stock, stockholders may not take any action by written consent.
Restrictions on Certain Business Combinations. The Company's Charter
provides that certain business combinations, such as mergers and stock and
asset sales, with an interested stockholder (typically a beneficial owner of
more than 15% of the outstanding voting shares of the Company's capital stock,
excluding certain persons, including Ms. Karan, Mr. Weiss, their lineal
descendants, affiliates, and associates, or trusts for their
75
<PAGE>
benefit), be approved by (i) the holders of 80% or more of the voting power of
the then outstanding voting shares, voting together as a single class, and
(ii) at least a majority of the voting power of the then outstanding voting
shares, voting as a single class, which are not owned beneficially, directly
or indirectly, by the interested stockholder, unless the transaction is
approved by a majority of certain directors or meets certain fair price
provisions.
Requirements for Advance Notification of Stockholder Nomination and
Proposals. The Company's Charter and the Company's Bylaws establish advance
notice procedures with regard to stockholder proposals and the nomination,
other than by or at the direction of the Board of Directors or a committee
thereof, of candidates for election as directors.
Vote Required to Amend or Repeal Certain Provisions of the Company's Charter
and Bylaws. The Company's Charter establishes certain supermajority voting
requirements to amend or repeal certain provisions of the Company's Charter or
Bylaws.
OTHER ANTI-TAKEOVER PROVISIONS
The Company has included provisions in certain of its material agreements
which could have the effect of discouraging a third party from pursuing a non-
negotiated takeover of the Company and preventing certain changes in control
of the Company. The Company's License Agreement with Gabrielle Studio and the
Company's employment agreement with Ms. Karan may be terminated by the
Licensor and Ms. Karan, respectively, upon a Change in Control, which includes
certain changes in the ownership of voting securities, an acquisition by a
third party of 30% of the voting securities of the Company, mergers, sales of
assets, and changes in the composition of the Board of Directors. In addition,
the Company's 1996 Stock Incentive Plan and 1996 Non-Employee Director Stock
Option Plan provide for accelerated vesting of stock options upon a "change in
control" of the Company. See the Glossary for a complete description of Change
in Control.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has included in its Charter provisions to limit the personal
liability of its officers and directors for monetary damages for breach of
their fiduciary duty as directors, except for liability that cannot be
eliminated under the Delaware General Corporation Law. The Charter provides
that directors of the Company will not be personally liable for monetary
damages for breach of their fiduciary duty as directors, except for liability
(i) for any breach of their duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for any unlawful
payment of a dividend or unlawful stock repurchase or redemption, as provided
in Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit. The
Bylaws of the Company also provide that the Company shall indemnify its
directors and officers to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law, including circumstances in which
indemnification is otherwise discretionary. The Company has also entered into
an agreement with a director and executive officer providing for his
indemnification in his capacity as a director and executive officer.
In addition, in the Contribution Agreement the Company has agreed to
indemnify the Principals for (i) acts or omissions taken or made by any of
them (a) at or prior to the date of closing under the Contribution Agreement
based on an allegation that such person was acting as an officer or director
of the Company or its predecessors with respect to acts or omissions that are
of a nature customarily performed by officers or directors of a Company, and
(b) after the date of closing under the Contribution Agreement based on an
allegation that such person was a director of the Company, whether or not he
or she was in fact a director of the Company at the time of the alleged act or
omission, in each case assuming such person seeking indemnification had acted
properly, (ii) any breaches of representations or warranties made by it in the
Contribution Agreement, and (iii) any New York State and New York City real
estate transfer taxes and New York State real estate gains taxes incurred in
connection with the Reorganization. In addition, the Principals have agreed to
indemnify the Company for any breaches of representations or warranties made
by them in the Contribution Agreement;
76
<PAGE>
provided, however, that the indemnification obligations of the Principals to
the Company are limited in the case of breaches of certain tax-related
warranties.
Each of the employment agreements between the Company and Ms. Karan and Mr.
Weiss provides that the Company will indemnify Ms. Karan or Mr. Weiss (as the
case may be) against all charges and expenses in connection with any act or
proceeding to which he or she is made a party by reason of being an employee,
officer, or director of the Company.
The License Agreement between the Company and Gabrielle Studio provides that
the Company will indemnify Gabrielle and Ms. Karan against losses arising out
of the Company's use of the Licensed Marks other than in accordance with the
terms of the License Agreement.
The license agreement between the Company and Stephen Weiss pursuant to which
Mr. Weiss will grant to the Company a license to use designs and utility
patents for the bottles in which the Beauty Division products are packaged
provides that the Company will indemnify Mr. Weiss from losses arising out of
claims by third parties relating to the use by the Company of the bottles or
patents.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to the Offering, there has been no established public
trading market for the Common Stock and no predictions can be made as to the
effect, if any, that public sales of shares or the availability of shares for
sale will have on the market price of the Common Stock prevailing from time to
time. In addition, there can be no assurance that a regular trading market will
develop in the Common Stock. Sales of the Common Stock in the public market
could have an adverse impact on the market price. All of the shares of Common
Stock outstanding immediately prior to Offering are deemed to be "restricted
securities," as that term is defined in Rule 144, in that such shares were
issued in private transactions not involving a public offering. None of such
shares will be eligible for sale under Rule 144 prior to the second anniversary
of the closing of the Offering.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person (or persons whose shares are
aggregated), including an affiliate of the Company, who has owned restricted
shares of Common Stock beneficially for at least two years is entitled to sell,
in brokerage transactions within any three-month period, a number of shares
(including non-restricted shares of the same class) equal to the greater of one
percent of the total number of outstanding shares of the same class or the
average weekly trading volume during the four calendar weeks preceding the
sale. A person who has not been an affiliate of the Company for at least the
three months immediately preceding the sale and who has beneficially owned
shares of Common Stock for at least three years (or such shorter period as may
be required under Rule 144) is entitled to sell such shares under Rule 144
without regard to any of the limitations described above.
Upon completion of the Offering, each of the Karan/Weiss Group and the
Takihyo Group will beneficially own 5,306,467 shares of restricted Common
Stock. The Company has granted to members of the Takihyo Group the right on an
aggregate of two occasions to demand registration under the Securities Act at
the Company's expense of all or a portion the shares of which they or their
affiliates have beneficial ownership upon completion of the Offering. The
Company has the option of purchasing at their then fair market value any shares
which are the subject of a demand for registration. See "Certain Relationships
and Related Transactions."
All existing stockholders of the Company have entered into lock-up agreements
with the Representatives wherein they have agreed not to sell any of their
shares within 180 days after the date of the Prospectus without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters. See "Underwriters" and "Certain Relationships and Related
Transactions."
77
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS OF COMMON STOCK
GENERAL
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a holder who is not a United States person (a "Non-U.S. Holder"), and
who acquires and owns such Common Stock as a capital asset within the meaning
of Section 1221 of the Internal revenue Code of 1986, as amended (the "Code").
For this purpose, the term "Non-U.S. Holder" is defined as any person other
than (i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity created or organized in the United States or under
the laws of the United States or of any state, or (iii) an estate or trust
whose income is includible in gross income for United States federal income
tax purposes, regardless of its source. This discussion does not consider
specific facts and circumstances that may be relevant to a particular Non-U.S.
Holder's tax position, does not address all aspects of United States federal
income and estate taxes and does not deal with foreign, state, and local
consequences and United States federal gift taxes that may be relevant to such
Non-U.S. Holders in light of their personal circumstances. Further, it does
not discuss the rules applicable to Non-U.S. Holders subject to special tax
treatment under the federal income tax laws (including but not limited to,
banks and insurance companies, dealers in securities, and holders of
securities held as part of a "straddle," "hedge," or "conversion transaction."
Furthermore, this discussion is based on current provisions of the Code,
existing and proposed regulations promulgated thereunder and administrative
and judicial interpretations thereof, all of which are subject to change,
possibly on a retroactive basis. In addition, officials of the Treasury
Department have recently stated that they intend to issue proposed regulations
that will revise the rules which deal with withholding on payments to foreign
persons. Each prospective purchaser of Common Stock is advised to consult a
tax advisor with respect to current and possible future tax consequences of
acquiring, holding, and disposing of Common Stock.
Proposed United States Treasury Regulations were issued on April 15, 1996
(the "Proposed Regulations") which, if adopted, would affect the United States
taxation of dividends paid to a Non-United States Holder on Common Stock. The
Proposed Regulations are generally proposed to be effective with respect to
dividends paid after December 31, 1997, subject to certain transition rules.
The discussion below is not intended to be a complete discussion of the
provisions of the Proposed Regulations, and prospective investors are urged to
consult their tax advisors with respect to the effect the Proposed Regulations
would have if adopted.
An individual may, among other ways, subject to certain exceptions, be
deemed to be a resident alien (as opposed to a nonresident alien) by virtue of
being present in the United States on at least 31 days in the calendar year
and for an aggregate of at least 183 days during a three-year period ending in
the current calendar year (counting, for such purposes, all of the days
present in the current year, one-third of the days present in the immediately
preceding year, and one-sixth of the days present in the second preceding
year). Resident aliens are subject to United States federal income tax as if
they were United States citizens.
DIVIDENDS
In general, dividends paid to a Non-U.S. Holder of Common Stock will be
subject to withholding of United States federal income tax at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty, unless
the dividends are effectively connected with the conduct of a trade or
business of the Non-U.S. Holder within the United States ("United States trade
or business income"). If the dividend is United States trade or business
income, the dividend would be subject to United States federal income tax on a
net income basis at applicable graduated individual or corporate rates and
would be exempt from the 30% withholding tax described above. Any such
dividends that are United States trade or business income received by a
foreign corporation may, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty. Certain certification and
disclosure requirements must be complied with in order to be exempt from
withholding under the United States trade or business income exemption
discussed above.
78
<PAGE>
Under current United States Treasury regulations, dividends paid to a
stockholder at an address in a foreign country are presumed to be paid to a
resident of such country for purposes of the withholding discussed above
(unless the payor has knowledge to the contrary) and, under the current
interpretation of United States Treasury regulations, for purposes of
determining the applicability of a tax treaty rate, unless an applicable tax
treaty requires some other method for determining a stockholder's residence.
Under the Proposed Regulations, to obtain a reduced rate of withholding
under a treaty, a Non-United States Holder would generally be required to
provide an Internal Revenue Service Form W-8 certifying such Non-United States
Holder's entitlement to benefits under a treaty. The Proposed Regulations
would also provide special rules to determine whether, for purposes of
determining the applicability of a tax treaty, dividends paid to a Non-United
States Holder that is an entity should be treated as paid to the entity or
those holding an interest in that entity.
A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to a tax treaty or whose dividends have
otherwise been subjected to withholding in an amount which exceeds such
holder's United States federal income tax liability, may obtain a refund or
credit of any excess amounts withheld by filing an appropriate claim for
refund with the United States Internal Revenue Service (the "Service").
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) the gain is effectively connected with a trade or
business of such holder in the United States, (ii) in the case of a Non-U.S.
Holder who is a nonresident alien individual and holds the Common Stock as a
capital asset, such holder is present in the United States for 183 or more
days in the taxable year of the sale or other disposition and certain other
conditions are met, (iii) the Non-U.S. Holder is subject to tax pursuant to
provisions of United States tax law that apply to certain expatriates, or (iv)
under certain circumstances if the Company is or has been during certain time
periods a "U.S. real property holding corporation" for United States federal
income tax purposes. The Company is not and does not anticipate becoming a
"U.S. real property holding corporation" for United States federal income tax
purposes.
If an individual Non-U.S. Holder falls under clause (i) above, such person
will be taxed on the net gain derived from the sale under regular graduated
United States federal income tax rates. If the individual falls under clause
(ii) above, such person will be subject to a flat 30% tax on such person's
United States source capital gains for the taxable year which may be offset by
United States source capital losses for such year (notwithstanding the fact
that he is not considered a resident of the United States). Thus, Non-U.S.
Holders who spend 183 days or more in the United States in the taxable year in
which they contemplate a sale of the Common Stock are urged to consult their
tax advisors as to the tax consequences of such sale.
If the Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, it will be taxed on its gain on a net income basis at applicable
graduated corporate rates and, in addition, may be subject to the branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable income tax
treaty.
Periodically, legislation has been introduced in Congress pursuant to which
the gain from the sale of stock of a domestic corporation by a foreign
corporation or a non-resident alien individual would be considered to be
effectively connected income, if such person owns 10% or more (by vote or
value) of the domestic corporation at any time during the previous five years.
It is not known whether such or similar legislation will be enacted.
FEDERAL ESTATE TAXES
Common Stock that is owned, or treated as owned, by a non-resident alien
individual (as specifically determined under residence rules for United States
federal estate tax purposes) at the time of death or that has been the subject
of certain lifetime transfers will be included in such holder's gross estate
for United States federal estate tax purposes, unless an applicable estate tax
treaty provides otherwise.
79
<PAGE>
UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The Company must report annually to the Service and to each Non-U.S. Holder
the amount of dividends paid to such holder and any tax withheld with respect
to such dividends. These information reporting requirements apply regardless
of whether withholding is required. Copies of the information returns
reporting such dividends and withholding may also be made available under the
provisions of an applicable treaty or agreement, to the tax authorities in the
country in which such holder resides.
United States backup withholding tax (which generally is a withholding tax
imposed at the rate of thirty-one percent (31%) on certain payments to persons
that fail to furnish certain information under the United States information
reporting requirements) generally will not apply to dividends paid on Common
Stock to a Non-U.S. Holder at an address outside the United States. Except as
provided below, Non-U.S. Holders will not be subject to backup withholding
with respect to the payment of proceeds from the disposition of Common Stock
effected by the foreign office of a broker; except that if the broker is a
United States person or a "U.S. related person", information reporting (but
not backup withholding) is required with respect to the payment, unless the
broker has documentary evidence in its files that the owner is a Non-U.S.
Holder (and the broker has no actual knowledge to the contrary) and certain
other requirements are met or the holder otherwise establishes an exemption.
For this purpose, a "U.S. related person" is (i) a "controlled foreign
corporation" for United States federal income tax purposes, or (ii) a foreign
person 50% or more of whose gross income from all sources for the three-year
period ending with the close of its taxable year preceding the collection or
payment of such proceeds (or for such part of the period that the broker has
been in existence) is derived from activities that are effectively connected
with the conduct of a United States trade or business. The payment of the
proceeds of a sale of shares of Common Stock to or through a United States
office of a broker is subject to information reporting and possible backup
withholding unless the owner certifies its non-United States status under
penalties of perjury or otherwise establishes an exemption. Backup withholding
is not an additional tax. Any amounts withheld under the backup withholding
rules from a payment to a Non-U.S. Holder will be allowed as a refund or a
credit against such Non-U.S. Holder's United States federal income tax
liability, provided that the required information is furnished to the Service.
The Proposed Regulations would, if adopted, alter the foregoing rules in
certain respects. Among other things, the Proposed Regulations would provide
certain presumptions under which a Non-United States Holder would be subject
to backup withholding in the absence of the required certification.
THE FOREGOING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT WITH HIS TAX
ADVISOR WITH RESPECT TO THE UNITED STATES FEDERAL INCOME TAX AND FEDERAL
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF COMMON STOCK,
INCLUDING THE APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN,
OR OTHER TAXING JURISDICTION.
80
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date of this Prospectus (the "Underwriting Agreement"), the Company
has agreed to sell 10,750,000 shares of Common Stock and the U.S. Underwriters
named below, for whom Morgan Stanley & Co. Incorporated, Bear, Stearns & Co.
Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Smith Barney
Inc. are serving as U.S. Representatives, have severally agreed to purchase,
and the International Underwriters named below, for whom Morgan Stanley & Co.
International Limited, Bear, Stearns, International Limited, Merrill Lynch
International, and Smith Barney Inc. are serving as International
Representatives, have severally agreed to purchase, the respective number of
shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated..............................
Bear, Stearns & Co. Inc........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................
Smith Barney Inc...............................................
----------
Subtotal..................................................... 7,525,000
==========
International Underwriters:
Morgan Stanley & Co. International Limited.....................
Bear, Stearns International Limited............................
Merrill Lynch International....................................
Smith Barney Inc...............................................
----------
Subtotal..................................................... 3,225,000
----------
Total........................................................ 10,750,000
==========
</TABLE>
The U.S. Underwriters and the International Underwriters are collectively
referred to as the "Underwriters." The Underwriting Agreement provides that
the obligations of the several Underwriters to pay for and accept delivery of
the shares of Common Stock offered hereby are subject to the approval of
certain legal matters by counsel and to certain other conditions. The
Underwriters are obligated to take and pay for all the shares of Common Stock
offered hereby if any such shares are taken.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, each U.S. Underwriter has represented and agreed that, with
certain exceptions, (a) it is not purchasing any U.S. Shares (as defined
below) being sold by it for the account of anyone other than a United States
or Canadian Person (as defined below) and (b) it has not offered or sold, and
will not offer or sell, directly or indirectly, any U.S. Shares or distribute
any prospectus relating to the U.S. Shares outside the United States or Canada
or to anyone other than a United States or Canadian Person. Pursuant to the
Agreement Between U.S. and International Underwriters, each International
Underwriter has represented and agreed that, with certain exceptions, (a) it
is not purchasing any International Shares (as defined below) being sold by it
for the account of any United States or Canadian Person and (b) it has not
offered or sold, and will not offer or sell, directly or indirectly, any
International Shares or distribute any prospectus relating to the
International Shares within the United States or Canada or to any United
States or Canadian Person. With respect to any Underwriter that is a U.S.
Underwriter and an International Underwriter, the foregoing representations
and agreements (i) made by it in its capacity as a U.S. Underwriter shall
apply only to shares purchased by it in its capacity as a U.S. Underwriter,
(ii) made by it
81
<PAGE>
in its capacity as an International Underwriter shall apply only to shares
purchased by it in its capacity as an International Underwriter, and (iii) do
not restrict its ability to distribute any prospectus relating to the shares
of Common Stock to any person. The foregoing limitations do not apply to
stabilization transactions or to certain other transactions specified in the
Agreement Between U.S. and International Underwriters. As used herein, "United
States or Canadian Person" means any national or resident of the United States
or Canada or any corporation, pension, profit-sharing, or other trust or other
entity organized under the laws of the United States or Canada or of any
political subdivision thereof (other than a branch located outside the United
States and Canada of any United States or Canadian Person) and includes any
United States or Canadian branch of a person who is otherwise not a United
States or Canadian Person. All shares of Common Stock to be purchased by the
U.S. Underwriters and the International Underwriters under the Underwriting
Agreement are referred to herein as the "U.S. Shares" and the "International
Shares," respectively.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, sales may be made between the U.S. Underwriters and
International Underwriters of any number of shares of Common Stock to be
purchased pursuant to the Underwriting Agreement as may be mutually agreed.
The per share price of any shares so sold shall be the Price to Public set
forth on the cover page hereof, in United States dollars, less an amount not
greater than the per share amount of the concession to dealers set forth
below.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, each U.S. Underwriter has represented that it has not offered or
sold, and has agreed not to offer or sell, any shares of Common Stock,
directly or indirectly, in Canada in contravention of the securities laws of
Canada or any province or territory thereof and has represented that any offer
of shares of Common Stock in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of
Canada in which such offer is made. Each U.S. Underwriter has further agreed
to send to any dealer who purchases from it any shares of Common Stock a
notice stating in substance that, by purchasing such shares of Common Stock,
such dealer represents and agrees that it has not offered or sold, and will
not offer or sell, directly or indirectly, any of such shares of Common Stock
in Canada or to, or for the benefit of, any resident of Canada in
contravention of the securities laws of Canada or any province or territory
thereof and that any offer of shares of Common Stock in Canada will be made
only pursuant to an exemption from the requirement to file a prospectus in the
province of Canada in which such offer is made, and that such dealer will
deliver to any other dealer to whom it sells any of such shares of Common
Stock a notice to the foregoing effect.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, each International Underwriter has represented and agreed that
(a) it has not offered or sold and will not offer or sell any shares of Common
Stock in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing, or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations (1995) (the "Regulations"); (b) it has complied and
will comply with all applicable provisions of the Financial Services Act 1986
and the Regulations with respect to anything done by it in relation to the
shares of Common Stock offered hereby in, from, or otherwise involving the
United Kingdom; and (c) it has only issued or passed on and will only issue or
pass on to any person in the United Kingdom any document received by it in
connection with the issue of the shares of Common Stock, other than any
document which consists of, or is part of, listing particulars, supplementary
listing particulars, or any other document required or permitted to be
published by listing rules under Part IV of the Financial Services Act 1986,
if that person is of a kind described in Article 9(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995, or to
any person to whom the document may lawfully be issued or passed on.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, each International Underwriter has represented and agreed that
it has not offered or sold, and agrees not to offer or sell, directly or
indirectly, in Japan or to or for the account of any resident thereof, any of
the shares of Common Stock acquired in connection with the distribution
contemplated hereby, except for offers or sales to Japanese International
Underwriters or dealers and except pursuant to any exemption from the
registration requirements of the Securities
82
<PAGE>
and Exchange Law of Japan. Each International Underwriter further agrees to
send to any dealer who purchases from it any of the shares of Common Stock a
notice stating in substance that, by purchasing such shares, directly or
indirectly in Japan or to or for the account of any resident thereof except
pursuant to any exemption from the registration requirements of the Securities
and Exchange Law of Japan, and that such dealer will send to any other dealer
whom it sells any of such shares of Common Stock a notice containing
substantially the same statement as contained in the foregoing.
The Underwriters propose to offer part of the shares of Common Stock
directly to the public at the Price to Public set forth on the cover page
hereof and part to certain dealers at a price which represents a concession
not in excess of $ a share below the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ a share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Underwriters.
Representatives of the Underwriters have informed the Company that the
Underwriters do not intend sales to discretionary accounts to exceed five
percent of the total number of shares of Common Stock offered by them.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to (i) 537,500 shares offered hereby for
directors, officers, employees, business associates, and related persons of
the Company and (ii) 215,000 shares for each of HPL and LVMH Moet Hennessy
Louis Vuitton. The number of shares of Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not so purchased will be
offered by the Underwriters to the general public on the same basis as the
other shares offered hereby.
Pursuant to the Underwriting Agreement, the Company has granted the U.S.
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to 1,612,500 additional shares of Common Stock at
the Price to Public set forth on the cover page hereof, less Underwriting
Discounts and Commissions. The U.S. Underwriters may exercise such option to
purchase solely for the purpose of covering over-allotments, if any, made in
connection with the Offering. To the extent such option is exercised, each
U.S. Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares of Common
Stock as the number set forth next to such U.S. Underwriter's name in the
preceding table bears to the total number of shares of Common Stock offered by
the U.S. Underwriters hereby.
The Company, all of the Company's executive officers and directors, and all
existing stockholders of the Company, have agreed that, without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters, they will not (i) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right, or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
(whether such shares or any such securities are now owned by such stockholder
or acquired after the date of the Prospectus), or (ii) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise, for a period
of 180 days after the date of this Prospectus, other than the sale to the
Underwriters of any shares of Common Stock pursuant to the Underwriting
Agreements.
The Offering will be made in compliance with the requirements of Schedule E
to the By-Laws of the NASD regarding an NASD member firm's participation in
distributing securities of an affiliate. In accordance with such requirements,
Bear, Stearns & Co. Inc. has agreed to serve as a "qualified independent
underwriter," as such term is defined in Schedule E of the By-Laws of the
NASD, and has conducted due diligence and will recommend a maximum price for
the Common Stock.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
83
<PAGE>
PRICING OF OFFERING
Prior to the Offering, there has been no public market for the shares of
Common Stock of the Company. Consequently, the initial public offering price
was determined by negotiation among the Company, the Principals, and the
Representatives. Among the factors considered in determining the initial
public offering price were the Company's record of operations, the Company's
current financial condition and future prospects, the experience of its
management, the economics of the industry in general, the general condition of
the equity securities market, and the market prices of similar securities of
companies considered comparable to the Company. There can be no assurance that
a regular trading market for the shares of Common Stock will develop after the
Offering or, if developed, that a public trading market can be sustained.
There can be no assurance that the prices at which the Common Stock will sell
in the public market after the Offering will not be lower than the price at
which it is issued by the Underwriters in the Offering.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for the
Company by Proskauer Rose Goetz & Mendelsohn LLP, 1585 Broadway, New York, New
York 10036. Certain legal matters will be passed upon for the Underwriters by
Davis Polk & Wardwell.
EXPERTS
The predecessor combined financial statements and schedule of Donna Karan
International Inc. at December 31, 1995 and January 1, 1995, and for each of
the three fiscal years in the period ended December 31, 1995, appearing in
this Prospectus and the Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus, which is part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain items of which are omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and to the financial
statements, schedules, and exhibits filed as a part thereof. The Registration
Statement, including all schedules and exhibits thereto, may be inspected
without charge at the public reference facilities maintained by the Commission
at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. and at the Commission's regional offices at 7 World Trade
Center, 13th floor, New York, New York and 500 West Madison Street, Suite
1400, Chicago, Illinois. Copies of such material may be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Such material may also be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec. gov.
Statements contained in this Prospectus concerning the contents of any
contract or other document are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or otherwise with the Commission, each
such statement being qualified in all respects by such reference.
The Company intends to furnish its stockholders with an annual report
containing consolidated financial statements certified by its independent
auditors and with quarterly reports for each of the first three quarters of
each fiscal year containing unaudited consolidated financial information.
84
<PAGE>
GLOSSARY
"Change in Control." For purposes of the employment agreements with Ms.
Karan and Mr.Weiss and the License Agreement, the acquisition (i) by any
"person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a person who is a stockholder of
the Company on the Effective Date of the Offering (an "Initial Stockholder")
of 30% or more of the voting power of securities of the Company over and above
that owned immediately after the closing date of the Offering, or (ii) the
acquisition by an Initial Stockholder other than members of the Karan/Weiss
Group (and excluding any such acquisition resulting from a purchase, sale or
transfer of Takihyo Inc. stock by and between any of the current stockholders
of Takihyo Inc.) of an additional 5% of the voting power of securities of the
Company over and above that owned immediately after the Closing Date of the
Offering; any merger or sale of substantially all of the assets of the Company
under circumstances where the holders of 20% or more of the equity securities
of the surviving entity of such transaction were not holders of the Common
Stock of the Company immediately prior to the consummation of such
transaction; or any change in the composition of the Board of Directors of the
Company not approved by (i) a majority of the Board of Directors of the
Company prior to such change and (ii) by not less than two directors of the
Company who were directors prior to the time any "person" who was not an
Initial Stockholder acquired 30% or more of the voting power of securities of
the Company.
"Company." For purposes of this Prospectus, references to the "Company" mean
the DK Companies, as of dates and periods prior to the closing date of the
Offering, and, thereafter, collectively, Donna Karan International Inc. and
its subsidiaries.
"Contribution Agreement." The contribution agreement to be entered into by
the Company, Ms. Donna Karan, Mr. Stephan Weiss, the KW Trusts, Gabrielle
Studio, Mr. Frank R. Mori, Mr. Mori's children, Mr. Tomio Taki, and Takihyo
Inc., simultaneously with the closing of the Offering, effecting the
Reorganization.
"Designer Collections." The designer collections of men's and women's
clothing, sportswear, accessories, and shoes marketed under the Donna Karan
New York(R) brand name.
"Distribution Notes." Promissory notes, bearing interest at the rate of 8%
per annum, in the aggregate principal amount of approximately $114.5 million.
"DK Companies." The partnerships and corporations, including The Donna Karan
Company, engaged in various aspects of the Company's business prior to the
Reorganization, each of which is ultimately owned one-half by Ms. Karan, Mr.
Weiss, and the KW Trusts and one-half by certain members of the Takihyo Group.
"Donna Karan Japan." Donna Karan Japan K.K., a Japanese corporation in which
the Company has a 30% equity interest.
"Door." A single retail outlet; a "store" refers to one or more retail
outlets operated under the same name.
"Effective Date." The effective date of the Offering.
"Gabrielle Studio." Gabrielle Studio, Inc., a New York corporation wholly-
owned by Ms. Karan, Mr. Weiss, and the KW Trusts.
"HPL." Hotel Properties Limited, a Singapore public company.
"Intermediate Entities." The various partnerships and corporations through
which the interests of the Principals in the DK Companies are held.
"International Offering." The public offering outside the United States of
an aggregate of 3,225,000 shares of Common Stock.
"International Retail Stores." Full-price, free-standing retail stores
licensed to third parties under the brand names Donna Karan New York(TM),
DKNY(TM), and Donna Karan(TM) in international markets.
"International Underwriters." The several underwriters of the International
Offering, for whom Morgan Stanley & Co. International Limited, Bear, Stearns
International Limited, Merrill Lynch International, and Smith Barney Inc. are
acting as representatives.
85
<PAGE>
"Karan/Weiss Group." Ms. Donna Karan, Mr. Stephan Weiss, the KW Trusts, and
Gabrielle Studio, as a group.
"KW Trusts." Trusts established for the benefit of Ms. Karan and for the
benefit of Ms. Karan's and Mr. Weiss' children.
"License Agreement." The license agreement between Gabrielle Studio and the
Company to be entered into simultaneously with the closing of the Offering.
"Licensed Marks." The trademarks "Donna Karan(R)," "Donna Karan New
York(R)," "DKNY(R)," "DK(R)," and all variations thereof.
"Licensor." Gabrielle Studio, with respect to the License Agreement.
"Offering." The U.S. Offering and the International Offering.
"Principals." Ms. Karan, Mr. Weiss, Mr. Taki, and Mr. Mori.
"Reorganization." The contribution by Ms. Karan, Mr. Weiss, the KW Trusts,
Gabrielle Studio, Mr. Mori, Mr. Taki, and Takihyo Inc. and certain of their
affiliates to Donna Karan International Inc. of all of the outstanding stock
of and partnership interests in the DK Companies and the various entities
which hold their interests in the DK Companies, in exchange for various
combinations of Common Stock and cash, pursuant to the Contribution Agreement.
"Representatives." The representatives of the several U.S. Underwriters and
International Underwriters. Morgan Stanley & Co. Incorporated, Bear, Stearns &
Co. Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Smith Barney
Inc. are the Representatives of the U.S. Underwriters and Morgan Stanley & Co.
International Limited, Bear, Stearns International Limited, Merrill Lynch
International, and Smith Barney Inc. are the Representatives of the
International Underwriters.
"Retail Agreement." The agreement entered into in March 1995 by the Company,
HPL, and a corporation owned by a private investor with a majority interest in
HPL, providing for the establishment of an aggregate of 29 free-standing
International Retail Stores by HPL in the Territories by December 31, 2000.
"Shoe Division." The Company's shoe collections.
"Takihyo Group." Mr. Tomio Taki, Mr. Frank R. Mori, Takihyo Inc., and
certain affiliates of Messrs. Taki and Mori, as a group.
"Territories." Hong Kong, The People's Republic of China, The Philippines,
South Korea, Taiwan, and Japan.
"U.S. Offering." The public offering in the United States of an aggregate of
7,525,000 shares of Common Stock.
"U.S. Underwriters." The several underwriters of the U.S. Offering, for whom
Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, and Smith Barney Inc. are acting as
representatives.
"Underwriters." The U.S. Underwriters and the International Underwriters.
"Underwriting Agreement." The Underwriting Agreement between the Company,
the U.S. Underwriters, and the International Underwriters.
86
<PAGE>
DONNA KARAN INTERNATIONAL INC.
INDEX TO PREDECESSOR COMBINED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 2, 1994, JANUARY 1, 1995, AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................... F-2
Predecessor Combined Statements of Income for the years ended January 2,
1994, January 1, 1995, and December 31, 1995............................ F-3
Predecessor Combined Balance Sheets as of January 1, 1995 and December
31, 1995................................................................ F-4
Predecessor Combined Statements of Stockholders' Equity and Partners'
Capital for the years ended January 2, 1994, January 1, 1995, and
December 31, 1995....................................................... F-5
Predecessor Combined Statements of Cash Flows for the years ended January
2, 1994, January 1, 1995, and December 31, 1995......................... F-6
Notes to Predecessor Combined Financial Statements....................... F-7
QUARTERS ENDED APRIL 2, 1995 AND MARCH 31, 1996 (UNAUDITED)
Predecessor Combined Statements of Income for the quarters ended April 2,
1995 and
March 31, 1996.......................................................... F-19
Predecessor Combined Balance Sheet as of March 31, 1996.................. F-20
Predecessor Combined Statements of Stockholders' Equity and Partners'
Capital for the quarters ended April 2, 1995 and March 31, 1996......... F-21
Predecessor Combined Statements of Cash Flows for the quarters ended
April 2, 1995 and
March 31, 1996.......................................................... F-22
Notes to Predecessor Combined Financial Statements....................... F-23
</TABLE>
The balance sheet of Donna Karan International Inc., which was formed in April
1996, has not been included because the amounts are immaterial.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of
Donna Karan International Inc.
We have audited the accompanying predecessor combined balance sheets of
Donna Karan International Inc. (the "Company") as of January 1, 1995 and
December 31, 1995, and the related predecessor combined statements of income,
stockholders' equity and partners' capital and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Donna Karan
International Inc. at January 1, 1995 and December 31, 1995, and the combined
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
New York, New York
April 16, 1996
F-2
<PAGE>
DONNA KARAN INTERNATIONAL INC.
PREDECESSOR COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
1994 1995 1995
---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues............................... $364,705 $420,164 $ 510,126
Cost of sales.............................. 234,230 271,172 330,689
-------- -------- ----------
Gross profit............................... 130,475 148,992 179,437
Selling, general, and administrative
expenses (Notes 1, 6, 7, and 12).......... 102,748 119,995 136,906
-------- -------- ----------
Operating income........................... 27,727 28,997 42,531
Other income (expense):
Equity in earnings of affiliate (Note
9)...................................... -- -- 2,519
Interest expense (Note 4)................ (4,147) (8,862) (7,650)
Interest income.......................... 84 -- --
Other expense (Note 10).................. (2,980) (2,651) --
Gain on sale of interests in affiliates
(Note 9)................................ -- -- 18,673
-------- -------- ----------
Income before income taxes................. 20,684 17,484 56,073
Provision for income taxes (Note 1)........ 1,312 1,139 2,398
-------- -------- ----------
Net income................................. $ 19,372 $ 16,345 $ 53,675
======== ======== ==========
Pro forma (Notes 1 and 13)--unaudited
Historical income before income taxes...... $ 56,073
Pro forma adjustments other than income
taxes..................................... 23,943
----------
Pro forma income before income taxes....... 32,130
Pro forma provision for income taxes (Note
13)....................................... 13,705
----------
Pro forma net income....................... $ 18,425
==========
Pro forma per share information............ $ .88
==========
Pro forma common shares outstanding........ 16,584,708
==========
</TABLE>
See notes to predecessor combined financial statements.
F-3
<PAGE>
DONNA KARAN INTERNATIONAL INC.
PREDECESSOR COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1995 1995
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................. $ 3,728 $ 12,153
Accounts receivable, net of allowances of $22,507 at
December 31,1995 and $15,013 at January 1, 1995
(Note 4)............................................ 49,879 62,231
Inventories (Notes 1, 2, and 4)...................... 63,606 85,655
Prepaid expenses and other current assets............ 8,241 9,946
-------- --------
Total current assets............................... 125,454 169,985
Property and equipment, at cost--net (Note 3).......... 24,467 22,505
Deposits and other noncurrent assets (Notes 4 and 9)... 7,083 11,485
-------- --------
$157,004 $203,975
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY AND
PARTNERS' CAPITAL
Current liabilities:
Short-term borrowings under revolving credit facility
(Note 4)............................................ $ 11,214 $ --
Accounts payable..................................... 29,153 53,825
Accrued expenses and other current liabilities (Note
5).................................................. 17,374 15,766
Current portion of long-term debt.................... 15,424 7,759
-------- --------
Total current liabilities.......................... 73,165 77,350
Long-term debt (Note 4)................................ 36,002 45,779
Commitments and contingencies (Notes 4, 6, 7, and 12)
Stockholders' equity and partners' capital (Note 1):
Common Stock......................................... 1,146 1,146
Retained earnings and partners' capital.............. 46,886 79,748
Cumulative translation adjustment.................... (195) (48)
-------- --------
Total stockholders' equity and partners' capital... 47,837 80,846
-------- --------
$157,004 $203,975
======== ========
</TABLE>
See notes to predecessor combined financial statements.
F-4
<PAGE>
DONNA KARAN INTERNATIONAL INC.
PREDECESSOR COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND
PARTNERS' CAPITAL
<TABLE>
<CAPTION>
RETAINED
EARNINGS
AND CUMULATIVE
COMMON PARTNERS' TRANSLATION
STOCK CAPITAL ADJUSTMENT TOTAL
------- --------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at January 2, 1993............. $ 1,146 $ 29,649 $ 14 $ 30,809
Net income............................. -- 19,372 -- 19,372
Translation adjustment................. -- -- (142) (142)
Less distributions to partners......... -- (7,710) -- (7,710)
------- -------- ----- --------
Balance at January 2, 1994............. 1,146 41,311 (128) 42,329
Net income............................. -- 16,345 -- 16,345
Translation adjustment................. -- -- (67) (67)
Less distributions to partners......... -- (10,770) -- (10,770)
------- -------- ----- --------
Balance at January 1, 1995............. 1,146 46,886 (195) 47,837
Net income............................. -- 53,675 -- 53,675
Translation adjustment................. -- -- 147 147
Less distributions to partners......... -- (20,813) -- (20,813)
------- -------- ----- --------
Balance at December 31, 1995........... $ 1,146 $ 79,748 $ (48) $ 80,846
======= ======== ===== ========
</TABLE>
See notes to predecessor combined financial statements.
F-5
<PAGE>
DONNA KARAN INTERNATIONAL INC.
PREDECESSOR COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
1994 1995 1995
---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................. $ 19,372 $ 16,345 $ 53,675
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities, as adjusted for effect of sale
of Donna Karan Japan:
Depreciation and amortization............. 5,354 7,590 6,742
Provision for bad debts................... 544 773 3,122
Equity in earnings of affiliate........... -- -- (2,519)
Gain on sale of interests in affiliates
(Note 9)................................. -- -- (18,673)
Loss on sale of property and equipment.... -- -- 32
Changes in operating assets and
liabilities:
Increase in accounts receivable.......... (13,497) (9,658) (14,392)
Increase in inventories.................. (22,205) (6,410) (29,611)
Increase in prepaid expenses and other
current assets.......................... (2,531) (2,253) (2,876)
Increase in deposits and other noncurrent
assets.................................. (1,542) (3,543) (4,956)
Increase in accounts payable, accrued
expenses, and other current
liabilities............................. 982 4,887 27,905
-------- -------- --------
Net cash (used in) provided by operating
activities................................. (13,523) 7,731 18,449
-------- -------- --------
INVESTING ACTIVITIES
Purchase of property and equipment.......... (11,056) (3,445) (4,289)
Net cash from sale of interests in
affiliates................................. -- -- 23,526
Proceeds from sale of property and
equipment.................................. -- -- 42
Net cash from acquisition of remaining 50%
interest in joint venture (Note 8)......... 269 -- --
-------- -------- --------
Net cash (used in) provided by investing
activities................................. (10,787) (3,445) 19,279
-------- -------- --------
FINANCING ACTIVITIES
Net increase (decrease) in borrowings under
revolving credit facility.................. 34,667 (40,903) (3,253)
Proceeds of long-term debt.................. -- 50,000 10,000
Payments under capital leases............... (162) (230) (237)
Repayments of long-term debt................ -- -- (15,000)
Decrease in due from affiliates............. (3,623) -- --
Distributions to partners................... (7,710) (10,770) (20,813)
-------- -------- --------
Net cash provided by (used in) financing
activities................................. 23,172 (1,903) (29,303)
-------- -------- --------
(Decrease) increase in cash................. (1,138) 2,383 8,425
Cash at beginning of year................... 2,483 1,345 3,728
-------- -------- --------
Cash at end of year......................... $ 1,345 $ 3,728 $ 12,153
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................... $ 3,409 $ 8,420 $ 6,410
======== ======== ========
Taxes paid.................................. $ 5,192 $ 942 $ 2,444
======== ======== ========
</TABLE>
See notes to predecessor combined financial statements.
F-6
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying predecessor combined financial statements include the
operations of The Donna Karan Company, Donna Karan Studio, Donna Karan Company
Store G.P., D.K. 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 9), 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, Donna Karan Company Store,
G.P., D.K. Footwear Partners, 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 The Donna Karan Shoe Company during the periods when it
was 50% owned by a nonaffiliated partner (see Note 8), and for Donna Karan
Japan during the period when it is 70% owned by a nonaffiliated partner (see
Note 9).
Amounts included for common stock represent the combined par or stated value
of the outstanding shares of the various corporations included in the
predecessor combined financial statements.
Pro Forma Adjustments (Unaudited)
In connection with the Company's initial public offering of stock
("Offering"), the Principals and certain of their affiliates are
simultaneously contributing to Donna Karan International Inc. all of the
outstanding stock of and partnership interests in the entities which comprise
the Company, in exchange for common stock ("Reorganization"). As consideration
for the contribution of their interests in the DK Companies, Ms. Karan, Mr.
Weiss, the KW Trusts, and Gabrielle Studio will receive an aggregate of
5,306,467 shares of Common Stock. As consideration for the contribution of
their interests in the DK Companies, members of the Takihyo Group will receive
an aggregate of 5,306,467 shares of Common Stock. In addition, the Company
expects to award 125,000 shares of Common Stock to certain employees pursuant
to the Company's stock incentive plan.
F-7
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth for fiscal 1995: (a) actual combined
statement of income data; (b) pro forma adjustments to reflect the
Reorganization, the Offering, certain other adjustments as if they occurred on
January 2, 1995; and (c) pro forma combined statement of income data.
PRO FORMA COMBINED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
-------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues............................ $510,126 ($5,521)(vi) $504,605
Gross profit............................ 179,437 (6,814)(vi) 159,817
(12,806)(i)
Selling, general, and administrative
expenses............................... 136,906 (4,828)(vi) 129,761
(2,317)(ii)
-------- --------
Operating income........................ 42,531 30,056
Equity in earnings of affiliate......... 2,519 394 (vi) 2,913
Interest expense........................ (7,650) 6,237 (iii) (839)
574 (iv)
Gain on sale of interests in
affiliates............................. 18,673 (18,673)(vi) --
-------- --------
Income before provision for income
taxes.................................. 56,073 32,130
Provision for income taxes.............. 2,398 11,307 (v) 13,705
-------- --------
Net income.............................. $ 53,675 $ 18,425
======== ========
</TABLE>
- --------
(i) Royalties of $12.8 million payable 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 $4.3 million to $2.0 million for
two of the Company's executives pursuant to their employment agreements.
(iii) Reduction in interest costs of $6.2 million assuming the application of
up to $75.7 million (which amount represents the maximum amount
outstanding during the year) of the proceeds from the Offering to reduce
the actual outstanding indebtedness under the Credit Agreement.
(iv) Reduction of $0.6 million in amortization of deferred financing costs,
which costs would have been written off, in connection with repayment of
outstanding indebtedness under the Credit Agreement.
(v) Increase of $11.3 million for income taxes based upon pro forma pre-tax
income as if the Company had been subject to Federal and additional
statement income taxes.
(vi) 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 from Donna Karan Japan to its customers and those net revenues of
the Company derived from 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 9.)
F-8
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the capitalization of the Company at December
31, 1995, and the pro forma capitalization of the Company as of such date
after giving effect to the issuance of promissory notes (the "Distribution
Notes") to the Principals or their intermediate companies or partnerships in
the aggregate principal amount of $114.5 million and recording a deferred tax
asset of $15.6 million, net of certain state and local deferred tax assets in
connection with the Company becoming subject to Federal and additional state
and local income taxes. Additionally, the resulting deficit in Retained
Earnings and Partners' Capital has been reclassified to additional paid-in-
capital.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Common stock of Intermediate Entities................... $ 1,146 $ --
Common Stock............................................ 106
Additional Paid in Capital.............................. -- (18,096)
Retained earnings and partners' capital (deficit)....... 79,748 --
Cumulative translation adjustment....................... (48) (48)
------- --------
Total stockholders' equity and partners' capital
(deficit).............................................. $80,846 $(18,038)
======= ========
</TABLE>
The Distribution Notes have been calculated to approximate the cumulative
undistributed taxable income of the predecessor companies (as computed for
Federal income tax purposes) (on which taxes previously have been paid) at the
date of the closing of the Offering contemplated hereby. The Distribution
Notes, which bear interest at 8%, mature on April 9, 2003 and may be prepaid
on the closing date of the Offering out of the proceeds therefrom.
Pro Forma Per Share Information
Pro forma net income per share is based upon (a) 10,612,934 shares of common
stock outstanding during the period, (b) the number of shares of common stock
(5,846,774) being sold by the Company, assuming an offering price of $21.50
($19.84, net of expenses) per share, the proceeds of which would be necessary
to pay approximately $116.0 million to members of the Takihyo Group and
members of the Karan/Weiss Group 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) 125,000 shares of Common Stock which the Company expects to
award certain employees pursuant to the Company's stock incentive plan. The
net income used in the calculation of pro forma per share information excludes
the reduction of interest costs of $6.2 million and the reduction in
amortization of deferred financing costs of $0.6 million, and the related tax
effect of $2.9 million.
Supplementary pro forma per share information is $.91 based upon 10,612,934
shares of common stock outstanding during the period increased by (a) the sale
of 5,846,774 shares of common stock assuming an offering price of $21.50 per
share ($19.84, net of expenses), the proceeds of which would be necessary to
pay approximately $116.0 million in satisfaction of the Distribution Notes,
(b) the sale of 3,639,113 shares of common stock assuming an offering price of
$21.50 per share ($19.84 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 March 31, 1996,
and (c) 125,000 shares of Common Stock which the Company expects to award
certain employees pursuant to the Company's stock incentive plan. The net
income used in the calculation of supplementary pro forma per share
information is $18.4 million.
F-9
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Business
The Company, which operates in one business segment, designs, contracts for
the manufacture of, and markets fashion apparel, accessories, and beauty
products. Its sales are principally to department and specialty stores located
throughout the United States, Asia and Europe and through Company owned outlet
stores located throughout the United States. A significant amount of the
Company's products are produced in Asia, through arrangements with independent
contractors. As a result, the Company's operations could be adversely affected
by political instability resulting in the disruption of trade from the
countries in which these contractors are located, or by the imposition of
additional duties or regulations relating to imports.
The Company's business is impacted by the general seasonal trends that are
characteristic of the apparel industry, 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 the fiscal year.
Several of the Company's customers have engaged in leveraged buyouts or
transactions in which they incurred significant amounts of debt, and certain
customers have operated or are currently operating under the protection of the
Federal bankruptcy laws. In January 1996, Barneys, Inc. and Barneys America,
Inc. (together, "Barneys") and certain affiliated entities filed for
protection under the Federal bankruptcy laws. Barneys accounted for 2.3% of
the Company's gross revenues during 1995, and the Company estimates that its
maximum uninsured loss as a result of Barneys' bankruptcy will be
approximately $2.0 million, which amount has been reserved for at December 31,
1995. The Company does not factor its accounts receivable and maintains credit
insurance to minimize the risk of bad debts.
The Company had one customer which accounted for approximately 7.2%, 12.4%,
and 12.3% of sales for the years ended January 2, 1994, January 1, 1995, and
December 31, 1995, respectively. During the year ended December 31, 1995,
another customer accounted for 11.1% of sales. During the year ended January
2, 1994, two different customers accounted for 11.9% and 10.3% of net sales,
respectively.
Fiscal Year
The Company's fiscal year consists of the 52- or 53-week period ending on
the Sunday nearest December 31.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Depreciation and Amortization
Depreciation of machinery, equipment and fixtures, including amounts
accounted for under capital leases, is computed using straight-line and
accelerated methods based on their estimated useful lives which range from
five to seven years. Leasehold improvements are amortized using the straight-
line method based on the lease term, and in certain instances include the
anticipated renewal period. The Company's share of the cost of constructing
in-store shop displays is capitalized and amortized using the straight-line
method over their estimated useful lives of four years. At December 31, 1995,
the unamortized balance of these costs of $2,034,000 is included in "Deposits
and other noncurrent assets" in the accompanying predecessor combined balance
F-10
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
sheets. Major additions and betterments are capitalized and repairs and
maintenance are charged to operations in the period incurred.
Advertising
The Company expenses the production costs of advertising upon the first
showing of the related advertisement which is generally less than six months
after the production costs are incurred. At January 1, 1995 and December 31,
1995, advertising costs totaling $1,327,000 and $1,334,000, respectively, were
included in "Prepaid expenses and other current assets" in the accompanying
predecessor combined balance sheets. Advertising, marketing, and public
relations expenses, including costs related to the Company's Creative Services
Department, for the years ended January 2, 1994, January 1, 1995, and December
31, 1995 were $32,517,000, $35,409,000 and $33,831,000 respectively.
Income Taxes
The entities in the combined group are partnerships, or corporations that
have elected to be taxed as S corporations pursuant to the Internal Revenue
Code. Therefore, no provision has been made in the accompanying predecessor
combined financial statements for Federal income taxes, since such taxes are
the liability of the partners. The provision for income taxes principally
reflects taxes levied by state and local governments ($1,010,000 in 1993,
$753,000 in 1994, and $2,120,000 in 1995), as well as income taxes levied by
foreign governments ($302,000 in 1993, $386,000 in 1994, and $278,000 in
1995).
Effective January 3, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." The cumulative effect of adopting SFAS No. 109 as of January 3,
1993 was not material to the Company.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant items
comprising the Company's net deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1995 1995
---------- ------------
<S> <C> <C>
Current:
Uniform inventory capitalization................... $ 80 $ 70
Allowance for doubtful accounts.................... 160 270
Other book accruals................................ 970 962
------ ------
1,210 1,302
Non Current:
Depreciation....................................... 350 380
------ ------
$1,560 $1,682
====== ======
</TABLE>
Revenue Recognition
Sales are recognized upon shipment of products or, in the case of sales by
Company-owned outlet stores, when payment is received. The Company provides
for estimated returns at the time of sales. Income from licensing agreements
is recognized when earned and is included in net revenues.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
F-11
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
For foreign operations, local currencies are considered the functional
currency. Assets and liabilities are translated using the exchange rates in
effect at the balance sheet date. Results of operations are translated using
the average exchange rates prevailing throughout the period. Translation
effects are accumulated as part of cumulative translation adjustment in
stockholders' equity and partners' capital. Gains and losses from foreign
currency transactions are included in operating results.
Foreign Exchange Contracts
The Company enters into forward exchange contracts as hedges relating to
identifiable currency positions. These financial instruments are designed to
minimize exposure and reduce risk from exchange rate fluctuations in the
regular course of business. The Company does not engage in speculation. Gains
and losses on foreign exchange contracts which hedge exposures on firm foreign
currency commitments are deferred and recognized as adjustments to the bases
of those assets. For the years ended January 2, 1994, January 1, 1995 and
December 31, 1995, gains and losses on foreign exchange contracts were not
material.
At December 31, 1995, the Company had approximately $587,000 of outstanding
forward exchange contracts, maturing at various dates in 1996, denominated in
Italian Lire. The Company's risk that counterparties to these contracts may be
unable to perform is minimized by limiting the counterparties to major
international banks and financial institutions. The Company does not expect
any losses as a result of counterparty default.
Stock Options
The Company intends to grant stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares on the
date of grant. The Company will account for stock option grants in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees, and,
accordingly, will recognize no compensation expense for the stock option
grants.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of ("Statement No. 121"), which requires impairment
losses to be recorded on long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. Statement
No. 121 also addresses the accounting for long-lived assets that are expected
to be disposed of. The Company will adopt Statement No. 121 in the first
quarter of 1996 and, based on current circumstances, does not believe the
effect of adoption will be material.
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1995 1995
---------- ------------
<S> <C> <C>
Raw materials........................................ $17,766 $16,369
Work in process...................................... 9,598 11,697
Finished goods....................................... 36,242 57,589
------- -------
$63,606 $85,655
======= =======
</TABLE>
F-12
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following (in
thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1995 1995
---------- ------------
<S> <C> <C>
Machinery, equipment, and fixtures.................. $ 18,305 $ 18,592
Property and equipment under capital leases......... 2,156 1,207
Leasehold improvements.............................. 22,789 25,568
-------- --------
43,250 45,367
Less accumulated depreciation and amortization...... (18,783) (22,862)
-------- --------
$ 24,467 $ 22,505
======== ========
</TABLE>
Deprecation and amortization of property and equipment amounted to
$5,354,000, $5,796,000, and $5,624,000 for the years ended January 2, 1994,
January 1, 1995, and December 31, 1995, respectively.
4. BORROWINGS
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1995 1995
---------- ------------
<S> <C> <C>
Revolving credit facility............................ $ -- $ 7,961
Term Loan A.......................................... 30,000 15,000
Term Loan B.......................................... 20,000 20,000
Term Loan C.......................................... -- 10,000
Capital lease obligations............................ 1,426 577
-------- -------
51,426 53,538
Less current portion................................. (15,424) (7,759)
-------- -------
$ 36,002 $45,779
======== =======
</TABLE>
Repayment of long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
REVOLVING
YEAR CREDIT
ENDED TOTAL TERM A TERM B TERM C FACILITY
----- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
1996............................... $ 7,500 $ 7,500 $ -- $ -- $ --
1997............................... 7,500 7,500 -- -- --
1998............................... 37,961 -- 20,000 10,000 7,961
------- ------- ------- ------- ------
$52,961 $15,000 $20,000 $10,000 $7,961
======= ======= ======= ======= ======
</TABLE>
At January 2, 1994, the Company had a credit facility available for the
issuance of letters of credit, acceptances, or direct borrowings up to
$110,000,000 of which $80,000,000 was available for direct borrowings. Direct
borrowings bore interest at 0.5% over the lead bank's prime rate and were
limited to a borrowing base calculated on eligible accounts receivable,
inventory, letters of credit, and intangibles. The lines of credit were
secured by accounts receivable, inventory, and intangibles (including an
interest in certain licensed trademarks), as well as certain intangibles of an
affiliated company.
In October 1994, the Company entered into a new credit agreement which
consists of a $50,000,000 term loan and a revolving line of credit available
for the issuance of letters of credit, acceptances, or direct borrowings
F-13
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
up to $75,000,000. Direct borrowings under the revolving line of credit bear
interest at 1.5% over the lead bank's prime rate (10.0% at December 31, 1995)
and are limited to a borrowing base calculated on eligible accounts
receivable, inventory, and letters of credit.
In December 1995, the Company amended its credit agreement to increase its
borrowing capability. The amended agreement calls for an additional term loan
of $10,000,000 and an increase in the revolving credit facility from
$75,000,000 to $105,000,000. The Company pays a commitment fee of 0.5% on the
unused portion of the revolving credit facility.
The revised term loan consists of a Term loan A, Term loan B, and Term loan
C. The credit agreement provides for various borrowing rate options including
borrowing rates based on a fixed spread over the London Interbank Offered Rate
(LIBOR). At December 31, 1995, $10,000,000 of Term loan C bears interest at
1.5% over the lead bank's prime rate (10.0%), $15,000,000 of Term loan A bears
interest at 2.75% above LIBOR (8.625%), and $20,000,000 of Term loan B bears
interest at 3.25% above LIBOR (9.125%).
The revolving credit facility and the term loans are secured by accounts
receivable, inventory, and intangibles.
The revolving credit facility matures on December 31, 1998. The term loan is
payable in quarterly installments, with the final payment due on December 31,
1998. The carrying amounts of the Company's borrowings approximate their fair
value.
The agreements contain certain restrictive covenants which, among other
things, require the Company to maintain certain financial ratios and restrict
investments, additional indebtedness, and payment of partner distributions.
The Company was in full compliance with all loan covenants as of December 31,
1995.
In connection with its credit facility, the Company incurred certain
financing costs which were deferred and are being amortized over the term of
the credit facility. At December 31, 1995, unamortized financing costs of
$2,954,000 are included in "Deposits and other noncurrent assets" in the
accompanying combined balance sheet.
The Company leases certain property and equipment under long-term
noncancellable lease agreements which are accounted for as capital leases.
These leases expire at various dates through 1998. Future minimum lease
payments as of December 31, 1995 are as follows (in thousands):
<TABLE>
<S> <C>
1996.................................................................... $299
1997.................................................................... 299
1998.................................................................... 37
----
635
Amount representing interest............................................ 58
----
Present value of total future minimum lease payments.................... 577
Less current portion.................................................... 259
----
Long-term portion of capital lease obligation........................... $318
====
</TABLE>
Letters of credit and acceptances outstanding were approximately $27,849,000
at January 1, 1995 and $33,934,000 at December 31, 1995.
On April 16, 1996, the Company issued Distribution Notes in the aggregate
principal amount of $114,484,000 (see Note 1), which bear interest at 8% and
mature on April 9, 2003.
F-14
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1995 1995
---------- ------------
<S> <C> <C>
Accrued operating expenses........................... $ 9,870 $ 8,590
Accrued state and local income taxes................. 2,859 2,351
Accrued compensation................................. 1,162 885
Accrued taxes other than income taxes................ 1,835 2,244
Other................................................ 1,648 1,696
------- -------
$17,374 $15,766
======= =======
</TABLE>
6. EMPLOYEE BENEFIT PLANS
The Company is required to make contributions to a multi-employer union
pension and health and welfare plan. These payments are based on wages paid to
the Company's union employees and amounts paid to contractors utilized by the
Company. The Company does not participate in the management of the plans and
has not been furnished with any information with respect to the type of
benefits provided, vested and nonvested benefits or plan assets. Health and
welfare plan expense approximated $1,412,000, $1,811,000, and $1,947,000 for
the years ended January 2, 1994, January 1, 1995, and December 31, 1995,
respectively. Pension expense approximated $757,000, $890,000, and $908,000
for the years ended January 2, 1994, January 1, 1995, and December 31, 1995,
respectively. Separate actuarial calculations regarding the Company's share of
plan benefits and net assets available for plan benefits have not been
determined.
Under the Employee Retirement Income Security Act of 1974, as amended, an
employer, upon withdrawal from or termination of a multi-employer plan, is
required to continue funding its proportionate share of the plan's unfunded
vested benefits. As of December 31, 1995, the Company had no intention of
withdrawing from the plan.
The Company sponsors a contributory defined contribution benefit plan
covering its non-union employees with a minimum of six months of eligible
service. The Company matches employee contributions at a rate of 50% to a
maximum of 6% of an employee's annual salary. Under the terms of the plan, a
participant is 100% vested in the employer's matching contribution after six
years of credited service. Expenses under this plan approximated $321,000,
$441,000, and $802,000 for the years ended January 2, 1994, January 1, 1995,
and December 31, 1995, respectively.
7. LEASES
Future minimum annual rental commitments under noncancellable operating
leases for office, warehouse and retail facilities, and equipment as of
December 31, 1995 are as follows (in thousands):
<TABLE>
<S> <C>
1996................................................................. $11,479
1997................................................................. 10,867
1998................................................................. 10,248
1999................................................................. 9,455
2000................................................................. 7,962
Thereafter........................................................... 35,553
-------
$85,564
=======
</TABLE>
F-15
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In addition, certain of the leases contain options to renew for periods up
to 10 years and others include contingent payments based on sales.
Rent expense amounted to approximately $11,145,000, $12,498,000, and
$14,105,000 for the years ended January 2, 1994, January 1, 1995, and December
31, 1995, respectively.
8. JOINT VENTURE
The Donna Karan Shoe Company was formed as a joint venture in 1992 between
DK Footwear Partners and a nonaffiliated partner. Effective December 1993, DK
Footwear Partners bought back the remaining 50% interest of the nonaffiliated
partner, and as a result, The Donna Karan Shoe Company was dissolved. At the
time of this transaction, the assets and liabilities assumed aggregated
$4,773,000 and $5,042,000, respectively. In connection therewith, the Company
recorded goodwill of $486,000 which is being amortized on a straight-line
basis over 20 years.
9. 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. Equity earnings for
the year ended December 31, 1995 amounted to $2,519,000. 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 $1,130,000 during the year ended December
31, 1995. The equity investment in Donna Karan Japan of $2,535,000 is included
in "Deposits and other noncurrent assets" in the accompanying combined balance
sheet.
10. OTHER EXPENSE
During 1994, the Company incurred certain costs, primarily legal and other
professional fees, related to a proposed debt offering. Ultimately, the
Company decided to obtain additional private financing (see Note 4), and as a
result, recorded a charge of $2,651,000 for these costs. Additionally, during
1993, the Company recorded a charge of $2,980,000 for related legal and other
professional fees incurred in connection with a proposed initial public
offering.
11. GEOGRAPHIC DATA
Export sales by geographic location are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1, DECEMBER 31,
1994 1995 1995
---------- ---------- ------------
<S> <C> <C> <C>
Japan.................................... $30,754 $ 51,078 $ 64,162
Europe and Middle East................... 19,743 37,986 56,704
Asia (excluding Japan)................... 11,589 15,830 23,230
Other.................................... 4,778 5,728 10,111
------- -------- --------
$66,864 $110,622 $154,207
======= ======== ========
</TABLE>
F-16
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
In January 1993, the Company obtained a favorable resolution of arbitration
which had been commenced in November 1990 between the Company and a licensee.
The arbitration was for claims arising out of defaults under a license
agreement. Under the terms of the resolution, the licensee agreed to remit to
the Company certain minimum license payments and to terminate the license
agreement. As a result of the arbitration and resolution thereof, in the first
quarter of 1993 the Company reversed amounts previously accrued of
approximately $1,425,000 which were related to this arbitration.
The Company has entered into an employment agreement expiring December 31,
2000 with its President and Chief Operating Officer. The agreement provides
for base salary and other benefits to be paid to the executive during the term
of the agreement. In addition, under the agreement, the executive is entitled
to a severance payment, as defined, under certain circumstances. The agreement
contains a provision whereby in the event of an initial public offering, the
executive will be paid the greater of $5,000,000 or 3% of the difference
between the "Aggregate Book Value" of the Company as of December 31, 1995 and
the "Fair Market Value" of the Company, as defined, on the date of the
Offering. The agreement also contains a provision whereby in the event of a
future disposition, in whole or in part, of the equity interests of the
Company by merger, consolidation, or sale to any third party, the executive
will be paid the lesser of (i) the aggregate amount received upon consummation
of the disposition, or (ii) 3% of the difference between the net sales price
and the attributed book value.
The Company is involved from time to time in routine legal matters
incidental to its business. In the opinion of the Company's management, the
resolution of such matters will not have a material effect on its financial
position or results of operations.
13. PRO FORMA INCOME TAXES (UNAUDITED)
As discussed in Note 1, the entities in the combined group are partnerships
or corporations that have elected to be taxed as S corporations pursuant to
the Internal Revenue Code. In connection with the offering made hereby, the
Company will 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.
Also, as discussed in Note 1, 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 December 31, 1995 would have been increased by
approximately $15.6 million, resulting in a total deferred tax asset of
approximately $17,300,000 inclusive of certain state and local tax assets
recorded on a historical basis. The deferred tax asset includes approximately
$2,500,000 as a result of certain changes in accounting for inventory reserves
for income tax purposes.
F-17
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The foreign and domestic components of pro forma income before pro forma
income taxes were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Domestic........................................................ $26,676
Foreign......................................................... 5,454
-------
$32,130
=======
</TABLE>
The pro forma income tax provision consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Current income taxes:
Federal taxes................................................. $12,215
State and local taxes......................................... 4,936
Foreign taxes................................................. 643
-------
17,794
Deferred income taxes......................................... (4,089)
-------
$13,705
=======
</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>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Federal statutory rate........................................ 35.0%
State and local taxes, net of Federal tax benefits............ 7.6
Other items, net, none of which individually exceeds 5% of
Federal taxes at statutory rates............................. 0.1
----
Effective tax rate............................................ 42.7%
====
</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
December 31, 1995 are as follows (in thousands):
<TABLE>
<S> <C>
Book over tax depreciation.......................................... $ 3,300
Allowance for doubtful accounts..................................... 2,400
Inventory reserves.................................................. 2,500
Uniform inventory capitalization.................................... 600
Other book accruals................................................. 8,500
-------
$17,300
=======
</TABLE>
F-18
<PAGE>
DONNA KARAN INTERNATIONAL INC.
PREDECESSOR COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------
APRIL 2, MARCH 31,
1995 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net revenues............................................ $ 120,693 $ 159,585
Cost of sales........................................... 76,490 106,724
---------- ----------
Gross profit............................................ 44,203 52,861
Selling, general and administrative expenses............ 33,041 39,411
---------- ----------
Operating income........................................ 11,162 13,450
Other income (expense):
Equity in earnings of affiliate....................... -- 988
Interest expense...................................... (1,701) (2,047)
Gain on sale of interests in affiliates............... 18,673 --
---------- ----------
Income before income taxes.............................. 28,134 12,391
Provision for income taxes.............................. 1,408 690
---------- ----------
Net income.............................................. $ 26,726 $ 11,701
========== ==========
Pro forma (Notes 3 and 6)
Historical income before income taxes................... $ 28,134 $ 12,391
Pro forma adjustments other than income taxes........... 20,938 1,459
---------- ----------
Pro forma income before income taxes.................... 7,196 10,932
Pro forma provision for income taxes.................... 3,108 4,721
---------- ----------
Pro forma net income.................................... $ 4,088 $ 6,211
========== ==========
Pro forma per share information......................... $ .19 $ .31
========== ==========
Pro forma common shares outstanding..................... 16,584,708 16,584,708
========== ==========
</TABLE>
See notes to predecessor combined financial statements.
F-19
<PAGE>
DONNA KARAN INTERNATIONAL INC.
PREDECESSOR COMBINED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1996
PRO FORMA
MARCH LIABILITY AND
31, STOCKHOLDERS'
1996 EQUITY
-------- -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 7,405
Accounts receivable, net of allowances of $24,351..... 87,014
Inventories........................................... 82,771
Prepaid expenses and other current assets............. 11,087
--------
Total current assets................................ 188,277
Property and equipment, at cost--net.................... 25,338
Deposits and other noncurrent assets.................... 12,652
--------
$226,267
========
LIABILITIES AND STOCKHOLDERS' EQUITY AND
PARTNERS' CAPITAL
Current liabilities:
Accounts payable...................................... $ 38,998
Accrued expenses and other current liabilities........ 22,754
Current portion of long-term debt..................... 7,759
Distribution Notes payable............................ -- $114,484
--------
Total current liabilities........................... 69,511
Long-term debt.......................................... 64,965
Commitments and contingencies...........................
Stockholders' equity and partners' capital:
Common stock of Intermediate Entities................. 1,146 --
Common stock.......................................... -- 106
Additional paid-in-capital............................ (7,257)
Retained earnings and partners' capital............... 90,687 --
Cumulative translation adjustment..................... (42) (42)
-------- --------
Total stockholders' equity and partners' capital.... 91,791 $ (7,193)
-------- ========
$226,267
========
</TABLE>
See notes to predecessor combined financial statements.
F-20
<PAGE>
DONNA KARAN INTERNATIONAL INC.
PREDECESSOR COMBINED STATEMENTS OF STOCKHOLDERS EQUITY
AND PARTNERS' CAPITAL
(UNAUDITED)
<TABLE>
<CAPTION>
RETAINED
EARNINGS
AND CUMULATIVE
COMMON PARTNERS' TRANSLATION
STOCK CAPITAL ADJUSTMENT TOTAL
-------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1995.......... $ 1,146 $ 46,886 $ (195) $ 47,837
Net income.......................... -- 26,726 -- 26,726
Translation adjustment.............. -- -- 151 151
Less distributions to partners...... -- (24) -- (24)
-------- --------- -------- ---------
Balance at April 2, 1995............ $ 1,146 $ 73,588 $ (44) $ 74,690
======== ========= ======== =========
Balance at December 31, 1995........ $ 1,146 $ 79,748 $ (48) $ 80,846
Net income.......................... -- 11,701 -- 11,701
Translation adjustment.............. -- -- 6 6
Less distributions to partners...... -- (762) -- (762)
-------- --------- -------- ---------
Balance at March 31, 1996........... $ 1,146 $ 90,687 $ (42) $ 91,791
======== ========= ======== =========
</TABLE>
See notes to predecessor combined financial statements.
F-21
<PAGE>
DONNA KARAN INTERNATIONAL INC.
PREDECESSOR COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------
APRIL 2, MARCH 31,
1995 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 26,726 $ 11,701
Adjustments to reconcile net cash used in operating
activities, as adjusted for effect of sale of Donna Karan
Japan:
Depreciation and amortization........................... 2,071 1,875
Provision for bad debts................................. 137 127
Equity in earnings of affiliate......................... -- (988)
Gain on sale of interests in affiliates................. (18,673) --
Changes in operating assets and liabilities:
Increase in accounts receivable....................... (23,928) (24,910)
Decrease in inventories............................... 6,673 2,889
Increase in prepaid expenses and other current
assets............................................... (5,640) (1,141)
Increase in deposits and other noncurrent assets...... (1,247) (738)
Decrease in accounts payable, accrued expenses, and
other current liabilities............................ (6,215) (7,839)
-------- --------
Net cash used in operating activities..................... (20,096) (19,024)
-------- --------
INVESTING ACTIVITIES
Purchase of property and equipment........................ (1,666) (4,148)
Net cash from sale of interests in affiliates............. 23,526 --
-------- --------
Net cash provided by (used in) investing activities....... 21,860 (4,148)
-------- --------
FINANCING ACTIVITIES
Net increase in borrowings under revolving credit facili-
ty....................................................... 5,630 21,124
Payments under capital leases............................. (59) (63)
Repayments of long-term debt.............................. (9,375) (1,875)
Distributions to partners................................. (24) (762)
-------- --------
Net cash (used in) provided by financing activities....... (3,828) 18,424
-------- --------
Decrease in cash.......................................... (2,064) (4,748)
Cash at beginning of period............................... 3,728 12,153
-------- --------
Cash at end of period..................................... $ 1,664 $ 7,405
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................. $ 1,365 $ 1,781
======== ========
Taxes paid................................................ $ 145 $ 272
======== ========
</TABLE>
See notes to predecessor combined financial statements.
F-22
<PAGE>
DONNA KARAN INTERNATIONAL INC
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS
MARCH 31, 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 periods ended April 2, 1995 and March 31, 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, 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 5), 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, 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 The Donna Karan Shoe Company during the periods when it
was 50% owned by a nonaffiliated partner and for Donna Karan Japan during the
period when it is 70% owned by a nonaffiliated partner (see Note 5).
3. PRO FORMA ADJUSTMENTS (UNAUDITED)
In connection with the Company's initial public offering of stock
("Offering"), the Principals and certain of their affiliates are
simultaneously contributing 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 ("Reorganization").
The following table sets forth for the three month periods ended April 2,
1995 and March 31, 1996: (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.
F-23
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
PRO FORMA COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 1996
-----------------------------------
ACTUAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
-------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues.............................. $159,585 $159,585
Gross profit.............................. 52,861 (4,162)(i) 48,699
Selling, general, and administrative ex-
penses................................... 39,411 (750)(ii) 38,661
-------- --------
Operating income.......................... 13,450 10,038
Equity in earnings of affiliate........... 988 988
Interest expenses......................... (2,047) 1,633 (iii) (94)
320 (iv)
-------- --------
Income before provision for income taxes.. 12,391 10,932
Provision for income taxes................ 690 4,031 (v) 4,721
-------- --------
Net income................................ $ 11,701 $ 6,211
======== ========
<CAPTION>
QUARTER ENDED APRIL 2, 1995
-----------------------------------
ACTUAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
-------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues.............................. $120,693 (5,521)(vi) $115,172
Gross profit.............................. 44,203 (6,814)(vi) 34,468
(2,921)(i)
Selling, general, and administrative ex-
penses................................... 33,041 (4,828)(vi) 27,634
(579)(ii)
-------- --------
Operating income.......................... 11,162 6,834
Equity in earnings of affiliate........... 0 394 (vi) 394
Interest expenses......................... (1,701) 1,525 (iii) (32)
144 (iv)
Gain on sale of interest in affiliates.... 18,673 (18,673) (vi) 0
-------- --------
Income before provision for income taxes.. 28,134 7,196
Provision for income taxes................ 1,408 1,700 (v) 3,108
-------- --------
Net income................................ $ 26,726 $ 4,088
======== ========
</TABLE>
- --------
(i) Royalties of $2.9 million and $4.2 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 $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 $1.5 million and $1.6 million in 1995 and
1996, respectively, assuming the application of up to $73.2 million and
$87.4 million in 1995 and 1996, respectively (which amounts represent
the maximum amount outstanding during the periods) of the proceeds from
the Offering to reduce the actual outstanding indebtedness under the
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 Credit Agreement.
(v) Increase of $1.7 million and $4.0 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.
(vi) 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 5)
F-24
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The pro forma liability and stockholders' equity at March 31, 1996 gives
effect to the issuance of promissory notes (the "Distribution Notes") to the
Principals or their intermediate companies or partnerships in the aggregate
principal amount of $114.5 million. Additionally the resulting deficit in
Retained earnings and partners' capital has been reclassified to additional
paid-in capital.
The Distribution Notes have been calculated to approximate the cumulative
undistributed taxable income of the predecessor companies (as computed for
Federal income tax purposes) (on which taxes previously have been paid) at the
date of the closing of the Offering contemplated hereby. The Distribution
Notes, which bear interest at 8%, mature on April 9, 2003 and may be prepaid
on the closing date of the Offering out of the proceeds therefrom.
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 (5,846,774) being sold by the Company, assuming an offering price of
$21.50 per share ($19.84, net of expenses), the proceeds of which would be
necessary to pay approximately $116.0 million to members of the Takihyo Group
and members of the Karan/Weiss Group 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) 125,000 shares of Common Stock which the Company expects to
award 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
quarters ended April 2, 1995 and March 31, 1996 excludes the reduction of
interest costs of $1.5 million and $1.6 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 $0.7 million and $0.8 million in 1995 and 1996, respectively.
Supplementary pro forma per share information for the quarters ended April
2, 1995 and March 31, 1996 is $.20 and $.31, respectively, based upon
10,612,934 shares of common stock outstanding during the period increased by
(a) the sale of 5,846,774,shares of Common Stock assuming an offering price of
$21.50 per share ($19.84, net of expenses), the proceeds of which would be
necessary to pay approximately $116.0 million in satisfaction of the
Distribution Notes, (b) the sale of 3,639,113 shares of common stock, assuming
an offering price of $21.50 per share, ($19.84, 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 March 31, 1996, and (c) 125,000 shares of Common Stock which the Company
expects to award 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 quarters ended April 2, 1995 and March 31,
1996 is $4.1 million and $6.2 million, respectively.
4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1996
---------
<S> <C>
Accrued operating expenses....................................... $12,430
Accrued state and local income taxes............................. 3,918
Accrued compensation............................................. 3,487
Accrued taxes other than income taxes............................ 1,717
Other............................................................ 1,202
-------
$22,754
=======
</TABLE>
F-25
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. 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. Equity earnings for
the three months ended March 31, 1996 amounted to $988,000. 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 $497,000 during the three months ended
March 31, 1996. The equity investment in Donna Karan Japan of $3,524,000 as of
March 31, 1996 is included in "Deposits and other noncurrent assets" in the
accompanying combined balance sheet.
6. PRO FORMA INCOME TAXES
The entities in the combined group are partnerships, or corporations that
have elected to be taxed as S corporations pursuant to the Internal Revenue
Code. In connection with the offering made hereby, the Company will 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 March 31, 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
$2,500,000 as a result of certain changes in accounting for inventory reserves
for income tax purposes.
The foreign and domestic components of pro forma income before pro forma
income taxes were as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED
------------------
APRIL 2, MARCH 31,
1995 1996
-------- ---------
<S> <C> <C>
Domestic................................................ $6,802 $ 9,935
Foreign................................................. 394 997
------ -------
$7,196 $10,932
====== =======
</TABLE>
F-26
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The pro forma income tax provision consists of the following (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED
------------------
APRIL 2, MARCH 31,
1995 1996
-------- ---------
<S> <C> <C>
Current income taxes:
Federal taxes........................................... $2,802 $3,201
State and local taxes................................... 1,162 1,340
Foreign taxes........................................... 61 50
------ ------
4,025 4,591
Deferred income taxes................................... (917) 130
------ ------
$3,108 $4,721
====== ======
</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>
QUARTER ENDED
------------------
APRIL 2, MARCH 31,
1995 1996
-------- ---------
<S> <C> <C>
Federal statutory rate................................ 35.0% 35.0%
State and local taxes, net of Federal tax benefits.... 8.1 8.2
Other items, net, none of which individually exceeds
5% of Federal taxes at statutory rates............... 0.1 (0.1)
---- -----
Effective tax rate.................................... 43.2% 43.1%
==== =====
</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
March 1996 are as follows (in thousands):
<TABLE>
<S> <C>
Book over tax depreciation........................................ $ 3,500
Allowance for doubtful accounts................................... 2,400
Inventory reserves................................................ 2,500
Uniform inventory capitalization.................................. 600
Other book accruals............................................... 8,200
-------
$17,200
=======
</TABLE>
F-27
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES +
+LAWS OF ANY SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued June 10, 1996
10,750,000 Shares
[LOGO OF DONNA KARAN INTERNATIONAL APPEARS HERE]
COMMON STOCK
-----------
OF THE 10,750,000 SHARES OF COMMON STOCK BEING OFFERED, 3,225,000 SHARES ARE
BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND 7,525,000 SHARES ARE BEING OFFERED INITIALLY IN
THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE "UNDERWRITERS." ALL
OF THE 10,750,000 SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON
STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING
PRICE WILL BE BETWEEN $20 AND $23 PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION
OF THE FACTORS CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
-----------
THE COMPANY'S COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK
EXCHANGE UNDER THE SYMBOL "DK," SUBJECT TO OFFICIAL NOTICE OF ISSUANCE.
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 OF THIS PROSPECTUS FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------
<S> <C> <C> <C>
Per Share.................. $ $ $
Total(3)................... $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Before deducting expenses of the Offering payable by the Company,
estimated at $ .
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
1,612,500 additional Shares of Common Stock at the price to public,
less underwriting discounts and commissions, for the purpose of
covering over-allotments, if any. If the Underwriters exercise such
option in full, the total price to public, underwriting discounts and
commissions, and proceeds to Company will be $ , $ , and $ ,
respectively. See "Underwriters."
-----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to the approval of certain legal
matters by Davis Polk & Wardwell, counsel for the Underwriters. It is expected
that delivery of the Shares will be made on or about , 1996 at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in same day funds.
-----------
MORGAN STANLEY & CO. BEAR, STEARNS INTERNATIONAL LIMITED
International
MERRILL LYNCH INTERNATIONAL
SMITH BARNEY INC.
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table shows the expenses, other than underwriting discounts,
which the Company expects to incur in connection with the issuance and
distribution of the securities being registered under this registration
statement. All expenses are estimated except for the Securities and Exchange
Commission registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 98,048
New York Stock Exchange listing fee.............................. 25,000
NASD filing fee.................................................. 28,934
Blue Sky fees and expenses....................................... 20,000
Legal fees and expenses.......................................... 2,700,000
Accounting fees and expenses..................................... 575,000
Printing and engraving expenses.................................. 525,000
Registrar and transfer agent's fee............................... 25,000
Miscellaneous.................................................... 103,018
----------
Total............................................................ $4,100,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
("Section 145") permits a Delaware corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending,
or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action by or in the right of
the corporation) by reason of the fact that such person is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against expenses (including attorneys' fees), judgments, fines, and amounts
paid in settlement actually and reasonably incurred by such person in
connection with such action, suit, or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such person's conduct
was unlawful.
In the case of an action by or in the right of the corporation, Section 145
permits the corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that such person is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the corporation. No indemnification
may be made in respect of any claim, issue, or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to
the extent that the Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
To the extent that a director, officer, employee, or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit,
or proceeding referred to in the preceding two paragraphs, Section 145
requires that such person be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith.
II-1
<PAGE>
Section 145 provides that expenses (including attorneys' fees) incurred by
an officer or director in defending any civil, criminal, administrative, or
investigative action, suit, or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit, or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in Section 145.
Article Eighth of the Company's Certificate of Incorporation eliminates the
personal liability of the directors of the Company to the Company or its
stockholders for monetary damages for breach of fiduciary duty as directors,
with certain exceptions. Article Ninth requires indemnification of directors
and officers of the Company, and for advancement of litigation expenses to the
fullest extent permitted by Section 145.
The Underwriting Agreement filed herewith as Exhibit 1.1 provides for
indemnification of the directors, certain officers, and controlling persons of
the Company by the Underwriters against certain civil liabilities, including
liabilities under the Securities Act. The Company has also entered into an
agreement with a director and executive officer providing for his
indemnification in his capacity as a director and executive officer, including
liabilities under the Federal securities laws.
In addition, in the Contribution Agreement the Company has agreed to
indemnify the Principals for (i) acts or omissions taken or made by any of
them (a) at or prior to the date of closing under the Contribution Agreement
based on an allegation that such person was acting as an officer or director
of the Company or its predecessors with respect to acts or omissions that are
of a nature customarily performed by officers or directors of a Company, and
(b) after the date of closing under the Contribution Agreement based on an
allegation that such person was a director of the Company, whether or not he
or she was in fact a director of the Company at the time of the alleged act or
omission, in each case assuming such person seeking indemnification had acted
properly, (ii) any breach of representations or warranties made by it in the
Contribution Agreement, and (iii) any New York State and New York City real
estate transfer taxes and New York State real estate gains taxes incurred in
connection with the Reorganization. In addition, the Principals have agreed to
indemnify the Company for any breaches of representations and warranties made
by them in the Contribution Agreement; provided, however, that the
indemnification obligations of the Principals to the Company are limited in
the case of breaches of certain tax-related warranties.
Each of the employment agreements between the Company and Ms. Karan and Mr.
Weiss provides that the Company will indemnify Ms. Karan or Mr. Weiss (as the
case may be) against all charges and expenses in connection with any act or
proceeding to which he or she is made a party by reason of being an employee,
officer, or director of the Company.
The License Agreement between the Company and Gabrielle Studio provides that
the Company will indemnify Gabrielle and Ms. Karan against losses arising out
of the Company's use of the Licensed Marks other than in accordance with the
terms of the License Agreement.
The license agreement between the Company and Stephan Weiss pursuant to
which Mr. Weiss will grant to the Company a license to use designs and utility
patents for the bottles in which the Beauty Division products are packaged
provides that the Company will indemnify Mr. Weiss from losses arising out of
claims by third parties relating to the use by the Company of the bottles or
patents.
See Item 17 below.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
See "Reorganization."
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(i) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement
2.1 Form of Agreement and Plan of Contribution among the Company, Takihyo
Inc., Donna Karan, Stephan Weiss, Stephan Weiss, as trustee under
Trust Agreement for the benefit of
Lisa Weiss Keyes, Corey Weiss, and Gabrielle Karan, Stephan Weiss, as
trustee under
Trust Agreement for the benefit of Donna Karan, Gabrielle Studio,
Inc.,
Tomio Taki, Frank Mori, Christopher Mori, and Heather Mori
3.1 Certificate of Incorporation of the Company*
3.2 Form of Amended and Restated Certificate of Incorporation of the
Company
3.3 Form of Bylaws of the Company
5.1 Opinion of Proskauer Rose Goetz & Mendelsohn LLP
10.1 Credit Agreement dated as of December 15, 1995 among The Donna Karan
Company,
The Donna Karan Company Store, G.P., Donna Karan Studio, DK Footwear
Partners, certain
lending institutions, and Citibank, N.A., as Agent*
10.2 Form of 1996 Stock Incentive Plan of the Company
10.3 Form of 1996 Non-Employee Director Stock Option Plan
10.4 Form of Registration Rights Agreement among the Company, Donna Karan,
Stephan Weiss,
Stephan Weiss, as trustee under Trust under trust agreement for the
benefit of Lisa Weiss Keyes, Corey Weiss, and Gabrielle Karan, Stephan
Weiss, as trustee under Trust Agreement for the benefit of Donna
Karan, Gabrielle Studio, Inc., Takihyo Inc., Tomio Taki, Frank Mori,
Christopher Mori, and Heather Mori
10.5 Form of License Agreement to be entered into between Gabrielle Studio,
Inc. and Donna Karan Studio
10.6 Form of Guaranties of License from the Company to Gabrielle Studio,
Inc.
10.7 Form of License Agreement to be entered into between Donna Karan
Studio and Stephan Weiss
10.8 Form of Employment Agreement between the Company and Donna Karan
10.9 Form of Employment Agreement between the Company and Stephan Weiss
10.10 Form of Stockholders Agreement among Donna Karan, Stephan Weiss,
Stephan Weiss as trustee under Trust Agreement for the benefit of Lisa
Weiss Keyes, Corey Weiss, and Gabrielle Karan, Stephan Weiss as
trustee under Trust Agreement for the benefit of Donna Karan, Gabriel
Studio, Inc., Takihyo Inc., Tomio Taki, Frank Mori, Christopher Mori,
and Heather Mori
10.11 Form of Incentive Compensation Plan
10.12 Employment Agreement between The Donna Karan Company and Stephen L.
Ruzow*
21.1 Subsidiaries of the Company*
23.1 Consent of Ernst & Young LLP
23.2 Consent of Proskauer Rose Goetz & Mendelsohn LLP (included in its
opinion filed as Exhibit 5.1 to the Registration Statement)
24.1 Power of Attorney from Tomio Taki
27.1 Financial Data Schedule*
</TABLE>
- --------
*Previously filed.
(ii) Financial Statement Schedule
Report of Independent Auditors on Schedule
Schedule II--Valuation & Qualifying Accounts & Reserves
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) under the
Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement (filed herewith as Exhibit
1.1) certificates in such denominations and registered in such names as
required by the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the provisions described above in Item 14 or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted against the
Registrant by such director, officer, or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933 and
will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF NEW YORK, STATE OF NEW YORK, ON JUNE 10, 1996.
Donna Karan International Inc.
/s/ Donna Karan
By: _________________________________
DONNA KARAN
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Donna Karan Chairman of the June 10, 1996
- ------------------------------------- Board and Chief
DONNA KARAN Executive Officer
(principal
executive officer)
/s/ Stephan Weiss Vice Chairman and June 10, 1996
- ------------------------------------- Director
STEPHAN WEISS
/s/ Stephen L. Ruzow President, Chief June 10, 1996
- ------------------------------------- Operating Officer,
STEPHEN L. RUZOW and Director
/s/ Joseph B. Parsons Executive Vice June 10, 1996
- ------------------------------------- President and Chief
JOSEPH B. PARSONS Financial Officer
(principal
accounting and
financial officer)
/s/ Frank R. Mori Director June 10, 1996
- -------------------------------------
FRANK R. MORI
/s/ Tomio Taki* Director June 10, 1996
- -------------------------------------
TOMIO TAKI
/s/ Frank R. Mori
*By: ___________________________
FRANK R. MORI, ATTORNEY-IN-FACT
II-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE
The Board of Directors of
Donna Karan International Inc.
We have audited the predecessor combined financial statements of Donna Karan
International Inc. (the "Company") as of January 1, 1995 and December 31,
1995, and for each of the three years in the period ended December 31, 1995,
and have issued our report thereon dated April 16, 1996 (included elsewhere in
this Registration Statement). Our audits also included the financial statement
schedule listed in Item 16(b) of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
April 16, 1996
<PAGE>
SCHEDULE II
DONNA KARAN INTERNATIONAL INC.
VALUATION & QUALIFYING ACCOUNTS & RESERVES
<TABLE>
<CAPTION>
ADDITIONS
--------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended January 2,
1994
Allowance for doubtful
accounts............. $ 1,709 $ 544 $-- $ 264 $ 1,989
Allowance for
chargebacks.......... 1,753 4,207 -- 779 5,181
Allowance for cash
discounts............ 1,345 16,984 -- 17,316 1,013
Allowance for sales
returns.............. 806 22,791 -- 22,583 1,014
------- ------- ---- ------- -------
$ 5,613 $44,526 $-- $40,942 $ 9,197
======= ======= ==== ======= =======
Year ended January 1,
1995
Allowance for doubtful
accounts............. $ 1,989 $ 773 $-- $ 158 $ 2,604
Allowance for
chargebacks.......... 5,181 7,075 -- 4,456 7,800
Allowance for cash
discounts............ 1,013 17,034 -- 16,668 1,379
Allowance for sales
returns.............. 1,014 21,942 -- 19,726 3,230
------- ------- ---- ------- -------
$ 9,197 $46,824 $-- $41,008 $15,013
======= ======= ==== ======= =======
Year ended December 31,
1995
Allowance for doubtful
accounts............. $ 2,604 $3,122 $-- $ 73 $ 5,653
Allowance for
chargebacks.......... 7,800 13,172 -- 8,067 12,905
Allowance for cash
discounts............ 1,379 17,493 -- 17,184 1,688
Allowance for sales
returns.............. 3,230 19,000 -- 19,969 2,261
------- ------- ---- ------- -------
$15,013 $52,787 $-- $45,293 $22,507
======= ======= ==== ======= =======
</TABLE>
The above reserves are deducted from accounts receivable in the predecessor
combined balance sheets.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS PAGE NO.
------- ----------------------- --------
<C> <S> <C>
1.1 Form of Underwriting Agreement
2.1 Form of Agreement and Plan of Contribution among the
Company,Takihyo Inc., Donna Karan, Stephan Weiss, Stephan
Weiss, as trustee under Trust Agreement for the benefit of
Lisa Weiss Keyes, Corey Weiss, and Gabrielle Karan, Stephan
Weiss, as trustee under Trust Agreement for the benefit of
Donna Karan, Gabrielle Studio, Inc., Tomio Taki, Frank
Mori, Christopher Mori, and Heather Mori
3.1 Certificate of Incorporation of the Company*
3.2 Form of Amended and Restated Certificate of Incorporation
of the Company
3.3 Form of Bylaws of the Company
5.1 Opinion of Proskauer Rose Goetz & Mendelsohn LLP
10.1 Credit Agreement dated as of December 15, 1995 among The
Donna Karan Company, The Donna Karan Company Store, G.P.,
Donna Karan Studio, DK Footwear Partners, certain lending
institutions, and Citibank, N.A., as Agent*
10.2 Form of 1996 Stock Incentive Plan of the Company
10.3 Form of 1996 Non-Employee Director Stock Option Plan
10.4 Form of Registration Rights Agreement among the Company,
Donna Karan, Stephan Weiss, Stephan Weiss, as trustee under
Trust under trust agreement for the benefit of Lisa Weiss
Keyes, Corey Weiss, and Gabrielle Karan, Stephan Weiss, as
trustee under Trust Agreement for the benefit of Donna
Karan, Gabrielle Studio, Inc., Takihyo Inc., Tomio Taki,
Frank Mori, Christopher Mori, and Heather Mori
10.5 Form of License Agreement to be entered into between
Gabrielle Studio, Inc. and Donna Karan Studio
10.6 Form of Guaranties of License from the Company to Gabrielle
Studio, Inc.
10.7 Form of License Agreement to be entered into between Donna
Karan Studio and Stephan Weiss
10.8 Form of Employment Agreement between the Company and Donna
Karan
10.9 Form of Employment Agreement between the Company and
Stephan Weiss
10.10 Form of Stockholders Agreement among Donna Karan, Stephan
Weiss, Stephan Weiss as trustee under Trust Agreement for
the benefit of Lisa Weiss Keyes, Corey Weiss, and Gabrielle
Karan, Stephan Weiss as trustee under Trust Agreement for
the benefit of Donna Karan, Gabriel Studio, Inc., Takihyo
Inc., Tomio Taki, Frank Mori, Christopher Mori, and Heather
Mori
10.11 Form of Incentive Compensation Plan
10.12 Employment Agreement between The Donna Karan Company and
Stephen L. Ruzow*
21.1 Subsidiaries of the Company*
23.1 Consent of Ernst & Young LLP
23.2 Consent of Proskauer Rose Goetz & Mendelsohn LLP (included
in its opinion filed as Exhibit 5.1 to the Registration
Statement)
24.1 Power of Attorney from Tomio Taki
27.1 Financial Data Schedule*
</TABLE>
- --------
* Previously filed.
<PAGE>
EXHIBIT 1.1
_______________ Shares
DONNA KARAN INTERNATIONAL INC.
COMMON STOCK, $.01 PAR VALUE
UNDERWRITING AGREEMENT
__________, 1996
<PAGE>
_____________, 1996
Morgan Stanley & Co.
Incorporated
Bear, Stearns & Co. Inc.
Merrill Lynch, Pierce, Fenner
& Smith Incorporated
Smith Barney Inc.
c/o Morgan Stanley & Co.
Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co.
International Limited
Bear, Stearns International Limited
Merrill Lynch, Pierce, Fenner
& Smith Incorporated
Smith Barney Inc.
c/o Morgan Stanley & Co.
International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs:
Donna Karan International Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to the several Underwriters (as defined below)
_______________ shares of the Common Stock (as defined below) (par value $.01
per share) of the Company (the "Firm Shares").
It is understood that, subject to the conditions hereinafter stated,
_________ Firm Shares (the "U.S. Firm Shares") will be sold to the several U.S.
Underwriters named in Schedule I hereto (the "U.S. Underwriters") in connection
with the offering and sale of such U.S. Firm Shares in the United States and
Canada to United States and Canadian Persons (as such terms are defined in the
Agreement Between U.S. and International Underwriters of even date herewith),
and _________ Firm Shares (the "International Shares") will be sold to the
several International Underwriters named in
<PAGE>
Schedule II hereto (the "International Underwriters") in connection with the
offering and sale of such International Shares outside the United States and
Canada to persons other than United States and Canadian Persons. Morgan Stanley
& Co. Incorporated, Bear, Stearns & Co. Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Smith Barney Inc. shall act as representatives (the "U.S.
Representatives") of the several U.S. Underwriters, and Morgan Stanley & Co.
International Limited, Bear, Stearns International Limited, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Smith Barney Inc. shall act as
representatives (the "International Representatives") of the several
International Underwriters. The U.S. Underwriters and the International
Underwriters are hereinafter collectively referred to as the "Underwriters".
The Company proposes to sell to the several U.S. Underwriters, not more
than _________ additional shares of the Common Stock (par value $.01 per share)
of the Company (the "Additional Shares"), if and to the extent that the U.S.
Representatives shall have determined to exercise, on behalf of the U.S.
Underwriters, the right to purchase such shares of Common Stock granted to the
U.S. Underwriters in Section 3 hereof. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "Shares". The shares of
Common Stock (par value $.01 per share) of the Company to be outstanding after
giving effect to the sales contemplated hereby are hereinafter referred to as
the "Common Stock".
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement relating to the Shares. The registration
statement contains two prospectuses to be used in connection with the offering
and sale of the Shares: the U.S. prospectus, to be used in connection with the
offering and sale of Shares in the United States and Canada to United States and
Canadian Persons, and the international prospectus, to be used in connection
with the offering and sale of Shares outside the United States and Canada to
persons other than United States and Canadian Persons. The international
prospectus is identical to the U.S. prospectus except for the outside front
cover page. The registration statement as amended at the time it becomes
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement"; the U.S. prospectus and the
international prospectus in the respective forms first used to confirm sales of
Shares are hereinafter collectively referred to as the "Prospectus". If the
Company has filed
2
<PAGE>
an abbreviated registration statement to register additional shares of Common
Stock pursuant to Rule 462(b) under the Securities Act (the "Rule 462
Registration Statement"), then any reference herein to the term Registration
Statement shall be deemed to include such Rule 462 Registration Statement.
The Company is a recently organized Delaware corporation which will acquire
the businesses conducted by The Donna Karan Company, The Donna Karan Company
Store, G.P., DK Footwear Partners, Donna Karan Studio and DSTF Japan Company,
all general partnerships, Donna Karan (H.K.) Limited, a Hong Kong corporation
and Donna Karan Italy S.R.L., an Italian corporation (collectively, the "DK
Companies") upon consummation of all of the transactions contemplated by the
Reorganization Documents (as defined below) as described under the heading
"Reorganization" in the Prospectus (the "Reorganization"). The DK Companies are
owned by various partnerships and corporations, the principal stockholders of
which are Donna Karan, Stephan Weiss, Gabrielle Studio, Inc., a New York
corporation ("Gabrielle Studio"), the trust under trust agreement for the
benefit of Lisa Weiss Keyes, Corey Weiss and Gabrielle Karan (the "Karan/Weiss
Trust"), the trust under trust agreement for the benefit of Donna Karan (the
"Karan Trust"; and together with the Karan/Weiss Trust, the "KW Trusts"), Tomio
Taki, Frank R. Mori, Christopher Mori, Heather Mori and Takihyo Inc., a Delaware
corporation (collectively, the "Principal Stockholders"). The term "Karan/Weiss
Group" means Donna Karan, Stephan Weiss, the KW Trusts and Gabrielle Studio.
The term "Takihyo Group" means Tomio Taki, Frank R. Mori, Christopher Mori,
Heather Mori and Takihyo Inc. The term "Reorganization Documents" means (a) the
Agreement and Plan of Contribution dated as of ________, 1996 (the "Contribution
Agreement") among the Company and the Principal Stockholders, (b) the Escrow
Agreement dated as of ________, 1996 (the "Escrow Agreement") among the Company,
the Principal Stockholders and Proskauer Rose Goetz & Mendelsohn LLP, as escrow
agent (in such capacity, the "Escrow Agent"), and (c) any other agreement,
opinion, certificate or other document required to be delivered pursuant to
either of the foregoing. It is understood that the Reorganization will be
consummated prior to or simultaneously with the closing of the sale of the Firm
Shares to the Underwriters.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE DK COMPANIES.
------------------------------------------------------------------
The Company and the DK Companies jointly and severally represent and warrant to
and agree with each of the Underwriters that:
3
<PAGE>
(a) The Registration Statement has become effective under the
Securities Act; no stop order suspending the effectiveness of the
Registration Statement is in effect, and no proceedings for such purpose
are pending before or, to the knowledge of the Company and the DK
Companies, threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) the Registration Statement and the Prospectus
comply and, as amended or supplemented, if applicable, will comply in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder and (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations
and warranties set forth in this Section 1(b) do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any (i) Underwriter furnished to the Company or the
DK Companies in writing by such Underwriter through you expressly for use
therein or (ii) Principal Stockholder furnished to the Company or the DK
Companies in writing by such Principal Stockholder for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware, has,
and as of the Closing Date (as defined in Section 5 below) after giving
effect to the Reorganization, will have, the corporate power and authority
to own its property and to conduct its business as described in the
Prospectus and is, and as of the Closing Date after giving effect to the
Reorganization, will be, duly qualified to transact business and is, and as
of the Closing Date after giving effect to the Reorganization, will be, in
good standing in each jurisdiction in which the conduct of its business or
its ownership or leasing of property requires such qualification, except to
the extent that the failure to be so qualified or be in good standing would
not have a material adverse effect on the Company
4
<PAGE>
and its subsidiaries, taken as a whole, after giving effect to the
Reorganization.
(d) Each of the DK Companies that is a corporation has been, and as
of the Closing Date after giving effect to the Reorganization, will be,
duly incorporated, is, and as of the Closing Date after giving effect to
the Reorganization, will be, validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, has, and
as of the Closing Date after giving effect to the Reorganization, will
have, the corporate power and authority to own its property and to conduct
its business as described in the Prospectus and is, and as of the Closing
Date after giving effect to the Reorganization, will be, duly qualified to
transact business and is, and as of the Closing Date after giving effect to
the Reorganization, will be in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole, after giving effect
to the Reorganization.
(e) Each of the DK Companies that is a partnership has been, and as
of the Closing Date after giving effect to the Reorganization, will be,
duly formed and is, and as of the Closing Date after giving effect to the
Reorganization, will be, validly existing as a general partnership under
the laws of its jurisdiction of formation, with partnership power and
authority to carry on its business as it is currently being conducted and
to own, lease and operate its properties, and each of the DK Companies that
is a partnership is, and as of the Closing Date after giving effect to the
Reorganization, will be, duly qualified and is, and as of the Closing Date
after giving effect to the Reorganization, will be, in good standing as a
foreign partnership authorized to do business in each jurisdiction in which
the nature of its business or its ownership or leasing of property requires
such qualification, except where the failure to be so qualified would not
have a material adverse effect on the Company and its subsidiaries, taken
as a whole, after giving effect to the Reorganization.
5
<PAGE>
(f) This Agreement has been duly authorized, executed and delivered
by the Company and each of the DK Companies and the Reorganization
Documents have been duly authorized, executed and delivered by the Company.
(g) The authorized capital stock of the Company conforms as to legal
matters in all material respects to the description thereof contained in
the Prospectus.
(h) All of the outstanding shares of capital stock of each of the
corporate subsidiaries of the DK Companies and, after giving effect to the
Reorganization, the Company, have been duly authorized and validly issued
and are fully paid and non-assessable, and are owned by the DK Companies
and, as of the Closing Date after giving effect to the Reorganization,
will be owned, directly or indirectly, by the Company, free and clear of
any security interest, claim, lien, encumbrance or adverse interest of any
nature.
(i) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive or similar rights.
(j) The execution and delivery by the Company and the DK Companies
of, and the performance by the Company and the DK Companies of their
respective obligations under, this Agreement and the Reorganization
Documents will not contravene any provision of applicable law, the
certificate of incorporation or by-laws of the Company or of the DK
Companies which are corporations or the partnership agreements of the DK
Companies which are partnerships or any agreement or other instrument
binding upon the Company, the DK Companies or any of their respective
subsidiaries that is material to the Company, the DK Companies and any of
their respective subsidiaries, taken as a whole, or any judgment, order or
decree of any governmental body, agency or court having jurisdiction over
the Company, the DK Companies or any of their respective subsidiaries, and
no consent, approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the Company
or the DK Companies of their respective obligations under this Agreement
and the Reorganization Documents, except such as have been obtained or as
may be required by the securities or Blue Sky laws of the various
6
<PAGE>
jurisdictions in connection with the offer and sale of the Shares and
except where such contravention or failure to obtain consents, approvals or
authorizations would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole, after giving effect to the
Reorganization.
(k) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company, the DK Companies and their respective
subsidiaries, taken as a whole, from that set forth in the Prospectus
(exclusive of any amendments or supplements thereto subsequent to the date
of this Agreement).
(l) There are no legal or governmental proceedings pending or, to the
knowledge of the Company and the DK Companies, threatened to which the
Company, the DK Companies or any of their respective subsidiaries is or
will be, as of the Closing Date after giving effect to the Reorganization,
a party or to which any of the properties of the Company, the DK Companies
or their respective subsidiaries is or will be, as of the Closing Date
after giving effect to the Reorganization, subject that are required to be
described in the Registration Statement or the Prospectus and are not so
described or any statutes, regulations, contracts or other documents that
are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that
are not described or filed as required.
(m) Except as described in the Prospectus, the DK Companies and their
subsidiaries possess, and, as of the Closing Date after giving effect to
the Reorganization, the Company and its subsidiaries, will possess, all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities, necessary to conduct their
respective businesses as described in the Prospectus, except where failure
to possess such certificates, authorizations or permits would not have a
material adverse effect on the DK Companies and their subsidiaries, taken
as a whole, or the Company and its subsidiaries, taken as a whole, after
giving effect to the Reorganization, and none of the DK Companies, the
Company or any of their respective subsidiaries has received any notice of
proceedings relating to the
7
<PAGE>
revocation or any other modification of any such certificate, authorization
or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material adverse
change in the condition, financial or otherwise, or in the earnings,
business or operations of the DK Companies and their subsidiaries, taken as
a whole, or the Company and its subsidiaries, taken as a whole, after
giving effect to the Reorganization.
(n) Except as described in the Prospectus, all patents, patent
applications, trademarks, trademark applications, trade names, service
marks, copyrights, franchises and other intangible properties and assets
which are material to the Company and its subsidiaries, taken as a whole,
after giving effect to the Reorganization (all of the foregoing being
herein called "Intangibles") that the DK Companies and their subsidiaries
and Donna Karan, prior to giving effect to the Reorganization, and the
Company and its subsidiaries after giving effect to the Reorganization,
owns or has pending, or under which they are licensed, are in good standing
and uncontested and not subject to any liens or encumbrances or rights
thereto or therein by third parties, except where such failure to be so
licensed or in good standing as to such Intangible would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole, after giving effect to the Reorganization and other than the lien
granted pursuant to the Amended and Restated Credit Agreement dated as of
December 15, 1995, among The Donna Karan Company, The Donna Karan Company
Store, G.P., Donna Karan Studio, DK Footwear Partners, Citibank N.A.
("Citibank") and the other lenders party thereto, as amended (the "Credit
Agreement"), which shall be released at or prior to the Closing Date; and
the license agreement to be entered into by Donna Karan Studio and
Gabrielle Studio is properly described in the Prospectus in all material
respects. The trademarks and tradenames referred to in the Prospectus
under the heading "Business -- Trademarks" which are material to the
Company and its subsidiaries, taken as a whole, after giving effect to the
Reorganization (the "Licensed Marks"), are trademarks and tradenames used
by the DK Companies, their subsidiaries and their respective licensees and,
subsequent to the Reorganization, will be used by the Company, its
subsidiaries and their respective licensees to identify their products and
services and each such trademark and tradename, and any other material
trademark or tradename of the DK Companies, the Company or any of
8
<PAGE>
their respective subsidiaries, is the subject of application or
registrations in the name of Donna Karan or Gabrielle Studio on the
principal register in the United States Patent and Trademark Office or
protected by rights in the United States accorded Donna Karan or Gabrielle
Studio by virtue of common or civil law, as well as by validly issued and
existing registrations in the name of Donna Karan, The Donna Karan Company
(as nominee for Donna Karan) or Gabrielle Studio and rights accorded Donna
Karan, the DK Companies, the Company, The Donna Karan Company (as nominee
for Donna Karan) or Gabrielle Studio by virtue of common or civil law, in
all foreign jurisdictions in which the DK Companies, the Company or their
respective subsidiaries currently conduct their business, except such as
would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole, after giving effect to the Reorganization.
The DK Companies, their subsidiaries and their respective licensees have
and as of the Closing Date after giving effect to the Reorganization, Donna
Karan Studio, its subsidiaries and their respective licensees will have,
the sole and exclusive right to use the Licensed Marks (except with regard
to certain rights retained by Donna Karan and as otherwise described in the
Prospectus) and any other material trademark or tradename of Donna Karan,
Gabrielle Studio, the DK Companies, the Company or their respective
subsidiaries, except such as would not have a material adverse effect on
the Company and its subsidiaries, taken as a whole, after giving effect to
the Reorganization, and there are no oppositions, cancellations or other
proceedings challenging such right of use, except such as would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole, after giving effect to the Reorganization. The Company has no
knowledge of any right under any Intangible necessary to the business of
the DK Companies, the Company or of any of their respective subsidiaries as
presently conducted or as the Prospectus indicates any of them contemplates
conducting that the DK Companies, the Company or such subsidiary do not own
or otherwise have the right to use, except such as would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole, after giving effect to the Reorganization. None of the DK
Companies, the Company or any of their respective subsidiaries has
infringed, is infringing, or has received notice of infringement with
respect to asserted Intangibles of others, except such as would not have a
material adverse effect on the Company and
9
<PAGE>
its subsidiaries, taken as a whole, after giving effect to
the Reorganization.
(o) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(p) None of the DK Companies or the Company is or, after giving effect
to the Reorganization and to the offering and sale of the Shares and the
application of the proceeds thereof as described in the Prospectus, will be an
"investment company" as such term is defined in the Investment Company Act of
1940, as amended.
(q) The DK Companies and their subsidiaries and, as of the Closing Date
after giving effect to Reorganization, the Company and its subsidiaries, (i)
are, or will be as of the Closing Date, in compliance with any and all
applicable foreign, federal, state and local laws and regulations relating to
the protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental Laws"),
(ii) have, or will have as of the Closing Date, received all permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) are, or will be as of the
Closing Date, in compliance with all terms and conditions of any such permit,
license or approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or approvals
would not, singly or in the aggregate, have a material adverse effect on the
Company and its subsidiaries, taken as a whole, after giving effect to the
Reorganization.
(r) The predecessor combined financial statements and schedules of the
DK Companies and the Company (including the related notes) included in the
Registration Statement and the Prospectus fairly present with respect to the
Company the combined financial position, the combined results of operations
and the other information purported to be shown therein at the respective
dates and for the respective periods to which they apply. Such financial
statements and schedules (including the related notes) have been prepared in
10
<PAGE>
accordance with generally accepted accounting principles consistently applied
throughout the periods involved, and are in accordance with the books and
records of the Company and the DK Companies. The accountants, Ernst & Young
LLP, whose report(s) on the audited financial statements are filed with the
Commission as a part of the Registration Statement are, and during the periods
covered by their report(s) included in the Registration Statement and the
Prospectus were, independent certified public accountants with respect to the
Company and the DK Companies within the meaning of the Securities Act. No
other financial statements are required by the Securities Act to be included
in the Registration Statement or the Prospectus.
(s) The pro forma financial data of the Company included in the
Prospectus are based upon good faith estimates and assumptions believed by the
DK Companies and the Company to be reasonable and have been prepared in
accordance with the Securities Act (including Article 11 of Regulation S-X).
No other pro forma financial information is required by the Securities Act to
be included in the Registration Statement or the Prospectus.
(t) Except as described in the Prospectus, there are no contracts,
agreements or understandings between the DK Companies and any person or
between the Company and any person granting such person the right to require
the DK Companies or the Company to file a registration statement under the
Securities Act with respect to any securities of the DK Companies or the
Company or to require the DK Companies or the Company to include such
securities with the Shares registered pursuant to the Registration Statement.
(u) The DK Companies and the Company have complied with all provisions of
Section 517.075, Florida Statutes relating to doing business with the
Government of Cuba or with any person or affiliate located in Cuba.
(v) The DK Companies and each other person or entity that, together with
the DK Companies, is treated as a single employer under Section 414 of the
Internal Revenue Code of 1986, as amended (the "Code") (each such person or
entity being an "ERISA Affiliate"), complies, in all material respects with
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and, to the extent applicable, the Code with respect to each pension plan (as
defined in Section 3(2) of ERISA) maintained by the DK Companies or such ERISA
Affiliate, and none of the DK Companies or any of their respective
11
<PAGE>
ERISA Affiliates has incurred any material liability to any pension plan or to
the Pension Benefit Guaranty Corporation that has not been fully paid as of
the date hereof.
(w) The representations and warranties of the Company and the DK
Companies set forth in Article II of the Contribution Agreement are true and
correct in all material respects. Except for consents required under the
Credit Agreement and as set forth in the Reorganization Documents, no other
action needs to be taken in order to effect the Reorganization. All
Reorganization Documents to be executed by the Company or the DK Companies
have been so executed and deposited with the Escrow Agent. The Reorganization
shall become effective prior to or simultaneously with the closing of the sale
of the Firm Shares to the Underwriters. The consummation of the
Reorganization complies in all material respects with the Securities Act and
the applicable rules and regulations of the Commission thereunder.
(x) The Company has all requisite power and authority to execute,
deliver and perform the trademark license agreement to be entered into between
such parties (the "License Agreement"). The License Agreement has been duly
authorized and, when executed and delivered by each of the parties thereto,
will be the legal, valid and binding obligation of the Company, enforceable as
to the Company in accordance with its terms, except as such enforcement may be
limited by bankruptcy, insolvency moratorium or similar laws affecting
creditors' rights and remedies generally. No consent of any party to any
contract, license, agreement, lease arrangement or understanding is required
for the execution, delivery or performance of the License Agreement by the
Company except such consents which have been obtained and are in full force
and effect; and the execution, delivery and performance of the License
Agreement by the Company will not violate, result in a breach of, conflict
with or entitle any party to terminate or call a default under any such
contract, license, agreement, lease arrangement or understanding.
2. REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL STOCKHOLDERS. (A)
------------------------------------------------------------
Each of the Principal Stockholders, severally as to herself, himself or itself,
represents and warrants to and agrees with each of the Underwriters that:
(a) Each Principal Stockholder hereby make the same representations and
warranties to the Underwriters as
12
<PAGE>
she, he or it makes in Article II of the Contribution Agreement, which section
is incorporated herein by reference.
(b) Except as set forth in the Reorganization Documents, no other action
needs to be taken by any of the Principal Stockholders in order to effect the
Reorganization.
(c) All Reorganization Documents to be executed by the Principal
Stockholders or any of their affiliated entities have been so executed and
deposited with the Escrow Agent. The Reorganization shall become effective
prior to or simultaneously with the closing of the sale of the Firm Shares to
the Underwriters.
(d) Each Principal Stockholder is familiar with the statements under the
captions "Reorganization," "Capitalization - Distributions" and "Certain
Relationships and Related Transactions - License Agreement for Principal
Trademarks" in the Prospectus and the statements relating to such Principal
Stockholder in the other parts of the Registration Statement. Such statements
do not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make such
statements not misleading.
(e) Each Principal Stockholder is familiar with the Prospectus and has
(A) no reason to believe that the representations and warranties of the
Company and the DK Companies in Section 1 above are not accurate in all
material respects, (B) no knowledge of any material fact, condition or
information not disclosed in the Prospectus that has adversely affected or
should reasonably be expected to materially and adversely affect the business
of the DK Companies and their subsidiaries, taken as a whole, or of the
Company and its subsidiaries, taken as a whole, after giving effect to the
Reorganization, or (C) no reason to believe that the Prospectus contains any
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
(B) Each of Donna Karan, Stephan Weiss and Gabrielle Studio, in addition
to paragraph (A) above, represents and warrants to and agrees with each of the
Underwriters that:
13
<PAGE>
(a) Gabrielle Studio has all requisite power and authority to execute,
deliver and perform the License Agreement. The License Agreement has been
duly authorized, executed and delivered by and is the legal, valid and binding
obligation of Gabrielle Studio enforceable as to Gabrielle Studio in
accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
other similar laws relating to or affecting enforcement of creditors' rights
generally, and except as enforcement thereof is subject to general principles
of equity (regardless of whether enforcement is considered in a proceeding in
equity or at law). No consent of any party to any material contract, license,
agreement, lease, arrangement or understanding to which Gabrielle Studio is a
party is required for the execution, delivery or performance by Gabrielle
Studio except such consents which have been obtained and are in full force and
effect; and the execution, delivery and performance of the License Agreement
by Gabrielle Studio will not violate, result in a breach of, conflict with or
entitle any party to terminate or call a default under any such material
contract, license, agreement, lease arrangement or understanding.
(b) The Licensed Marks are in good standing and uncontested and not
subject to any liens or encumbrances or rights thereto or therein by third
parties, except where such failure to be in good standing as to such Licensed
Marks would not have a material adverse effect on the Company or its
subsidiaries, taken as a whole, after giving effect to the Reorganization and
other than the lien granted pursuant to the Credit Agreement, which shall be
released at or prior to the Closing Date; and the license agreement to be
entered into by Donna Karan Studio and Gabrielle Studio is properly described
in the Prospectus in all material respects. The Licensed Marks are used by
the DK Companies, their subsidiaries and their respective licensees and,
subsequent to the Reorganization, will be used by the Company, its
subsidiaries and their respective licensees to identify their products and
services and each such trademark and tradename, and any other material
trademark or tradename of the DK Companies, the Company or any of their
respective subsidiaries, is the subject of application or registrations in the
name of Donna Karan or Gabrielle Studio on the principal register in the
United States Patent and Trademark Office or protected by rights in the United
States accorded Donna Karan or Gabrielle Studio by virtue of common or civil
law, as well as by validly issued and existing registrations in the name of
Donna
14
<PAGE>
Karan, The Donna Karan Company (as nominee for Donna Karan) or Gabrielle
Studio and rights accorded Donna Karan, The Donna Karan Company (as nominee
for Donna Karan) or Gabrielle Studio by virtue of common or civil law, in all
foreign jurisdictions in which the DK Companies, the Company or their
respective subsidiaries currently conduct their business, except such as would
not have a material adverse effect on the Company and its subsidiaries, taken
as a whole, after giving effect to the Reorganization. The DK Companies,
their subsidiaries and their respective licensees have and as of the Closing
Date after giving effect to the Reorganization, Donna Karan Studio, its
subsidiaries and their respective licensees will have, the sole and exclusive
right to use the Licensed Marks (except with regard to certain rights retained
by Donna Karan and as otherwise described in the Prospectus) and any other
material trademark or tradename of Donna Karan, Gabrielle Studio, the DK
Companies, the Company or their respective subsidiaries, except such as would
not have a material adverse effect on the Company and its subsidiaries, taken
as a whole, after giving effect to the Reorganization, and there are no
oppositions, cancellations or other proceedings challenging such right of use
except such as would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole, after giving effect to the Reorganization
3. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees to sell
-------------------------------
to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedule I or II
hereto opposite its name at $______ a share (the "Purchase Price").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the U.S. Underwriters, and the U.S. Underwriters shall have a one-time right
to purchase, severally and not jointly, up to _______________ Additional Shares
at the Purchase Price. If you, on behalf of the U.S. Underwriters, elect to
exercise such option, you shall so notify the Company in writing not later than
30 days after the date of this Agreement, which notice shall specify the number
of Additional Shares to be purchased by the U.S. Underwriters and the date on
which such shares are to be purchased. Such date may be the same as the Closing
Date but not earlier than the Closing Date nor later than ten business days
after the date of such
15
<PAGE>
notice. Additional Shares may be purchased as provided in Section 6 hereof
solely for the purpose of covering over-allotments made in connection with the
offering of the Firm Shares. If any Additional Shares are to be purchased, each
U.S. Underwriter agrees, severally and not jointly, to purchase from the Company
the number of Additional Shares (subject to such adjustments to eliminate
fractional shares as you may determine) that bears the same proportion to the
total number of Additional Shares to be sold as the number of U.S. Firm Shares
set forth in Schedule I hereto opposite the name of such U.S. Underwriter bears
to the total number of U.S. Firm Shares.
The Company and each Principal Stockholder hereby agrees that, without
the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters, it will not, during the period ending 180 days after the date of
the Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock (whether such shares or any such
securities are now owned by the undersigned or are hereafter acquired) or (ii)
enter into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (a) the sale of any Shares
to the Underwriters to be sold hereunder, (b) the transactions contemplated by
the Contribution Agreement and the Escrow Agreement, (c) the granting of options
under the Company's stock option plans in effect on the Closing Date or the
issuance of shares of Common Stock pursuant to the exercise of such options or
(d) bona fide gifts to persons or transfers to members of a Principal
Stockholder's family, (including spouse, parents, children and siblings) or
trusts for the benefit of any of such persons who agree in writing with the
Underwriters to be bound by the provisions of this paragraph.
4. TERMS OF PUBLIC OFFERING. The Company is advised by you that the
------------------------
Underwriters propose to make a public offering of the Shares as soon after the
Registration Statement and this Agreement have become effective as in your
judgment is advisable. The Company is further advised by you that the Shares
are to be offered to the public initially at $________ a share (the "Public
Offering Price")
16
<PAGE>
and to certain dealers selected by you at a price that represents a concession
not in excess of $___ a share under the Public Offering Price, and that any
Underwriter may allow, and such dealers may reallow, a concession, not in excess
of $___ a share, to any Underwriter or to certain other dealers.
Each U.S. Underwriter hereby makes to and with the Company the
representations and agreements of such U.S. Underwriter contained in the fifth
and sixth paragraphs of Article III of the Agreement Between U.S. and
International Underwriters of even date herewith. Each International
Underwriter hereby makes to and with the Company the representations and
agreements of such International Underwriter contained in the seventh, eighth,
ninth and tenth paragraphs of Article III of such Agreement.
5. PAYMENT AND DELIVERY. Payment for the Firm Shares shall be made in
--------------------
federal or other funds immediately available in New York City against delivery
of such Firm Shares for the respective accounts of the several Underwriters at
the office of Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York
10017 at 9:30 A.M., local time, on ____________, 1996, or at such other time on
the same or such other date, not later than _________, 1996, as shall be
designated in writing by you. The time and date of such payment are hereinafter
referred to as the "Closing Date."
Payment for any Additional Shares to be sold by the Company shall be made
in federal or other funds immediately available in New York City against
delivery of such Additional Shares for the respective accounts of the several
U.S. Underwriters at the office of Davis Polk & Wardwell, 450 Lexington Avenue,
New York, New York at 9:30 A.M., local time, on the date specified in the notice
described in Section 3 or on such other date, in any event not later than
_________ 1996, as shall be designated in writing by you. The time and date of
such payment are hereinafter referred to as the "Option Closing Date."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares
17
<PAGE>
to the Underwriters duly paid, against payment of the Purchase Price therefor.
6. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of the
-------------------------------------------
Company to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 4:00 P.M. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the execution and delivery of this Agreement and prior
to the Closing Date, there shall not have occurred any change, or any
development involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of the DK Companies and
their subsidiaries, taken as a whole, or the Company and its subsidiaries,
taken as a whole, after giving effect to the Reorganization, from that set
forth in the Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your judgment, is material
and adverse and that makes it, in your judgment, impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of the
Company, to the effect set forth in clause (a) above and to the effect that
the representations and warranties of the Company and the DK Companies
contained in this Agreement are true and correct as of the Closing Date, and
that the Company and the DK Companies have complied with all of the agreements
and satisfied all of the conditions on their part to be performed or satisfied
hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon the best
of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an opinion
of Proskauer Rose Goetz & Mendelsohn LLP, outside counsel for the Company and
the DK Companies, dated the Closing Date, in substantially the form of Exhibit
A hereto.
18
<PAGE>
(d) The Underwriters shall have received on the Closing Date an opinion
of Phillips Nizer Benjamin Krim & Ballon LLP, special tax counsel for the
Company and the DK Companies, dated the Closing Date, in substantially the
form of Exhibit B hereto.
(e) The Underwriters shall have received on the Closing Date an opinion
of Cowan Leibowitz & Latman, special Intellectual Property counsel for the
Company, dated the Closing Date, in substantially the form of Exhibit C
hereto.
(f) The Underwriters shall have received on the Closing Date an opinion
of David Bressman, Esq., Vice President and General Counsel of the Company,
dated the Closing Date, in substantially the form of Exhibit D hereto.
(g) The Underwriters shall have received on the Closing Date, an opinion
of Werbel, McMillin & Carnelutti, a professional corporation, counsel for
Donna Karan, Stephan Weiss and Gabrielle Studio, dated the Closing Date, in
substantially the form of Exhibit E hereto.
(h) The Underwriters shall have received on the Closing Date, an opinion
of Paul, Hastings, Janofsky & Walker, counsel for Tomio Taki, Frank R. Mori,
Christopher Mori, Heather Mori and Takihyo Inc., dated the Closing Date, in
substantially the form of Exhibit F hereto.
(i) The Underwriters shall have received on the Closing Date an opinion
of Davis Polk & Wardwell, counsel for the Underwriters, dated the Closing
Date, covering the matters referred to in subparagraphs (ii) (but only as to
this Agreement), (v), (vii) (but only as to the statements in the Prospectus
under "Underwriters") and (xiv) of Exhibit A.
With respect to subparagraph (xiv) of Exhibit A, Proskauer Rose Goetz &
Mendelsohn LLP may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification, except as
specified.
The opinion of Proskauer Rose Goetz & Mendelsohn LLP described in
paragraph (c), the opinion of Phillips Nizer
19
<PAGE>
Benjamin Krim & Ballon LLP described in paragraph (d), the opinion of Cowen
Leibowitz & Latman described in paragraph (e), the opinion of David Bressman
described in paragraph (f), the opinion of Werbel, McMillin & Carnelutti
described in paragraph (g) and the opinion of Paul, Hastings, Janofsky &
Walker described in paragraph (h) above shall be rendered to the Underwriters
at the request of the Company and the DK Companies or the relevant Principal
Stockholders, as the case may be, and shall so state therein.
(j) The Underwriters shall have received, on each of the date hereof and
the Closing Date, a letter dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to the Underwriters, from
Ernst & Young LLP, independent public accountants, containing statements and
information of the type ordinarily included in accountants' "comfort letters"
to underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus;
provided that the letter delivered on the Closing Date shall use a "cut-off
--------
date" not earlier than the date hereof.
(k) The "lock-up" agreements, each substantially in the form of Exhibit
G hereto, between you and certain stockholders of the Company relating to
sales and certain other dispositions of shares of Common Stock or certain
other securities, delivered to you on or before the date hereof, shall be in
full force and effect on the Closing Date.
(l) The Shares shall have been approved for inclusion on the New York
Stock Exchange, subject to official notice of issuance.
(m) All documents, opinions or certificates required to be delivered on
or prior to the Closing Date pursuant to the Reorganization Documents shall
have been delivered and shall be in form and substance reasonably satisfactory
to the Underwriters, and all transactions contemplated pursuant to the
Reorganization Documents as described under the caption "Reorganization" in
the Prospectus shall have been consummated, including the distribution of all
Reorganization Documents pursuant to the Escrow Agreement, other than those
actions which are described in Article IV and Sections 1.2, 1.3(b) and 1.5 of
the Contribution Agreement which are to be consummated after the Closing Date.
20
<PAGE>
(n) The License Agreement and the Employment Agreements (as defined in
the Glossary section of the Prospectus) shall have been executed by the
parties thereto prior to the Closing Date.
(o) Amendment No. 4 to the Credit Agreement shall have become effective.
The several obligations of the U.S. Underwriters to purchase Additional
Shares hereunder are subject to the delivery to the U.S. Representatives, on the
Option Closing Date of such documents as the U.S. Representatives may reasonably
request with respect to the good standing of the Company, the due authorization
and issuance of the Additional Shares and other matters related to the issuance
of the Additional Shares.
7. COVENANTS OF THE COMPANY AND THE PRINCIPAL STOCKHOLDERS. (A) In
-------------------------------------------------------
further consideration of the agreements of the Underwriters herein contained,
the Company covenants with each Underwriter as follows:
(a) To furnish to you, without charge, five
signed copies of the Registration Statement (including exhibits thereto) and
for delivery to each other Underwriter a conformed copy of the Registration
Statement (without exhibits thereto) and to furnish to you in New York City,
without charge, prior to 5:00 P.M. New York City time on the business day
following the date of this Agreement and during the period mentioned in
paragraph (c) below, as many copies of the Prospectus and any supplements and
amendments thereto or to the Registration Statement as you may reasonably
request.
(b) Before amending or supplementing the Registration Statement or the
Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to which
you reasonably object, and to file with the Commission within the applicable
period specified in Rule 424(b) under the Securities Act any prospectus
required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public offering
of the Shares as in the opinion of counsel for the Underwriters the Prospectus
is required by law to be delivered in connection with sales by an Underwriter
or dealer, any event shall occur or condition exist as a result of which it is
necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the
21
<PAGE>
Prospectus is delivered to a purchaser, not misleading, or if, in the opinion
of counsel for the Underwriters, it is necessary to amend or supplement the
Prospectus to comply with applicable law, forthwith to prepare, file with the
Commission and furnish, at its own expense, to the Underwriters and to the
dealers (whose names and addresses you will furnish to the Company) to which
Shares may have been sold by you on behalf of the Underwriters and to any
other dealers upon request, either amendments or supplements to the Prospectus
so that the statements in the Prospectus as so amended or supplemented will
not, in the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request; provided, however, that no such qualification shall be required in
-------- -------
any jurisdiction where, as a result thereof, the Company would be subject to
service of general process or to taxation as a foreign corporation doing
business in such jurisdiction.
(e) To make generally available to the Company's security holders and to
you as soon as practicable an earning statement covering the twelve-month
period ending ____________, 1997 that satisfies the provisions of Section
11(a) of the Securities Act and the rules and regulations of the Commission
thereunder.
(f) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's counsel,
the Company's accountants and the reasonable fees, disbursements and expenses
of the Principal Stockholders' counsel in connection with the registration and
delivery of the Shares under the Securities Act and all other fees or expenses
in connection with the preparation and filing of the Registration Statement,
any preliminary prospectus, the Prospectus and amendments and supplements to
any of the foregoing, including all printing costs associated therewith, and
the mailing and delivering of copies thereof to the Underwriters and dealers,
in the quantities hereinabove specified, (ii) all costs and expenses related
to the transfer and delivery of the Shares to the Underwriters, including any
transfer or
22
<PAGE>
other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or Legal Investment memorandum in connection with the offer and sale of
the Shares under securities laws of various states and other jurisdictions and
all expenses in connection with the qualification of the Shares for offer and
sale under state securities laws as provided in Section 7(d) hereof, including
filing fees and the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky or Legal Investment memorandum not to exceed $20,000, (iv) all filing
fees and disbursements of counsel to the Underwriters incurred in connection
with the review and qualification of the offering of the Shares by the
National Association of Securities Dealers, Inc., (v) all fees and expenses in
connection with the preparation and filing of the registration statement on
Form 8-A relating to the Common Stock and all costs and expenses incident to
listing the Shares on the New York Stock Exchange, (vi) the cost of printing
certificates representing the Shares, (vii) the costs and charges of any
transfer agent, registrar or depositary, (viii) the costs and expenses of the
Company relating to investor presentations on any "road show" undertaken in
connection with the marketing of the offering of the Shares, including,
without limitation, expenses associated with the production of road show
slides and graphics, fees and expenses of any consultants engaged in
connection with the road show presentations with the prior written approval of
the Company, travel and lodging expenses of the representatives and officers
of the Company and any such consultants, and, with the prior written approval
of the Company, the cost of any aircraft chartered in connection with the road
show, (ix) all costs and expenses related to the Directed Share Program
incurred in connection with sales to individuals or entities located outside
the United States, and (x) all other costs and expenses incident to the
performance of the obligations of the Company hereunder for which provision is
not otherwise made in this Section. It is understood, however, that except as
provided in this Section 7(f), Section 8 and the last paragraph of Section 10
below, the Underwriters will pay all of their costs and expenses, including
fees and disbursements of their counsel, stock transfer taxes payable on
resale of any of the Shares by them and any advertising expenses connected
with any offers they may make.
(g) As soon as reasonably practicable following the Closing Date, make
all filings which are necessary or proper to validly record the transfer of
ownership of the Licensed Marks from Donna Karan to Gabrielle Studio in
23
<PAGE>
each jurisdiction where any products bearing a Licensed Mark is marketed or
sold, except where the failure to file or record would not have a material
adverse effect on the Company or its subsidiaries, taken as a whole.
(B) In further consideration of the agreements of the Underwriters herein
contained, each Principal Stockholder covenants with each Underwriter to
cooperate with the other Principal Stockholders, the Company and the DK
Companies, to execute and deliver or cause to be delivered, all instruments,
including instruments of conveyance, assignment and transfer, and take all
actions consistent with the terms of the Reorganization Documents in order to
effectuate the Reorganization.
8. INDEMNITY AND CONTRIBUTION. (a) The Company and the DK Companies
--------------------------
jointly and severally agree to indemnify and hold harmless each Principal
Stockholder, each Underwriter and each person, if any, who controls any
Principal Stockholder or any Underwriter within the meaning of either Section 15
of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) caused by any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company or the DK Companies shall have furnished any
amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company or the DK Companies in
writing by such Underwriter expressly for use in the Registration Statement, any
preliminary prospectus, the Prospectus or any amendments or supplements thereto;
provided, however, that the foregoing indemnity agreement with respect to any
- -------- -------
preliminary prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting such losses, claims, damages or liabilities purchased
Shares, or any person controlling such Underwriter, if a copy of the Prospectus
(as then amended or supplemented if the Company or the DK Companies shall have
furnished any amendments or supplements thereto) was not sent or given by or on
behalf of such Underwriter to such
24
<PAGE>
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities.
(b) Each of the Principal Stockholders (other than any member of the
Takihyo Group with respect to clause (y)(ii) below) severally agrees, as to
herself, himself or itself, to indemnify and hold harmless the directors of the
Company and the DK Companies (other than directors who are Principal
Stockholders), the officers of the Company and the DK Companies who sign the
Registration Statement, each Underwriter, and each person, if any, who controls
any Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) caused by any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company or the DK Companies shall have furnished any
amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only with reference
to (x) information relating to such Principal Stockholder furnished to the
Company or the DK Companies in writing by such Principal Stockholder expressly
for use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto, (y) information relating to
the statements set forth under the headings (i) "Reorganization,"
"Capitalization -- Distributions" and (ii) "Certain Relationships and Related
Transactions -- License Agreement for Principal Trademarks" in the Registration
Statement, or (z) any material breach of any representation, warranty, covenant
or agreement of such Principal Stockholder contained in this Agreement or the
Reorganization Documents. Notwithstanding the foregoing, the liability of each
Principal Stockholder under this Section 8(b) shall be limited to the aggregate
amount of the undistributed earnings previously allocated, represented by
subordinated promissory notes previously distributed, and subsequently paid out
of the proceeds of the offering to such Principal Stockholder plus all
consideration received directly or indirectly by such Principal Stockholder for
his, her or its interests in the DK Companies; provided, that in no event shall
--------
any member of the Takihyo Group be liable hereunder for an amount greater than
the maximum
25
<PAGE>
amount for which any member of the Karan/Weiss Group may be liable hereunder;
provided, however, that the foregoing indemnity agreement with respect to any
- -------- -------
preliminary prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting such losses, claims, damages or liabilities purchased
Shares, or any person controlling such Underwriter, if a copy of the Prospectus
(as then amended or supplemented if the Company or the DK Companies shall have
furnished any amendments or supplements thereto) was not sent or given by or on
behalf of such Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of the Shares to
such person, and if the Prospectus (as so amended or supplemented) would have
cured the defect giving rise to such losses, claims, damages or liabilities.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, the DK Companies, their directors, their officers who
sign the Registration Statement, the Principal Stockholders and each person, if
any, who controls the Company or the DK Companies, within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, to the same
extent as the indemnity from the Company, the DK Companies and the Principal
Stockholders to such Underwriter, but only with reference to information
relating to such Underwriter furnished to the Company or the DK Companies in
writing by such Underwriter expressly for use in the Registration Statement, any
preliminary prospectus, the Prospectus or any amendments or supplements thereto.
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to Section 8(a), (b) or (c), such person (the "indemnified
party") shall promptly notify the person against whom such indemnity may be
sought (the "indemnifying party") in writing, and the indemnifying party, upon
request of the indemnified party, shall retain counsel reasonably satisfactory
to the indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and
26
<PAGE>
representation of both parties by the same counsel would be inappropriate due to
actual or potential differing interests between them. It is understood that the
indemnifying party shall not, in respect of the legal expenses of any
indemnified party in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the fees and expenses of more than one
separate firm (in addition to any local counsel) for all such indemnified
parties and that all such fees and expenses shall be reimbursed as they are
incurred. In the case of any such separate firm for the Underwriters and such
control persons of Underwriters, such firm shall be designated in writing by
Morgan Stanley & Co. Incorporated. In the case of any such separate firm for
the Company, the DK Companies, and such directors, officers and control persons
of the Company and the DK Companies, such firm shall be designated in writing by
the Company. In the case of any such separate firm for the Takihyo Group and
such control persons of the Takihyo Group, such firm shall be designated in
writing by Tomio Taki and Frank R. Mori. In the case of any such separate firm
for the Karan/Weiss Group and such control persons of the Karan/Weiss Group,
such firm shall be designated by Stephan Weiss. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened proceeding
in respect of which any indemnified party is or could have been a party and
indemnity could have been sought hereunder by such indemnified party, unless
such settlement includes an unconditional release of such indemnified party from
all liability on claims that are the subject matter of such proceeding.
(e) To the extent the indemnification provided for in Section 8 (a), (b)
or (c) is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such Section 8(a), (b) or (c), in lieu of indemnifying
such indemnified party thereunder, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, the DK Companies, the Principal Stockholders
and the Underwriters from the offering of the Shares (including benefits to the
Principal Stockholders pursuant to the
27
<PAGE>
Reorganization Documents) or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of the Company, the DK Companies, each of the Principal
Stockholders and of the Underwriters in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Company, the DK Companies, the Principal Stockholders and the
Underwriters in connection with the offering of the Shares shall be deemed to be
in the same respective proportions as the net proceeds from the offering of the
Shares (before deducting expenses, but after deducting underwriting discounts
and commissions received by the Underwriters) received by the Company, the DK
Companies, the Principal Stockholders (including benefits to the Principal
Stockholders pursuant to the Reorganization Documents) and the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover of the Prospectus, bear to the
aggregate Public Offering Price of the Shares; provided, that in no event shall
--------
the relative benefits received by the Takihyo Group be deemed to exceed the
relative benefits received by the Karan/Weiss Group. The relative fault of the
Company, the DK Companies, the Principal Stockholders and the Underwriters shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, the DK
Companies, any of the Principal Stockholders or by the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Underwriters' respective
obligations to contribute pursuant to this Section 8(e) are several in
proportion to the respective number of Shares they have purchased hereunder, and
not joint. The Principal Stockholders' respective obligations to contribute
pursuant to this Section 8(e) are several and not joint.
(f) The Company, the DK Companies, the Principal Stockholders and the
Underwriters agree that it would not be just or equitable if contribution
pursuant to Section 8(e) were determined by pro rata allocation (even if the
--- ----
Underwriters were treated as one entity for such purpose) or by any other method
of allocation that does not take account of the equitable considerations
referred to in Section 8(e). The amount paid or payable by an indemnified party
as a result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be
28
<PAGE>
deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of Section 8(e), no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 8 are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this Section
8 and the representations, warranties and other statements of the Company, the
DK Companies and the Principal Stockholders contained in this Agreement shall
remain operative and in full force and effect regardless of (i) any termination
of this Agreement, (ii) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter or by or on behalf of the
Company, the DK Companies, their officers or directors, the Principal
Stockholders or any person controlling the Company, the DK Companies, or any
Principal Stockholder and (iii) acceptance of and payment for any of the Shares.
9. TERMINATION. This Agreement shall be subject to termination by
-----------
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses (a)(i) through (iv), such
29
<PAGE>
event, singly or together with any other such event, makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus.
10. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become
--------------------------------------
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase Shares that
it has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedules I and II bears to the aggregate
number of Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
--------
Shares that any Underwriter has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 10 by an amount in excess of one-ninth of
such number of Shares without the written consent of such Underwriter. If, on
the Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased, and arrangements satisfactory to you and the Company for
the purchase of such Firm Shares are not made within 36 hours after such
default, this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter or the Company. In any such case either you or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any U.S.
Underwriter or U.S. Underwriters shall fail or refuse to purchase Additional
Shares and the aggregate number of Additional Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Additional
Shares to be purchased, the non-defaulting U.S. Underwriters shall have the
option to (i) terminate their obligation hereunder to purchase Additional Shares
or (ii) purchase not less than the number of Additional Shares that such non-
30
<PAGE>
defaulting U.S. Underwriters would have been obligated to purchase in the
absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company, the DK
Companies or the Principal Stockholders to comply with the terms or to fulfill
any of the conditions of this Agreement, or if for any reason the Company, the
DK Companies or the Principal Stockholders shall be unable to perform their
respective obligations under this Agreement, the Company or the DK Companies or
the Principal Stockholders who fail or refuse to comply with the terms and
conditions hereof will reimburse the Underwriters or such Underwriters as have
so terminated this Agreement with respect to themselves, severally, for all out-
of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
11. COUNTERPARTS. This Agreement may be signed in two or more
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
12. APPLICABLE LAW. This Agreement shall be governed by and construed
--------------
in accordance with the internal laws of the State of New York.
13. HEADINGS. The headings of the sections of this Agreement have been
--------
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
31
<PAGE>
Very truly yours,
DONNA KARAN INTERNATIONAL INC.
By_____________________________
Name:
Title:
THE DONNA KARAN COMPANY
By
its General Partner
By
its General Partner
By_____________________________
Name:
Title:
THE DONNA KARAN COMPANY STORE, G.P.
By
its General Partner
By
its General Partner
By_____________________________
Name:
Title:
32
<PAGE>
DK FOOTWEAR PARTNERS
By
its General Partner
By
its General Partner
By_____________________________
Name:
Title:
DONNA KARAN STUDIO
By
its General Partner
By
its General Partner
By_____________________________
Name:
Title:
DSTF JAPAN COMPANY
By
its General Partner
By
its General Partner
By_____________________________
Name:
Title:
33
<PAGE>
DONNA KARAN (H.K.) LIMITED
By_____________________________
Name:
Title:
GABRIELLE STUDIO, INC.
By
its General Partner
By
its General Partner
By_____________________________
Name:
Title:
TAKIHYO INC.
By_____________________________
Name: Frank R. Mori
Title: President
_______________________________
Donna Karan
________________________________
Stephan Weiss
34
<PAGE>
THE TRUST UNDER TRUST AGREEMENT FOR
THE BENEFIT OF DONNA KARAN
By:_____________________________
Trustee: Stephan Weiss
THE TRUST UNDER TRUST AGREEMENT FOR
THE BENEFIT OF LISA WEISS KEYES,
COREY WEISS AND GABRIELLE KARAN
By:_____________________________
Trustee: Stephan Weiss
________________________________
Tomio Taki
_______________________________
Frank R. Mori
________________________________
Christopher Mori
________________________________
Heather Mori
35
<PAGE>
Accepted as of the date hereof:
MORGAN STANLEY & CO. INCORPORATED
BEAR, STEARNS & CO. INC.
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
SMITH BARNEY INC.
Acting severally on behalf
of themselves and the
several U.S. Underwriters named
in Schedule I hereto.
By MORGAN STANLEY & CO.
INCORPORATED
By__________________________
Name:
Title:
MORGAN STANLEY & CO. INTERNATIONAL
LIMITED
BEAR, STEARNS INTERNATIONAL LIMITED
MERRILL LYNCH INTERNATIONAL
SMITH BARNEY INC.
Acting severally on behalf
of themselves and the
several International Underwriters
named in Schedule II hereto.
By MORGAN STANLEY & CO.
INTERNATIONAL LIMITED
By___________________________
Name:
Title:
36
<PAGE>
SCHEDULE I
U.S. Underwriters
-----------------
Number of
Firm Shares
Underwriter To Be Purchased
----------- ---------------
Morgan Stanley & Co. Incorporated
Bear, Stearns & Co. Inc.
Merrill Lynch, Pierce, Fenner
& Smith Incorporated
Smith Barney Inc.
[NAMES OF OTHER U.S. UNDERWRITERS]
Total U.S. Firm Shares ........ _______________
<PAGE>
SCHEDULE II
International Underwriters
--------------------------
<TABLE>
<CAPTION>
Number of
---------------
Firm Shares
---------------
Underwriter To be Purchased
- ----------- ---------------
<S> <C>
Morgan Stanley & Co. International Limited
Bear, Stearns International Limited
Merrill Lynch International
Smith Barney Inc.
[NAMES OF OTHER INTERNATIONAL UNDERWRITERS]
Total International Firm Shares..............
----------------
</TABLE>
<PAGE>
Exhibit A
[LETTERHEAD OF PROSKAUER ROSE]
------------------------------
(i) the Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in the jurisdictions
listed on Annex I hereto;
(ii) this Agreement has been duly authorized, executed and
delivered by the Company and the DK Companies and the Reorganization
Documents have been duly authorized, executed and delivered by the Company;
(iii) the authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus;
(iv) all of the outstanding shares of capital stock of each of the
corporate subsidiaries of the Company have been duly authorized and validly
issued and are fully paid and non-assessable, and are owned, directly or
indirectly, by the Company, free and clear of any security interest, claim,
lien, encumbrance or adverse interest of any nature;
(v) the Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive or similar rights;
(vi) the execution and delivery by the Company and the DK Companies
of, and the performance by the Company and the DK Companies of their
respective obligations under, this Agreement and the Reorganization
Documents will not contravene any provision of applicable law or the
certificate of incorporation or by-laws of the Company or the DK Companies
that are corporations or the partnership agreements of the DK Companies
that are partnerships or, to the best of such counsel's knowledge, any
agreement or other instrument binding upon the Company or any of its
subsidiaries that is filed as an
<PAGE>
exhibit to the Registration Statement and that is material to the Company
and its subsidiaries, taken as a whole, or, to the best of such counsel's
knowledge, any judgment, order or decree of any governmental body, agency
or court having jurisdiction over the Company or any subsidiary, and no
consent, approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the Company
or the DK Companies of their respective obligations under this Agreement
and the Reorganization Documents, except such as have been obtained or as
may be required by the securities or Blue Sky laws of the various
jurisdictions in connection with the offer and sale of the Shares;
(vii) the statements (A) in the Prospectus under the captions "Risk
Factors -- Dependence on Key Personnel," "Risk Factors -- Dependence on
Licensed Trademarks," "Risk Factors -- Shares Eligible for Future Sale,"
"Management -- Compensation Arrangements," "Management -- Summary of 1996
Stock Option Plan," "Certain Relationships and Related Transactions,"
"Description of Capital Stock," "Shares Eligible for Future Sale" and
"Underwriters" and (B) in the Registration Statement in Items 14, in each
case insofar as such statements constitute summaries of the legal matters,
documents or proceedings referred to therein, fairly present the
information called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein;
(viii) after due inquiry, such counsel does not have actual knowledge of
any legal or governmental proceedings pending or threatened to which the
Company or any of its subsidiaries is a party or to which any of the
properties of the Company or any of its subsidiaries is subject that are
required to be described in the Registration Statement or the Prospectus
and are not so described or of any [statutes, regulations,]/1/ contracts or
other documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement that are not described or filed as required;
(ix) none of the DK Companies or the Company is or, after giving
effect to the offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus, will be, an "investment
- ----------
/1/ We can delete this from the PRG&M opinion if we get the opinion from David
Bressman.
<PAGE>
company" as such term is defined in the Investment Company Act of 1940, as
amended;
(x) except as described in the Prospectus, such counsel has no actual
knowledge, after due inquiry, of any contracts, agreements or
understandings between the Company and any person or between the DK
Companies and any person granting such person the right to require the
Company or the DK Companies to file a registration statement under the
Securities Act with respect to any securities of the Company or the DK
Companies or to require the Company or the DK Companies to include such
securities with the Shares registered pursuant to the Registration
Statement;
(xi) the Company has all requisite power and authority to execute,
deliver and perform the License Agreement. The License Agreement has been
duly authorized, executed and delivered by the Company and is the legal,
valid and binding obligation of the Company, enforceable as to the Company
in accordance with its terms except (i) as such enforcement may be limited
by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or similar laws affecting creditors' rights and remedies
generally and (ii) as such enforcement may be limited by general principles
of equity, regardless of whether enforcement is sought in a proceeding at
law or in equity. No consent of any party to any contract, license,
agreement, lease arrangement or understanding known to such counsel and
filed as an exhibit to the Registration Statement is required for the
execution, delivery or performance of the License Agreement by the Company
except such consents which have been obtained and are in full force and
effect; and the execution, delivery and performance of the License
Agreement by the Company will not violate, result in a breach of, conflict
with or entitle any party to terminate or call a default under any such
contract, license, agreement, lease arrangement or understanding;
(xii) except as set forth in the Reorganization Documents, no other
action needs to be taken by the Company or the DK Companies in order to
effect the Reorganization in all material respects;
(xiii) the consummation of the Reorganization and the transactions
contemplated by the Reorganization Documents does not require registration
under the Securities Act and the applicable rules and regulations of the
Commission thereunder; and
<PAGE>
(xiv) the Registration Statement and Prospectus (except for the
financial statements and schedules and other financial and statistical data
included therein as to which such counsel need not express any opinion)
comply as to form in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder.
Such counsel shall further state that it has participated in the
preparation of the Registration Statement and Prospectus and meetings with
members of management of the Company and its independent certified public
accountants, the DK Companies and the Principal Stockholders relating to
the Registration Statement and the Prospectus. Although such counsel need
not pass upon or assume any responsibility for the accuracy, completeness
or fullness of the information contained in the Registration Statement or
Prospectus (except as set forth in clause (vii) above), such counsel shall
state that nothing has come to its attention which has caused it to believe
that (except for the financial statements and schedules and other financial
and statistical data included therein or omitted therefrom as to which such
counsel need not express any belief) (A) the Registration Statement and the
prospectus included therein at the time the Registration Statement became
effective contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading and (B) the Prospectus contains any
untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
<PAGE>
Exhibit B
[LETTERHEAD OF PHILLIPS NIZER]
------------------------------
(i) the statements in the Prospectus under the captions
"Reorganization," "Capitalization -- Distributions" and "Certain
United States Federal Tax Consequences to Non-United States Holders of
Common Stock," in each case insofar as such statements constitute
summaries of the tax aspects of the legal matters or documents
referred to therein, fairly present the tax aspects of such legal
matters and documents.
Such counsel shall further state that it has participated in
conferences with officers and other representatives of the Company and
the DK Companies, Proskauer Rose Goetz & Mendelsohn LLP (counsel for
the Company and the DK Companies), Werbel, McMillin & Carnelutti, P.C.
(counsel for Donna Karan and Stephan Weiss), Paul, Hastings, Janofsky
& Walker (counsel for the Takihyo Group) and the Underwriters, at
which portions of the Registration Statement and the Prospectus and
related matters were discussed and although such counsel is not
passing upon, and does not assume responsibility for, the accuracy,
completeness or fairness of any portion of the Registration Statement
or the Prospectus, as amended or supplemented (except to the extent
specified in paragraph (i) above), nothing has come to its attention
that causes it to believe that, with respect to tax matters, the
Registration Statement and the Prospectus included therein at the time
the Registration Statement became effective contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or that, with respect to tax matters, the
Prospectus contains an untrue statement of a material fact or omits to
state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
<PAGE>
Exhibit C
LETTERHEAD OF COWAN LEIBOWITZ & LATMAN
--------------------------------------
(i) except as described in the Prospectus, all Intangibles which are
material to the Company and its subsidiaries, taken as a whole, that the
Company and its subsidiaries owns or has pending, or under which they are
licensed, are in good standing and uncontested and not subject to any liens
or encumbrances or rights thereto or therein by third parties, except where
failure to be so licensed or in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole; and
the license agreement to be entered into by Donna Karan Studio and
Gabrielle Studio is properly described in the Prospectus in all material
respects. The Licensed Marks are trademarks and tradenames used by the
Company, its subsidiaries and their respective licensees to identify their
products and services and each such trademark and tradename, and any other
material trademark or tradename of the Company or any of its subsidiaries,
is the subject of application or registrations in the name of Donna Karan
or Gabrielle Studio on the principal register in the United States Patent
and Trademark Office or protected by rights in the United States accorded
Donna Karan or Gabrielle Studio by virtue of common or civil law, as well
as by validly issued and existing registrations in the name of Donna Karan,
The Donna Karan Company (as nominee for Donna Karan) or Gabrielle Studio
and rights accorded Donna Karan, The Donna Karan Company (as nominee for
Donna Karan) or Gabrielle Studio by virtue of common or civil law, in all
foreign jurisdictions in which the Company or its subsidiaries currently
conduct their business, except such as would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole. Donna Karan
Studio, its subsidiaries and their respective licensees have the sole and
exclusive right to use the Licensed Marks (except with regard to certain
rights retained by Donna Karan and as otherwise described in the
Prospectus) and any other material trademark or tradename of Donna Karan,
Gabrielle Studio, the Company or its subsidiaries, except such as would not
have a material adverse effect on the Company and its subsidiaries, taken
as a whole, and there are no oppositions, cancellations or other
proceedings challenging such right of use, except such as would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole. There is no right under any trademark or servicemark
<PAGE>
necessary to the business of the Company or of any of its subsidiaries as
presently conducted or as the Prospectus indicates any of them contemplates
conducting that the Company or such subsidiary do not own or otherwise have
the right to use, except such as would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole. Neither the Company
nor any of its subsidiaries has infringed, is infringing, or has received
notice of infringement with respect to asserted trademarks or servicemarks
of others, except such as would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole.
Such counsel shall further state that it has participated in conferences
with officers and other representatives of the Company and the DK Companies,
Proskauer Rose Goetz & Mendelsohn LLP (counsel for the Company and the DK
Companies) and Werbel, McMillin & Carnelutti, P.C. (counsel for Donna Karan
and Stephan Weiss), at which portions of the Registration Statement and the
Prospectus and related matters were discussed and although such counsel is not
passing upon, and does not assume responsibility for, the accuracy,
completeness or fairness of any portion of the Registration Statement or the
Prospectus, as amended or supplemented (except to the extent specified in
paragraph (i) above), nothing has come to its attention that causes it to
believe that, with respect to intellectual property matters, the Registration
Statement and the Prospectus included therein at the time the Registration
Statement became effective contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that, with respect to
intellectual property matters, the Prospectus contains an untrue statement of
a material fact or omits to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
<PAGE>
Exhibit D
[LETTERHEAD OF THE COMPANY]
---------------------------
(i) each of the subsidiaries of the Company that is a corporation is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority
to own its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to
the extent that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
(ii) each of the subsidiaries of the Company that is a partnership
has been duly formed and is validly existing as a general partnership
under the laws of its jurisdiction of formation, with partnership power
and authority to carry on its business as described in the Prospectus,
and each of the subsidiaries of the Company that is a partnership is in
good standing as a foreign partnership authorized to do business in each
jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the failure
to be so qualified would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole;
(iii) except as described in the Prospectus, the Company and its
subsidiaries possess all certificates, authorizations and permits issued
by the appropriate federal, state, local or foreign regulatory
authorities, necessary to conduct their respective businesses as
described in the Prospectus, except where failure to possess such
certificates, authorizations or permits would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole, and neither
the Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or any other modification of any
such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a material adverse change in the condition, financial or
<PAGE>
otherwise, or in the earnings, business or operations of the Company and
its subsidiaries, taken as a whole;
(iv) the Company and its subsidiaries (A) are in compliance with any
and all applicable Environmental Laws, (B) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses, and (C) are in
compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits, licenses
or approvals would not, singly or in the aggregate, have a material
adverse effect on the Company and its subsidiaries, taken as a whole; and
(v) the Company and each other person or entity that, together with
the Company, is treated as a single employer under Section 414 of the
Internal Revenue Code of 1986, as amended (the "Code") (each such person
or entity being an "ERISA Affiliate"), complies, in all material respects
with the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and, to the extent applicable, the Code with respect to each
pension plan (as defined in Section 3(2) of ERISA) maintained by the
Company or such ERISA Affiliate, and none of the Company or any of their
respective ERISA Affiliates has incurred any material liability to any
pension plan or to the Pension Benefit Guaranty Corporation that has not
been fully paid as of the date hereof.
<PAGE>
Exhibit E
[LETTERHEAD OF WERBEL, MCMILLIN & CARNELUTTI]
---------------------------------------------
(i) each of Donna Karan, Stephan Weiss and Gabrielle Studio, has all
requisite power and authority to execute, deliver and perform this
Agreement and the Reorganization Documents to which such person or entity
is a party. All necessary corporate proceedings of Gabrielle Studio have
been taken to authorize the execution, delivery and performance of this
Agreement and the Reorganization Documents to which it is a party. This
Agreement and the Reorganization Documents have been duly executed and
delivered by each of Donna Karan, Stephan Weiss and Gabrielle Studio, are
the legal, valid and binding obligations of each of Donna Karan, Stephan
Weiss and Gabrielle Studio, and are enforceable as to each of Donna
Karan, Stephan Weiss and Gabrielle Studio in accordance with their
respective terms (subject to applicable bankruptcy, insolvency and other
laws affecting the enforceability of creditors' rights generally and
general principles of equity). No consent, authorization, approval,
order, license, certificate or permit of or from or declaration or filing
with, any federal, state, local or other governmental authority or to the
knowledge of such counsel, after due inquiry, any court or other tribunal
is required by Donna Karan, Stephan Weiss or Gabrielle Studio for the
execution, delivery or performance of this Agreement or the
Reorganization Documents by Donna Karan, Stephan Weiss or Gabrielle
Studio, except such as have been obtained or as may be required by
securities or Blue Sky laws of the various jurisdictions in connection
with the offer and sale of the Shares. To our knowledge, after due
inquiry, no consent of any party to any material contract, agreement,
instrument, lease, license, arrangement or understanding known to such
counsel to which Donna Karan, Stephan Weiss or Gabrielle Studio is a
party, or to which any of her, his, or its properties or assets are
subject, is required for the execution, delivery or performance by Donna
Karan, Stephan Weiss or Gabrielle Studio of this Agreement or the
Reorganization Documents, except such consents which have been obtained
and are in full force and effect; and the execution, delivery, and
performance by Donna Karan, Stephan Weiss and Gabrielle Studio of this
Agreement and the Reorganization Documents will not violate,
<PAGE>
result in a breach of, conflict with or (with or without the giving of
notice or the passage of time or both) entitle any party to terminate or
call a default under any such material contract, agreement, instrument,
lease, license, arrangement or understanding known to such counsel to
which Donna Karan, Stephan Weiss or Gabrielle Studio is a party, or
violate or result in a breach of any term of the partnership agreement of
Gabrielle Studio or violate, result in a breach of or conflict with any
law, rule, regulation, order, judgment or decree binding on Donna Karan,
Stephan Weiss or Gabrielle Studio or to which any of her, his or its
operations, businesses, properties or assets are subject, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of Donna Karan, Stephan Weiss or Gabrielle Studio;
(ii) each of Donna Karan, Stephan Weiss and Gabrielle Studio have
conveyed good and marketable title to the shares of the corporations and
the interests in the partnerships being transferred by them to the
Company in connection with the Reorganization, free and clear of all
liens, security interests, pledges, charges, encumbrances, stockholders'
agreements and voting trusts;
(iii) except as set forth in the Reorganization Documents, no other
action needs to be taken by Donna Karan, Stephan Weiss or Gabrielle
Studio in order to effect the Reorganization; and
(iv) to the knowledge of such counsel, there is no litigation,
arbitration, claim, governmental or other proceeding (formal or
informal), or investigation pending or threatened (or any basis therefor)
with respect to Donna Karan, Stephan Weiss or Gabrielle Studio which
would prohibit or delay the offering or the consummation of the
Reorganization.
<PAGE>
Exhibit F
[LETTERHEAD OF PAUL, HASTINGS, JANOFSKY & WALKER]
-------------------------------------------------
(i) each of Tomio Taki, Frank R. Mori, Christopher Mori, Heather
Mori and Takihyo Inc. has all requisite power and authority to execute,
deliver and perform this Agreement and the Reorganization Documents to
which such person is a party. All necessary corporate proceedings of
Takihyo Inc. have been taken to authorize the execution, delivery and
performance of this Agreement and the Reorganization Documents to which
it is a party. This Agreement and the Reorganization Documents have been
duly authorized, executed and delivered by Tomio Taki, Frank R. Mori,
Christopher Mori, Heather Mori and Takihyo Inc., are the legal, valid and
binding obligations of Tomio Taki, Frank R. Mori, Christopher Mori,
Heather Mori and Takihyo Inc., and are enforceable as to Tomio Taki,
Frank R. Mori, Christopher Mori, Heather Mori and Takihyo Inc. in
accordance with their respective terms (subject to applicable bankruptcy,
insolvency and other laws affecting the enforceability of creditors'
rights generally and general principles of equity). No consent,
authorization, approval, order, license, certificate or permit of or from
or declaration or filing with, any federal, state, local or other
governmental authority or to our knowledge, after due inquiry, any court
or other tribunal is required by Tomio Taki, Frank R. Mori, Christopher
Mori, Heather Mori or Takihyo Inc. for the execution, delivery or
performance of this Agreement or the Reorganization Documents by Tomio
Taki, Frank R. Mori, Christopher Mori, Heather Mori or Takihyo Inc.,
except such as have been obtained or as may be required by securities or
Blue Sky laws of the various jurisdictions in connection with the offer
and sale of the Shares. To our knowledge, after due inquiry, no consent
of any party to any material contract, agreement, instrument, lease,
license, arrangement or understanding known to such counsel to which
Tomio Taki, Frank R. Mori, Christopher Mori, Heather Mori or Takihyo Inc.
is a party, or to which any of his, her or its properties or assets are
subject, is required for the execution, delivery or performance by Tomio
Taki, Frank R. Mori, Christopher Mori, Heather Mori and Takihyo Inc. of
this Agreement or the Reorganization Documents, except such consents
which have been obtained and are in full force
<PAGE>
and effect; and the execution, delivery, and performance by Tomio Taki,
Frank R. Mori, Christopher Mori, Heather Mori and Takihyo Inc. of this
Agreement and the Reorganization Documents will not violate, result in a
breach of, conflict with or (with or without the giving of notice or the
passage of time or both) entitle any party to terminate or call a default
under any such material contract, agreement, instrument, lease, license,
arrangement or understanding known to such counsel, or to our knowledge
violate or result in a breach of the certificate of incorporation or by-
laws of Takihyo Inc., or to our knowledge violate, result in a breach of
or conflict with any law, rule, regulation, order, judgment or decree
binding on Tomio Taki, Frank R. Mori, Christopher Mori, Heather Mori or
Takihyo Inc., or to which any of his, her or its operations, businesses,
properties or assets are subject, or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of Tomio
Taki, Frank R. Mori, Christopher Mori, Heather Mori or Takihyo Inc.;
(ii) each of Tomio Taki, Frank R. Mori, Christopher Mori, Heather
Mori and Takihyo Inc. have conveyed good and marketable title to the
shares of the corporations and the interests in the partnerships being
transferred by them to the Company in connection with the Reorganization,
free and clear of all liens, security interests, pledges, charges,
encumbrances, stockholders' agreements and voting trusts;
(iii) except as set forth in the Reorganization Documents, no other
action needs to be taken by Tomio Taki, Frank R. Mori, Christopher Mori,
Heather Mori or Takihyo Inc. in order to effect the Reorganization; and
(iv) to our knowledge, there is no litigation, arbitration, claim,
governmental or other proceeding (formal or informal), or investigation
pending or threatened (or any basis therefor) with respect to Tomio Taki,
Frank R. Mori, Christopher Mori, Heather Mori or Takihyo Inc. which would
prohibit or delay the offering or the consummation of the Reorganization.
<PAGE>
Exhibit G
[FORM OF LOCK-UP LETTER]
------------------------
____________, 1996
Morgan Stanley & Co. Incorporated
Bear, Stearns & Co. Inc.
Merrill Lynch, Pierce, Fenner
& Smith Incorporated
Smith Barney Inc.
As Representatives of the
Several U.S. Underwriters
Morgan Stanley & Co. International Limited
Bear, Stearns International Limited
Merrill Lynch International
Smith Barney Inc.
As Representatives of the
Several International Underwriters
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs:
The undersigned understands that Morgan Stanley & Co. Incorporated
("Morgan Stanley"), as Representative of the several underwriters, proposes to
enter into an Underwriting Agreement (the "Underwriting Agreement") with Donna
Karan International Inc., a Delaware corporation (the "Company") providing for
the public offering (the "Public Offering") by the several underwriters,
including Morgan Stanley (the "Underwriters") of ___________ shares (the
"Shares") of the Common Stock ($.01 par value per share) of the Company (the
"Common Stock").
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 180 days after the date of the final Prospectus relating
to the Public Offering (the "Prospectus"), (1) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any
<PAGE>
option or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock (whether such shares or any such securities are now owned by the
undersigned or are hereafter acquired), or (2) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of the Common Stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (i) the sale of any Shares to the Underwriters pursuant to
the Underwriting Agreement, (ii) the transactions contemplated by the
Contribution Agreement and the Escrow Agreement (as defined in the Underwriting
Agreement) or (iii) bona fide gifts to persons or transfers to members of the
undersigned's family, (including spouse, parents, children and siblings) or
trusts for the benefit of any of such persons who agree in writing with the
Underwriters to be bound by the provisions of this letter. In addition, the
undersigned agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, it will not, during the period ending 180 days after
the date of the Prospectus, make any demand for or exercise any right with
respect to, the registration of any shares of Common Stock or any security
convertible into or exercisable or exchangeable for Common Stock.
Whether or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only be made
pursuant to the Underwriting Agreement, the terms of which are subject to
Agreement between the Company and Underwriters.
Very truly yours,
_________________________
(Name)
_________________________
(Address)
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF CONTRIBUTION
THIS AGREEMENT AND PLAN OF CONTRIBUTION is made and entered into as of
the _______ day of ______, 1996, by and among DONNA KARAN INTERNATIONAL INC., a
Delaware corporation (the "Corporation"), GABRIELLE STUDIO, INC., a New York
corporation ("Gabrielle"), TAKIHYO INC., a Delaware corporation ("Takihyo"),
DONNA KARAN ("Karan"), STEPHAN WEISS ("Weiss"), TRUST UNDER TRUST AGREEMENT FOR
THE BENEFIT OF LISA WEISS KEYES, COREY WEISS AND GABRIELLE KARAN (the
"Karan/Weiss Trust"), TRUST UNDER TRUST AGREEMENT FOR THE BENEFIT OF DONNA KARAN
(the "Karan Trust," and together with the Karan/Weiss Trust, the "KW Trusts"),
TOMIO TAKI ("Taki"), FRANK R. MORI ("Mori"), CHRISTOPHER MORI ("CM") and HEATHER
MORI ("HM"). Mori, CM and HM are sometimes referred to hereinafter as the "Mori
Family." Karan, Weiss, the KW Trusts, Taki, Mori, CM and HM are sometimes
referred to hereinafter as the "Stockholders."
W I T N E S E T H:
- - - - - - - - -
WHEREAS, the Corporation, Gabrielle, Takihyo and the Stockholders have
entered into this Agreement to accomplish a restructuring (the "Restructuring")
of the businesses conducted by The Donna Karan Company ("Company"), The Donna
Karan Company Store, G.P. ("Store"), DK Footwear Partners ("Shoe"), Donna Karan
Studio ("Studio") and DSTF Japan Company ("Japan"), all general partnerships,
and Donna Karan (H.K.) Limited, a Hong Kong corporation ("HK", and together
with Company, Store, Shoe, Studio and Japan, collectively referred to as the
"Donna Karan Companies"), in conjunction with an initial public offering (the
"Offering") of the Corporation's common stock as an integrated plan pursuant to
Section 351 of the Internal Revenue Code of 1986, as amended (the "Code"); and
(a) Takihyo Fashion Company, L.P. ("TFC"), a limited partnership that owns a 50%
interest in Company and holds a 50% interest in HK (as Company's nominee) will
execute and deliver an instrument of transfer and execute such other documents
and take such other action as should be necessary to assign or transfer
ownership of such interest in HK to the Company under applicable law and (b)
Takihyo, Mori and Taki will cause to be liquidated (the "TM Liquidations"): (i)
TFC, (ii) Takihyo Design Company, L.P. ("TDC"), a limited partnership that owns
a 50% interest in Studio, (iii) TFT Store Company, L.P. ("TFT Store"), a limited
partnership that owns a 50% interest in Store, (iv) TFT Shoe Company, L.P. ("TFT
Shoe"), a limited partnership that owns a 50% interest in Shoe, and (v) TFT
Japan Company, L.P. ("TFT Japan"), a limited partnership that owns a 50%
interest in Japan; and
WHEREAS, pursuant to the TM Liquidations, (i) Takihyo will receive a
30% interest in each of Company, Studio,
<PAGE>
Store, Shoe and Japan, (ii) Tolara Tetragon Inc. ("Tolara") and Full
Requirements Merchandising, Inc. ("Full"), each a New York corporation, will
each receive a 10% interest in each of Company and Studio, (iii) Tomio Tangents,
Inc. ("Tomio") and Formal Reserve Management, Inc. ("Formal"), each a New York
corporation, will each receive a 10% interest in Store, (iv) Tangents Two, Inc.
("Tangents") and First Run Management, Inc. ("First"), each a New York
corporation, will each receive a 10% interest in Shoe, and (v) TT DK Japan, Inc.
("TT Japan") and FM DK Japan, Inc. ("FM Japan"), each a New York corporation,
will each receive a 10% interest in Japan; and
WHEREAS, a Registration Statement on Form S-1 (the "Registration
Statement") with respect to the registration of shares of common stock, $.01 par
value per share, of the Corporation (the "Common Stock") was filed with the
Securities and Exchange Commission on April 17, 1996, in connection with the
proposed Offering pursuant to a proposed underwriting agreement with various
underwriters (the "Underwriters"), for which certain of the Underwriters will be
acting as representatives (the "Representatives"); and
WHEREAS, pursuant to the Restructuring and as part of an integrated
plan under Section 351 of the Code, on the Closing Date (as hereinafter
defined): (i) Karan, Weiss and the KW Trusts will each contribute all their
shares in each of Gabby Apparel, Inc. ("Gabby"), The Donna Karan Store
Corporation ("DK Store"), DK Shoe Corp. ("DK Shoe") and Gabrielle Japan, Inc.
("GJI"), each a New York corporation (collectively, the "DK Corporations"), to
the Corporation solely in exchange for certain shares of Common Stock, (ii)
Gabrielle will contribute its 50% interest in Studio to the Corporation solely
in exchange for certain shares of Common Stock, (iii) Takihyo will contribute
its 30% interest in each of the Donna Karan Companies (other than HK) to the
Corporation solely in exchange for certain shares of Common Stock, (iv) Taki
will contribute all the issued and outstanding shares in each of Tolara, Tomio,
Tangents and TT Japan (collectively, the "TT Corporations") to the Corporation
solely in exchange for certain shares of Common Stock, (v) Mori will contribute
all the issued and outstanding shares in each of Formal, First and FM Japan and
all his shares in Full to the Corporation solely in exchange for certain shares
of Common Stock, (vi) CM will contribute all his shares in Full to the
Corporation solely in exchange for certain shares of Common Stock, and (vii) HM
will contribute all her shares in Full to the Corporation solely in exchange for
certain shares of Common Stock (collectively, Full, Formal, First
2
<PAGE>
and FM Japan are referred to herein as the "FM Corporations");
WHEREAS, this Agreement and certain other documents (such documents
other than this Agreement being collectively referred to as the "Major
Documents") will be placed in escrow pursuant to an escrow agreement, dated as
of June 10, 1996, among the parties hereto and the Escrow Agent (as defined
therein);
NOW, THEREFORE, in consideration of the mutual terms, conditions and
other agreements set forth herein, the parties hereto agree as follows:
ARTICLE I
EXCHANGE OF PROPERTY; PAYMENTS AND ADJUSTMENTS
SECTION 1.1. Exchange of Property.
--------------------
On the Closing Date (as defined herein) and upon the terms and subject
to the conditions set forth in this Agreement:
(a) Karan, Weiss, the Karan/Weiss Trust and the Karan Trust shall each
contribute all their shares in each of the DK Corporations to the Corporation in
exchange for an aggregate of 3,605,744, 961,532, 48,077, and 192,306 shares of
Common Stock, respectively.
(b) Gabrielle shall contribute its 50% equity interest in Studio to
the Corporation in exchange for an aggregate of 498,808 shares of Common Stock.
(c) Takihyo shall contribute its 30% equity interest in each of the
Donna Karan Companies (other than HK) to the Corporation in exchange for an
aggregate of 3,183,881 shares of Common Stock.
(d) Taki shall contribute all the issued and outstanding shares of
each of
3
<PAGE>
the TT Corporations to the Corporation in exchange for an aggregate of 1,061,293
shares of Common Stock.
(e) Mori shall contribute all the issued and outstanding shares of
each of Formal, First and FM Japan and all his shares in Full to the Corporation
in exchange for an aggregate of 875,567 shares of Common Stock.
(f) CM shall contribute all his shares in Full to the Corporation in
exchange for an aggregate of 92,863 shares of Common Stock.
(g) HM shall contribute all her shares in Full to the Corporation in
exchange for an aggregate of 92,863 shares of Common Stock.
4
<PAGE>
SECTION 1.2. Closing. The consummation of the exchanges described
-------
in Section 1.1 hereof (the "Closing") shall be held concurrently with the
closing of the Offering (such date being referred to herein as the "Closing
Date") at the offices of Proskauer Rose Goetz & Mendelsohn LLP, New York, New
York. Each party hereto agrees to use its best efforts promptly to satisfy the
conditions to the obligations of such party in order to expedite the Closing.
SECTION 1.3. Closing Deliveries.
------------------
Subject to the conditions to the respective obligations of the parties
hereto, on the Closing Date:
(a) Karan, Weiss and the KW Trusts shall deliver, or cause to be
delivered, to the Corporation: (i) share certificates representing all their
shares in each of the DK Corporations, duly endorsed in blank or accompanied by
stock powers duly endorsed in blank, in each case in proper form for transfer,
with signatures guaranteed by a commercial bank located in the City of New York
or a member firm of the New York Stock Exchange, Inc., and with all stock
transfer and any other required documentary stamps affixed thereto; (ii) except
as otherwise provided in Section 4.4 hereof, all the books and records of the DK
Corporations, including, but not limited to, all minute books and stock transfer
ledgers, all accounting records and copies of all tax returns filed for taxable
periods ending prior to the Closing Date; (iii) a list of all the bank accounts
of the DK Corporations and the signatories thereon; (iv) a list of the directors
and officers of the DK Corporations and all resignations of officers and
directors of the DK Corporations requested by the Corporation; (v) a duly
executed certificate stating that each of them has satisfied all of the
conditions set forth in Section 1.3(g) hereof; and (vi) an opinion of counsel
dated the Closing Date in the form annexed hereto as Exhibit A.
(b) Gabrielle shall deliver, or cause to be delivered, to the
Corporation: (i) a duly executed Assignment of its 50% partnership interest in
Studio; (ii) a duly executed certificate stating that it has satisfied all the
conditions set forth in Section 1.3(g) hereof;
5
<PAGE>
and (iii) an opinion of counsel dated the Closing Date in the form annexed
hereto as Exhibit A.
(c) In addition to the actions taken with respect to the assignment or
transfer of HK (as described in the second WHEREAS clause hereof, Takihyo shall
deliver, or cause to be delivered, to the Corporation: (i) a duly executed
Assignment of its 30% partnership interest in each of the Donna Karan Companies
(other than HK); (ii) a duly executed certificated stating that it has satisfied
all the conditions set forth in Section 1.3(g) hereof; and (iii) an opinion of
counsel dated the Closing Date in the form annexed hereto as Exhibit B.
(d) Each of Mori, CM and HM shall deliver, or cause to be delivered,
to the Corporation: (i) their share certificates in the FM Corporations which
together represent all the issued and outstanding shares in each of the FM
Corporations, duly endorsed in blank or accompanied by stock powers duly
endorsed in blank, in each case in proper form for transfer, with signatures
guaranteed by a commercial bank located in the City of New York or a member firm
of the New York Stock Exchange, Inc., and with all stock transfer and any other
required documentary stamps affixed thereto; (ii) except as otherwise provided
in Section 4.4 hereof, all the books and records of the FM Corporations,
including, but not limited to, all minute books and stock transfer ledgers, all
accounting records and copies of all tax returns filed for taxable periods
ending prior to the Closing Date; (iii) a list of all the bank accounts of the
FM Corporations and the signatories thereon; (iv) a list of the directors and
officers of the FM Corporations and all resignations of directors and officers
of the FM Corporations requested by the Corporation; (v) a duly executed
certificate stating that they have satisfied all the conditions set forth in
Section 1.3(g) hereof; and (vi) an opinion of counsel dated the Closing Date in
the form annexed hereto as Exhibit B.
(e) Taki shall deliver, or cause to be delivered, to the Corporation:
(i) share certificates representing all the issued and outstanding shares in
each of the TT Corporations, duly endorsed in blank or accompanied by stock
powers duly endorsed in blank, in each case in proper form for transfer, with
signatures guaranteed by a commercial bank located in the City of New York or a
member firm of the New York Stock Exchange, Inc., and with all stock transfer
and any other required documentary stamps affixed thereto; (ii) all the books
and records of the TT
6
<PAGE>
Corporations, including, but not limited to, all minute books and stock transfer
ledgers, all accounting records and copies of all tax returns filed for taxable
periods ending prior to the Closing Date; (iii) a list of all the bank accounts
of the TT Corporations and the signatories thereon; (iv) a list of the directors
and officers of the TT Corporations and all resignations of directors and
officers of the TT Corporations requested by the Corporation; (v) a duly
executed certificate stating that he has satisfied all the conditions set forth
in Section 1.3(g) hereof; and (vi) an opinion of counsel dated the Closing Date
in the form annexed hereto as Exhibit B.
(f) The Corporation shall issue and deliver, or cause to be issued and
delivered: (i) a certificate representing shares 3,605,744 of Common Stock to
Karan; (ii) a certificate representing 961,532 shares of Common Stock to Weiss;
(iii) a certificate representing 48,077 shares of Common Stock to the
Karan/Weiss Trust; (iv) a certificate representing 192,306 shares of Common
Stock to the Karan Trust; (v) a certificate representing 498,808 shares of
Common Stock to Gabrielle; (vi) a certificate representing 3,183,881 shares of
Common Stock to Takihyo; (vii) a certificate representing 1,061,293 shares of
Common Stock to Taki; (viii) a certificate representing 875,567 shares of Common
Stock to Mori; (ix) a certificate representing 92,863 shares of Common Stock to
CM; (x) a certificate representing 92,863 shares of Common Stock to HM; (xi) an
opinion of counsel dated the Closing Date in the form annexed hereto as Exhibit
E to Takihyo and the Stockholders; and (xii) a duly executed certificate stating
that it has satisfied all the conditions set forth in Section 1.3(g) hereof to
Takihyo and the Stockholders.
(g) Each party hereto shall deliver a certificate (the "Bring-Down
Certificate") stating that its representations and warranties contained herein
or in the Disclosure Schedule are true in all material respects as of and at the
Closing Date with the same effect as though made at the Closing Date, except (i)
for changes permitted or contemplated
7
<PAGE>
by this Agreement; (ii) to the extent that any representation or warranty is
made herein as of a specified date, in which case such representation or
warranty shall be true in all respects as of such specified date and (iii) to
the extent set forth in such certificate. Each party's Bring-Down Certificate
shall further state that such party has performed in all material respects all
obligations and complied in all material respects with all covenants and other
agreements required by this Agreement to be performed or complied with by it
before the Closing Date.
8
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION 2.1. Representations and Warranties of Karan and Weiss.
--------------------------------------------------
Karan and Weiss jointly and severally represent, warrant and agree,
and for purposes of Section 2.1(n), each of Gabrielle, Karan, Weiss and the KW
Trusts represent and warrant severally, but not jointly, as follows:
(a) Corporate Organization. Gabrielle is a corporation duly
----------------------
organized, validly existing and in good standing under the laws of the State of
New York and has all requisite corporate power and authority to enter into this
Agreement and to perform its obligations hereunder. Each of the DK Corporations
is a corporation duly organized, validly existing and in good standing under the
laws of the State of New York and has all requisite corporate power and
authority to own its properties and carry on its business as the same is now
being conducted and each is, or on the Closing Date will be, duly qualified to
do business in each jurisdiction in which the nature of its business or
properties makes such qualification necessary, except where the failure to be so
qualified would not have a materially adverse effect on its business. Complete
and correct copies of the Certificate of Incorporation and By-laws of Gabrielle
and each of the DK Corporations have been delivered to the Corporation.
(b) Capitalization of DK Corporations; Title to Shares. The
--------------------------------------------------
authorized capital stock of each of the DK Corporations consists of 400 shares
of Common Stock, no par value per share, of which 200 shares are voting and 200
shares are non-voting. None of the non-voting shares of Common Stock are
outstanding, and the following number of voting shares of Common Stock are
outstanding, all of which have been validly issued, are fully paid and
nonassessable, have not been issued in violation of any preemptive rights of
stockholders and are owned beneficially and of record by Karan, Weiss and the KW
Trusts, free and clear of any liens, claims, encumbrances or other contractual
restrictions of any kind:
<TABLE>
<CAPTION>
Karan/Weiss Karan
Karen Weiss Trust Trust
----- ----- ----------- -----
<S> <C> <C> <C> <C>
Gabby 75 20 1 4
DK Store 75 20 1 4
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
DK Shoe 75 20 1 4
GJI 75 20 1 4
</TABLE>
No options, warrants or other rights to acquire, sell or issue shares of capital
stock of any of the DK Corporations (whether upon conversion of other securities
or otherwise) are outstanding. The contribution and delivery of the shares in
the DK Corporations by Karan, Weiss and the KW Trusts to the Corporation as
contemplated by this Agreement will transfer good title to all such shares to
the Corporation, free and clear of all security interests, liens, claims,
encumbrances and other contractual restrictions of any kind.
(c) Validity of Agreement. Each of Gabrielle, Karan, Weiss and the KW
---------------------
Trusts has all requisite power and authority to execute, deliver and perform
this Agreement and each of the Closing Documents (as defined in Section 8.4
hereof) to which it is a party and to perform the transactions herein
contemplated. The execution and delivery of this Agreement and each of the
Closing Documents to which Gabrielle is a party by Gabrielle and the performance
of the transactions herein contemplated have been duly authorized by the Board
of Directors of Gabrielle and shareholders of Gabrielle and no further corporate
action on the part of Gabrielle is necessary to authorize this Agreement and the
performance of such transactions. All necessary proceedings have been duly taken
by Karan, Weiss, and the KW Trusts to authorize the execution, delivery and
performance by each such person or entity of this Agreement and each of the
Closing Documents to which it is a party. This Agreement and each Major Document
to which such person is a party have been duly authorized and executed and, on
the Closing Date will be, duly delivered by Gabrielle, Karan, Weiss and the KW
Trusts and, assuming due authorization, execution and delivery hereof and
thereof by the other parties to this Agreement and to each of the Major
Documents, constitute the valid and binding agreements of Gabrielle, Karan,
Weiss and the KW Trusts enforceable in accordance with their terms. Each other
Closing Document to which such person is a party has been duly authorized and,
on the Closing Date, will be duly executed and delivered by Gabrielle, Karan,
Weiss and The KW Trusts and, assuming due authorization, execution and delivery
hereof and thereof by the other parties thereto will constitute the valid and
binding agreements of Gabrielle, Karan, Weiss and the KW Trusts enforceable in
accordance with their terms.
(d) No Conflict or Violation. No consent, authorization, approval,
------------------------
order, license, certificate or permit of or from or declaration or filing with
any federal, state, local or governmental authority or any court or other
tribunal is required for the execution, delivery or performance by each of the
DK Corporations, Gabrielle, Karan, Weiss and the KW Trusts of this Agreement and
each of the Closing Documents to which it is a party. No consent of any party
to any contract, agreement, instrument, lease, license, arrangement or
understanding to which any of the DK Corporations, Gabrielle, Karan, Weiss or
the KW Trusts is a party or to which any of their respective properties or
assets is subject, is required for the execution, delivery or
10
<PAGE>
performance of this Agreement and each of the Closing Documents to which it is a
party except for such consents as will be obtained prior to the Closing Date;
and the execution, delivery and performance of this Agreement and each of such
Closing Documents will not violate, result in the breach of, conflict with or
(with or without the giving of notice or the passage of time or both) entitle
any party to terminate or call a default under any such contract, agreement,
instrument, lease, license, arrangement or understanding, or violate or result
in a breach of any term of the Certificate of Incorporation or By-Laws of any of
the DK Corporations or violate, result in a breach of or conflict with any law,
rule, regulation, order, judgment or decree binding on any of the DK
Corporations, Gabrielle, Karan, Weiss or the KW Trusts or to which any of their
respective operations, businesses, properties or assets are subject or result in
the creation of any mortgage, pledge, lien, charge or encumbrance upon Gabrielle
or any of the assets of any of the DK Corporations or the loss of any license or
other contractual right with respect thereto.
(e) Tax Matters. For purposes of this Agreement, "Tax" means any
-----------
tax imposed under Subtitle A of the Internal Revenue Code of 1986 as amended
(the "Code") and any net income, alternative or add-on minimum tax, gross
income, gross receipts, sales, use, ad valorem, value added, transfer,
franchise, profits, license, withholding, payroll, employment, excise,
severance, stamp, capital stock, occupation, property, environmental or windfall
profit tax, premium, custom, duty or other tax, governmental fee or other like
assessment or charge of any kind whatsoever, together with any interest,
penalty, addition to tax or additional amount imposed by any governmental
authority (a "Taxing Authority") responsible for the imposition of any such tax
(domestic or foreign); "Returns" means all Tax returns, statements, reports and
forms (including estimated tax or information returns and reports, or filing
extensions with respect thereto) required to be filed with any Taxing Authority
in connection with the determination, assessment, collection or administration
of any Tax; "Overlap Period" means any taxable period beginning on or before and
ending after the Closing Date; and "Post-Closing Tax Period" means (1) any
taxable period beginning after the Closing Date and (2) the portion of any
Overlap Period beginning immediately after the Closing Date and ending at the
close of the last day of such Overlap Period.
11
<PAGE>
(i) All Returns with respect to (A) any tax period ending on or before
the close of the Closing Date and (B) the portion of any Overlap Period
beginning on the first day of such Overlap Period and ending at the close of the
Closing Date ("Pre-Closing Tax Period") by each DK Corporation, have, to the
extent required to be filed on or before the date hereof, been filed when due in
accordance with all applicable laws;
(ii) except for state and local taxes due and payable with respect to
any Pre-Closing Tax Period beginning on or after January 1, 1996, all Taxes due
and payable by, or attributable to, each DK Corporation with respect to any Pre-
Closing Tax Period, other than Taxes relating to income from operations of any
of the Donna Karan Companies that is attributable to the Closing Date, have been
timely paid, or withheld and remitted to the appropriate Taxing Authority;
(iii) except as disclosed in Section 2.1(e) of the Disclosure
Schedule, none of the DK Corporations has granted any extension or waiver of the
statute of limitations period applicable to any Return, which period (after
giving effect to such extension or waiver) has not yet expired;
(iv) except as disclosed in Section 2.1(e) of the Disclosure
Schedule, none of the DK Corporations has received any written notice of any
claim, audit, action, suit, proceeding, or investigation with respect to any of
the DK Corporations with respect to any Pre-Closing Tax Period;
(v) there are no pending written requests for rulings or
determinations in respect of any Tax by any of the DK Corporations with any
Taxing Authority;
(vi) none of the property owned or used by any of the DK Corporations
is subject to a tax benefit transfer lease executed in accordance with Section
168(f)(8) of the Internal Revenue Code of 1954, as amended;
(vii) none of the property owned or used by any of the DK
Corporations is subject to a lease, other than a "true" lease for federal income
tax purposes;
(viii) none of the property owned by any of the DK Corporations is
"tax-exempt use property" within the meaning of Section 168(h) of the Code;
(ix) none of the DK Corporations has entered into or will it enter
into any agreement or consent pursuant to Section 341(f) of the Code;
12
<PAGE>
(x) there are no liens for Taxes upon the assets of any of the DK
Corporations, except liens for current Taxes not yet due or payable;
(xi) none of the DK Corporations is subject to withholding under
Section 1445 of the Code with respect to any transaction contemplated hereby;
(xii) none of the DK Corporations or Donna Karan Companies will be
required to include any adjustment in taxable income for any Post-Closing Tax
Period under Section 481 of the Code (or any similar provision of the Tax laws
of any jurisdiction) as a result of a change in method of accounting for a Pre-
Closing Tax Period made by any DK Corporation or any of the Donna Karan
Companies or pursuant to the provisions of any agreement entered into with any
Taxing Authority with regard to the Tax liability of such DK Corporation or such
Donna Karan Company for any Pre-Closing Tax Period (including, without
limitation, any request made by any of the Donna Karan Companies before the
Closing Date to change its method of accounting, whenever such change shall be
determined by the Internal Revenue Service to be effective);
(xiii) without the prior written consent of the Corporation, none of
the DK Corporations shall between the date hereof and the Closing Date, to the
extent it may affect or relate to the Corporation, make or change any tax
election, change any annual tax accounting period, adopt or change any method of
tax accounting, file any amended Return, enter into any closing agreement,
settle any Tax claim or assessment, surrender any right to claim a Tax refund,
or take or omit to take any other action, if any such action or omission would
have the effect of increasing the Tax liability or reducing any Tax benefit of
the Corporation.
(f) Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
Section 2.1(f) of the Disclosure Schedule, since their formation, the DK
Corporations have not owned or operated any business other than their respective
interests in the Donna Karan Companies and Gabby's equity interest in HK which
Gabby holds as nominee.
(g) Real Estate. None of the DK Corporations directly owns any real
-----------
property and none has any direct leasehold interest in real property.
(h) Litigation. Except as disclosed in Section 2.1(h) of the
----------
Disclosure Schedule, there is no lawsuit or legal, administrative or regulatory
proceeding or investigation pending or threatened against any DK Corporation.
13
<PAGE>
(i) Employees; Benefit Plans. None of the DK Corporations has any
------------------------
employees nor is it a party to any agreement with any person relating to the
performance of services on behalf of such corporation. None of the DK
Corporations is a direct party to any qualified or non-qualified employee
benefit plan or collective bargaining agreement.
(j) Liabilities. Except as otherwise set forth in Section 2.1(e)
-----------
hereof, to the best knowledge of Karan and Weiss, no DK Corporation has any
liabilities or obligations of any nature, whether absolute, accrued, contingent
or otherwise, except as specifically disclosed in Section 2.1(j) of the
Disclosure Schedule.
(k) Estimated Taxes. As of the date hereof, each DK Corporation has
---------------
paid over, or applied, and, as of the Closing Date, will have paid over, or
applied, to the relevant state and local taxing authorities as a deposit of its
estimated taxes for the Pre-Closing Tax Periods beginning on or after January 1,
1996 (the "Estimated Pre-Closing Tax Period Taxes") the amount of Estimated Pre-
Closing Tax Period Taxes as disclosed in Section 2.1(k)-1 or Section 2.1(k)-2,
respectively, of the Disclosure Schedule, provided that the parties agree that
each of DK Corporations shall deliver Section 2.1(k)-2 on or prior to the
Closing Date and, after such delivery, "Estimated Pre-Closing Tax Period Taxes"
shall be as set forth on Schedule 2.1(k)-2 of the Disclosure Schedule.
(l) Title to Assets. The sole assets of the DK Corporations are their
---------------
respective partnership interests in the Donna Karan Companies and Gabby's 50%
equity interest in HK. Except as disclosed in Section 2.1(1) of the Disclosure
Schedule, each of the DK Corporations has good and marketable title to all its
assets, free and clear of all security interests, liens, claims, encumbrances
and other contractual restrictions of any kind. The transfer and delivery of
the 50% equity interest in Studio by Gabrielle to the Corporation as
contemplated by this Agreement and the Assignment referred to in Section 1.3(b)
will transfer good title to all such interest to the Corporation, free and clear
of all security interests, liens, claims, encumbrances and other contractual
restrictions of any kind.
(m) Agreements. Except as disclosed in Section 2.1(m) of the
----------
Disclosure Schedule, none of the DK Corporations is a party to any written or
oral agreement.
(n) Acquisition for Investment Purposes. Each of Gabrielle, Karan,
-----------------------------------
Weiss and the KW Trusts hereby represents and warrants severally, but not
jointly, that (i) such party is acquiring the Common Stock for its own account,
for investment and not with a view to distribution thereof within the meaning of
applicable Federal and State securities laws; (ii) each of them understands that
the Common Stock acquired pursuant hereto has not been registered pursuant to
applicable securities laws and that such Common Stock must be held indefinitely
unless a subsequent disposition thereof is registered pursuant to applicable
securities laws or is exempt from the registration
14
<PAGE>
requirements thereof; (iii) each of them acknowledges that the Restructuring,
including the issuance of the Common Stock pursuant to this Agreement, is
intended by the parties hereto to qualify as an integrated plan pursuant to
Section 351 of the Code and each of them agrees to report the transactions
contemplated hereunder consistent with said intention on all applicable returns
required to be filed with all relevant taxing authorities; (iv) none of them
has, and on or prior to the Closing Date will have, entered into a binding
commitment or agreement with any party (other than a party to this Agreement) to
dispose of any shares of Common Stock received by it pursuant to the terms of
this Agreement, provided, however, that the parties to this Agreement agree that
-------- -------
the entering into of any arrangement or agreement among or between the
Underwriters or the parties to this Agreement, in connection with the Offering
(including, but not limited to, the Registration Statement and any document
which is an exhibit thereto), does not, and will not, constitute such a binding
commitment or agreement.
(o) Validity of S Corporations. As of the close of the day before
--------------------------
the Closing Date, each of the DK Corporations is, and has been for every taxable
year since the date of its incorporation, a valid S corporation (as defined in
Section 1361 et seq. of the Code, and regulations promulgated thereunder).
-------
SECTION 2.2. Representations and Warranties of Takihyo, Taki, Mori,
------------------------------------------------------
HM and CM.
- ----------
Except as otherwise qualified below, (A) Takihyo, Taki, and Mori
jointly and severally represent, warrant and agree with respect to Takihyo,
(B) Mori, HM, and CM, (but not Takihyo or Taki) jointly and severally represent,
warrant and agree with respect to Mori, HM, CM, and Full, (C) Mori (but not
Takihyo, Taki, HM or CM) represents, warrants and agrees with respect to the FM
Corporations other than Full (the "Other FM Corporations"), and (D) Taki (but
not Takihyo, Mori, HM or CM) represents, warrants and agrees with respect to
Taki and the TT Corporations, as follows:
(a) Corporate Organization. Takihyo is a corporation duly organized,
----------------------
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to enter into this Agreement
and to perform its obligations hereunder. Each of the TT Corporations, Full and
each of the Other FM Corporations is a corporation duly organized, validly
existing and in good standing under the laws of the State of New York and has
all requisite corporate power and authority to own its properties and carry on
its business as the same is now being conducted and each is, or on the Closing
Date will be, duly qualified to do business in each jurisdiction in which the
nature of its business or properties makes such qualification necessary, except
where the failure to be so qualified would not have a
15
<PAGE>
materially adverse effect on its business. Complete and correct copies of the
Certificate of Incorporation and By-laws of Takihyo and each of the TT
Corporations, Full and each of the Other FM Corporations have been delivered to
the Corporation.
(b) Capitalization of TT Corporations and FM Corporations; Title to
---------------------------------------------------------------
Shares. The authorized capital stock of each of the TT Corporations, Full and
- ------
each of the Other FM Corporations consists of the following number of shares of
common stock, $1.00 par value per share, of which the following number of shares
are outstanding, all of which have been validly issued, are fully paid and
nonassessable, have not been issued in violation of any preemptive rights of
stockholders and are owned beneficially and of record by Taki, in the case of
the TT Corporations, and the Mori Family, in the case of the FM Corporations,
as set forth below, free and clear of any liens, claims, encumbrances or other
contractual restrictions of any kind:
<TABLE>
<CAPTION>
Authorized Issued and Outstanding
---------- ----------------------
Taki
----
<S> <C> <C>
Tolara 100 100
Tomio 20,000 100
Tangents 2,000 100
TT Japan 20,000 100
<CAPTION>
Mori CM HM
---- -- --
<S> <C> <C> <C> <C>
Full 100 80 10 10
Formal 20,000 100
First 2,000 100
FM Japan 20,000 100
</TABLE>
No options, warrants or other rights to acquire, sell or issue shares of capital
stock of any of the TT Corporations, Full or any of the Other FM Corporations
(whether upon conversion of other securities or otherwise) are outstanding. The
contribution and delivery of the shares in the TT Corporations by Taki and the
contribution and delivery of the shares in Full and each of the Other
Corporations by the Mori Family, to the Corporation as contemplated by this
Agreement will transfer good title to all such shares to the Corporation, free
and clear of all security interests, liens, claims, encumbrances and other
contractual restrictions of any kind.
(c) Validity of Agreement. Each of Taki, Mori, HM, CM and Takihyo has
---------------------
full power and authority to execute and deliver
16
<PAGE>
this Agreement and each of the Closing Documents to which it is a party and to
perform the transactions herein contemplated. The execution and delivery of this
Agreement by Takihyo and the performance of the transactions herein contemplated
have been duly authorized by the Board of Directors and shareholders of Takihyo,
the execution and delivery of each of the other Closing Documents to which
Takihyo is a party have been duly authorized by the Board of Directors of
Takihyo, and no further corporate action on the part of Takihyo is necessary to
authorize this Agreement and the performance of such transactions. All necessary
proceedings have been duly taken by Taki, Mori, HM and CM to authorize the
execution, delivery and performance by each such person of this Agreement and
each of the Closing Documents to which it is a party. This Agreement and each
Major Document to which such person is a party have been duly authorized and
executed and, on the Closing Date will be, duly delivered by Takihyo, Taki,
Mori, HM and CM, and assuming due authorization, execution and delivery hereof
and thereof by the other parties to this Agreement and to each of the Closing
Documents, constitute the valid and binding agreements of Takihyo, Taki, Mori,
HM and CM enforceable in accordance with their terms. Each other Closing
Document to which such person is a party has been duly authorized and, on the
Closing Date, will be duly executed and delivered by Takihyo, Taki, Mori, HM and
CM and, assuming due authorization, execution and delivery hereof and thereof by
the other parties thereto, will constitute the valid and binding agreements of
Takihyo, Taki, Mori, HM and CM enforceable in accordance with their terms.
(d) No Conflict or Violation. No consent, authorization, approval,
------------------------
order, license, certificate or permit of or from or declaration or filing with
any federal, state, local or governmental authority or any court or other
tribunal is required for the execution, delivery or performance by each of the
TT Corporations, Full, the Other FM Corporations, Taki, Mori, HM, CM and Takihyo
of this Agreement and the Closing Documents to which it is a party. No consent
of any party to any contract, agreement, instrument, lease, license, arrangement
or understanding to which any of the TT Corporations, Full, the Other FM
Corporations, Taki, Mori, HM, CM or Takihyo is a party or to which any of their
respective properties or assets is subject, is required for the execution,
delivery or performance of this Agreement and each of the Closing Documents to
which it is a party, except for such consents as will be obtained prior to the
Closing Date; and the execution, delivery and performance of this Agreement and
each of such Closing Documents to which it is a party will not violate, result
in the breach of, conflict with or (with or without the giving of notice or the
passage of time or both) entitle any party to terminate or call a default under
any such contract, agreement, instrument, lease, license, arrangement or
understanding, or violate or result in a breach of any term of the Certificate
of Incorporation or By-Laws of any of the TT Corporations, Full or the Other FM
Corporations or violate, result in a breach of or conflict with any law, rule,
regulation, order, judgment or decree binding on any of the TT Corporations,
Full, the Other Corporations, Taki, Mori, HM, CM or Takihyo or to which any
of their respective operations, businesses, properties or assets are subject or
result in the creation of any mortgage, pledge, lien, charge or encumbrance upon
any of the assets of any of the TT Corporations, Full or the Other FM
17
<PAGE>
Corporations or the loss of any license or other contractual right with respect
thereto.
(e) Tax Matters.
-----------
(i) All Returns with respect to any Pre-Closing Tax Period by
each of the TT Corporations, Full and the Other FM Corporations, have, to the
extent required to be filed on or before the date hereof, been filed when due in
accordance with all applicable laws;
(ii) except for state and local taxes due and payable with
respect to any Pre-Closing Tax Period beginning on or after January 1, 1996, all
Taxes due and payable by, or attributable to, each TT Corporation, Full and the
Other FM Corporations with respect to any Pre-Closing Tax Period, other than
Taxes relating to income from operations of any of the Donna Karan Companies
that is attributable to the Closing Date, have been timely paid, or withheld and
remitted to the appropriate Taxing Authority;
(iii) except as set forth on Section 2.2(e) of the Disclosure
Schedule, none of the TT Corporations, Full or the Other FM Corporations has
granted any extension or waiver of the statute of limitations period applicable
to any Return, which period (after giving effect to such extension or waiver)
has not yet expired;
(iv) except as set forth on Section 2.2(e) of the Disclosure
Schedule, none of the TT Corporations, Full or the Other FM Corporations has
received any written notice of any claim, audit, action, suit, proceeding, or
investigation against or with respect to any of the TT Corporations, Full or the
Other FM Corporations with respect to any Pre-Closing Tax Period;
(v) there are no pending written requests for rulings or
determinations in respect of any Tax by any of the TT Corporations, Full or the
Other FM Corporations with any Taxing Authority;
(vi) none of the property owned or used by any of the TT
Corporations, Full or the Other FM Corporations is subject to a tax benefit
transfer lease executed in accordance with Section 168(f)(8) of the Code;
18
<PAGE>
(vii) none of the property owned or used by any of the TT
Corporations, Full or the Other FM Corporations is subject to a lease, other
than a "true" lease for federal income tax purposes;
(viii) none of the property owned by any of the TT Corporations,
Full or the Other FM Corporations is "tax-exempt use property" within the
meaning of Section 168(h) of the Code;
(ix) none of the TT Corporations, Full or the Other FM
Corporations has entered into or will it enter into any agreement or consent
pursuant to Section 341(f) of the Code;
(x) there are no liens for Taxes upon the assets of any of the
TT Corporations, Full or the Other FM Corporations, except liens for current
Taxes not yet due or payable;
(xi) none of the TT Corporations, Full or the Other FM
Corporations is subject to withholding under Section 1445 of the Code with
respect to any transaction contemplated hereby;
(xii) none of the TT Corporations, Full, the Other FM
Corporations, the Corporation or Donna Karan Companies will be required to
include any adjustment in taxable income for any Post-Closing Tax Period under
Section 481 of the Code (or any similar provision of the Tax laws of any
jurisdiction) as a result of a change in method of accounting for a Pre-Closing
Tax Period made by any TT Corporation, Full, any of the Other FM Corporations or
any of the Donna Karan Companies, or pursuant to the provisions of any agreement
entered into with any Taxing Authority with regard to the Tax liability of such
TT Corporation, Full or of the Other FM Corporation or any such Donna Karan
Companies for any Pre-Closing Tax Period (including, without limitation, any
request made by any of the Donna Karan Companies before the Closing Date to
change its method of accounting, whenever such change shall be determined by the
Internal Revenue Service to be effective);
(xiii) without the prior written consent of the Corporation, none
of the TT Corporations, Full or the Other FM Corporations shall between the date
hereof and the Closing Date, to the extent it may affect or relate to the
Corporation, make or change any tax election, change any annual tax accounting
period, adopt or change any method of tax accounting, file any amended Return,
enter into any closing agreement, settle any Tax claim or assessment, surrender
any right to claim a Tax refund, or take or omit to take any other action, if
any such action or omission would have the effect of increasing the Tax
liability or reducing any Tax benefit of the Corporation.
(f) Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
Section 2.2(f) of the Disclosure Schedule, since their formation, none of the TT
Corporations, Full or the Other FM Corporations has
19
<PAGE>
owned or operated any business other than their respective interests in the
Donna Karan Companies (other than HK).
(g) Real Estate. None of the TT Corporations, Full or the Other
-----------
FM Corporations directly owns any real property and none has any direct
leasehold interest in real property.
(h) Litigation. Except as disclosed in Section 2.2(h) of the
----------
Disclosure Schedule, there is no lawsuit or legal, administrative or regulatory
proceeding or investigation pending or threatened against Takihyo, any TT
Corporation, Full or any Other FM Corporation.
(i) Employees; Benefit Plans. None of the TT Corporations, Full or
------------------------
any of the Other FM Corporations has any employees nor is it a party to any
agreement with any person relating to the performance of services on behalf of
such Corporation. None of the TT Corporations, Full or any of the Other FM
Corporations is a direct party to any qualified or non-qualified employee
benefit plan or collective bargaining agreement.
(j) Liabilities. Except as otherwise set forth in Section 2.2(e)
-----------
hereof, to the best knowledge of Taki, no TT Corporation has, and to the best
knowledge of Mori, no FM Corporation, and, to the best knowledge of HM and CM,
Full does not have, any liabilities or obligations of any nature, whether
absolute, accrued, contingent or otherwise, except as specifically disclosed in
Section 2.2(j) of the Disclosure Schedule.
(k) Estimated Taxes. As of the date hereof, Full, each of the Other
---------------
FM Corporations and each TT Corporation has paid over, or applied, and, as of
the Closing Date, will have paid over, or applied, to the relevant state and
local taxing authorities as a deposit of its estimated taxes for the Pre-Closing
Tax Periods beginning on or after January 1, 1996 (the "Estimated Pre-Closing
Tax Period Taxes") the amount of Estimated Pre-Closing Tax Period Taxes
disclosed in Section 2.2(k)-1 or Section 2.2(k)-2, respectively, of the
Disclosure Schedule, provided that the parties agree that Full, each of Other FM
Corporations and each TT Corporation shall deliver Section 2.2(k)-2 on or prior
to the Closing Date and, after such delivery, "Estimated Pre-Closing Tax Period
Taxes" shall be as set forth on Section 2.2(k)-2 of the Disclosure Schedule.
(l) Title to Assets. The sole assets of the TT Corporations, Full and
---------------
the Other FM Corporations are their respective partnership interests in the
Donna Karan Companies (other than HK). Except as disclosed in Section 2.2(l) of
the Disclosure Schedule, each of the TT Corporations, Full and each of the Other
FM Corporations has good and marketable title to all its assets, free and clear
of all security interests, liens, claims, encumbrances and other contractual
restrictions of any kind. The contribution and delivery of the 30% equity
interests in each of the Donna Karan Companies by Takihyo to the Corporation as
contemplated by this Agreement and the Assignment referred to in Section 1.3(c)
hereof will transfer good title to all such
20
<PAGE>
interests to the Corporation, free and clear of all security interests, liens,
claims, encumbrances and other contractual restrictions of any kind.
(m) Agreements. Except as disclosed in Section 2.2(m) of the
----------
Disclosure Schedule, none of the TT Corporations, Full or any of the Other FM
corporations is a party to any written or oral agreement.
(n) Acquisition for Investment Purposes. Each of Takihyo, Taki, Mori,
-----------------------------------
HM and CM hereby represents and warrants severally, but not jointly, that (i)
such party is acquiring the Corporation's Common Stock for its own account, for
investment and not with a view to distribution thereof within the meaning of
applicable Federal and State securities laws; (ii) each of them understands that
the Common Stock acquired pursuant hereto has not been registered pursuant to
applicable securities laws and that such Common Stock must be held indefinitely
unless a subsequent disposition thereof is registered pursuant to applicable
securities laws or is exempt from the registration requirements thereof; (iii)
each of them acknowledges that the Restructuring, including the issuance of the
Common Stock pursuant to this Agreement, is intended by the parties hereto to
qualify as an integrated plan pursuant to Section 351 of the Code and each of
them agrees to report the transactions contemplated hereunder consistent with
said intention on all applicable Returns required to be filed with all relevant
Taxing Authorities; and (iv) none of them has, and on or prior to the Closing
Date none of them will have, entered into a binding commitment or agreement with
any party (other than a party to this Agreement) to dispose of any shares of
Common Stock received by it pursuant to the terms of this Agreement, provided,
--------
however, that the parties to this Agreement agree that the entering into of any
- -------
arrangement or agreement among or between the Underwriters or the parties to
this Agreement, in connection with the Offering (including, but not limited to,
the Registration Statement and any document which is an exhibit thereto), does
not, and will not, constitute such a binding commitment or agreement.
(o) Validity of S Corporations. As of the close of the day before
--------------------------
the Closing Date, Full, each of the Other FM Corporations and each of the TT
Corporations is, and has been for every taxable year since the date of its
incorporation, a valid S corporation (as defined in Section 1361 et seq. of the
-------
Code, and regulations promulgated thereunder).
(p) Partnership Status. Each of Takihyo, Taki, Mori, HM and CM hereby
------------------
represents and warrants jointly and severally that each of TFC and TDC is, and
each of Takihyo, Taki and Mori hereby represents and warrants jointly and
severally that each of TFT Store, TFT Shoe and TFT Japan is, and, in each such
case, has been for every taxable year since the date of its formation and, in
each such case, will be on the date of its liquidation, a partnership for
federal
21
<PAGE>
income tax purposes.
SECTION 2.3. Representations and Warranties of the Corporation. The
------------------------------------- -----------
Corporation represents, warrants and agrees as follows:
(a) Corporate Organization. It is a corporation duly organized,
----------------------
validly existing, and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to enter into this Agreement
and the Closing Documents and to perform its obligations hereunder. Complete
and correct copies of its Certificate of Incorporation, its proposed Amended and
Restated Certificate of Incorporation and its Bylaws have been delivered to
Takihyo and the Stockholders.
(b) Authorization and Validity of Agreement. The execution and
---------------------------------------
delivery of this Agreement and the Closing Documents by the Corporation and the
performance of the transactions herein contemplated have been duly authorized by
its Board of Directors and no further corporate action on the part of the
Corporation is necessary to authorize this Agreement and the performance of such
transactions. This Agreement and the Major Documents have been duly executed
and delivered by the Corporation and, assuming due authorization, execution and
delivery by the other parties hereto, constitute the valid and binding
agreements of the Corporation, enforceable in accordance with their terms. Each
other Closing Document to which the Company is a party has been duly authorized
and, on the Closing Date, will be duly executed and delivered by the Company
and, assuming due authorization, execution and delivery hereof and thereof by
the other parties thereto, will constitute the valid and binding agreements of
the Company enforceable in accordance with their terms.
(c) No Conflict or Violation. No consent, authorization, approval,
------------------------
order, license, certificate or permit of or from or declaration or filing with
any federal, state, local or governmental authority or any court or other
tribunal is required for the execution, delivery or performance by the
Corporation of this Agreement and the Closing Documents to which it is a party
(except filings under the Securities and Exchange Act of 1933 which have been or
will be made before the Closing Date and consents under "blue sky" or securities
laws which have been obtained prior to the Effective Date). No consent of any
party to any material contract, agreement, instrument, lease, license,
arrangement or understanding to which the Corporation is a party or to which any
of its respective properties or assets are subject, is required for the
execution, delivery or performance of this Agreement and the Closing Documents
to which it is a party except for such consents as will be obtained prior to the
Closing Date; and the execution, delivery and performance of this Agreement and
such Closing Documents to which it is a party will not violate, result in the
breach of, conflict with or (with or without the giving of notice or the passage
of time or both) entitle any party to terminate or call a default under any such
contract, agreement, instrument, lease, license, arrangement
22
<PAGE>
or understanding, or violate or result in a breach of any term of the
Certificate of Incorporation or By-Laws of the Corporation or violate, result in
a breach of or conflict with any law, rule, regulation, order, judgment or
decree binding on the Corporation or to which any of its respective operations,
businesses, properties or assets are subject or result in the creation of any
mortgage, pledge, lien, charge or encumbrance upon any of the assets of any of
the Corporation or the loss of any license or other contractual right with
respect thereto.
(d) Tax Treatment of the Restructuring. The Corporation acknowledges
----------------------------------
that the Restructuring, including the issuance of the Common Stock pursuant to
this Agreement, is intended to qualify as an integrated plan pursuant to Section
351 of the Code and that it shall treat the transactions contemplated hereunder
consistent with said intention on all applicable Returns required to be filed
with all relevant Taxing Authorities and with respect to any matter related
thereto.
SECTION 2.4. Survival.
--------
Each of the representations and warranties made by the parties in this
Article II (including statements in the Disclosure Schedule, insofar as the
Disclosure Schedule relates to such representations and warranties) shall
survive the Closing indefinitely.
ARTICLE III
ACTIONS BEFORE THE CLOSING DATE
The parties covenant to take the following actions between the date
hereof and the Closing Date:
SECTION 3.1. Access to Records.
-----------------
Except as otherwise provided in Section 4.4 hereof, each of the
Stockholders shall grant to the Corporation and its agents and attorneys
reasonable access during normal business hours to the properties and financial
records of the DK Corporations, the TT Corporations and the FM Corporations
(collectively, the "Acquired Companies") and furnish to the Corporation such
additional data and information as it or its agents or attorneys may from time
to time reasonably request.
23
<PAGE>
SECTION 3.2. No Public Announcement.
----------------------
No party hereto other than the Corporation shall make any public
announcement concerning the transactions contemplated by this Agreement without
the prior approval of the other parties, which approval shall not be
unreasonably withheld. Notwithstanding the foregoing, in the event any such
public announcement is required by law to be made by the party proposing to make
the same, such party may make such announcement but shall use its best efforts
to consult in good faith with the other parties before the making of such public
announcement.
SECTION 3.3. TM Liquidations.
---------------
On the day prior to the Closing Date, Takihyo, Mori and Taki will
cause the TM Liquidations to take place.
SECTION 3.4. Conduct of Business.
-------------------
Each of the Stockholders covenants that the business of the Donna
Karan Companies shall be conducted only in the ordinary course, consistent with
the present conduct of its business, and agree to use his, her or its best
efforts to maintain, preserve and protect the assets and goodwill of the Donna
Karan Companies from the date hereof through the Closing Date. Taki covenants
that the business of each of the TT Corporations shall be conducted only in the
ordinary course, consistent with the present conduct of its business, and agrees
to use his best efforts to maintain, preserve and protect the assets and
goodwill of such corporations from the date hereof through the Closing Date.
Each of Mori, HM and CM covenants that the business of Full, and Mori covenants
that the business of the other FM Corporations shall be conducted only in the
ordinary course, consistent with the present conduct of its business, and agrees
to use his or her best efforts to maintain, preserve and protect the assets and
goodwill of such corporation on the date hereof through the Closing Date. Each
of Karan and Weiss covenants that the business of each of the DK Corporations
shall be conducted only in the ordinary course, consistent with the present
conduct of its business, and agrees to use his or her best efforts to maintain,
preserve and protect the assets and goodwill of the DK Corporations from the
date hereof through the Closing Date. The Stockholders shall not, without the
prior written consent of the Corporation, take or commit to be taken, or cause
to be taken or committed to be taken, on behalf of themselves or the Donna Karan
Companies, the TT Corporations, the FM Corporations, or the DK Corporations any
action which would cause any of the representations and warranties made by any
of them to be inaccurate from the date hereof through the Closing Date.
24
<PAGE>
ARTICLE IV
ACTIONS AFTER THE CLOSING DATE
The parties covenant to take the following actions after the Closing
Date:
SECTION 4.1. Further Information.
-------------------
Except as otherwise provided in Section 4.4 hereof, following the
Closing, each party shall afford, and the Corporation shall cause the Donna
Karan Companies to afford, to each of the other parties, their counsel and
accountants, during normal business hours, reasonable access to the books,
records and other data of the Acquired Companies and the Donna Karan Companies
in its possession with respect to periods prior to the Closing and the right to
make copies and extracts therefrom, to the extent that such access may be
reasonably required by the requesting party (i) to facilitate the investigation,
litigation and final disposition of any claims which may have been or may be
made against any party or its Affiliates that relate to any of the Acquired
Companies, or (ii) for any other reasonable business purpose.
SECTION 4.2. Record Retention.
----------------
Except as otherwise provided in Section 4.4 hereof, the Corporation
agrees that for a period of not less than three years following the Closing Date
it shall not, and shall not permit the Acquired Companies or the Donna Karan
Companies to, destroy or otherwise dispose of any of those books, records or
other documents held by any of them and relating to their properties,
liabilities or operations before the Closing Date except in a manner consistent
with policies approved by counsel for the Corporation in light of applicable
statutes of limitation.
SECTION 4.3. Further Assurances.
------------------
Each party shall cooperate with the others, and execute and deliver,
or cause to be executed and delivered, all such other instruments, including
instruments of conveyance, assignment and transfer, and take all such other
actions as such party may reasonably be requested to take by the other parties
hereto from time to time, consistent with the terms of this Agreement, in order
to effectuate the provisions and purposes of this Agreement.
SECTION 4.4. Tax Matters.
-----------
(a) Pre-Closing Tax Period Returns.
------------------------------
25
<PAGE>
(i) Subsidiaries.
------------
(A) Each Stockholder or its designated representatives shall
prepare and file, or cause to be prepared or filed, at its own expense, all
1995 federal, state and local Returns of the FM Corporations, the TT
Corporations and the DK Corporations (each such corporation, a "Subsidiary"),
all 1996 federal S corporation Returns of each Subsidiary and all 1996 state and
local Returns of each subsidiary reflecting its status as an S corporation. At
least thirty (30) days prior to the due date of any such Return, the Stockholder
shall cause such Return to be delivered to the Corporation for review by it and
its representatives. If any position reflected on such Return is inconsistent
with such Subsidiary's past filing practices and positions, then such Return
shall not be filed without the prior written consent of the Corporation (which
consent may not be unreasonably withheld). For purposes of this Agreement, the
"due date" of a Return shall mean the earlier of (A) the date on which the
Return is required to be filed under applicable law (including extensions) and
(B) the actual filing date of such Return.
(B) In the event of a dispute between the Corporation and any
Stockholder as to the taking of any position reflected on any Return described
in Section 4.4(a)(i)(A) hereof, the parties shall consult with each other and
attempt to resolve their dispute. If such dispute cannot be resolved by them,
it shall be referred to a nationally recognized accounting firm that is
designated by the Corporation and such Stockholders and represents none of the
parties (the "Tax Arbitrator"). Each of the Corporation and the Stockholders
shall present its position to the Tax Arbitrator which shall decide which
position shall be adopted. The Tax Arbitrator shall not be entitled to adopt
any other position, unless the Corporation and such Stockholders so agree in
writing. The decision of the Arbitrator shall be final and binding, and its
fees and costs shall be paid by the party or parties whose position(s) is not
adopted by the Tax Arbitrator. Each party shall bear its own legal and other
advisory expenses incurred in connection with such arbitration.
(C) With respect to Returns of the Subsidiaries that relate to
any Pre-Closing Tax Period, other than Returns described in Section 4.4(a)(i)(A)
hereof, if the Corporation shall cause a Subsidiary to take a position on such a
Return that, to the best of the knowledge of the management of the Corporation,
is inconsistent with a past filing practice or
26
<PAGE>
position reflected in a Return of such Subsidiary relating to any Pre-Closing
Tax Period and for which the statute of limitations has not yet expired, then
the Corporation shall promptly notify the Stockholders of such position. The
Corporation shall promptly provide the Stockholders with a copy of any filed
Pre-Closing Tax Returns of the Subsidiaries, other than Returns described in
Section 4.4(a)(i)(A) hereof.
(ii) Donna Karan Companies.
---------------------
(A) The Corporation shall prepare and file, or cause to be
prepared or filed, at its own expense, all Returns of the Donna Karan Companies
relating to any Pre-Closing Tax Period that are not required to be filed
(reflecting extensions) prior to the Closing Date (collectively with the Returns
described in Section 4.4(a)(i), the "Pre-Closing Tax Returns").
(B) In the case of Pre-Closing Tax Returns of any of the Donna
Karan Companies that are federal, New York State, New York City or New Jersey
partnership information Returns, the Corporation shall be responsible for the
initial preparation of all such Returns and shall consult with the Stockholders,
Takihyo and Gabrielle (each such person, a "Previous Holder") or their
designated representatives on a regular basis in connection therewith as to (1)
allocation of items of income, gain, deduction and loss for each of the Donna
Karan Companies between the Pre-Closing Tax Period and Post-Closing Tax Period
of such Donna Karan Company, and (2) any filing position inconsistent with such
Donna Karan Company's past filing practice. The Corporation shall provide each
Previous Holder or its designated representatives with a final draft of each
such Pre-Closing Tax Return for each of the Donna Karan Companies no later than
thirty (30) days prior to the earlier of the (1) due date of such Return, and
(2) the due date (including extensions) of the Pre-Closing Tax Returns of those
Subsidiaries that hold a direct or indirect interest in such Donna Karan
Company. Each of the Subsidiaries agrees to file for such filing extensions as
are allowable under law with respect to its Pre-Closing Returns so that the
Returns of the Donna Karan Companies may be adequately and timely prepared. The
Corporation agrees not to allow the Donna Karan Companies to take any position
on any such Pre-Closing Tax Return that is inconsistent with such Donna Karan
Company's past filing practices and positions unless failing to take such an
inconsistent position would, in the opinion of the Corporation's outside
accountant, more likely than not be subject to a penalty under applicable law.
(C) In the event of a dispute between the Corporation and the
Previous Holders as to an allocation of income, gain, loss or deduction between
periods or any position
27
<PAGE>
with respect to any Pre-Closing Tax Return described in Section 4.4(a)(ii)(B)
hereof, the parties shall consult with each other and attempt to resolve their
dispute. If such dispute cannot be resolved by them, it shall be referred to the
Tax Arbitrator under the procedures described in Section 4.4(a)(i)(B) hereof.
(D) With respect to Pre-Closing Tax Returns of the Donna Karan
Companies, other than Returns described in Section 4.4(a)(ii)(B) hereof, if the
Corporation shall cause a Donna Karan Company to take a position on such a
Return that, to the best of the knowledge of the management of the Corporation,
is inconsistent with a past filing practice or position reflected in a Pre-
Closing Tax Return of such Donna Karan Company for which the statute of
limitations has not yet expired, then the Corporation shall promptly notify the
Previous Holders of such position. The Corporation shall promptly provide the
Previous Holders with a copy of any filed Pre-Closing Tax Returns of the Donna
Karan Companies, other than Returns described in Section 4.4(a)(ii)(B) hereof.
(iii) Miscellaneous Definitions and Rights. For purposes of this
------------------------------------
Section 4.4, any references herein to (A) the "Taxpayers" shall mean the
Previous Holders and the Omega Beta Trust, and (B) the rights or obligations of
a Previous Holder or Taxpayer relate solely to that entity in which such
Previous Holder or Taxpayer holds or has held any direct or indirect ownership
interest. Notwithstanding anything to the contrary in this Agreement, for
purposes of this Section 4.4, where the interests of all Previous Holders are
involved, Taki, Mori CM, HM and Takihyo may act only through one agent appointed
by them with full power and authority to act on each of their behalf, including,
but not limited to, the authority to receive all payments and notices and
execute and deliver all documents as may be necessary ("TM Agent"), and Karan,
Weiss, Gabrielle and the KW Trusts may act only through one agent appointed by
them with full power and authority to act on each of their behalf, including,
but not limited to, the authority to receive all payments and notices and
execute and deliver all documents as may be necessary ("DK Agent"). Except as
otherwise specified herein, each party shall be responsible for its own costs
incurred (including, without limitation, professional fees) in connection with
any actions taken with respect to the provisions of this Section 4.4.
(b) Cooperation.
-----------
(i) Corporation; Donna Karan Companies; Subsidiaries. The
------------------------------------------------
Corporation shall, and shall cause the Donna Karan Companies and the
Subsidiaries to, cooperate with each Previous Holder or its designated
representatives (A) in the preparation of Pre-Closing Tax Returns and (B) with
respect to any matter described in Section 4.4(d) and Section 4.4(e). Such
28
<PAGE>
cooperation shall include, without limitation, furnishing prior years Pre-
Closing Tax Returns or return preparation work papers illustrating previous
reporting practices or containing historical information relevant to the
preparation of such Pre-Closing Tax Returns, furnishing such other information
within the possession of the Corporation, the Donna Karan Companies or the
Subsidiaries, requested by such Previous Holder or its designated
representatives as is relevant to the preparation of the Returns, provision of
powers of attorney necessary for the purpose of signing Returns and defending
any audit or examination, immediately forwarding to the Taxpayers copies of any
notices or forms or other communications received from or sent to any Taxing
Authority which relate to the Pre-Closing Tax Returns or any Pre-Closing Tax
Period (or any Tax Audit or Tax Adjustment thereof (as defined below)) to the
extent that either the Previous Holder could have an indemnification obligation
under Section 7.1 hereof with respect to such Return, Tax Audit or Tax
Adjustment or any Taxpayer could have personal liability because of the status
of a Subsidiary as an S corporation, and providing documents relating to rulings
or other determinations by any Taxing Authority and records concerning the
ownership and tax basis of property, which the Corporation, the Donna Karan
Companies or the Subsidiaries may possess. The Corporation shall, and shall
cause the Donna Karan Companies and the Subsidiaries to, make their respective
accountants, employees and facilities available on a mutually convenient basis
to provide explanations of any documents or information provided hereunder.
(ii) Previous Holders. Each Previous Holder shall cooperate with the
----------------
Corporation (A) in the preparation of, and in connection with any post-closing
matters relating to, all Pre-Closing Tax Returns and (B) with respect to any
matter described in Section 4.4(d). Such cooperation shall include, without
limitation, immediately forwarding to the Corporation copies of any notices or
forms or other communications received from or sent to any Taxing Authority
which relate to the Pre-Closing Tax Returns or any Pre-Closing Period (or any
audit or examination thereof), and providing documents relating to rulings or
other determinations by any taxing authority and records concerning the
ownership and tax basis of property, which such Previous Holders may possess.
The Previous Holders shall make their respective accountants, employees and
facilities available on a mutually convenient basis to provide explanations of
any documents or information provided hereunder. Notwithstanding anything to
the contrary in this Agreement, no Taxpayer (or any of their respective
accountants, employees, affiliates or
29
<PAGE>
representatives) shall have any obligation to disclose to the Corporation or the
Donna Karan Companies (or any of their respective accountants, employees,
affiliates or representatives) any information relating to the personal tax
returns, tax positions or tax situations of any Taxpayer (or any affiliate or
family member thereof).
(c) Books and Records. For a period of ten (10) years from the date
-----------------
hereof, the Corporation shall, and shall cause its affiliates, the Donna Karan
Companies and the Subsidiaries to, retain all Pre-Closing Tax Returns, books and
records of the Donna Karan Companies and Subsidiaries for all Pre-Closing Tax
Periods, and shall allow the Previous Holders or their designated
representatives to examine and make copies of such Returns, books and records.
Thereafter, the Corporation may dispose of any such material unless it has first
received in writing from the a Previous Holder or its designated representatives
a request for specified Returns, books and records which the Corporation shall
then preserve or furnish copies of to such Previous Holder or its designated
representatives.
(d) Tax Audits and Adjustments.
--------------------------
(i) Pre-Closing Tax Returns of Subsidiaries.
---------------------------------------
(A) With respect to any Pre-Closing Tax Return of any
Subsidiary for which a Previous Holder could have an indemnification obligation
under Section 7.1 hereof or Taxpayer could have personal liability because of
the status of a Subsidiary as an S corporation, the Previous Holder or its
designated representatives shall have the sole right to control and settle any
audit or examination by any Taxing Authority ("Tax Audit") and contest and
defend against any assessment, notice of deficiency, or other adjustment or
proposed adjustment ("Tax Adjustment"), provided, however, if the resolution of
-------- -------
any issue arising with respect to such Tax Audit or Tax Adjustment could have a
material adverse effect on the amount or timing of the Tax liability of, or
attributable to, such Subsidiary (or any affiliate) in any Post-Closing Tax
Period, the Previous Holder shall promptly notify the Corporation in writing and
shall afford the Corporation the opportunity to control jointly the conduct and
resolution of the portion of such Tax Audit or Tax Adjustment that could have
the effect of increasing the Tax liabilities of, or attributable to, the
Subsidiary (or any affiliate) in a Post-Closing Tax Period.
(B) If the Corporation shall decline in writing to
participate in the control of the conduct of such Tax Audit or Tax Adjustment,
the Previous Holder shall have the right to control the conduct of such Tax
Audit or Tax Adjustment, provided that the Previous Holder shall not resolve
such Tax
30
<PAGE>
Audit or Tax Adjustment without the Corporation's written consent, which shall
not be unreasonably withheld.
(ii) Pre-Closing Tax Returns of Donna Karan Companies. With
------------------------------------------------
respect to any Tax Audit or Tax Adjustment of any Pre-Closing Tax Return of any
Donna Karan Company, the Corporation and Previous Holders (or their designated
representatives) shall jointly control the conduct and resolution of any Tax
Audit and any Tax Adjustment; provided, however, that if the resolution of any
-------- -------
issue arising with respect to a Tax Audit or Tax Adjustment described in this
Section 4.4(d)(ii) has no impact, directly or indirectly, on the ultimate Tax
liability of the Corporation or any Subsidiary in a Post-Closing Tax Period,
then the Previous Holder shall have sole control of the conduct and resolution
of such Tax Audit or Tax Adjustment; provided, further, however, that if the
-------- ------- -------
resolution of any issue arising with respect to a Tax Audit or Tax Adjustment
described in this Section 4.4(d)(ii) has no impact, directly or indirectly, on
the ultimate Tax liability of any Subsidiary in a Pre-Closing Tax Period or any
Taxpayer, then the Corporation shall have sole control of the conduct and
resolution of such Tax Audit or Tax Adjustment.
(iii) Arbitration. In the event of a dispute between the Previous
-----------
Holders and the Corporation regarding the conduct or resolution of any Tax Audit
or Tax Adjustment described in Section 4.4(d)(i) and Section 4.4(d)(ii) hereof
in which they share joint control of the conduct and resolution, such dispute
shall be referred to the Tax Arbitrator. Each of the Previous Holders and the
Corporation shall present its position to the Tax Arbitrator which shall decide
which position shall be adopted. The Tax Arbitrator shall not be entitled to
adopt any other position, unless such Previous Holders and the Corporation so
agree in writing. The decision of the Tax Arbitrator shall be final and binding.
The fees and costs of the Tax Arbitrator shall be paid by the party or parties
whose position(s) is not adopted by the Tax Arbitrator. Each party shall bear
its own legal and other advisory expenses incurred in connection with such
arbitration.
(e) Post-Closing Tax Returns; Amended Returns for Pre-Closing Tax
-------------------------------------------------------------
Periods.
- -------
(i) Post-Closing Tax Returns. If the Corporation shall cause a
------------------------
Subsidiary or a Donna Karan Company to take a position on a Return or amended
Return for a Post-Closing Tax Period that, to the best of the knowledge of the
management of the Corporation, is inconsistent with a past filing practice or
position reflected in a Pre-Closing Tax Return of such Subsidiary or such Donna
Karan Company for which the statute of limitations
31
<PAGE>
has not yet expired, then the Corporation shall promptly notify the Previous
Holders of such position.
(ii) Amended Returns for Pre-Closing Tax Periods.
-------------------------------------------
(A) The Corporation shall not cause a Subsidiary or Donna
Karan Company to file an amended Pre-Closing Tax Return, unless the Corporation
is notified by its outside accountants that, in the opinion of such accountants,
it is more likely that not that the Corporation would incur a penalty under
applicable law if such amended Return were not filed. In that event, the
Corporation shall provide the Previous Holders with a final draft of such
amended Return no later than sixty (60) days prior to the due date for filing
such amended Return for review by the Previous Holders and their advisors.
(B) In the event of a dispute between the parties regarding
an issue described in Section 4.4(e)(ii)(A), the dispute shall be referred to a
Tax Arbitrator and resolved under the same procedures described in Section
4.4(d)(iii) hereof with respect to a Tax Audit or Tax Adjustment.
(f) Refunds and Credits. The Taxpayers shall be entitled to any
-------------------
refunds or credits of any Taxes attributable to or arising in any Pre-Closing
Tax Periods (other than state or local Taxes for Pre-Closing Tax Periods of the
Subsidiaries beginning on or after January 1, 1996) with respect to the
Subsidiaries (or for which the Taxpayers could otherwise be liable for under the
provisions of this Agreement relating to Taxes); provided, however, that this
-------- -------
Section 4.4(f) shall not obligate the Corporation to file for any refund or file
any amended Return; provided, further, however, that to the extent that any such
-------- ------- -------
refund or credit of any Taxes attributable to or arising in any Pre-Closing Tax
Period ending before January 1, 1996 gives rise to a tax detriment after
December 31, 1995 as a result of a timing adjustment, the amount of the refund
or credit to which the Taxpayers are entitled under this Section 4.4(f) shall be
reduced by the amount of such tax detriment ("Tax Detriment Amount"). The
Corporation shall, immediately upon the receipt or application by the
Corporation, the Donna Karan Companies, the Subsidiaries, or any affiliates
thereof of any refunds or credits described in the previous sentence, forward to
the Taxpayers such refunds or credits or reimburse them for the application of
such refunds or credits, together with any related interest received or
credited, reduced by any Tax Detriment Amount. The Taxpayers acknowledge that
they are not entitled to payment of any refund or credit of any Taxes to the
extent such refund or credit, as disclosed in Section 2.1(k) or 2.2(k) of the
Disclosure Schedule, was applied in calculating the additional amount of
32
<PAGE>
cash payment due for second quarter 1996 estimated Taxes, of any of the
Subsidiaries.
(g) Tax Periods; Allocation of Income and Loss. The Corporation and
------------------------------------------
the Previous Holders agree that if the Corporation, the Donna Karan Companies
and the Subsidiaries are permitted but not required under any applicable U.S.
state, U.S. local or foreign income tax law to treat the Closing Date as the
last day of a taxable period, the Corporation, the Donna Karan Companies and the
Subsidiaries shall not treat such date as the last day of a taxable period. In
the case of all Taxes other than those based on or measured by property or
capital, the amount of Taxes attributable to such period shall be determined
based on a daily proration of income and expenses between the periods or based
on an interim closing of the books, as the Corporation shall elect. The parties
agree that Takihyo's interests in the profits and losses of the Donna Karan
Companies (other than Studio) shall terminate as of the close of the day
immediately preceding the Closing Date. No allocation of profits and losses from
any of the Donna Karan Companies (other than Studio) shall be made to Takihyo
for any period beginning on or after the Closing Date. To the extent required by
law, the parties shall cooperate in executing, or causing to be executed, any
amendments to the partnership agreements of the Donna Karan Companies (other
than Studio) to reflect the allocation described above. However, notwithstanding
anything to the contrary above, if Takihyo is treated by any Taxing Authority
as being allocated any profits of the Donna Karan Companies (other than Studio)
attributable to the Closing Date, then a distribution shall be made to Takihyo
in an amount equal to 53.185% of the net income so allocated to Takihyo for the
Closing Date. In the case of Taxes based on, or measured by, property or capital
(including, but not limited to, any ad valorem and real and personal property
-- -------
Taxes) the amount of Taxes attributable to the period ending on the Closing Date
shall be equal to the total amount of such Taxes for the taxable period in
question multiplied by a fraction the numerator of which is the number of days
in such period through the Closing Date and the denominator of which is the
total number of days in such period.
(h) New York Real Estate Transfer/Gains Taxes. The Corporation shall
-----------------------------------------
timely pay, and indemnify and hold harmless each of the other parties hereto
from and against, all New York
33
<PAGE>
State and New York City real estate transfer taxes and New York State real
property transfer gains taxes (including penalties and interest) that may accrue
or be assessed against such party on account of (i) the contribution of an
interest in any of the Donna Karan Companies or the Subsidiaries pursuant to
this Agreement, or (ii) the issuance of Common Stock pursuant to this Agreement
in connection with the Offering. Each party hereto shall cooperate with the
Corporation in preparing, signing and filing all applicable tax returns required
to be filed with respect to the above-described events. The indemnity under this
Section 4.4 shall be subject to the notice and claim provisions of Article VII
hereof.
(i) Other Transfer Taxes. Except as provided in Section 4.4(h), all
--------------------
transfer, documentary, sales, use, stamp, registration, value added and other
such taxes and fees (including any penalties and interest) incurred in
connection with this Agreement shall be paid by each of the Donna Karan
Companies, the DK Corporations, the TT Corporations and the FM Corporations when
due, and those entities will, at their own expense, file all necessary Tax
returns and other documentation with respect to all such Taxes and fees, and, if
required by applicable law, the Corporation will join in the execution of any
such Tax returns and other documentation.
ARTICLE V
EFFECTIVENESS
This agreement shall be effective upon or simultaneous with the
consummation of the Offering.
ARTICLE VI
TERMINATION AND REMEDIES
SECTION 6.1. Termination.
-----------
Notwithstanding anything in this Agreement to the contrary:
(a) Mutual Consent. This Agreement may be terminated by the mutual
--------------
consent in writing of all the parties hereto.
(b) Default. If, notwithstanding the terms of this Agreement, a party
-------
hereto shall fail or refuse to consummate the transactions contemplated herein
or to take any other action referred to herein necessary to consummate the
transactions contemplated herein, then a non-defaulting party, after affording
the defaulting party a one (1) day period after notice in which
34
<PAGE>
to cure such breach or default, shall have the right, in addition to the other
rights specified in Section 6.2 hereof, to terminate this Agreement by written
notice given to the defaulting party hereto. If any party hereto (other than the
Corporation) includes information in its Bring-Down Certificate pursuant to
Section 1.3(g)(iii) (the "Disclosing Party"), the Corporation shall have the
right to terminate this Agreement by written notice given to the Disclosing
Party if any member of the Board of Directors of the Corporation (ofter than the
members of the Board who are affiliated with the Disclosing Party) shall so
request in writing.
SECTION 6.2. Remedies.
--------
(a) Specific Performance. Subject to compliance with the terms of
--------------------
Section 6.2(d) hereof, any party desiring to proceed with the Closing despite
any failure or refusal of the other party hereto of the type described in
Section 6.1(b) hereof shall have the right to pursue the remedy of specific
performance.
(b) Damages. Subject to compliance with the terms of Section 6.2(d)
-------
hereof, if this Agreement is terminated pursuant to Section 6.1(b) hereof, and
if the failure or refusal referred to in Section 6.1(b) hereof constitutes a
breach of this Agreement, the breaching party shall be responsible for and shall
pay to any non-defaulting party all damages and reasonable out-of-pocket costs
and expenses suffered and sustained by any non-defaulting party.
(c) Effect of Termination. Except as set forth in Section 6.2(a) or
---------------------
Section 6.2(b) hereof, any termination of this Agreement by any party hereto
shall have the effect of causing this Agreement thereupon to become void and of
no further force or effect whatsoever, and thereupon no party hereto will have
any rights, duties, liabilities or obligations of any kind or nature whatsoever
against any other party hereto based upon either this Agreement or the
transactions contemplated hereby, except in each case the obligations of the
Corporation for expenses incurred by it and such attorneys' fees it has
otherwise agreed to pay on behalf of the Stockholders in connection with the
transactions contemplated by this Agreement and the obligations of each party
with respect to confidentiality set forth in Section 8.1 hereof.
(d) Cure Period. Any party seeking any form of relief referred to in
-----------
Sections 6.2(a) or (b) hereof shall, as a condition to the right to seek such
relief, afford the defaulting party hereto with a one (1) day period to effect
reasonable cure of such breach or default.
(e) Attorneys' Fees. In any action, suit, or other proceeding under
---------------
or to enforce any provision of this Agreement, the prevailing party shall be
entitled to recover its reasonable attorneys' fees and other out-of-pocket
expenses from the losing party.
35
<PAGE>
ARTICLE VII
INDEMNIFICATION
SECTION 7.1. General.
-------
Except as otherwise limited by this Article VII or as otherwise
provided in Section 4.4 hereof, from and after the Closing Date, each party
hereto shall indemnify and hold the other parties hereto harmless from and
against any and all losses, damages, costs and expenses (including but not
limited to court costs and reasonable outside attorneys' and accountants' fees),
as and when incurred and whether or not involving a third party, actually
suffered or incurred by it or any assignee or successor of any of the foregoing
(hereinafter "Loss") arising out of or resulting from any information included
by such party in its Bring-Down Certificate pursuant to Section 1.3(g)(iii) or
any breach of (i) any representation or warranty made by such party to another
party contained in Article II hereof; provided, however, that such obligation to
indemnify and hold harmless shall not apply unless the party seeking
indemnification shall have given timely written notice to the breaching party of
such breach of representation or warranty in accordance with Section 7.2 hereof,
or (ii) any other covenant or agreement by any party contained in this
Agreement. Except as otherwise limited by this Article VII, from and after the
Closing Date, the Corporation shall indemnify and hold Karan, Weiss, Taki and
Mori harmless from and against any and all losses, as and when incurred and
whether or not involving a third party, with respect to alleged violations of
law resulting from acts or omissions allegedly taken or made by any of them (a)
on or prior to the Closing Date based on the allegation that, when acting as
partners of the Corporation's predecessors, he or she was acting as an officer
or director of the Corporation or its predecessors with respect to acts or
omissions that are of a nature customarily performed by officers or directors of
a corporation, and (b) after the Closing Date based on the allegation that he or
she was a director of the Corporation, whether or not he or she was in fact a
director of the Corporation at the time of the alleged act or omission, in each
case, assuming such person seeking indemnification had acted properly; provided,
--------
however, that such obligation to indemnify and hold harmless shall not apply
- -------
unless the party seeking indemnification shall have given timely written notice
to the Corporation in accordance with Section 7.2 hereof. With respect to
indemnification sought by the Corporation pursuant to this Section 7.1 for a
breach by a party of the representation or warranty made in Section 2.1(e)(xii)
or Section 2.2(e)(xii) hereof, insofar as such breach relates to the Section 481
adjustment to any of the Donna Karan Companies in a period after the Closing
Date, the amount of such indemnification from a party shall be limited to the
amount of the distribution to such party to the extent of the amount of such
party's allocable share of
36
<PAGE>
the Section 481 adjustment for the Donna Karan Companies, less any applicable
Taxes imposed on such party (and on such party's direct or indirect owners).
SECTION 7.2. Claims.
------
The party seeking indemnification hereunder shall promptly give the
breaching party or the Corporation, as the case may be, written notice of any
matter which the party seeking indemnification has determined has given or could
give rise to a right of indemnification under this Agreement stating the amount
of the Loss, if known, and method of computation thereof, all with reasonable
particularity and containing a reference to the provisions of this Agreement in
respect of which such right of indemnification is claimed. The obligations and
liabilities of the breaching party or the Corporation, as the case may be, under
this Article VII with respect to a Loss arising from claims of any third party
that are subject to the indemnification provided for in this Article VII
("Third-Party Claims") shall be governed by and be contingent upon the following
additional terms and conditions: if the party seeking indemnification shall
receive notice of any Third-Party Claim, it shall give the breaching party or
the Corporation, as the case may be, prompt written notice thereof and shall
permit the breaching party or the Corporation, as the case may be, at its
option, to participate in the defense of such Third-Party Claim by counsel of
its own choosing and at its expense. If, however, the breaching party or the
Corporation, as the case may be, acknowledges in writing its obligation to
indemnify the damaged party or the Corporation, as the case may be, hereunder
against any Loss that may result from such Third-Party Claim, then the breaching
party, or the Corporation, as the case may be, shall be entitled, at its option,
to assume and control the defense of such Third-Party Claim at its expense and
through counsel of its choice if it gives prompt written notice of its intention
to do so to the damaged party. However, if the damaged party elects not to
defend against any such Third-Party Claim, then it shall promptly so notify the
breaching party or the Corporation, as the case may be, and in such event, the
breaching party or the Corporation, as the case shall be, shall thereupon again
be entitled, at its option, to assume and control the defense of such Third-
Party Claim at its expense and through counsel of its choice. If the breaching
party or the Corporation, as the case shall be, exercises its right to undertake
the defense against any such Third-Party Claim as provided above, the damaged
party shall cooperate with the breaching party or the Corporation, as the case
shall be, in such defense and make available to the breaching party or the
Corporation, as the case shall be, at the breaching party's or the
Corporation's, as the case shall be, expense, all pertinent records, materials
and information in their possession or under their control relating thereto as
is reasonably required by the breaching party. Similarly, if the
37
<PAGE>
damaged party is conducting the defense against any such Third-Party Claim, the
breaching party or the Corporation, as the case shall be, shall cooperate with
it in such defense and make available to it all such records, materials and
information in its possession or under its control relating thereto as is
reasonably required by the damaged party. No such Third-Party Claim may be
settled by the breaching party or the Corporation, as the case shall be, without
the written consent of the damaged party except where the settlement thereof
involves the payment of money only and the damaged party is totally indemnified
by the breaching party or the Corporation, as the case shall be, for such
payment. The damaged party shall not, without the written consent of the
breaching party or the Corporation, as the case shall be, settle any Third-Party
Claim which is being defended in good faith by the breaching party or the
Corporation, as the case shall be.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
SECTION 8.1. Confidentiality.
---------------
All information given by any party hereto to any other party shall be
considered confidential and shall be used only for the purposes intended.
Notwithstanding the foregoing, the parties agree that the Corporation may
describe the terms of this agreement in the Corporation's Registration Statement
filed with the Securities and Exchange Commission and file this Agreement as an
exhibit thereto, and the Corporation may also use such information to the extent
necessary to enable it to run the businesses of the Donna Karan Companies and
the Acquired Companies in the ordinary course.
SECTION 8.2. Successors and Assigns; No Third-Party Beneficiaries.
----------------------------------------------------
This Agreement shall inure to the benefit of, and be binding upon, the
parties hereto and their respective successors and assigns; provided, however,
-------- -------
that no party shall assign or delegate any of the obligations created under this
Agreement without the prior written consent of the other parties. Nothing in
this Agreement shall confer upon any person or entity not a party to this
Agreement, or the legal representatives of such person or entity, any rights or
remedies of any nature or kind whatsoever under or by reason of this Agreement.
38
<PAGE>
SECTION 8.3. Notices.
-------
All notices and other communications given or made pursuant hereto
shall be deemed to have been given or made if in writing and delivered
personally, sent by registered or certified mail (postage prepaid, return
receipt requested) or sent via facsimile to the parties at the following
addresses:
(a) If to Gabrielle, Karan, Weiss, the KW Trusts or the Corporation,
to:
550 Seventh Avenue
New York, NY 10018
Attention: Stephan Weiss
Facsimile: (212) 789-1506
(b) If to Takihyo, Taki, Mori, CM or HM to:
c/o Takihyo Inc.
205 West 39th Street
New York, New York 10018
Attention: Frank R. Mori
Facsimile: (212) 626-6354
or to such other persons or at such other addresses as shall be furnished by
either party by like notice to the other, and such notice or communication shall
be deemed to have been given or made as of the date so delivered or mailed. No
change in any of such addresses shall be effective insofar as notices under this
Section 8.3 are concerned unless such changed address is located in the United
States of America and notice of such change shall have been given to the other
parties hereto as provided in this Section 8.3.
SECTION 8.4. Entire Agreement.
----------------
This Agreement, together with the exhibits hereto, represents the
entire agreement and understanding of the parties with reference to the
transactions set forth herein and no representations or warranties have been
made in connection with this Agreement other than those expressly set forth
herein or in the exhibits, certificates and other documents delivered in
accordance herewith (the "Closing Documents"). This Agreement supersedes all
prior negotiations, discussions, correspondence, communications, understandings
and agreements among the parties relating to the subject matter of this
Agreement and all prior drafts of this Agreement, all of which are merged into
this Agreement. No prior drafts of this Agreement and no words or phrases from
any such prior drafts shall be admissible into evidence in any action or suit
involving this Agreement.
39
<PAGE>
all of which shall terminate on the date the Restructuring is completed.
SECTION 8.5. Waivers and Amendments.
----------------------
Any party may by written notice to the others (a) extend the time for
the performance of any of the obligations or other actions of the others; (b)
waive any inaccuracies in the representations or warranties of the others
contained in this Agreement; (c) waive compliance with any of the covenants of
the others contained in this Agreement; (d) waive performance of any of the
obligations of the others created under this Agreement; or (e) waive fulfillment
of any of the conditions to its own obligations under this Agreement; provided
however, that no waiver by any party to this Agreement shall be construed as a
waiver by any other party to this Agreement. The waiver by any party hereto of
a breach of any provision of this Agreement shall not operate or be construed as
a waiver of any subsequent breach, whether or not similar. This Agreement may
not be amended, modified or supplemented, unless consented to in writing by each
of the parties hereto and Morgan Stanley & Co. Incorporated.
SECTION 8.6. Severability.
------------
This entire Agreement shall be void if any provision of this Agreement
is invalid, illegal, unenforceable or inapplicable to any party or circumstance
to which it is intended to be applicable.
SECTION 8.7. Titles and Headings.
-------------------
The Article and Section headings and the Table of Contents contained
in this Agreement are solely for convenience of reference and shall not affect
the meaning or interpretation of this Agreement or of any term or provision
hereof.
SECTION 8.8. Counterparts.
------------
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original and all of which together shall be considered
one and the same agreement.
SECTION 8.9. Convenience of Forum; Consent to Jurisdiction.
---------------------------------------------
Each party to this Agreement, acting for and for its respective
successors and assigns, without regard to domicile, citizenship or residence,
hereby expressly and irrevocably elects as the sole judicial forum for the
adjudication of any matters arising under or in connection with this Agreement,
and consents and subjects itself to the jurisdiction of, the courts of the
40
<PAGE>
State of New York located in New York City, and/or the United States District
Court for the Southern District of New York, in respect of any matter arising
under this Agreement. Service of process, notices and demands of such courts may
be made upon any party to this Agreement by personal service at any place where
it may be found or giving notice to such party as provided in Section 8.3
hereof.
SECTION 8.10. Governing Law.
-------------
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York without giving effect to
principles of conflict of laws.
SECTION 8.11. Advice of Legal Counsel.
-----------------------
Each party acknowledges and represents that, in executing this
Agreement, such party has had the opportunity to seek the advice of legal
counsel and that such party has read and understood all the terms and provisions
of this Agreement. Further, this Agreement shall not be construed against any
party by reason of its preparation or having drafted this Agreement.
SECTION 8.12. Miscellaneous.
-------------
For purposes of Articles VI and VII hereof, Gabrielle, Karan, Weiss
and the KW Trusts shall be treated as one party and Takihyo, Taki, Mori, CM and
HM shall be treated as one party.
SECTION 8.13. Action and Disputes by Takihyo, Taki and the Mori
-------------------------------------------------
Family.
- ------
In taking any action required or permitted under this Agreement, the
Mori Family shall act in unison through Mori, individually, as an agent for the
Mori Family, and Takihyo shall act through Taki or Mori, individually, as an
agent for Takihyo. Takihyo, Taki and the Mori Family hereby agree among
themselves and individually with the Corporation to the payment of the Offering
consideration described in Article I hereof in the proportions set forth
therein. Takihyo agrees to the appointment of Taki and Mori as its
representative to act as its agent, individually under this Agreement and the
Closing Documents to which it is a party, and CM and HM agree to the appointment
of Mori as their representative to act as their agent under this Agreement and
the Closing Documents to which they are a party. Taki and Mori severally agree
to act as agents for Takihyo under this Agreement and the Closing Documents to
which it is a party, and Mori agrees to act as agent for the Mori Family under
this Agreement and the Closing Documents to which any of them is a party.
Takihyo, Taki, Mori, CM and HM agree that they will not bring any claim against
the Corporation relating to (i) its
41
<PAGE>
payment of the Offering consideration in the proportions set forth therein, (ii)
its taking actions under this Agreement pursuant to the actions or instructions
of Taki or Mori as agents for Takihyo, or Mori as agent for the Mori Family, or
(iii) the actions of Taki or Mori as the agents for Takihyo, or the actions of
Mori as the agent for the Mori Family, under the Closing Documents, and shall,
jointly and severally, indemnify and hold harmless the Corporation and its
affiliates against any losses or expenses incurred by the Corporation in
connection with any claim or action brought by Takihyo, Taki or the Mori Family
in violation of this Section 8.13.
SECTION 8.14. Action and Disputes by Gabrielle, Karan, Weiss and
--------------------------------------------------
the KW Trusts.
- --------------
In taking any action required or permitted under this Agreement,
Karan, Weiss and the KW Trusts shall act in unison through Weiss, individually,
as an agent for each of them and Gabrielle shall act through Karan or Weiss,
individually, as an agent for Gabrielle. Gabrielle, Karan, Weiss and the KW
Trusts hereby agree among themselves and individually with the Corporation to
the payment of the Offering consideration described in Article I hereof in the
proportions set forth therein. Gabrielle agrees to the appointment of Karan and
Weiss as its representative to act as its agent, individually under this
Agreement and the Closing Documents to which it is a party, and Karan, Weiss and
each of the KW Trusts agrees to the appointment of Weiss as their representative
to act as their agent under this Agreement and the Closing Documents to which
any of them is a party. Karan and Weiss severally agree to act as agents for
Gabrielle under this Agreement and the Closing Documents to which it is a party,
and Weiss agrees to act as agent for Karan, Weiss and the KW Trusts under this
Agreement and the closing Documents to which any of them is a party. Gabrielle,
Karan, Weiss and the KW Trusts agree that they will not bring any claim against
the Corporation relating to (i) its payment of the Offering consideration in the
proportions set forth therein, (ii) its taking actions under this Agreement
pursuant to the actions or instructions of Karan or Weiss as agents for
Gabrielle or Weiss as agent for Karan, Weiss and the KW Trusts, or (iii) the
actions of Karan or Weiss as the agents for Gabrielle, or the actions of Weiss
as the agent for Karan, Weiss and the KW Trusts under the Closing Documents, and
shall, jointly and severally, indemnify and hold harmless the Corporation and
its affiliates against any losses or expenses incurred by the Corporation in
connection with any claim or action brought by Gabrielle, Karan, Weiss or the KW
Trusts in violation of this Section 8.14.
42
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
DONNA KARAN INTERNATIONAL INC.
By:
------------------------------------
Name:
Title:
GABRIELLE STUDIO, INC.
By:
------------------------------------
Name:
Title:
TAKIHYO INC.
By:
------------------------------------
Name: Frank R. Mori
Title: President
---------------------------------------
Donna Karan
---------------------------------------
Stephan Weiss
TRUST UNDER TRUST AGREEMENT FOR THE
BENEFIT OF LISA WEISS KEYES, COREY
WEISS AND GABRIELLE KARAN
By:
------------------------------------
Stephan Weiss, as trustee
TRUST UNDER TRUST AGREEMENT FOR THE
BENEFIT OF DONNA KARAN
By:
------------------------------------
Stephan Weiss, as trustee
43
<PAGE>
[Signature Page to Agreement and Plan of Contribution]
-----------------------------
Tomio Taki
-----------------------------
Frank R. Mori
-----------------------------
Christopher Mori
-----------------------------
Heather Mori
44
<PAGE>
Exhibit A
---------
[Opinion of Counsel to Gabrielle,
Karan, Weiss, and KW Trusts]
(i) Gabrielle is a corporation duly organized, validly existing and in
good standing under the laws of the State of New York and has all requisite
corporate power and authority to enter into the Agreement and to perform its
obligations thereunder.
(ii) The outstanding capital stock of each of the DK Corporations set
forth below, to the knowledge of such counsel, is owned beneficially and of
record by Karan, Weiss and the KW Trusts, free and clear of any liens, claims,
encumbrances or other contractual restrictions of any kind of which such counsel
has actual knowledge [subject to the release of the pledge of shares and the
release of the grant of the security interests pursuant to the Credit Agreement-
- -this clause to be eliminated in the opinion to be rendered on the Closing
Date]:
<TABLE>
<CAPTION>
Issued and Outstanding
---------------------------------
Karan/Weiss Karan
Karan Weiss Trust Trust
----- ----- ----------- ------
<S> <C> <C> <C> <C>
Gabby 75 20 1 4
DK Store 75 20 1 4
DK Shoe 75 20 1 4
GJI 75 20 1 4
</TABLE>
[Subject to the release of the pledge of shares and the release of the grant of
the security interests pursuant to the Credit Agreement and --this clause to be
eliminated in the opinion to be rendered on the Closing Date] [a]ssuming the
Corporation was a bona fide purchaser within the meaning of the New York Uniform
Commercial Code and purchased such shares and interests without notice of any
adverse claims thereto, the contribution and delivery of the shares in the DK
Corporations by Karan, Weiss and the KW Trusts to the Corporation as
contemplated by the Agreement will transfer good title to such shares to the
Corporation, free and clear of all security interests, liens, claims or
encumbrances and free and clear of other contractual restrictions of any kind of
which such counsel has actual knowledge
<PAGE>
other than any lien, security interest, pledge, charge, encumbrance, agreement
or voting trust created by the Corporation or to which the Corporation is
subject.
(iii) Each of Gabrielle, Karan, Weiss and the KW Trusts has all
requisite power and authority to execute, deliver and perform the Agreement and
the Closing Documents to which it is a party and to perform the transactions
therein contemplated. All necessary proceedings have been duly taken to
authorize the execution, delivery and performance by each of Gabrielle, Karan,
Weiss and the KW Trusts of the Agreement and the Closing Documents to which it
is a party. The Agreement and the Closing Documents have been duly authorized
by Gabrielle and have been duly executed and delivered by each of Gabrielle,
Karan, Weiss and the KW Trusts and, assuming due authorization, execution and
delivery by the other parties thereto, constitute the valid and binding
agreements of each of Gabrielle, Karan, Weiss and the KW Trusts, enforceable in
accordance with their terms, except as enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
other similar laws relating to or affecting enforcement of creditors' rights
generally, and except as enforcement thereof is subject to general principles of
equity (regardless of whether enforcement is considered in a proceeding in
equity or at law).
(iv) [Subject to the release of the pledge of shares and the release
of the grant of the security interests pursuant to the Credit Agreement,--this
clause to be eliminated in the opinion to be rendered on the Closing Date] [n]o
consent, authorization, approval, order, license, certificate or permit of or
from or declaration or filing with any Federal or New York State authority or,
to the knowledge of such counsel, any court or other tribunal is required for
the execution, delivery or performance of the Agreement by each of Gabrielle,
Karan, Weiss and the KW Trusts and the Closing Documents to which it is a party.
Except for such consents which were obtained prior to the Closing Date, no
consent of any party to any material contract, agreement, instrument, lease,
license, arrangement or understanding to which any of Gabrielle, Karan, Weiss or
the KW Trusts is a party or to which any of their respective properties or
assets are subject and of which such counsel has actual knowledge, is required
for the execution, delivery or performance of this Agreement and the Closing
Documents to which it is a party; and the execution, delivery and performance of
the Agreement and such Closing
<PAGE>
Documents will not violate, result in the breach of, conflict with or (with or
without the giving of notice or the passage of time or both) entitle any party
to terminate or call a default under any such material contract, agreement,
instrument, lease, license, arrangement or understanding, or violate, result in
a breach of or conflict with any term of the Certificate of Incorporation or By-
Laws of Gabrielle violate, result in the breach of or conflict with the trust
agreement for any of the KW Trusts, or violate, result in a breach of or
conflict with any law, rule or regulation, or, to the knowledge of such counsel,
any order, judgment or decree binding on any of Gabrielle, Karan, Weiss or any
of the KW Trusts or to which any of their respective operations, businesses,
properties or assets are subject or result in the creation of any mortgage,
pledge, lien, charge or encumbrance upon Gabrielle or the loss of any license.
(v) [Subject to the release of the pledge of shares and the release of
the grant of the security interests pursuant to the Credit Agreement and--this
clause to be eliminated in the opinion to be rendered on the Closing Date]
[a]ssuming the Corporation was a bona fide purchaser within the meaning of the
New York Uniform Commercial Code and purchased such shares and interests without
notice of any adverse claims thereto, the contribution and delivery of the 50%
equity interest in Studio by Gabrielle to the Corporation as contemplated by the
Agreement and the Assignment will transfer good title to all of such interest to
the Corporation, free and clear of contractual restrictions of any kind of which
such counsel has actual knowledge and free and clear of all other security
interests, liens, claims and encumbrances other than any lien, security
interest, pledge, charge, encumbrance, agreement or voting trust created by the
Corporation or to which the Corporation is subject.
[The opinion(s) in the last sentence of paragragh (iii) to be delivered other
than on the Closing Date shall be required only to address the valid execution
and delivery of the Agreement and the Major Documents.]
<PAGE>
Exhibit B
---------
[Opinion of Counsel to Takihyo, Taki, Mori, HM and CM]
(i) Takihyo is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware and has all requisite
corporate power and authority to enter into the Agreement and to perform its
obligations thereunder. Each of the TT Corporations and the FM Corporations is
a corporation duly incorporated, validly existing and in good standing under the
laws of the State of New York and has all requisite corporate power and
authority to own its properties and carry on its business as the same is now
being conducted, and each is duly qualified to do business in each jurisdiction
in which the nature of its business or properties makes such qualification
necessary, except where the failure to be so qualified would not have a
materially adverse effect on its business.
(ii) The authorized capital stock of each of the TT Corporations and
the FM Corporations consists of the number of shares of common stock, $1.00 par
value per share, set forth below, of which the number of shares set forth below
are outstanding, all of which have been validly issued, are fully paid and
nonassessable, and, to the knowledge of such counsel, have not been issued in
violation of any preemptive rights of stockholders. Such shares are owned
beneficially and of record by Taki, in the case of the TT Corporations, and the
Mori Family, in the case of the FM Corporations, free and clear of any liens,
claims, encumbrances or other contractual restrictions of any kind of which such
counsel has actual knowledge[, subject to the release of the pledge of such
shares and the release of the grant of security interests pursuant to the Credit
Agreement--this clause to be eliminated in the opinion rendered on the Closing
Date]:
<PAGE>
<TABLE>
<CAPTION>
Issued and Outstanding
----------------------
Authorized Taki
---------- ----
<S> <C> <C>
Tolara 100 100
Tomio 20,000 100
Tangents 2,000 100
TT Japan 20,000 100
<CAPTION>
Mori CM HM
---- -- --
<S> <C> <C> <C> <C>
Full 100 80 10 10
Formal 20,000 100
First 2,000 100
FM Japan 20,000 100
</TABLE>
Such counsel has no actual knowledge that any options, warrants or other rights
to acquire, sell or issue shares of capital stock of any of the TT Corporations
or the FM Corporations (whether upon conversion of other securities or
otherwise) are outstanding. [Subject to the release of the pledge of shares and
the release of security interests pursuant to the Credit Agreement and--this
clause to be eliminated in the opinion rendered on the Closing Date] [a]ssuming
the Corporation was a bona fide purchaser within the meaning of the New York
Uniform Commercial Code and purchased such shares and interest without notice of
any adverse claims thereto, the contribution and delivery of the shares in the
TT Corporations by Taki, and the contribution and delivery of the shares in the
FM Corporations by the Mori Family, to the Corporation as contemplated by the
Agreement will transfer good title to all of such shares to the Corporation,
free and clear of all security interests, liens, claims or encumbrances and free
and clear of other contractual restrictions of any kind of which such counsel
has actual knowledge and other than any lien, security interest, pledge, charge,
encumbrance, agreement or voting trust created by the Corporation or to which
the Corporation is subject.
(iii) Each of Taki, Mori, HM, CM and Takihyo has full power and
authority to execute and deliver the Agreement and the Closing Documents to
which it is a party and to perform the transactions therein contemplated. The
execution and delivery of the Agreement and the performance of the transactions
therein contemplated have been duly authorized by the Board of Directors and
shareholders of Takihyo and the execution and delivery of
2
<PAGE>
each of the other Closing Documents to which Takihyo is a party have been duly
authorized by the Board of Directors, and no further corporate action on the
part of Takihyo is necessary to authorize the Agreement and the performance of
such transactions. All necessary proceedings have been duly taken by Taki, Mori,
HM and CM to authorize the execution, delivery and performance by such person of
the Agreement and each of the Closing Documents to which such person is a party.
The Agreement and such Closing Documents have been duly executed and delivered
by Takihyo, Taki, Mori, HM and CM, and assuming due authorization, execution and
delivery by the other parties thereto, constitute the valid and binding
agreements of Takihyo, Taki, Mori, HM and CM enforceable in accordance with
their terms, except as enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or other similar
laws relating to or affecting enforcement of creditors' rights generally, and
except as enforcement thereof is subject to general principles of equity
(regardless of whether enforcement is considered in a proceeding in equity or at
law).
(iv) No consent, authorization, approval, order, license, certificate
or permit of or from or declaration or filing with any Federal or New York State
authority or, to the knowledge of such counsel, any court or other tribunal is
required for the execution, delivery or performance by each of the TT
Corporations, the FM Corporations, Taki, Mori, HM, CM and Takihyo of the
Agreement and the Closing Documents to which it is a party. Except such
consents which have been obtained and are in full force and effect, no consent
of any party to any material contract, agreement, instrument, lease, license,
arrangement or understanding to which any of the TT Corporations, the FM
Corporations, Taki, Mori, HM, CM or Takihyo is a party or to which any of their
respective properties or assets are subject and of which such counsel has actual
knowledge, is required for the execution, delivery or performance of the
Agreement and the Closing Documents to which it is a party; and the execution,
delivery and performance of the Agreement and such Closing Documents to which it
is a party will not violate, result in the breach of, conflict with or (with or
without the giving of notice or the passage of time or both) entitle any party
to terminate or call a default under any such material contract, agreement,
instrument, lease, license, arrangement or understanding of which such counsel
has actual knowledge, or violate or result in a breach of any term of the
Certificate of Incorporation or By-Laws of any of the TT Corporations or the FM
Corporations or violate, result in a breach of or conflict with any law, rule or
regulation or, to the knowledge of such counsel, any order, judgment or decree
binding on any of the TT Corporations, the FM Corporations, Taki, Mori, HM, CM
or Takihyo or to which any of their respective operations, businesses,
properties or assets are subject or result in the creation of any mortgage,
pledge, lien, charge or encumbrance upon any of the
3
<PAGE>
assets of any of the TT Corporations or the FM Corporations or the loss of any
license.
(v) Except as disclosed in Sections 2.2(h) and 2.2(j) of the
Disclosure Schedule, such counsel has no actual knowledge that there is any
lawsuit or legal, administrative or regulatory proceeding or investigation
pending or threatened against Takihyo, any TT Corporation or any FM Corporation.
(vi) [Subject to the release of the pledge of shares and the release
of security interests pursuant to the Credit Agreement and--this clause to be
eliminated in the opinion rendered on the Closing Date] [a]ssuming the
Corporation was a bone fide purchaser within the meaning of the New York Uniform
Commercial Code and purchased such shares and interest without notice of any
adverse claims thereto, the contribution and delivery of the 30% equity
interests in each of the Donna Karan Companies by Takihyo to the Corporation as
contemplated by the Agreement and the Assignment will transfer good title to all
of such interests to the Corporation, free and clear of all security interests,
liens, claims, or encumbrances and free and clear of other contractual
restrictions of any kind of which such counsel has actual knowledge and other
than any lien, security interest, pledge, charge, encumbrance, agreement or
voting trust created by the Corporation or to which the Corporation is subject.
[The opinion(s) in the last sentence of paragraph (iii) to be delivered other
than on the Closing Date shall be required only to address the valid execution
and delivery of the Agreement and the Major Documents.]
4
<PAGE>
Exhibit C
---------
[Opinion of Counsel to the Corporation]
(i) The Corporation is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Delaware and has all
requisite corporate power and authority to enter into the Agreement and the
Closing Documents and to perform its obligations thereunder.
(ii) The execution and delivery of the Agreement and the Closing
Documents by the Corporation and the performance of the transactions therein
contemplated have been duly authorized by its Board of Directors and no further
corporate action on the part of the Corporation is necessary to authorize the
Agreement and the performance of such transactions. The Agreement and the
Closing Documents have been duly executed and delivered by the Corporation and,
assuming due authorization, execution and delivery by the other parties thereto,
constitute the valid and binding agreements of the Corporation, enforceable in
accordance with their terms, except as enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
other similar laws relating to or affecting enforcement of creditors' rights
generally, and except as enforcement thereof is subject to general principles of
equity (regardless of whether enforcement is considered in a proceeding in
equity or at law).
(iii) No consent, authorization, approval, order, license,
certificate or permit of or from or declaration or filing with any Federal or
New York State authority or, to the knowledge of such counsel, any court or
other tribunal is required for the execution, delivery or performance by the
Corporation of the Agreement and the Closing Documents to which it is a party
(except filings under the Securities Act of 1933 which have been or will be made
before the Closing Date and consents under "blue sky" or securities laws which
have been obtained prior to the Effective Date). No consent of any party to any
contract, agreement, instrument, lease, license, arrangement or understanding to
which the Corporation is a party or to which any of its properties or assets are
subject and of which such counsel has actual knowledge, is required for the
execution, delivery or performance of the Agreement and the Closing Documents to
which it is a party except for such consents which were obtained prior to the
Closing Date; and the execution, delivery and performance of the Agreement and
such Closing Documents to which it is a party will not violate, result in the
breach of, conflict with or (with or without the giving of notice or the passage
of time or both) entitle any party to terminate or
<PAGE>
call a default under any such contract, agreement, instrument, lease, license,
arrangement or understanding, or violate or result in a breach of any term of
the Certificate of Incorporation or By-Laws of the Corporation or violate,
result in a breach of or conflict with any law, rule or regulation or, to the
knowledge of such counsel, any order, judgment or decree binding on the
Corporation or to which any of its operations, businesses, properties or assets
are subject or result in the creation of any mortgage, pledge, lien, charge or
encumbrance upon any of the assets of any of the Corporation or, to the
knowledge of such counsel, the loss of any license.
[The opinion(s) in the last sentence of paragraph (iii) to be delivered other
than on the Closing Date shall be required only to address the valid execution
and delivery of the Agreement and the Major Documents.]
2
<PAGE>
Exhibit F
---------
[To be prepared]
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
DONNA KARAN INTERNATIONAL INC.
Donna Karan International Inc., a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
1. Donna Karan International Inc. (the "Corporation") was originally
incorporated under the name Donna Karan International, Inc., and the original
Certificate of Incorporation of the Corporation was filed with the Secretary of
State of the State of Delaware on April 10, 1996.
2. The amendments and the restatement of the Certificate of
Incorporation herein certified have been duly adopted by the stockholders in
accordance with the provisions of Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware.
3. The text of the Certificate of Incorporation is hereby amended
and restated to read in its entirety as follows:
FIRST: NAME.
The name of the corporation is Donna Karan International Inc. (the
"Corporation").
SECOND: ADDRESS.
The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road in the City of Wilmington, County of New Castle.
The name of its registered agent at that address is The Prentice-Hall
Corporation System, Inc.
THIRD: PURPOSE.
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: CAPITALIZATION
SECTION 1. Authorized Capital. The total number of shares of stock
------------------
which the Corporation shall have authority to issue is 36,000,020 shares,
consisting of 18 shares of Class A Common Stock, par value $.01 per share (the
"Class A Common Stock"), two shares
<PAGE>
of Class B Common Stock, par value $.01 per share (the "Class B Common Stock"),
35,000,000 shares of Common Stock, par value $.01 per share (the "Common
Stock"), and 1,000,000 shares of Preferred Stock, par value $.01 per share
("Preferred Stock").
SECTION 2. Capital Stock. The powers, preferences, rights,
-------------
qualifications, limitations, and restrictions of the Class A Common Stock, the
Class B Common Stock, and the Common Stock shall be identical in all respects,
except (a) as provided in Article Seventh and (b) on all matters submitted to a
vote of stockholders, (i) each holder of Class A Common Stock shall be entitled
to one vote for each share of Class A Common Stock held, (ii) each holder of
Class B Common Stock shall be entitled to nine votes for each share of Class B
Common Stock held, and (iii) each holder of Common Stock shall be entitled to
one vote for each share of Common Stock held. Except as otherwise required by
law, the holders of Class A Common Stock, Class B Common Stock, and Common Stock
shall vote together, and not separately as a class. No holder of stock of any
class of the Corporation shall have any preemptive right to purchase or
subscribe for any part of any issue of stock or of securities of the Corporation
convertible into stock of any class whatsoever, whether now or hereafter
authorized.
The Board of Directors is expressly authorized at any time, and from
time to time, to provide for the issuance of shares of Preferred Stock in one or
more series, with such voting powers, full or limited, or without voting powers
and with such designations, preferences and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions thereof,
as shall be stated and expressed in the resolution or resolutions providing for
the issue thereof adopted by the Board of Directors, subject to the limitations
prescribed by law.
FIFTH: BOARD OF DIRECTORS
SECTION 1. Number. The business, property and affairs of the
------
Corporation shall be managed by or under the direction of the Board of
Directors. The number of directors shall be fixed from time to time by the
Board of Directors pursuant to the Bylaws; provided, however, that if at any
time a party (a "Forfeiting Party") to that certain stockholders' agreement,
(the "Stockholders' Agreement") among the Company, the stockholders of the
Company on the date hereof, and others, pursuant to the provisions thereof, no
longer has the right to nominate the number of directors which the Forfeiting
Party had the right to nominate on the date of execution of the Stockholders'
Agreement, then, if approved by the Board of Directors: (a) the number of
directors constituting the whole Board of Directors shall be automatically
reduced by the number of directors which the Forfeiting Party no longer has the
right to nominate pursuant to the Stockholders' Agreement; (b) the director
2
<PAGE>
or directors (the "Removed Director(s)") previously nominated by the Forfeiting
Party and as to which the Forfeiting Party no longer has the right to nominate
pursuant to the immediately preceding clause (a) shall be automatically removed
from the Board of Directors; (c) the class or classes of the Board of Directors
of which the Removed Director(s) was a member shall be automatically reduced to
equal the number of remaining members of such class or classes; and (d) if the
Forfeiting Party retains the right to nominate one or more directors pursuant to
the Stockholders' Agreement, the Removed Director(s) shall be from the class or
classes of the Board of Directors whose term of office is nearest to expiration
in accordance with the classification provided by Section 2 of this Article
Fifth.
SECTION 2. Classification. The Board of Directors shall be divided
--------------
into three classes, as nearly equal in number as the then total number of
directors constituting the whole Board permits, with the term of office of one
class expiring each year. At each annual meeting of stockholders, the
successors to the class of directors whose term shall then expire shall be
elected to hold office for a term expiring at the third succeeding annual
meeting and each director so elected shall hold office until his successor is
elected and qualified, or until his earlier resignation or removal.
If the number of directors is changed, any increase or decrease in the
number of directors shall be apportioned among the three classes so as to make
all classes as nearly equal in number as possible, and the Board of Directors
shall decide which class shall contain an unequal number of directors.
Notwithstanding the foregoing, whenever holders of any shares of Preferred
Stock, or any series thereof, shall be entitled, voting separately as a class,
to elect any directors, all directors so elected shall be allocated, each time
they are so elected, to the class whose term expires at the next succeeding
annual meeting of stockholders.
SECTION 3. Nomination. Except as provided in the Stockholders'
----------
Agreement, Only persons who are nominated in accordance with the procedures set
forth in this Section 3 of Article Fifth of the Certificate of Incorporation
shall be eligible to serve as directors. Nominations of persons for election to
the Board of Directors of the Corporation may be made (a) by or at the direction
of the Board of Directors (or any duly authorized committee thereof) or (b) at
an annual meeting of stockholders by any stockholder of the Corporation who is a
stockholder of record at the time of giving notice provided for in this Section
3 of Article Fifth, who shall be entitled to vote for the election of directors
at the meeting and who complies with the procedures set forth below. Any
nominations not made by or at the direction of the Board of Directors must be
made pursuant to timely notice in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered to or mailed and received
at
3
<PAGE>
the principal executive offices of the Corporation within the time periods
specified in Rule 14a-8(a)(3) (or any successor rule) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Such stockholder's notice
shall set forth (a) as to each person whom the stockholder proposes to nominate
for election or reelection as a director, all information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Exchange Act (including such person's written consent to being named
as a nominee and to serving as a director if elected); and (b) as to the
stockholder giving the notice (i) the name and address, as they appear on the
Corporation's books, of such stockholder, (ii) the class and number of shares of
stock of the Corporation which are beneficially owned by such stockholder, (iii)
a representation that such stockholder intends to appear in person or by proxy
at the annual meeting to nominate the persons named in its notice and (iv) a
description of all arrangements or understandings between such stockholder and
any other person or persons (including their names) in connection with such
nomination and any material interest of such stockholder in such nomination. At
the request of the Board of Directors, any person nominated by the Board of
Directors for election as a director shall furnish to the Secretary of the
Corporation that information required to be set forth in a stockholder's notice
of nomination which pertains to the nominee. If the Board of Directors shall
determine, based on the facts, that a nomination was not made in accordance with
the procedures set forth in this Section 3 of Article Fifth, the Chairman shall
so declare to the meeting and the defective nomination shall be disregarded.
Notwithstanding the foregoing provisions of this Section 3 of Article Fifth, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Section 3 of Article Fifth.
SECTION 4. Vacancies. Newly-created directorships resulting from
---------
death, resignation, retirement, disqualification, removal from office or other
cause, may be filled by a majority vote of the remaining directors then in
office, though less than a quorum, or by the sole remaining director, and each
director so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of the class to which he or she has been
elected expires and until such director's successor shall have been duly elected
and qualified. No decrease in the authorized number of directors shall shorten
the term of any incumbent director.
SECTION 5. Removal. A director may be removed only for cause. A
-------
director may be removed only by the holders of a majority of the outstanding
shares of all classes of capital stock of the
4
<PAGE>
Corporation entitled to vote in the election of directors, considered for this
purpose as one class.
SIXTH: STOCKHOLDER ACTION.
Any action required or permitted to be taken by stockholders may be
effected only at a duly called annual or special meeting of stockholders with
prior notice and with a vote, and may not be effected by consent in writing.
Except as otherwise required by law and subject to any rights of the holders of
Preferred Stock, annual meetings and special meetings of stockholders may be
called only by the Board of Directors pursuant to a resolution approved by a
majority of the Continuing Directors (as defined in Article Seventh), or by the
Chairman of the Board, the Vice Chairman of the Board, the Chief Executive
Officer or a Co-Chief Executive Officer. Stockholders are not permitted to call
an annual meeting or to call a special meeting of stockholders or to require
that the Board of Directors call such an annual or special meeting.
SEVENTH: CERTAIN BUSINESS COMBINATIONS.
SECTION 1. Stockholder Approval. In addition to any affirmative vote
--------------------
required by, or other conditions to be complied with pursuant to, applicable law
or this Certificate of Incorporation, and except as otherwise expressly provided
in Section 2 of this Article Seventh,
(a) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with (i) an Interested Stockholder
(as hereinafter defined) or (ii) any other corporation (whether or not
itself an Interested Stockholder) which is, or after such merger or
consolidation would be, an Affiliate or Associate (as such terms are
hereinafter defined) of an Interested Stockholder, or
(b) any sale, lease, exchange, mortgage, pledge, grant of a
security interest, transfer or other disposition (in one transaction
or a series of transactions) to or with (i) an Interested Stockholder
or (ii) any other person (whether or not itself an Interested
Stockholder) which is, or after such sale, lease, exchange, mortgage,
pledge, grant of a security interest, transfer or other disposition
would be, an Affiliate or Associate of an Interested Stockholder,
directly or indirectly, of assets of the Corporation (including,
without limitation, any voting securities of a Subsidiary) or any
Subsidiary, or both, having an aggregate
5
<PAGE>
Fair Market Value (as hereinafter defined) of $10,000,000 or more, or
(c) the issuance or transfer by the Corporation or any Subsidiary
(in one transaction or series of transactions) of any securities of
the Corporation or any Subsidiary, or both, to (i) an Interested
Stockholder or (ii) any other person (whether or not itself an
Interested Stockholder) which is, or after such issuance or transfer
would be, an Interested Stockholder or an Affiliate or Associate of an
Interested Stockholder, in exchange for cash, securities or other
property (or a combination thereof) having an aggregate Fair Market
Value of $10,000,000 or more, other than the issuance of securities
upon the conversion of convertible securities of the Corporation or
any Subsidiary which were not acquired by such Interested Stockholder
(or such Affiliate or Associate) from the Corporation or a Subsidiary,
or,
(d) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an
Interested Stockholder or any Affiliate or Associate of an Interested
Stockholder, or
(e) any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any
other transaction (whether or not with or into or otherwise involving
an Interested Stockholder), which has the effect, directly or
indirectly, of increasing the proportionate share of the outstanding
shares of any class of equity or convertible securities of the
Corporation or any Subsidiary directly or indirectly beneficially
owned by (i) an Interested Stockholder or (ii) any other person
(whether or not itself an Interested Stockholder) which is, or after
such reclassification, recapitalization, merger or consolidation or
other transaction would be, an Affiliate or Associate or an Interested
Stockholder;
shall not be consummated unless such consummation shall have been approved by
the affirmative vote of the holders of record of outstanding shares representing
(i) at least 80% of the voting power of the then outstanding Voting Shares (as
hereinafter
6
<PAGE>
defined) of the Corporation, voting together as a single class and (ii) at least
a majority of the voting power of the then outstanding Voting Shares of the
Corporation, voting together as a single class, which are not beneficially
owned, directly or indirectly, by such Interested Stockholder. Such affirmative
vote shall be required notwithstanding the fact that no vote may be required, or
that a lesser percentage may be specified, by law, in this Certificate of
Incorporation or in any agreement with any national securities exchange or
otherwise.
SECTION 2. Alternative Procedural Requirements. The provisions of
-----------------------------------
Section 1 of this Article Seventh shall not be applicable to any particular
Business Combination (as hereinafter defined), and such Business Combination
shall require only such affirmative vote as is required by law and any other
provision of this Certificate of Incorporation, if the Business Combination
shall have been approved by a majority of the Continuing Directors (as
hereinafter defined). The approval of a majority of the Continuing Directors
shall be required whether or not the particular Business Combination meets the
criteria set forth below (but meeting such criteria shall not be deemed to mean
the proposed Business Combination is fair or to require the Continuing Directors
to approve the Business Combination); provided, however, that if such criteria
-------- -------
are not met, then prior to approving such Business Combination, the Continuing
Directors shall obtain the advice of a financial advisor to the effect that such
Business Combination is fair to the holders of Voting Shares (other than an
Interested Stockholder); provided further, that, subject to the foregoing, the
Continuing Directors shall have no obligation to approve such Business
Combination unless:
(a) The transaction constituting the Business Combination shall
provide for a consideration to be received by all holders of Common Stock in
exchange for all shares of their Common Stock, and the aggregate amount of the
cash and the Fair Market Value as of the date of the consummation of the
Business Combination of consideration other than cash to be received per share
by holders of Common Stock in such Business Combination, shall be at least equal
to the higher of the following:
(i) if applicable, the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees)
paid in order to acquire any shares of Common Stock beneficially owned
by an Interested Stockholder (1) within the two-year period
immediately prior to the Announcement Date (as hereinafter defined),
(2) within the two-year period immediately prior to the Determination
Date (as hereinafter defined) or (3) in the transaction in which it
became an Interested Stockholder, whichever is highest; or
7
<PAGE>
(ii) the Fair Market Value per share of Common Stock on the
Announcement Date or on the Determination Date, whichever is higher;
(b) If the transaction constituting the Business Combination shall
provide for a consideration to be received by holders of any class or series of
outstanding Voting Shares other than Common Stock, the aggregate amount of the
cash and the Fair Market Value as of the date of the consummation of the
Business Combination of consideration other than cash to be received per share
by holders of shares of such class or series of Voting Shares shall be at least
equal to the highest of the following (it being intended that the requirements
of this subsection (b) shall be required to be met with respect to every class
and series of outstanding Voting Shares, whether or not an Interested
Stockholder has previously acquired any shares of a particular class of Voting
Shares):
(i) if applicable, the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees)
paid in order to acquire any shares of such class or series of Voting
Shares beneficially owned by an Interested Stockholder (1) within the
two-year period immediately prior to the Announcement Date, (2) within
the two-year period immediately prior to the Determination Date or (3)
in the transaction in which it became an Interested Stockholder,
whichever is highest; or
(ii) the Fair Market Value per share of such class or series of
Voting Shares on the Announcement Date or the Determination Date,
whichever is higher; or
(iii) if applicable, the highest preferential amount per share
to which the holders of shares of such class or series of Voting
Shares are entitled in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation;
(c) The consideration to be received by holders of a particular class
or series of outstanding Voting Shares (including Common Stock) shall be in cash
or in the same form as was previously paid in order to acquire shares of such
class or series of Voting Shares which are beneficially owned by an Interested
Stockholder and, if an Interested Stockholder beneficially owns shares of any
class or series of Voting Shares which were acquired with varying forms of
consideration, the form of consideration for such class or series of Voting
Shares shall be either cash or the
8
<PAGE>
form used to acquire the largest number of shares of such class or series of
Voting Shares beneficially owned by it. The price determined in accordance with
subsections (a) and (b) of this Section 2 of Article Seventh shall be subject to
appropriate adjustment in the event of any recapitalization, stock dividend,
stock split, combination of shares or similar event;
(d) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination:
(i) except as approved by a majority of the Continuing
Directors, there shall have been no failure to declare and pay at the
regular date therefor any full quarterly dividends (whether or not
cumulative) on any outstanding stock having preference over the Common
Stock as to dividends or liquidation;
(ii) there shall have been (1) no reduction in the annual rate
of dividends paid on the Common Stock (except as necessary to reflect
any subdivision of the Common Stock) except as approved by a majority
of the Continuing Directors, and (2) an increase in such annual rate
of dividends as necessary to reflect any reclassification (including
any reverse stock split), recapitalization, reorganization or any
similar transaction which has the effect of reducing the number of
outstanding shares of the Common Stock, unless the determination not
to increase such annual rate is approved by a majority of the
Continuing Directors; and
(iii) such Interested Stockholder shall not have become the
beneficial owner of any additional Voting Shares except as part of the
transaction in which it became an Interested Stockholder;
(e) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the benefit,
directly or indirectly (except proportionately as a stockholder), of any loans,
advances, guaranties, pledges or other financial assistance or any tax credits
or other tax advantages provided by the Corporation, whether in anticipation of
or in connection with such Business Combination or otherwise; and
(f) A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Exchange Act and the
rules and regulations thereunder (or any subsequent provisions replacing the
Exchange Act or such rules or regulations) shall be mailed to the stockholders
of the
9
<PAGE>
Corporation, not later than the earlier of (i) 30 days prior to any vote on the
proposed Business Combination or (ii) if no vote on such Business Combination is
required, 60 days prior to the consummation of such Business Combination
(whether or not such proxy or information statement is required to be mailed
pursuant to the Exchange Act or any subsequent provisions replacing the Exchange
Act). Such proxy statement shall contain at the front thereof, in a prominent
place, any recommendations as to the advisability (or inadvisability) of the
Business Combination which the Continuing Directors, or any of them, may have
furnished in writing and, if deemed advisable by a majority of the Continuing
Directors, an opinion of a reputable investment banking firm as to the fairness
(or lack of fairness) of the terms of such Business Combination, from the point
of view of the holders of Voting Shares other than an Interested Stockholder
(such investment banking firm to be selected by a majority of the Continuing
Directors, to be furnished with all information it reasonably requests and to be
paid a reasonable fee for its services upon receipt by the Corporation of such
opinion).
SECTION 3. Certain Definitions. For the purposes of this Article:
-------------------
(a) "Business Combination" shall mean any transaction which is
referred to in any one or more of subsections (a) through (e) of Section 1 of
this Article Seventh.
(b) "Voting Shares" shall mean shares of all classes and series of
stock of the Corporation entitled to vote generally in the election of
directors.
(c) "Person" shall mean any individual, firm, trust, partnership,
association, corporation, unincorporated organization or other entity (other
than the Corporation, any Subsidiary of the Corporation for itself or as a
fiduciary for customers, or a trustee holding stock for the benefit of the
employees of the Corporation or its Subsidiaries, or any one of them, pursuant
to one or more employee benefit plans or arrangements), as well as two or more
persons acting as a partnership, limited partnership, syndicate, association or
other group for the purpose of acquiring, holding or disposing of shares of
stock.
(d) "Interested Stockholder" shall mean any person (other than: (i)
the Corporation; (ii) any Subsidiary of the Corporation; (iii) any employee
benefit plan of the Corporation or any Subsidiary of the Corporation or any
entity holding shares of Common Stock for or pursuant to the terms of any such
plan; (iv) Donna Karan; (v) Stephan Weiss; (vi) the lineal descendants of Donna
Karan or Stephan Weiss; (vii) in the event of the death or incompetence of any
of the Persons described in clauses (iv), (v) and (vi), such Person's estate,
executor, administrator, committee
10
<PAGE>
or other personal representative; (viii) any trusts created for the benefit of
the Persons described in clause (iv), (v) or (vi); (ix) any Affiliate or
Associate of the Persons described in clause (iv), (v), (vi) or (viii); or (x)
any person who acquires beneficial ownership of more than 15% of the outstanding
Voting Shares with the prior approval of a majority of the Continuing
Directors), who or which:
(a) is the beneficial owner, directly or indirectly, of more
than 15% of the combined voting power of the then outstanding Voting
Shares; or
(b) is an assignee of or has otherwise succeeded to the
beneficial ownership of any Voting Shares which were at any time
within the two-year period immediately prior to the date in question
beneficially owned by an Interested Stockholder.
Notwithstanding the foregoing, no person shall become an Interested Stockholder
as a result of an acquisition of Voting Shares by the Corporation which, by
reducing the number of shares of Common Stock outstanding, increases the
proportionate number of shares beneficially owned by such person to 15% or more
of the Voting Shares of the Corporation then outstanding; provided, however,
-------- -------
that if a person shall become the beneficial owner of 15% or more of the Voting
Shares of the Corporation then outstanding by reason of shares purchased by the
Corporation, and after such purchases by the Corporation becomes the beneficial
owner of any additional Voting Shares of the Corporation, then such person shall
be deemed to be an Interested Stockholder.
For purposes of determining whether a person is an "Interested Stockholder," the
number of Voting Shares deemed to be outstanding shall include shares deemed
owned through application of subsection (e) below but shall not include any
other Voting Shares which may be issuable pursuant to any agreement, arrangement
or understanding, or upon exercise of conversion rights, warrants or options, or
otherwise.
(e) A person shall be a "beneficial owner" of any Voting Shares:
(i) which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly; or
(ii) which such person or any of its Affiliates or Associates
has (1) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding or upon the exercise
11
<PAGE>
or conversion of rights, exchange rights, warrants or options, or
otherwise or (2) the right to vote or to direct the voting thereof
pursuant to any agreement, arrangement or understanding; or
(iii) which are beneficially owned, directly or indirectly, by
any other person with which such person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any Voting
Shares.
(f) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act.
(g) "Subsidiary" shall mean any corporation, partnership or other
entity of which a majority of any class of equity security (as defined in Rule
3a(11)-1 of the General Rules and Regulations under the Exchange Act), is owned,
directly or indirectly, by the Corporation; provided, however, that for purposes
of the definition of Interested Stockholder set forth above in subsection (d),
the term "Subsidiary" shall mean only a corporation, partnership or other entity
of which a majority of each class of equity security is beneficially owned,
directly or indirectly, by the Corporation.
(h) "Continuing Director" shall mean any member of the Board of
Directors who is unaffiliated with, and not a nominee of, an "Interested
Stockholder," and who was a member of the Board of Directors prior to the time
that such Person became an Interested Stockholder, and any successor of a
Continuing Director who is unaffiliated with, and not a nominee of, an
Interested Stockholder and is recommended to succeed a "Continuing Director" by
a majority of Continuing Directors then on the Board of Directors.
(i) "Announcement Date" shall mean the date of the first public
announcement of the proposed Business Combination.
(j) "Determination Date" shall mean the date which is two years prior
to the date on which the Interested Stockholder became an Interested
Stockholder.
(k) "Fair Market Value" shall mean: (1) in the case of stock, the
highest closing sale price during the 30-day period immediately preceding the
date in question of a share of such stock on the Composite Tape for New York
Stock Exchange Listed Shares, or, if such stock is not listed on such Exchange,
on the principal United States securities exchange registered under the Exchange
Act on which such stock is listed, or, if such stock is not listed on any such
exchange, the highest closing bid quotation with respect to a share of such
stock during the 30-day period preceding the
12
<PAGE>
date in question on the National Association of Securities Dealers, Inc.
Automated Quotation System or any system then in use, or, if no such quotations
are available, the fair market value on the date in question of a share of such
stock as determined by a majority of the Continuing Directors in good faith; and
(ii) in the case of property other than cash or stock, the fair market value of
such property on the date in question as determined by a majority of the
Continuing Directors in good faith.
SECTION 4. Determinations by the Board of Directors. A majority of
----------------------------------------
the Continuing Directors shall have the power and duty to determine for the
purposes of this Article Seventh, on the basis of information known to them
after reasonable inquiry, all facts necessary to determine compliance with this
Article Seventh including, without limitation, (i) whether a person is an
Interested Stockholder, (ii) the number of Voting Shares beneficially owned by
any person, (iii) whether a person is an Affiliate or Associate of another, (iv)
whether the assets which are the subject of any Business Combination have, or
the consideration to be received for the issuance or transfer of securities by
the Corporation or any Subsidiary in any Business Combination has, an aggregate
Fair Market Value of $10,000,000 or more, (v) whether the requirements of
Section 2 of this Article Seventh have been met and (vi) such other matters with
respect to which a determination is required under this Article Seventh. The
good faith determination of a majority of the Continuing Directors on such
matters shall be conclusive and binding for all purposes of this Article
Seventh, and no director will have any liability to the Corporation or any other
person by reason of any such determination so made.
SECTION 5. Fiduciary Obligations. Nothing contained in this Article
---------------------
Seventh shall be construed to relieve the members of the Board of Directors or
an Interested Stockholder from any fiduciary obligation imposed by law.
The fact that any Business Combination complies with the provisions of
Section 2 of this Article Seventh shall not be construed to impose any fiduciary
duty, obligation or responsibility on the Board of Directors, or any member
thereof, to approve such Business Combination or recommend its adoption or
approval to the stockholders of the Corporation, nor shall such compliance
limit, prohibit or otherwise restrict in any manner the Board of Directors, or
any member thereof, with respect to evaluations of or actions and responses
taken with respect to such Business Combination.
EIGHTH: LIABILITY OF DIRECTORS.
No director shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director;
provided, however, that to the extent required
13
<PAGE>
by the provisions of Section 102(b)(7) of the General Corporation Law of the
State of Delaware or any successor statute, or any other laws of the State of
Delaware, this provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the General Corporation Law of the State of Delaware or (iv) for
any transaction from which the director derived an improper personal benefit. If
the General Corporation Law of the State of Delaware hereafter is amended to
authorize the further elimination of, or limitation on, personal liability of
directors, then the liability of a director of the Corporation, in addition to
the limitation on personal liability provided herein, shall be limited to the
fullest extent permitted by the amended General Corporation Law of the State of
Delaware. Any repeal or modification of this Article Eighth by the stockholders
of the Corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
NINTH: INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.
SECTION 1. Indemnification. The Corporation shall indemnify each
---------------
person who was or is made a party or is threatened to be made a party to or is
involved in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "proceeding"), by
reason of the fact that he or she, or a person of which he or she is the legal
representative, is or was a director or officer, or had agreed to serve as a
director or officer, of the Corporation or is or was serving or has agreed to
serve at the request of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, or by
reason of any act alleged to have been taken or omitted in such capacity,
whether the basis of such proceeding is alleged action in an official capacity
as a director, officer, employee or agent or alleged action in any other
capacity while serving as a director, officer, employee or agent, to the maximum
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide prior
to such amendment), against all cost, expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement) actually and reasonably incurred by such
person or on his or her behalf in connection with such proceeding shall continue
as to a person who has ceased to be a director.
14
<PAGE>
SECTION 2. Indemnification for Costs, Charges and Expenses for
---------------------------------------------------
Successful Party. Notwithstanding the other provisions of this Article Ninth,
- ----------------
to the extent that a director or officer of the Corporation has been successful
on the merits or otherwise, including, without limitation, the dismissal of an
action without prejudice, in defense of any action, suit or proceeding referred
to in Section 1 of this Article Ninth, or in the defense of any claim, issue or
matter therein, he shall be indemnified against all costs, charges and expenses
(including attorneys' fees) actually and reasonably incurred by him or on his
behalf in connection therewith.
SECTION 3. Advancement of Costs, Charges and Expenses. Costs,
------------------------------------------
charges and expenses (including attorneys' fees) incurred by a person referred
to in Section 1 of this Article Ninth in defending a civil or criminal action,
suit or proceeding (including investigations by any government agency and all
costs, charges and expenses incurred in preparing for any threatened action,
suit or proceeding) shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding; provided, however, that, if
-------- -------
Delaware General Corporation Law so requires, the payment of such costs, charges
and expenses incurred by a director or officer in his capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer) in advance of the final disposition of
such action, suit or proceeding shall be made only upon receipt of an
undertaking by or on behalf of the director or officer to repay all amounts so
advanced in the event that it shall ultimately be determined that such director
or officer is not entitled to be indemnified by the Corporation as authorized in
this Article Ninth or otherwise. No security shall be required for such
undertaking and such undertaking shall be accepted without reference to the
recipient's financial ability to make repayment. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a presumption
that the person did not meet any standard of conduct for indemnification imposed
by the Delaware General Corporation Law. The Board of Directors may, in the
manner set forth above, and subject to the approval of such director or officer,
authorize the Corporation's counsel to represent such person in any action, suit
or proceeding, whether or not the Corporation is a party to such action, suit or
proceeding.
SECTION 4. Procedure for Indemnification. Any indemnification under
-----------------------------
Section 1 or advance of costs, charges and expenses under Section 3 of this
Article Ninth shall be made promptly, and in any event within 60 days, upon the
written request by the director or officer directed to the Secretary of the
Corporation. The right to indemnification or advances as granted by this
Article Ninth shall be enforceable by the director or
15
<PAGE>
officer in any court of competent jurisdiction if the Corporation denies such
request, in whole or in part, or if no disposition thereof is made within 60
days. Such person's costs and expenses incurred in connection with successfully
establishing his right to indemnification or advances, in whole or in part, in
any such action shall also be indemnified by the Corporation. It shall be a
defense to any such action (other than an action brought to enforce a claim for
the advance of costs, charges and expenses under Section 3 of this Article Ninth
where the required undertaking, if any, has not been received by the
Corporation) that the claimant has not met the standard of conduct, if any, set
forth in the Delaware General Corporation Law, but the burden of proving that
such standard of conduct has not been met shall be on the Corporation. Neither
the failure of the Corporation (including its Board of Directors, its
independent legal counsel, and its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he has met the applicable standard of
conduct, if any, set forth in the Delaware General Corporation Law, nor the fact
that there has been an actual determination by the Corporation (including its
Board of Directors, its independent legal counsel, and its stockholders) that
the claimant has not met such applicable standard of conduct, shall be a defense
to the action or create a presumption that the claimant has not met the
applicable standard of conduct.
SECTION 5. Other Rights; Continuation of Rights of Indemnification.
-------------------------------------------------------
The indemnification provided by this Article Ninth shall not be deemed exclusive
of any other rights to which a person seeking indemnification may be entitled
under any law (common or statutory), agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding office, and shall continue as
to a person who has ceased to be a director or officer and shall inure to the
benefit of the estate, heirs, executors and administrators of such person. All
rights to indemnification under this Article Ninth shall be deemed to be a
contract between the Corporation and each director and officer of the
Corporation who serves or served in such capacity at any time while this Article
Ninth is in effect. No amendment or repeal of this Article Ninth or of any
relevant provisions of the Delaware General Corporation Law or any other
applicable laws shall adversely affect or deny to any director or officer any
rights to indemnification which such person may have, or change or release any
obligations of the Corporation, under this Article Ninth with respect to any
costs, charges, expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement which arise out of an action, suit or proceeding
based in whole or substantial part on any act or failure to act, actual or
alleged, which takes place before or while this Article Ninth is in effect. The
provisions of this Section 5 of Article Ninth shall apply to any
16
<PAGE>
such action, suit or proceeding whenever commenced, including any such action,
suit or proceeding commenced after any amendment or repeal of this Article
Ninth. The right to indemnification and advancement of expenses conferred on any
person by this Article Ninth shall not limit the Corporation from providing any
other indemnification permitted by law.
SECTION 6. Saving Clause. If this Article Ninth or any portion
-------------
hereof shall be invalidated on any ground by a court of competent jurisdiction,
then the Corporation shall nevertheless indemnify each director and officer of
the Corporation as to costs, charges and expenses (including attorneys' fees)
judgments, fines and amounts paid in settlement with respect to any action, suit
or proceeding, whether civil, criminal, administrative or investigative,
including an action by or in the right of the Corporation, to the full extent
permitted by any applicable portion of this Article Ninth that shall not have
been invalidated and to the full extent permitted by applicable law.
SECTION 7. Indemnification of Other Persons. If authorized by the
--------------------------------
Board of Directors, the Corporation may indemnify and advance expenses to any
other person whom it has the power to indemnify under Section 145 of the
Delaware General Corporation Law to the fullest extent permitted by such
statute.
SECTION 8. Insurance. The Corporation may purchase and maintain
---------
insurance, at its expense, to protect itself and any director, officer, employee
or agent of the Corporation or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person pursuant to the
Delaware General Corporation Law.
TENTH: ARRANGEMENTS WITH CREDITORS.
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware, may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for the Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code, order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three fourths in value of the creditors or class of
creditors, and/or of the stockholders or
17
<PAGE>
class of stockholders of this Corporation, as the case may be, agree to any
compromise or arrangement and to any reorganization of this Corporation as a
consequence of such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the creditors or
class of creditors, and/or on all the stockholders or class of stockholders, of
this Corporation, as the case may be, and also on this Corporation.
ELEVENTH: AMENDMENT OF BYLAWS.
The Board of Directors shall have power to make, amend and repeal the
Bylaws. Any Bylaws made by the Board of Directors under the powers conferred
hereby may be amended or repealed by the Board of Directors or by the
stockholders. Notwithstanding the foregoing and anything contained in this
Certificate of Incorporation to the contrary, Sections 1.1, 1.2, and 1.9 of
Article I, Sections 2.2 and 2.10 of Article II, and Article VII of the Bylaws
shall not be amended or repealed, and no provision inconsistent therewith shall
be adopted, without the affirmative vote of the holders of record of outstanding
shares representing (i) at least 80% of the voting power of the then outstanding
Voting Shares (as defined in Article Seventh), voting together as a single class
and (ii) if there is then an Interested Stockholder (as defined in Article
Seventh), at least a majority of the voting power of the then outstanding Voting
Shares, voting together as a single class which are not beneficially owned,
directly or indirectly, by an Interested Stockholder, effected at a duly called
annual or special meeting of such stockholders, with such prior notice as is
required by the Bylaws; provided, however, that the provisions of this sentence
shall not apply to any amendment, repeal or adoption of any inconsistent
provision declared advisable by the Board of Directors by the affirmative vote
of a majority of the total number of directors which the Corporation would have
if there were no vacancies on the Board of Directors and, if there is then an
Interested Stockholder, a majority of the Continuing Directors (as defined in
Article Seventh).
TWELFTH: AMENDMENT OF CERTIFICATE OF INCORPORATION.
The Corporation reserves the right to amend or repeal any provision
contained in this Certificate of Incorporation, in the manner now or hereafter
prescribed by statute, and all rights conferred upon stockholders herein are
granted subject to this reservation. Notwithstanding any other provision of
this Certificate of Incorporation or the Bylaws (and in addition to any other
vote that may be required by applicable law, by this Certificate of
Incorporation or by the Bylaws), the affirmative vote of the holders of record
of outstanding shares representing (i) at least 80% of the voting power of the
then outstanding Voting Shares of the Corporation, voting together as a single
class, and (ii) if there is then an Interested Stockholder (as defined in
Article Seventh), at least a majority of the voting power of the then
outstanding Voting Shares of
18
<PAGE>
the Corporation, voting together as a single class, which are not beneficially
owned, directly or indirectly, by an Interested Stockholder, voting at a duly
called annual or special meeting of such stockholders, with prior notice, and
with a vote and not by written consent, shall be required to amend or repeal, or
adopt any provisions inconsistent with this Article or Articles Fifth through
Twelfth of this Certificate of Incorporation; provided, however, that the
-------- -------
provisions of this sentence shall not apply to any amendment, repeal or adoption
of any inconsistent provision declared advisable by the Board of Directors by
the affirmative vote of a majority of the total number of directors which the
Corporation would have if there were no vacancies on the Board of Directors and,
if there is then an Interested Stockholder, a majority of the Continuing
Directors (as defined in Article Seventh).
IN WITNESS WHEREOF, the undersigned have executed this Amended and
Restated Certificate of Incorporation on behalf of the Corporation and hereby
affirm that the statements made herein are true under the penalties of perjury,
this ____ day of ____________, 1996.
___________________________________
Stephen L. Ruzow, President
Attest:
____________________________
David L. Bressman, Secretary
19
<PAGE>
EXHIBIT 3.3
BYLAWS
of
DONNA KARAN INTERNATIONAL INC.
<PAGE>
Exhibit 3.3
DONNA KARAN INTERNATIONAL INC.
A Delaware Corporation
BYLAWS
ARTICLE I
Stockholders
Section 1.1 Annual Meeting.
An annual meeting of stockholders for the purpose of electing
directors and of transacting such other business as may properly come before it
in accordance with Section 1.9 hereof shall be held each year only upon call of
the person or persons designated in the Certificate of Incorporation, at such
date, time, and place, either within or without the State of Delaware, as may be
stated in the notice.
Section 1.2 Special Meetings.
Subject to the rights of holders of any series of preferred stock,
special meetings of stockholders for any purpose or purposes may be held at any
time only upon call of the person or persons designated in the Certificate of
Incorporation, at such date, time, and place, either within or without the State
of Delaware, as may be stated in the notice.
<PAGE>
Section 1.3 Notice of Meetings.
Written notice of duly called stockholders meetings, stating the
place, date, and hour thereof shall be given by the Chairman of the Board, the
Vice Chairman of the Board, the President, any Vice President, the Secretary, or
an Assistant Secretary, to each stockholder entitled to vote thereat at least
ten days but not more than sixty days before the date of the meeting, unless a
different period is prescribed by law. The notice of an annual meeting shall
state that the meeting is called for the election of directors and for the
transaction of other business which may properly come before the meeting, and
shall, if any other action which could be taken at a special meeting is to be
taken at such annual meeting, state the additional purpose or purposes for which
the meeting is called. The notice of a special meeting shall in all instances
state the purpose or purposes for which the meeting is called.
Section 1.4 Quorum.
Except as otherwise provided by law or in the Certificate of
Incorporation or these Bylaws, at any meeting of stockholders, the holders of a
majority of the outstanding shares of each class of stock entitled to vote at
the meeting shall be present or represented by proxy in order to constitute a
quorum for the transaction of any business. In the absence of a quorum, a
majority in voting interest of the stockholders present or the chairman of the
meeting may adjourn the meeting from time to time in the manner provided in
Section 1.5 of these Bylaws until a quorum shall attend.
-2-
<PAGE>
Section 1.5 Adjournment.
Any meeting of stockholders, annual or special, may be adjourned from
time to time to reconvene at the same or some other place, and notice need not
be given of any such adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At any adjourned
meeting at which a quorum is present, any business may be transacted which might
have been transacted at the original meeting. If the adjournment is for more
than thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 1.6 Organization.
The Chairman of the Board, or in the absence of the Chairman of the
Board, the Vice Chairman of the Board, or in their absence one of the following
officers, the Chief Executive Officer or a Co-Chief Executive Officer, the
President, or a Vice President, shall call to order meetings of stockholders,
and shall act as chairman of such meetings. The Board of Directors or, if the
Board fails to act, the stockholders, may appoint any stockholder, director, or
officer of the Corporation to act as chairman of any meeting in the absence of
the Chairman of the Board, the Vice Chairman of the Board, the Chief Executive
Officer or the Co-Chief Executive Officers, the President, and all Vice
Presidents.
The Secretary of the Corporation shall act as secretary of all
meetings of stockholders, but, in the absence of the Secretary, the chairman of
the meeting may appoint any other person to act as secretary of the meeting.
-3-
<PAGE>
Section 1.7 Voting.
Except as otherwise provided by law or in the Certificate of
Incorporation or these Bylaws and except for the election of directors, at any
meeting duly called and held at which a quorum is present, a majority of the
votes cast at such meeting upon a given question by the holders of outstanding
shares of stock of all classes of stock of the Corporation entitled to vote
thereon who are present in person or by proxy shall decide such question. At
any meeting duly called and held for the election of directors at which a quorum
is present, directors shall be elected by a plurality of the votes cast by the
holders (acting as such) of shares of stock of the Corporation entitled to elect
such directors.
Section 1.8 Proxy Representation.
Each stockholder entitled to vote at any meeting of stockholders, or
to express consent to or dissent from corporate action in writing without a
meeting, may authorize another person to act for him or her by proxy. No proxy
shall be valid after three years from its date, unless it provides otherwise.
Section 1.9 Stockholders. At an annual meeting of the stockholders,
only such business shall be conducted as shall have been brought before the
meeting (a) pursuant to the Corporation's notice of meeting, (b) by or at the
direction of the Board of Directors or (c) by a stockholder of the Corporation
who is a stockholder of record at the time of giving of the notice provided for
in this Section 1.9, who shall be entitled to vote at such meeting and who
complies with the notice procedures set forth in the Certificate of
Incorporation and this Section 1.9. For business to be properly brought before
an annual meeting by a stockholder pursuant to clause (c) above, the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation within
the time
-4-
<PAGE>
periods specified in Rule 14a-8(a)(3) (or any successor rule) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the meeting (a) a brief description of the
business desired to brought before the meeting and the reasons for conducting
such business at the meeting, (b) the name and address, as they appear on the
Corporation's books of the stockholder proposing such business, and the name and
address of the beneficial owner, if any, on whose behalf the proposal is made,
(c) the class and number of shares of stock of the Corporation which are owned
beneficially and of record by such stockholder of record and by the beneficial
owner, if any, on whose behalf the proposal is made, and (d) any material
interest of such stockholder of record and the beneficial owner, if any, on
whose behalf the proposal is made in such business. Notwithstanding anything in
this Section 1.9 to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this Section 1.9.
The chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting whether or not business was properly brought before the meeting
in accordance with the procedures prescribed by these Bylaws, and if (s)he
should so determine, (s)he shall so declare to the meeting, and any such
business not properly brought before the meeting shall not be transacted.
Notwithstanding the foregoing provisions of this Section 1.9, a stockholder also
shall comply with all applicable requirements of the Exchange Act and the rules
and regulations thereunder, as well as the Certificate of Incorporation, with
respect to the matters set forth in this Section 1.9.
-5-
<PAGE>
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 Number and Term of Office.
The business, property, and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors of the
Corporation. The initial number of directors which shall constitute the whole
Board of Directors shall be nine; provided, however, that the Board of
Directors, by resolution adopted by vote of a majority of the then authorized
number of directors, may increase or decrease the number of directors with the
consent of the Takihyo Group (as defined in the Stockholders' Agreement
between the Corporation and certain stockholders dated as of May __, 1996 (the
"Stockholders' Agreement")) and the Karan/Weiss Group (as defined in the
Stockholders' Agreement), which consent shall be required only if the Takihyo
Group or the Karan/Weiss Group, as the case may be, is entitled to designate
one or more members of the Board of Directors pursuant to the Stockholders'
Agreement. No decrease in the number of directors may shorten the term of any
incumbent director. The directors shall be elected by the holders of shares
entitled to vote thereon at the annual meeting of stockholders, and each shall
serve (subject to the provisions of Article IV and the Certificate of
Incorporation) until the next succeeding annual meeting of stockholders and
until his or her respective successor has been elected and qualified.
-6-
<PAGE>
Section 2.2 Nomination, Classification, Election, and Term.
The nomination, classification, election, and term of directors shall
be governed by the Certificate of Incorporation.
Section 2.3 Chairman and Vice Chairman of the Board.
The directors may elect a Chairman and a Vice Chairman of the Board of
Directors. The Chairman and Vice Chairman shall be executive officers of the
Corporation and shall be subject to the control of and may be removed by the
Board of Directors.
Section 2.4 Meetings.
Regular meetings of the Board of Directors may be held without notice
at such time and place as shall from time to time be determined by the Board.
Special meetings of the Board of Directors shall be held at such time
and place as shall be designated in the notice of the meeting whenever called by
the Chairman of the Board, the Vice Chairman, the Chief Executive Officer, a Co-
Chief Executive Officer, or by a majority of the directors then in office.
Section 2.5 Notice of Special Meetings.
The Secretary, or in the absence of the Secretary, any other officer
of the Corporation, shall give each director notice of the time and place of
holding of special meetings of the Board of Directors by mail at least seven
days before the meeting, or by telecopy, telegram, cable, radiogram, or personal
service at least two days before the meeting. Unless otherwise stated in the
notice thereof, any and all business may be transacted at any meeting without
specification of such business in the notice.
-7-
<PAGE>
Section 2.6 Quorum and Organization of Meetings.
A majority of the total number of members of the Board of Directors as
constituted from time to time shall constitute a quorum for the transaction of
business, but, if at any meeting of the Board of Directors (whether or not
adjourned from a previous meeting) there shall be less than a quorum present, a
majority of those present may adjourn the meeting to another time and place, and
the meeting may be held as adjourned without further notice or waiver. Except as
otherwise provided by law or in the Certificate of Incorporation or these
Bylaws, a majority of the directors present at any meeting at which a quorum is
present may decide any question brought before such meeting. Meetings shall be
presided over by the Chairman of the Board, or in the absence of the Chairman of
the Board, by the Vice Chairman, the Chief Executive Officer or a Co-Chief
Executive Officer, the President, or such other person as the directors may
select. The Secretary of the Corporation shall act as secretary of the meeting,
but in the absence of the Secretary, the chairman of the meeting may appoint any
person to act as secretary of the meeting.
Section 2.7 Committees.
The Board of Directors may, by resolution adopted by a majority of the
whole Board, designate one or more committees, each committee to consist of one
or more of the directors of the Corporation. The Board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not (s)he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in place of any such absent or disqualified
member.
-8-
<PAGE>
Any such committee, to the extent provided in the resolution of the Board of
Directors, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business, property, and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but no such committee shall have power or authority
in reference to amending the Certificate of Incorporation of the Corporation
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the Board
of Directors pursuant to authority expressly granted to the Board of Directors
by the Corporation's Certificate of Incorporation, fix any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the Corporation, or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the Corporation),
adopting an agreement of merger or consolidation under Section 251 or 252 of the
General Corporation Law of the State of Delaware, recommending to the
stockholders the sale, lease, or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of dissolution, or amending these
Bylaws; and, unless the resolution expressly so provided, no such committee
shall have the power or authority to declare a dividend, to authorize the
issuance of stock, or to adopt a certificate of ownership and merger pursuant to
Section 253 of the General Corporation Law of the State of Delaware. Each
committee which may be established by the Board of Directors pursuant to these
Bylaws may fix its own rules and procedures. Notice of meetings of committees,
other than of regular meetings provided for by the rules, shall be given to
committee members. All action taken by committees shall be recorded in minutes
of the meetings.
-9-
<PAGE>
Section 2.8 Action Without Meeting.
Nothing contained in these Bylaws shall be deemed to restrict the
power of members of the Board of Directors or any committee designated by the
Board to take any action required or permitted to be taken by them without a
meeting, if all the members of the Board of Directors or committee, as the case
may be, consent in writing to the adoption, and the writing or writings are
filed with the minutes of proceedings of the Board or Committee.
Section 2.9 Telephone Meetings.
Nothing contained in these Bylaws shall be deemed to restrict the
power of members of the Board of Directors, or any committee designated by the
Board, to participate in a meeting of the Board, or committee, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other.
Section 2.10 Gabrielle Studio, Inc.
Donna Karan, Stephan Weiss and members of their immediate family, if
then serving as a director of the Corporation, shall not participate in any vote
taken by the Board of Directors with respect to actions to be taken by the
Corporation regarding its transactions with Gabrielle Studio, Inc. or its
successors or assigns ("Studio"). The foregoing prohibition shall include, but
not be limited to, any proposed amendment to, forfeiture of, or waiver or
enforcement of rights or obligations under, the License Agreement between the
Corporation and Studio.
-10-
<PAGE>
ARTICLE III
Officers
Section 3.1 Executive Officers.
The executive officers of the Corporation shall consist of a Chief
Executive Officer or Co-Chief Executive Officers, a President, a Secretary, a
Chief Financial Officer, and if deemed necessary, expedient, or desirable, a
Chairman of the Board, a Vice Chairman of the Board, and one or more Executive
Vice Presidents, each of whom shall be elected by the Board of Directors. The
Board of Directors may elect or appoint such other officers (including one or
more Senior Vice Presidents, one or more other Vice Presidents, a Controller,
and one or more Assistant Treasurers and Assistant Secretaries) as it may deem
necessary or desirable. Each officer shall hold office for such term as may be
prescribed by the Board of Directors from time to time. Any person may hold at
one time two or more offices.
Section 3.2 Chairman of the Board.
The Chairman of the Board shall preside at all meetings of the
stockholders and of the Board of Directors. The Chairman of the Board shall
have the power to fix the compensation of elected officers whose compensation is
not fixed by the Board of Directors or a committee thereof and also to engage,
discharge, determine the duties and fix the compensation of all employees and
agents of the Corporation necessary or proper for the transaction of the
business of the Corporation. The Chairman of the Board shall also be the Chief
Executive Officer of the Corporation, unless another person is so designated by
the Board of Directors.
-11-
<PAGE>
Section 3.3 Vice Chairman of the Board.
The Vice Chairman of the Board shall, at the request, or in the
absence or disability, of the Chairman of the Board, perform the duties and
exercise the powers of such office.
Section 3.4 Chief Executive Officer.
The Chief Executive Officer of the Corporation shall have general
supervision of the business, affairs and property of the Corporation, and over
its several officers. In general, the Chief Executive Officer shall have all
authority incident to the office of Chief Executive Officer and shall have such
other authority and perform such other duties as may from time to time be
assigned by the Board of Directors or by any duly authorized committee of
directors. The Board of Directors may from time to time designate one or more
persons as Co-Chief Executive Officer. If the Chief Executive Officer is not
also the Chairman of the Board, then the Chief Executive Officer shall report to
the Chairman of the Board or, in the absence of the Chairman of the Board, the
Vice Chairman.
Section 3.5 President.
The President shall be the chief operating officer of the Corporation
and, subject to the direction of the Board of Directors, or any duly authorized
committee of directors, and the Chairman of the Board and the Chief Executive
Officer, and subject to any contractual restriction, shall have general
supervision of the operations of the Corporation. In general, but subject to
any contractual restriction, the President shall have all authority incident to
the office of President and chief operating officer and shall have such other
authority and perform such other duties as may from time to time be assigned by
the Board of Directors or by any duly authorized committee of directors or by
the Chairman of the Board of Directors. The President shall, at the request or
in the absence or disability of the
-12-
<PAGE>
Chairman or Vice Chairman of the Board, or the Chief Executive Officer, perform
the duties and exercise the powers of such officer.
Section 3.6 Chief Designer.
The Chief Designer shall have ultimate responsibility, and ultimate
creative and artistic control, over all items produced by the Corporation and
any of its subsidiaries and licensees (to the extent permitted in the
Corporation's license agreements with such licensees), including with respect to
the design, presentation, advertising, marketing, sublicensing and other
exploitation of such products and brands. The Board of Directors may from time
to time designate more than one person as Co-Chief Designer.
Section 3.7 Vice Presidents.
Each vice president shall have such powers and duties as the Board or
the President assigns to him.
Section 3.8 Chief Financial Officer.
The Chief Financial Officer of the Corporation shall be in charge of
the corporation's books and accounts. Subject to the control of the Board,
(s)he shall have such other powers and duties as the Board or the president
assigns to him.
Section 3.9 Secretary.
The Secretary shall be the secretary of, and keep the minutes of, all
meetings of the Board and the stockholders, and shall have such other powers and
duties as the Board or the President assigns to him. In the absence of the
Secretary from any meeting, the minutes shall be kept by the person appointed
for that purpose by the chairman of the meeting.
-13-
<PAGE>
ARTICLE IV
Resignations, Removals, And Vacancies
Section 4.1 Resignations.
Any director or officer of the Corporation, or any member of any
committee, may resign at any time by giving written notice to the Board of
Directors, the President, or the Secretary of the Corporation. Any such
resignation shall take effect at the time or upon the occurrence of an event
specified therein or, if no such time or event is specified therein, then upon
receipt thereof. Unless otherwise provided in the resignation, the acceptance of
such resignation shall not be necessary to make it effective.
Section 4.2 Removals.
The Board of Directors, by a vote of not less than a majority of the
entire Board, at any meeting thereof, or by written consent, at any time, may,
to the extent permitted by law, remove with or without cause from office or
terminate the employment of any officer or member of any committee and may, with
or without cause, disband any committee.
The removal of any director or the entire Board of Directors shall be
governed by the Certificate of Incorporation.
Section 4.3 Vacancies.
The filling of newly-created directorships and vacancies in the Board
of Directors shall be governed by the Certificate of Incorporation.
-14-
<PAGE>
ARTICLE V
Capital Stock
Section 5.1 Stock Certificates.
The certificates for shares of the capital stock of the Corporation
shall be in such form as shall be prescribed by law and approved, from time to
time, by the Board of Directors. Each certificate shall be signed by the
Chairman or Vice Chairman of the Board of Directors, if any, or by the Chief
Executive Officer or a Co-Chief Executive Officer or the President and by the
Chief Financial Officer or the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary of the Corporation. Any and all signatures
on any such certificates may be facsimiles. In case any officer, transfer
agent, or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent, or
registrar before such certificate is issued, it may be issued by the Corporation
with the same effect as if (s)he were such officer, transfer agent, or registrar
at the date of issue.
Section 5.2 Transfer of Shares.
Upon compliance with provisions restricting the transfer or
registration of transfer of shares of capital stock, if any, shares of the
capital stock of the Corporation may be transferred on the books of the
Corporation only by the holder of such shares or by his or her duly authorized
attorney, upon the surrender to the Corporation or its transfer agent of the
certificate representing such stock properly endorsed and the payment of taxes
due thereon.
-15-
<PAGE>
Section 5.3 Fixing Record Date.
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof or to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion, or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which, unless
otherwise provided by law, shall not be more than sixty nor less than ten days
before the date of such meeting, nor more than sixty days prior to any other
action.
Section 5.4 Lost Certificates.
The Board of Directors or any transfer agent of the Corporation may
direct a new certificate or certificates representing stock of the Corporation
to be issued in place of any certificate or certificates theretofore issued by
the Corporation, alleged to have been lost, stolen, or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors (or any transfer agent of the Corporation
authorized to do so by a resolution of the Board of Directors) may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen, or destroyed certificate or certificates, or his or
her legal representative, to give the Corporation a bond in such sum as the
Board of Directors (or any transfer agent so authorized) shall direct to
indemnify the Corporation against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed or the issuance of such new certificates, and such requirement may
be general or confined to specific instances.
-16-
<PAGE>
Section 5.5 Regulations.
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer,
registration, cancellation, and replacement of certificates representing stock
of the Corporation.
ARTICLE VI
Miscellaneous
Section 6.1 Corporate Seal.
The corporate seal shall have inscribed thereon the name of the
Corporation and shall be in such form as may be approved from time to time by
the Board of Directors.
Section 6.2 Fiscal Year.
The fiscal year of the Corporation shall be determined by resolution
of the Board of Directors.
Section 6.3 Notices and Waivers Thereof.
Whenever any notice is required by law, the Certificate of
Incorporation, or these Bylaws to be given to any stockholder, director, or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail, or, in the case of directors or officers, by telecopy,
telegram, cable, or radiogram, addressed to such address as appears on the books
of the Corporation. Any notice given by telecopy, telegram, cable, or radiogram
shall be deemed to have been given when it shall have been delivered for
transmission and any notice given by mail shall be deemed to have been given
when it shall have been deposited in the United States mail with postage thereon
prepaid.
-17-
<PAGE>
Whenever any notice is required to be given by law, the Certificate of
Incorporation, or these Bylaws, a written waiver thereof, signed by the person
entitled to such notice, whether before or after the meeting or the time stated
therein, shall be deemed equivalent in all respects to such notice to the full
extent permitted by law. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
Section 6.4 Stock of Other Corporations or Other Interests.
Unless otherwise ordered by the Board of Directors, the Chairman of
the Board, the Vice Chairman of the Board, or the Chief Executive Officer or a
Co-Chief Executive Officer, and such attorneys or agents of the Corporation as
may from time to time be authorized by the Board of Directors or the Chairman of
the Board shall have full power and authority on behalf of this Corporation to
attend and to act and vote in person or by proxy at any meeting of the holders
of securities of any corporation or other entity in which this Corporation may
own or hold shares or other securities, and at such meetings shall possess and
may exercise all the rights and powers incident to the ownership of such shares
or other securities which this Corporation, as the owner or holder thereof,
might have possessed and exercised if present. The Chairman of the Board, the
Vice Chairman of the Board, the Chief Executive Officer or a Co-Chief Executive
Officer, or such attorneys or agents, may also execute and deliver on behalf of
this Corporation powers of attorney, proxies, consents, waivers, and other
instruments relating to the shares or securities owned or held by this
Corporation.
-18-
<PAGE>
ARTICLE VII
Amendments
Subject to the provisions of the Delaware General Corporation Law, the
power to adopt, amend, or repeal the Bylaws of the Corporation shall be as
provided in the Certificate of Incorporation.
-19-
<PAGE>
EXHIBIT 5.1
June , 1996
Donna Karan International Inc.
550 Seventh Avenue
New York, New York 10018
Dear Sirs:
We are acting as counsel to Donna Karan International Inc., a Delaware
corporation (the "Company"), in connection with the Registration Statement on
Form S-1 with exhibits thereto (the "Registration Statement") filed by the
Company under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, relating to the registration of 12,362,500 shares (the
"Shares") of Common Stock, par value $.01 per share, of the Company. The shares
are to be issued and sold by the Company pursuant to an underwriting agreement
(the "Underwriting Agreement") among the Company, the underwriters party thereto
(the "Underwriters"), and certain other parties. A form of the Underwriting
Agreement has been filed as an exhibit to the Registration Statement.
As such counsel, we have participated in the preparation of the
Registration Statement and have reviewed certain corporate proceedings. We have
also examined and relied upon originals or copies, certified or otherwise
authenticated to our satisfaction, of certain public officials and of
representatives of the Company, and have made such investigations of law, and
have discussed with representatives of the Company and such other persons such
questions of fact, as we have deemed proper and necessary as a basis for
rendering this opinion.
Based upon, and subject to, the foregoing, we are of the opinion that, when
the Amended and Restated Certificate of Incorporation, a form of which has been
filed as an exhibit to the Registration Statement, is duly approved and adopted
by the Board of Directors and the stockholders of the Company and duly filed
with the Secretary of State of Delaware, the Shares will be duly authorized and,
upon issuance and sale of the Shares in accordance with the terms of the
Underwriting Agreement (assuming the price to be paid by the Underwriters is at
least $.01 per Share), will be legally issued, fully paid, and non-assessable.
<PAGE>
Donna Karan International Inc.
June , 1996
Page 2
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement. In giving the foregoing consent, we do not admit that
we are in the category of persons whose consent is required under Section 7 of
the Securities Act or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
Sincerely,
/s/ Proskauer Rose Goetz & Mendelsohn LLP
<PAGE>
EXHIBIT 10.2
______________________________________________________________________________
DONNA KARAN INTERNATIONAL INC.
1996 STOCK INCENTIVE PLAN
______________________________________________________________________________
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
I. PURPOSES OF THE PLAN.................................. 1
--------------------
II. DEFINITIONS........................................... 1
-----------
III. EFFECTIVE DATE........................................ 5
--------------
IV. ADMINISTRATION........................................ 5
--------------
A. Duties of the Committee......................... 5
-----------------------
B. Advisors........................................ 5
--------
C. Determinations.................................. 6
--------------
V. SHARES; ADJUSTMENT UPON CERTAIN EVENTS................ 6
--------------------------------------
A. Shares to be Delivered; Fractional Shares....... 6
-----------------------------------------
B. Number of Shares................................ 6
----------------
C. Adjustments; Recapitalization, etc.............. 6
----------------------------------
VI. TERMS OF OPTIONS...................................... 7
----------------
A. Grant........................................... 7
-----
B. Exercise Price.................................. 8
--------------
C. Number of Shares................................ 8
----------------
D. Exercisability.................................. 8
--------------
E. Exercise of Options............................. 8
-------------------
F. Incentive Stock Option Limitations.............. 9
----------------------------------
G. Buy Out and Settlement Provisions............... 9
---------------------------------
H. Modification, Extension and Renewal
-----------------------------------
of Options...................................... 9
----------
I. Other Terms and Conditions...................... 10
--------------------------
VII. RESTRICTED SHARES..................................... 10
-----------------
A. Restricted Shares................................. 10
-----------------
B. Awards and Certificates........................... 10
-----------------------
VIII. ACCELERATION EVENTS................................... 11
-------------------
IX. TERMINATION OF EMPLOYMENT............................. 12
-------------------------
A. General.......................................... 12
-------
B. Termination by Company for Cause................. 12
--------------------------------
C. Miscellaneous.................................... 12
-------------
D. Cancellation of Options.......................... 12
-----------------------
X. NONTRANSFERABILITY OF AWARDS.......................... 13
----------------------------
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
XI. RIGHTS AS A STOCKHOLDER............................... 13
-----------------------
XII. TERMINATION, AMENDMENT AND MODIFICATION............... 13
---------------------------------------
XIII. USE OF PROCEEDS....................................... 14
---------------
XIV. GENERAL PROVISIONS.................................... 14
------------------
A. Right to Terminate Employment or
--------------------------------
Consultancy....................................... 14
-----------
B. Trusts, etc....................................... 14
------------
C. Notices........................................... 14
-------
D. Severability of Provisions........................ 15
--------------------------
E. Payment to Minors, Etc............................ 15
-----------------------
F. Headings and Captions............................. 15
---------------------
G. Controlling Law................................... 15
---------------
H. Other Benefits.................................... 15
--------------
I. Costs............................................. 15
-----
J. Section 16(b) of the Exchange Act................. 15
---------------------------------
K. Death/Disability.................................. 16
----------------
XV. ISSUANCE OF STOCK CERTIFICATES;
LEGENDS; PAYMENT OF EXPENSES.......................... 16
----------------------------
A. Stock Certificates................................ 16
------------------
B. Legends........................................... 16
-------
XVI. LISTING OF SHARES AND RELATED MATTERS................. 16
-------------------------------------
XVII. WITHHOLDING OF TAXES.................................. 17
--------------------
</TABLE>
ii
<PAGE>
DONNA KARAN INTERNATIONAL INC.
1996 STOCK INCENTIVE PLAN
I. PURPOSES OF THE PLAN
--------------------
The purposes of this 1996 Stock Incentive Plan (the "Plan") are to enable
Donna Karan International Inc. (the "Company"), each Designated Parent (as
defined herein) and Designated Subsidiaries (as defined herein) to attract,
retain and motivate certain employees and consultants who are important to the
success and growth of the business of the Company, such Designated Parent and
Designated Subsidiaries and to create a long-term mutuality of interest between
such individuals and the stockholders of the Company by granting Awards (as
defined herein) under the Plan.
II. DEFINITIONS
-----------
In addition to the terms defined elsewhere herein, for purposes of this
Plan, the following terms will have the following meanings when used herein with
initial capital letters:
A. "Agreement" means an agreement evidencing the grant of an Award.
B. "Award" means any Option or Restricted Shares granted pursuant to the
Plan.
C. "Board" means the Board of Directors of the Company.
D. "Cause" means with respect to a Participant's Termination of
Employment, (1) in the case where there is no employment or consulting agreement
between the Company, Designated Parent or Designated Subsidiary (as applicable)
and the Participant, or where there is an employment or consulting agreement,
but such agreement does not define cause (or words of like import), termination
due to a Participant's dishonesty, fraud, insubordination, willful misconduct,
gross negligence, refusal to perform services (for any reason other than illness
or incapacity) or materially unsatisfactory performance of his or her duties for
the Company, Designated Parent or Designated Subsidiary, as may be applicable,
or the Participant's conviction of a felony or other crime involving, in the
sole discretion of the Committee, moral turpitude; or (2) in the case where
there is an employment or consulting agreement between the Company,
<PAGE>
Designated Parent or Designated Subsidiary (as applicable) and the Participant,
termination that is or would be deemed to be for cause (or words of like import)
as defined under such agreement. The Committee shall have sole discretion to
determine whether cause exists, and its determination shall be final, binding
and conclusive.
E. "Change In Control" means any of the following:
(a) the acquisition by any "person" (as such term is used in
Section 13(d) or 14(d) of the Exchange Act) other than a person who is a
stockholder of the Company on the effective date of the registration
statement filed under the Securities Act relating to the first public
offering of securities of the Company (an "Initial Stockholder") of 30% or
more of the voting power of securities of Company or the acquisition by an
Initial Stockholder other than an affiliate of Gabrielle Studio, Inc.
(and excluding any such acquisition resulting from a purchase, sale or
transfer of Takinyo Inc. stock by and between any of the current
stockholders of Takinyo Inc.) of an additional 5% of the voting power of
securities of the Company over and above that owned immediately after the
closing date of the initial public offering of the Company's Common Stock;
excluding, however, the following: (x) any acquisition by the Company or a
Subsidiary or an affiliate of any of the foregoing, or (y) any acquisition
by an employee benefit plan (or related trust) sponsored or maintained by
the Company or a Subsidiary; or
(b) any merger or sale of substantially all of the assets of the
Company under circumstances where the holders of 20% or more of the equity
securities of the surviving entity of such transaction were not holders of
the Common Stock of the Company immediately prior to the consummation of
such transaction; or
(c) any change in the composition of the Board of Directors of
the Company not approved by (i) a majority of the Board prior to such
change and (ii) by not less than two directors of the Company who were
directors prior to the time any person who was not an Initial Stockholder
acquired 30% or more of the voting power of securities of the Company.
F. "Code" means the Internal Revenue Code of 1986, as amended and
all rules and regulations promulgated thereunder.
G. "Committee" means the committee appointed by the Board to
administer the Plan, consisting of two or more members of the Board as may be
appointed from time to time by the Board each of whom shall qualify as a
"disinterested person" or "non-employee director" as defined in Rule 16b-3
promulgated under Section 16(b) of the Exchange Act to the extent then required.
H. "Common Stock" means the common stock of the Company, par value
$0.01 per share, any Common Stock into which the Common Stock may be converted
and any Common Stock resulting from any reclassification of the Common Stock.
I. "Company" means Donna Karan International Inc., a Delaware
corporation.
2
<PAGE>
J. "Consultant" means any executive-level consultant of, or advisor
to, the Company, Designated Parent or Designated Subsidiary as determined by the
Committee.
K. "Designated Parent" means any Parent which has been designated
from time to time by the Board to participate in the Plan.
L. "Designated Subsidiary" means any Subsidiary which has been
designated from time to time by the Board to participate in the Plan.
M. "Disability" means (1) in the case where there is no employment
agreement between the Company, Designated Parent or Designated Subsidiary (as
applicable) and the Participant, or where there is an employment agreement, but
such agreement does not define disability, total and permanent disability, as
defined in Section 22(e)(3) of the Code; or (2) in the case where there is an
employment agreement between the Company, Designated Parent or Designated
Subsidiary (as applicable) and the Participant, disability as defined under such
employment agreement.
N. "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and all rules and regulations promulgated thereunder.
O. "Fair Market Value" of a share of Common Stock means, for
purposes of this Plan, unless otherwise required by any applicable provision of
the Code or any regulations issued thereunder, as of any date, the last sales
prices reported for the Common Stock on the applicable date, (i) as reported by
the principal national securities exchange in the United States on which it is
then traded, or (ii) if not traded on any such national securities exchange, as
quoted on an automated quotation system sponsored by the National Association of
Securities Dealers, or if the sale of the Common Stock shall not have been
reported or quoted on such date, on the first day prior thereto on which the
Common Stock was reported or quoted. If the Common Stock is not readily
tradable on a national securities exchange or any system sponsored by the
National Association of Securities Dealers, its Fair Market Value shall be such
amount as is set by the Committee in good faith.
P. "Incentive Stock Option" means any Option awarded under this Plan
intended to be and designated as an "Incentive Stock Option" within the meaning
of Section 422 of the Code. Notwithstanding anything herein to the contrary,
Incentive Stock Option shall be granted solely to Key Employees and shall not be
granted to Consultants.
Q. "Key Employee" means any person who is an officer or other
valuable employee of the Company, (regardless of title or position) a Designated
Parent or a Designated Subsidiary, as determined by the Committee in its sole
discretion.
R. "Non-Qualified Stock Option" shall mean any Option awarded under
this Plan that is not an Incentive Stock Option.
3
<PAGE>
S. "Option" means the right to purchase the number of shares granted
in the Option Agreement at a prescribed purchase price on the terms specified in
the Plan.
T. "Parent" means, other than the Company, (i) any corporation in an
unbroken chain of corporations ending with the Company which owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain or (ii) any corporation or
trade or business (including, without limitation, a partnership or limited
liability company) which controls 50% or more (whether by ownership of stock,
assets or an equivalent ownership interest) of the Company.
U. "Participant" means a Key Employee or Consultant who is granted
an Award under the Plan which Award has not expired.
V. "Restricted Shares" means shares of Common Stock or the right to
receive shares of Common Stock, as the case may be, awarded to a Key Employee of
the Company, Designated Parent or a Designated Subsidiary pursuant to Article
VII.
W. "Retirement" means a Termination of Employment without Cause at
or after age 65 (or, with the consent of the Committee, before age 65).
X. "Securities Act" means the Securities Act of 1933, as amended,
and all rules and regulations promulgated thereunder.
Y. "Share" means a share of Common Stock.
Z. "Subsidiary" means, other than the Company, (i) any corporation
in an unbroken chain of corporations beginning with the Company which owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain; (ii) any corporation or
trade or business (including, without limitation, a partnership or limited
liability company) which is controlled 50% or more (whether by ownership of
stock, assets or an equivalent ownership interest) by the Company or one of its
Subsidiaries; or (iii) any other entity, approved by the Board as a Subsidiary
under the Plan, in which the Company or any of its Subsidiaries has an equity or
other ownership interest.
AA. "Ten Percent Stockholder" shall mean a person owning at the time
the Option is granted Common Stock of the Company possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or of a Designated Parent or Designated Subsidiary.
AB. "Termination of Employment" with respect to an individual means
that individual is no longer actively employed as an employee by the Company, a
Parent or a Subsidiary, irrespective of whether or not such employee is
receiving salary continuance pay, is continuing to participate in other employee
benefit programs or is otherwise receiving severance type payments. With
respect to a Consultant, "Termination of Employment" means that the Consultant
is no longer acting as a Consultant to the Company, Designated Parent or
Designated Subsidiary. In the event an entity shall cease to be a Subsidiary,
there shall be deemed a
4
<PAGE>
Termination of Employment of any individual who is not otherwise an employee or
Consultant of the Company, a Parent or another Subsidiary at the time the entity
ceases to be a Subsidiary. In the event an entity shall cease to be a Parent,
there shall be deemed a Termination of Employment of any individual who is not
otherwise an employee or Consultant of the Company, another Parent or a
Subsidiary at the time the entity ceases to be a Parent.
III. EFFECTIVE DATE
--------------
The Plan shall become effective on ___________. Grants of Awards by
the Committee under the Plan may be made on or after the Effective Date of the
Plan.
IV. ADMINISTRATION
--------------
A. Duties of the Committee. The Plan shall be administered and
-----------------------
interpreted by the Committee. The Committee shall have full authority to
interpret the Plan and to decide any questions and settle all controversies and
disputes that may arise in connection with the Plan; to establish, amend and
rescind rules for carrying out the Plan; to administer the Plan, subject to its
provisions; to select Participants in, and grant Awards under, the Plan; to
determine the terms, exercise price and form of exercise payment for each Option
granted under the Plan and the terms and conditions (which need not be
identical) of all Options granted under the Plan; when and how an Award can be
exercised and whether in whole or in installments; to determine whether and to
what extent Incentive Stock Options and Non-Qualified Stock Options, or any
combination thereof, are to be granted hereunder to one or more Key Employees or
Consultants; to prescribe the form or forms of instruments evidencing Awards and
any other instruments required under the Plan (which need not be uniform); and
to make all other determinations and to take all such steps in connection with
the Plan and the Awards as the Committee, in its sole discretion, deems
necessary or desirable. The Committee shall not be bound to any standards of
uniformity or similarity of action, interpretation or conduct in the discharge
of its duties hereunder, regardless of the apparent similarity of the matters
coming before it. Any determination, action or conclusion of the Committee
shall be final, conclusive and binding on all parties. Anything in the Plan to
the contrary notwithstanding, no term of this Plan relating to Incentive Stock
Options shall be interpreted, amended or altered, nor shall any discretion or
authority granted under the Plan be so exercised, so as to disqualify the Plan
under Section 422 of the Code, or, without the consent of the Participants
affected, to disqualify any Incentive Stock Option under such Section 422.
B. Advisors. The Committee may employ such legal counsel,
--------
consultants and agents as it may deem desirable for the administration of the
Plan, and may rely upon any advice or opinion received from any such counsel or
consultant and any computation received from any such consultant or agent.
Expenses incurred by the Committee in the engagement of such counsel, consultant
or agent shall be paid by the Company.
5
<PAGE>
C. Determinations. Each determination, interpretation or other
--------------
action made or taken pursuant to the provisions of this Plan by the Committee
shall be final, conclusive and binding for all purposes and upon all persons,
including, without limitation, the Participants, the Company, a Designated
Parent and Designated Subsidiaries, directors, officers and other employees of
the Company, a Designated Parent and Designated Subsidiaries, and the respective
heirs, executors, administrators, personal representatives and other successors
in interest of each of the foregoing.
V. SHARES; ADJUSTMENT UPON CERTAIN EVENTS
--------------------------------------
A. Shares to be Delivered; Fractional Shares. Shares to be issued
-----------------------------------------
under the Plan shall be made available, at the sole discretion of the Board,
either from authorized but unissued Shares or from issued Shares reacquired by
the Company and held in treasury. No fractional Shares will be issued or
transferred upon the exercise of any Option. Fractional Shares resulting from
any adjustment in Awards described in Article V(C) or otherwise shall be
aggregated. With respect to any remaining fractional Share, upon exercise of
any Option, the Company shall pay a cash adjustment equal to the pro rata
portion of the Fair Market Value of one Share on the date of exercise.
B. Number of Shares. Subject to adjustment as provided in this
----------------
Article V, the maximum aggregate number of Shares that may be issued under the
Plan shall be 1,600,000. If Options are for any reason cancelled, or expire or
terminate unexercised, the Shares covered by such Options shall again be
available for the grant of Options, subject to the foregoing limit. If
Restricted Shares are forfeited or otherwise do not become vested, the Shares
covered by such Restricted Share Agreement shall again be available for the
grant of Awards, subject to the foregoing limit.
C. Adjustments; Recapitalization, etc.
-----------------------------------
1. The existence of the Plan and the Awards granted hereunder
shall not affect in any way the right or power of the Board or the stockholders
of the Company to make or authorize any adjustment, recapitalization,
reorganization or other change in the Company's capital structure or its
business, any merger or consolidation of the Company, any issue of bonds,
debentures, preferred or prior preference stocks ahead of or affecting Common
Stock, the dissolution or liquidation of the Company, a Designated Parent or
Designated Subsidiary, any sale or transfer of all or part of their assets or
business or any other corporate act or proceeding. The Committee may make or
provide for such adjustments in the maximum number of Shares specified in
Article V(B), in the number of Shares covered by outstanding Awards granted
hereunder, and/or in the exercise price, grant price or Purchase Price
applicable to such Awards or such other adjustments in the number and kind of
securities received upon the exercise of Options, as the Committee in its sole
discretion may determine is equitably required to prevent dilution or
enlargement of the rights of Participants or to otherwise recognize the effect
that otherwise would result from any stock dividend, stock split, combination of
shares, recapitalization or other change in the capital structure of the
Company, merger, consolidation,
6
<PAGE>
spin-off, reorganization, partial or complete liquidation, issuance of rights or
warrants to purchase securities or any other corporate transaction or event
having an effect similar to any of the foregoing.
2. In the event of a merger or consolidation in which the
Company or a Designated Parent is not the surviving entity or in the event of
any transaction that results in the acquisition of substantially all of the
Company's or a Designated Parent's outstanding Common Stock by a single person
or entity or by a group of persons and/or entities acting in concert, or in the
event of the sale or transfer of all of the Company's or a Designated Parent's
assets (the foregoing being referred to as "Acquisition Events"), then the
Committee may in its sole discretion terminate all outstanding Options effective
as of the consummation of the Acquisition Event by delivering notice of
termination to each Participant at least 20 days prior to the date of
consummation of the Acquisition Event; provided that, during the period from the
date on which such notice of termination is delivered to the consummation of the
Acquisition Event, each Participant shall have the right to exercise in full all
the Options that are then outstanding (without regard to limitations on exercise
otherwise contained in the Options) but contingent on occurrence of the
Acquisition Event, and, provided that, if the Acquisition Event does not take
place within a specified period after giving such notice for any reason
whatsoever, the notice and exercise shall be null and void.
Notwithstanding the foregoing, at the discretion of the Committee, the
provisions contained in this subsection shall be adjusted as they apply to
Options granted to Participants within six months before the occurrence of an
Acquisition Event if the holder of such Option is subject to the reporting
requirements of Section 16(a) of the Exchange Act in such manner as determined
by the Committee, including without limitation, terminating Options at specific
dates after the Acquisition Event, in order to give the Participant the benefit
of the Option. If an Acquisition Event occurs, to the extent the Committee does
not terminate the outstanding Options pursuant to this Article V(C)(2), then the
provisions of Article V(C)(1) shall apply.
3. Except as hereinbefore expressly provided, the issuance by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, for cash, property, labor or services, upon direct
sale, upon the exercise of rights or warrants to subscribe therefor or upon
conversion of shares or other securities, and in any case whether or not for
fair value, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the number and class of shares and/or other securities or
property subject to Awards theretofore granted or the exercise price, grant
price or Purchase Price (as hereinafter defined).
VI. TERMS OF OPTIONS
----------------
A. Grant. The Committee may grant Non-Qualified Stock Options or
-----
Incentive Stock Options, or any combination thereof to Key Employees and may
grant Non-Qualified Stock Options to Consultants. Notwithstanding the
foregoing, that during the calendar year 1996, in
7
<PAGE>
no event shall the Committee grant Options to Stephan Weiss, Donna Karan, Frank
R. Mori and Tomio Taki. Each Option shall be evidenced by an Option Agreement
in such form as the Committee shall approve from time to time.
B. Exercise Price. The purchase price per Share (the "Purchase
--------------
Price") deliverable upon the exercise of a Non-Qualified Stock Option shall be
determined by the Committee and set forth in a Participant's Option Agreement,
provided that the Purchase Price shall not be less than 100% of the Fair Market
Value of a Share at the time of grant; provided, however, if an Incentive Stock
Option is granted to a Ten Percent Stockholder, the Purchase Price shall be no
less than 110% of the Fair Market Value of a Share.
C. Number of Shares. With respect to an Option granted to a
----------------
Participant, the Option Agreement shall specify the number of Shares underlying
such Option, as determined by the Committee in its sole discretion.
D. Exercisability. At the time of grant, the Committee shall
--------------
specify when and on what terms the Options granted shall be exercisable. In the
case of Options not immediately exercisable in full, the Committee may at any
time accelerate the time at which all or any part of the Options may be
exercised and may waive any other conditions to exercise. No Option shall be
exercisable after the expiration of ten years from the date of grant; provided,
however, the term of an Incentive Stock Option granted to a Ten Percent
Stockholder may not exceed five years. Each Option shall be subject to earlier
termination as provided in Article IX below. Other than on a Change In Control,
no Option which is granted to a Participant who is subject to Section 16(b) of
the Exchange Act shall be exercisable before six months after it is granted
solely to the extent required by Section 16(b) of the Exchange Act.
E. Exercise of Options.
-------------------
1. A Participant may elect to exercise all or any portion of
the Participant's Option by giving written notice to the Committee of such
election and of the number of Shares with respect to such Option which
Participant has elected to purchase, accompanied by payment in full of the
aggregate Purchase Price for the number of Shares for which the Option is being
exercised.
2. Shares purchased pursuant to the exercise of Options shall
be paid for at the time of exercise as follows:
(a) in cash or by check, bank draft or money order payable to the
order of Company;
(b) if the Shares are traded on a national securities exchange,
through the delivery of irrevocable instructions to a broker to deliver
promptly to the Company an amount equal to the aggregate Purchase Price; or
8
<PAGE>
(c) on such other terms and conditions as may be acceptable to
the Committee (which may include payment in full or in part by the transfer
of Shares which, if owned by a Participant who is subject to Section 16(b)
of the Exchange Act, have been held by the Participant for at least six
months solely to the extent required by Section 16(b) of the Exchange Act,
or the surrender of vested Options owned by the Participant) and in
accordance with applicable law.
F. Incentive Stock Option Limitations. To the extent that the
----------------------------------
aggregate Fair Market Value (determined as of the time of grant) of the Common
Stock with respect to which Incentive Stock Options are exercisable for the
first time by the Participant during any calendar year under the Plan and/or any
other stock option plan of the Company or any subsidiary or parent corporation
(within the meaning of Section 424 of the Code) exceeds $100,000, such Options
shall be treated as Options which are not Incentive Stock Options. To the
extent that any Option does not qualify as an Incentive Stock Option (whether
because of its provisions or the time or manner of its exercise or otherwise),
such Option or the portion thereof which does not qualify, shall constitute a
separate Non-Qualified Stock Option.
To the extent permitted under Section 422 of the Code, or the
applicable regulations thereunder or any applicable Internal Revenue Service
pronouncement, if (i) a Participant's employment with the Company or Designated
Subsidiary is terminated by reason of death, Disability, Retirement or
Termination of Employment without Cause (except as otherwise provided herein),
and (ii) the portion of any Incentive Stock Option that would be exercisable
during the post-termination period specified under Article IX but for the
$100,000 limitation currently contained in Section 422(d) of the Code, is
greater than the portion of such Stock Option that is immediately exercisable as
an `incentive stock option' during such post-termination period under Section
422, such excess shall be treated as a Non-Qualified Stock Option. If the
exercise of an Incentive Stock Option is accelerated for any reason, any portion
of such Option that is not exercisable as an Incentive Stock Option by reason of
the $100,000 limitation contained in Section 422(d) of the Code shall be treated
as a Non-Qualified Stock Option.
Should any of the foregoing provisions not be necessary in order for
the Stock Options to qualify as Incentive Stock Options, or should any
additional provisions be required, the Committee may amend the Plan accordingly,
without the necessity of obtaining the approval of the shareholders of the
Company, except as otherwise required by law.
G. Buy Out and Settlement Provisions. The Committee may at any time
---------------------------------
on behalf of the Company offer to buy out an Option previously granted, based on
such terms and conditions as the Committee shall establish and communicate to
the Participant at the time that such offer is made.
H. Modification, Extension and Renewal of Options. The Committee
----------------------------------------------
may modify, extend or renew outstanding Options granted under the Plan, or
accept the surrender of outstanding Options (up to the extent not theretofore
exercised) and authorize the granting of new Options in substitution therefor
(to the extent not theretofore exercised).
9
<PAGE>
I. Other Terms and Conditions. Options may contain such other
--------------------------
provisions, which shall not be inconsistent with any of the foregoing terms of
the Plan, as the Committee shall deem appropriate including, without limitation,
permitting "reloads" such that the same number of Options are granted as the
number of Options exercised, shares used to pay for the exercise price of
Options or shares used to pay withholding taxes ("Reloads"). With respect to
Reloads, the exercise price of the new Stock Option shall be the Fair Market
Value on the date of the "reload" and the term of the Stock Option shall be the
same as the remaining term of the Options that are exercised, if applicable, or
such other exercise price and term as determined by the Committee.
VII. RESTRICTED SHARES
-----------------
Awards granted pursuant to this Article VII shall be evidenced by an
Award Agreement in such form as the Committee shall from time to time approve
and the terms and conditions of such Awards shall be set forth therein.
Restricted Shares may be issued either alone or in addition to other Awards
granted under the Plan.
A. Restricted Shares. The Committee shall determine the eligible
-----------------
persons to whom, and the time or times at which, grants of Restricted Shares
will be made, the number of Shares to be awarded, the price (if any) to be paid
by the recipient, the time or times within which such Awards may be subject to
forfeiture, the vesting schedule and rights to acceleration thereof, and all
other terms and conditions of the Awards. Notwithstanding the foregoing, during
the calendar year 1996, in no event shall the Committee grant Restricted Shares
to Stephan Weiss, Donna Karan, Frank R. Mori and Tomio Taki. The Committee may
condition the grant of Restricted Shares upon the attainment of specified
performance goals or such other factors as the Committee may determine, in its
sole discretion.
B. Awards and Certificates. The prospective Participant selected to
-----------------------
receive Restricted Shares shall not have any rights with respect to such Award,
unless and until such Participant has delivered a fully executed copy of the
Award Agreement to the Company and has otherwise complied with the applicable
terms and conditions of such Award. Further, such Award shall be subject to the
following conditions:
1. Purchase Price. The purchase price for Restricted Shares
--------------
may be less than their par value and may be zero, to the extent permitted by
applicable law.
2. Acceptance. Awards of Restricted Shares must be accepted
----------
within a period of sixty (60) days (or such shorter period as the Committee may
specify at grant) after the Award date, by executing a Restricted Share Award
Agreement and by paying whatever price (if any) the Committee has designated
thereunder.
3. Certificates. Upon an Award of Restricted Shares, the
------------
Committee may, in its sole discretion, decide to either have the Company or
other agent appointed by the Committee hold the share certificates
representing such Restricted Shares in escrow or issue share certificates to the
Participant.
10
<PAGE>
4. Restrictions/Vesting. Restricted Shares may not be sold,
--------------------
assigned, transferred, pledged, hypothecated or otherwise disposed of, except by
will or the laws of descent and distribution within the six (6) month period
following the date the Award is granted or such other period as determined by
the Committee (including no period). Any attempt to dispose of any such Shares
of stock in contravention of such restrictions shall be null and void and
without effect. Unless otherwise provided in the applicable Agreement, a
Participant's Restricted Shares shall be fully vested on the date of the Award.
5. Ownership. Except to the extent otherwise set forth in the Award
---------
Agreement, the Participant shall possess all incidents of ownership of such
shares, subject this Article VII, including the right to receive dividends with
respect to such Shares and to vote and tender such Shares. The Committee, in its
sole discretion, as determined at the time of the Award, may permit or require
the payment of dividends to be deferred.
VIII. ACCELERATION EVENTS
-------------------
Unless otherwise provided in the applicable Agreement, all Options
granted and not previously exercisable shall become vested and fully exercisable
immediately upon the occurrence of a Change In Control and the restrictions to
which Restricted Shares granted prior to the Change In Control are subject shall
lapse as if the applicable Restriction Period had ended upon such Change In
Control.
11
<PAGE>
The Committee, in its sole discretion, may provide, as part of the
Agreement or otherwise, for the purchase of any Option granted under the Plan by
the Company, a Designated Parent or a Designated Subsidiary for an amount of
cash equal to the excess of the Change In Control Price (as defined herein) of
the shares of Common Stock covered by such Option, over the aggregate exercise
price or purchase price of such Option. For purposes of this Plan, Change In
Control Price shall mean the higher of (i) the highest price per share of Common
Stock paid in any transaction related to a Change In Control, or (ii) the
highest Fair Market Value at any time during the 60-day period preceding a
Change In Control.
IX. TERMINATION OF EMPLOYMENT
-------------------------
A. General. Unless otherwise provided in the applicable Agreement,
-------
if a Participant's employment or consultancy shall terminate due to Retirement,
Disability or for any reason other than for Cause prior to the complete exercise
of an Option (or deemed exercise thereof), then such Option shall thereafter be
exercisable to the extent such Option is vested and shall remain exercisable for
[ ] [years/months]; provided, however, that no Option may be exercised after
the scheduled expiration date of such Option. Unless otherwise provided in the
Restricted Share Agreement, if a Participant's employment or consultancy shall
terminate due to Retirement, Disability or for any reason other than for Cause
at any time, Restricted Shares shall not be forfeited for any reason and the
restrictions in Article VII(B)(4) shall continue to apply to such Restricted
Shares. Any termination of employment or consultancy by the Company for Cause
will be treated in accordance with the provisions of paragraph (B) below.
B. Termination by Company for Cause. Unless otherwise provided in
--------------------------------
the applicable Agreement, if a Participant's employment or consultancy with the
Company, Parent or a Subsidiary shall be terminated by the Company, Parent or
such Subsidiary for Cause, then all outstanding Options held by such Participant
shall immediately terminate and rights to all Restricted Shares shall be
forfeited immediately.
C. Miscellaneous. The Committee may determine whether any given
-------------
leave of absence constitutes a Termination of Employment. Awards granted under
the Plan shall not be affected by any change of employment so long as the
Participant continues to be an employee of the Company, Parent or a Subsidiary.
D. Cancellation of Options. Except as otherwise provided in Article
-----------------------
VIII, no Options that were not exercisable during the period of employment shall
thereafter become exercisable upon a Termination of Employment for any reason or
no reason whatsoever, and such Options shall terminate and become null and void
upon a Termination of Employment, unless the Committee determines in its sole
discretion that such Options shall be exercisable.
12
<PAGE>
X. NONTRANSFERABILITY OF AWARDS
----------------------------
No Award shall be transferable by the Participant otherwise than by
will or under applicable laws of descent and distribution, and during the
lifetime of the Participant may be exercised only by the Participant or his or
her guardian or legal representative. In addition, except as provided above, no
Award shall be assigned, negotiated, pledged or hypothecated in any way (whether
by operation of law or otherwise), and no Award shall be subject to execution,
attachment or similar process. Upon any attempt to transfer, assign, negotiate,
pledge or hypothecate any Award, or in the event of any levy upon any Award by
reason of any execution, attachment or similar process contrary to the
provisions hereof, such Award shall immediately terminate and become null and
void.
XI. RIGHTS AS A STOCKHOLDER
-----------------------
A Participant shall have no rights as a stockholder with respect to
any Shares covered by such Participant's Award until such Participant shall have
become the holder of record of such Shares, and no adjustments shall be made for
dividends in cash or other property or distributions or other rights in respect
to any such Shares, except as otherwise specifically provided in this Plan.
XII. TERMINATION, AMENDMENT AND MODIFICATION
---------------------------------------
The Plan shall terminate at the close of business on the tenth
anniversary of the Effective Date (the "Termination Date"), unless terminated
sooner as hereinafter provided, and no Award shall be granted under the Plan on
or after that date. The termination of the Plan shall not terminate any
outstanding Awards that by their terms continue beyond the Termination Date. At
any time prior to the Termination Date, the Committee or Board may amend or
terminate the Plan or suspend the Plan in whole or in part.
The Committee or Board may at any time, and from time to time, amend,
in whole or in part, any or all of the provisions of the Plan (including any
amendment deemed necessary to ensure that the Company complies with any
regulatory requirements referred to in Article XIV), or suspend or terminate it
entirely, retroactively or otherwise; provided, however, that, unless otherwise
-------- -------
required by law or specifically provided herein, the rights of a Participant
with respect to Awards granted prior to such amendment, suspension or
termination, may not, be materially impaired without the consent of such
Participant and, provided further, without the approval of the stockholders of
the Company entitled to vote, solely to the extent required by Section 16(b) of
the Exchange Act, no amendment may be made which would (i) increase the
aggregate number of shares of Common Stock that may be issued under this Plan
(except by operation of Article V) or, with respect to Awards; (ii) decrease the
minimum Purchase Price of any Award; (iii) extend the maximum period during
which an Option may be exercised under Article VI(D) or (iv) effect any change
that would require stockholder approval under Section 16(b) of the Exchange Act.
13
<PAGE>
The Committee or the Board may amend the terms of any Award granted,
prospectively or retroactively, but, subject to Article VIII above or as
otherwise provided herein, no such amendment or other action by the Committee or
the Board shall materially impair the rights of any Participant without the
Participant's consent. No modification of an Award shall adversely affect the
status of an Incentive Stock Option as an incentive stock option under Section
422 of the Code. Notwithstanding the foregoing and solely to the extent
required by Section 16(b) of the Exchange Act, neither the Board nor the
Committee may make any determination or interpretation or take any other action
which would cause any member of the Committee to cease to be a "disinterested
person" or "non-employee director" with regard to the Plan for purposes of Rule
16b-3 under the Exchange Act.
XIII. USE OF PROCEEDS
---------------
The proceeds of the sale of Shares subject to Awards under the Plan
are to be added to the general funds of Company and used for its general
corporate purposes as the Board shall determine.
XIV. GENERAL PROVISIONS
------------------
A. Right to Terminate Employment or Consultancy. Neither the
--------------------------------------------
adoption of the Plan nor the grant of Awards shall impose any obligation on the
Company, a Designated Parent or Designated Subsidiaries to continue the
employment or consultancy of any Participant, nor shall it impose any obligation
on the part of any Participant to remain in the employ of the Company,
Designated Parent or Designated Subsidiaries.
B. Trusts, etc. Nothing contained in the Plan and no action taken
------------
pursuant to the Plan (including, without limitation, the grant of any Award
thereunder) shall create or be construed to create a trust of any kind, or a
fiduciary relationship, between the Company and any Participant or the executor,
administrator or other personal representative or designated beneficiary of such
Participant, or any other persons. If and to the extent that any Participant or
such Participant's executor, administrator or other personal representative, as
the case may be, acquires a right to receive any payment from the Company
pursuant to the Plan, such right shall be no greater than the right of an
unsecured general creditor of the Company.
C. Notices. Any notice to the Company required by or in respect of
-------
this Plan will be addressed to Donna Karan International Inc. at 550 Seventh
Avenue, New York, New York 10018, Attention: General Counsel (or such other
place of business as shall become Donna Karan International Inc. principal
executive offices from time to time). Each Participant shall be responsible for
furnishing the Committee with the current and proper address for the mailing to
such Participant of notices and the delivery to such Participant of agreements,
Shares and payments. Any such notice to the Participant will, if the Company
has received notice that the Participant is then deceased, be given to the
Participant's personal representative if such representative has previously
informed the Company of his status and address (and has provided
14
<PAGE>
such reasonable substantiating information as the Company may request) by
written notice under this Article XIV. Any notice required by or in respect of
this Plan will be deemed to have been duly given when delivered in person or
when dispatched by telecopy or one business day after having been dispatched by
a nationally recognized overnight courier service or three business days after
having been mailed by United States registered or certified mail, return receipt
requested, postage prepaid. The Company assumes no responsibility or obligation
to deliver any item mailed to such address that is returned as undeliverable to
the addressee and any further mailings will be suspended until the Participant
furnishes the proper address.
D. Severability of Provisions. If any provisions of the Plan shall
--------------------------
be held invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provisions of the Plan, and the Plan shall be construed and
enforced as if such provisions had not been included.
E. Payment to Minors, Etc. Any benefit payable to or for the
-----------------------
benefit of a minor, an incompetent person or other person incapable of receipt
thereof shall be deemed paid when paid to such person's guardian or to the party
providing or reasonably appearing to provide for the care of such person, and
such payment shall fully discharge the Committee, the Company and their
employees, agents and representatives with respect thereto.
F. Headings and Captions. The headings and captions herein are
---------------------
provided for reference and convenience only. They shall not be considered part
of the Plan and shall not be employed in the construction of the Plan.
G. Controlling Law. The Plan shall be construed and enforced
---------------
according to the laws of the State of Delaware, without giving effect to rules
governing the conflicts of laws.
H. Other Benefits. No payment under this Plan shall be considered
--------------
compensation for purposes of computing benefits under any retirement plan of the
Company, a Designated Parent or a Designated Subsidiary nor affect any benefits
under any other benefit plan now or subsequently in effect under which the
availability of benefits is related to the level of compensation.
I. Costs. The Company shall bear all expenses included in
-----
administering this Plan, including expenses of issuing Common Stock pursuant to
any Awards hereunder.
J. Section 16(b) of the Exchange Act. All elections and
---------------------------------
transactions under the Plan by persons subject to Section 16 of the Exchange Act
involving shares of Common Stock shall be intended to comply with any applicable
condition under Rule 16b-3 as then in effect. In such event, the Committee may
at any time impose any limitations upon the exercise of an Option or issuance of
Shares or other conditions which, in the Committee's discretion, are necessary
or desirable in order to comply with Section 16(b) and the rules and regulations
thereunder and may establish and adopt written administrative guidelines,
designed to facilitate compliance with Section 16(b) of the Exchange Act, as it
may deem necessary or proper for the administration and operation of the Plan
and the transaction of business thereunder.
15
<PAGE>
K. Death/Disability. The Committee may in its discretion require the
----------------
transferee of a Participant to supply it with written notice of the
Participant's death or Disability and to supply it with a copy of the will (in
the case of the Participant's death) or such other evidence as the Committee
deems necessary to establish the validity of the transfer of an Award. The
Committee may also require that the agreement of the transferee to be bound by
all of the terms and conditions of the Plan.
XV. ISSUANCE OF STOCK CERTIFICATES;
LEGENDS; PAYMENT OF EXPENSES
----------------------------
A. Stock Certificates. Upon any exercise of an Option and payment
------------------
of the exercise price as provided in such Option or lapse of restriction on a
Restricted Share, a certificate or certificates for the Shares as to which such
Award has been granted shall be issued by the Company in the name of the person
or persons receiving such Award and shall be delivered to or upon the order of
such person or persons.
B. Legends. All certificates for shares of Common Stock delivered
-------
under the Plan shall be subject to such stock transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations
and other requirements of the Securities and Exchange Commission, any stock
exchange upon which the Stock is then listed or any national securities
association system upon whose system the Stock is then quoted, any applicable
federal or state securities law, and any applicable corporate law, and the
Committee may cause a legend or legends to be put on any such certificates to
make appropriate reference to such restrictions.
If the Board or the Committee determines in its sole discretion, each
Participant shall, upon any exercise or conversion of an Award, execute and
deliver to the Company a written statement, in form satisfactory to the Company,
representing and warranting that such Participant is purchasing or accepting the
Shares then acquired for such Participant's own account and not with a view to
the resale or distribution thereof, that any subsequent offer for sale or sale
of any such Shares shall be made either pursuant to (i) a registration statement
on an appropriate form under the Securities Act, which registration statement
shall have become effective and shall be current with respect to the Shares
being offered and sold, or (ii) a specific exemption from the registration
requirements of the Securities Act, and that in claiming such exemption the
Participant will, prior to any offer for sale or sale of such Shares, obtain a
favorable written opinion, satisfactory in form and substance to the Company,
from counsel approved by the Company as to the availability of such exception.
XVI. LISTING OF SHARES AND RELATED MATTERS
-------------------------------------
If the Company determines, in its discretion, that the listing,
registration, or qualification of the Award or the Shares subject to the Award
upon any securities exchange or under any state or federal securities or other
law or regulation, or the exemption from such listing, registration or
qualification requirements, or the consent or approval of any governmental
regulatory body is necessary or desirable as a condition to or in connection
with the granting of
16
<PAGE>
an Option, the exercisability of an Award or the issue or purchase of Shares
thereunder or the vesting of Restricted Shares, no Shares shall be issued upon
the exercise of the Option unless the listing, registration, qualification,
exemption, consent or approval has been effected or obtained free of any
conditions not acceptable to the Company. The holder of the Option or
Restricted Share will supply the Company with certificates, representations, and
information that the Company requests and shall otherwise cooperate with the
Company in obtaining the listing, registration, qualification, exemption,
consent or approval. Without limiting the foregoing, no Shares shall be issued
upon the exercise of an Option or vesting of Restricted Shares if the Company or
the Committee determines that the issuance of shares upon exercise or vesting
does not comply with any applicable federal and state securities laws. The
Committee in its sole discretion may require as a condition of exercise of any
Option, an opinion of counsel for the holder of the Option that shares to be
issued upon exercise of the Option are exempt from registrations under the
Securities Act or applicable state "blue sky" laws. If the Company or the
Committee, as part of an offering of securities or otherwise, finds it
desirable, because of federal or state regulatory requirements, to reduce the
period during which any Options may be exercised, the Company or the Committee
may, in its discretion and without the Participant's consent, reduce the
exercise period on not less than 15 days' written notice to the Participant.
XVII. WITHHOLDING OF TAXES
--------------------
The Company shall have the right to deduct from any payment to be made
to a Participant, or to otherwise require, prior to the issuance or delivery of
any shares of Common Stock or the payment of any cash hereunder, payment by the
Participant of, any Federal, state or local taxes required by law to be
withheld.
The Committee may permit any such withholding obligation with regard
to any Participant to be satisfied by reducing the number of shares of Common
Stock otherwise deliverable or by delivering shares of Common Stock already
owned. If the Company is subject to reporting under the Exchange Act, a person
required to file reports under Section 16(a) of the Exchange Act with respect to
securities of the Company may elect to have a sufficient number of shares of
Common Stock withheld to fulfill such tax obligations (hereinafter a
"Withholding Election") only if the election complies with such conditions as
are necessary to prevent the withholding of such shares from being subject to
Section 16(b) of the Exchange Act. To the extent necessary under then current
law, such conditions shall include the following: (x) the withholding election
shall be subject to the disapproval of the Committee and (y) the withholding
election shall be made (i) during the period beginning on the third business day
following the date of release for publication of the quarterly or annual summary
statements of sales and earnings of the Company and ending on the twelfth
business day following such date or is made in advance but takes effect during
such period, (ii) six months before the Award becomes taxable, or (iii) during
any other period in which a withholding election may be made under the
provisions of Rule 16b-3 promulgated pursuant to the Act. Any fraction of a
share of Common Stock required to satisfy such tax obligations shall be
disregarded and the amount due shall be paid instead in cash by the Participant.
17
<PAGE>
EXHIBIT 10.3
DONNA KARAN INTERNATIONAL INC.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
I. PURPOSES OF THE PLAN............................................. 1
--------------------
II. DEFINITIONS...................................................... 1
-----------
III. EFFECTIVE DATE................................................... 2
--------------
IV. ADMINISTRATION................................................... 3
--------------
A. Duties of the Committee.................................... 3
-----------------------
B. Advisors................................................... 3
--------
C. Determinations............................................. 3
--------------
D. Disinterested or Non-Employee Directors.................... 3
---------------------------------------
V. SHARES; ADJUSTMENT UPON CERTAIN EVENTS........................... 3
--------------------------------------
A. Shares to be Delivered; Fractional Shares.................. 3
-----------------------------------------
B. Number of Shares........................................... 3
----------------
C. Adjustments; Recapitalization, etc......................... 4
----------------------------------
VI. AWARDS AND TERMS OF OPTIONS...................................... 5
---------------------------
A. Grant...................................................... 5
-----
B. Date of Grant.............................................. 5
-------------
C. Option Agreement........................................... 6
----------------
D. Option Terms............................................... 6
------------
E. Expiration................................................. 6
-----------
F. Acceleration of Exercisability............................. 6
------------------------------
VII. EFFECT OF TERMINATION OF DIRECTORSHIP............................ 7
-------------------------------------
A. Death, Disability or Otherwise Ceasing to be a Director... 7
-------------------------------------------------------
B. Cancellation of Options................................... 7
-----------------------
VIII. NONTRANSFERABILITY OF OPTIONS.................................... 7
-----------------------------
IX. RIGHTS AS A STOCKHOLDER.......................................... 8
-----------------------
X. TERMINATION, AMENDMENT AND MODIFICATION.......................... 8
---------------------------------------
XI. USE OF PROCEEDS.................................................. 9
---------------
XII. GENERAL PROVISIONS............................................... 9
------------------
A. Right to Terminate Directorship............................ 9
-------------------------------
B. Trusts, etc................................................ 9
------------
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
C. Notices.......................................................... 9
-------
D. Severability of Provisions....................................... 10
--------------------------
E. Payment to Minors, Etc........................................... 10
----------------------
F. Headings and Captions............................................ 10
---------------------
G. Controlling Law.................................................. 10
---------------
H. Section 16(b) of the Act......................................... 10
------------------------
XIII. ISSUANCE OF STOCK CERTIFICATES;
LEGENDS; PAYMENT OF EXPENSES........................................... 10
----------------------------
A. Stock Certificates............................................... 10
------------------
B. Legends.......................................................... 10
-------
C. Payment of Expenses.............................................. 10
-------------------
XIV. LISTING OF SHARES AND RELATED MATTERS.................................. 11
-------------------------------------
XV. WITHHOLDING TAXES...................................................... 11
-----------------
</TABLE>
Form of Option Agreement Exhibit A
ii
<PAGE>
DONNA KARAN INTERNATIONAL INC.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
I. PURPOSES OF THE PLAN
--------------------
The purposes of this 1996 Non-Employee Director Stock Option Plan (the
"Plan") are to enable the Donna Karan International Inc. (the "Company") to
attract, retain and motivate the directors who are important to the success and
growth of the business of the Company and to create a long-term mutuality of
interest between the directors and the stockholders of the Company by granting
the directors options to purchase Common Stock (as defined herein).
II. DEFINITIONS
-----------
In addition to the terms defined elsewhere herein, for purposes of
this Plan, the following terms will have the following meanings when used herein
with initial capital letters:
A. "Act" means the Securities Exchange Act of 1934, as amended, and
all rules and regulations promulgated thereunder.
B. "Board" means the Board of Directors of the Company.
C. "Code" means the Internal Revenue Code of 1986, as amended (or any
successor statute).
D. "Committee" means the Board or a duly appointed committee of the
Board to which the Board has delegated its power and functions hereunder.
E. "Common Stock" means the common stock of the Company, par value
$.01 per share, any common stock into which the common stock may be converted
and any common stock resulting from any reclassification of the common stock.
F. "Company" means the Donna Karan International Inc., a Delaware
corporation, and any successor thereto.
G. "Disability" shall mean a total and permanent disability, as
defined in Section 22(e)(3) of the Code.
H. "Eligible Director" means a director of the Company who is not an
active employee of the Company or any Related Person and who is not an officer,
director or employee of (i) any entity which, directly or indirectly,
beneficially owns or controls 5% or more of the combined voting power of the
then outstanding voting securities of the Company (or any Related Person)
entitled to vote generally in the election of directors or (ii) any entity
controlling, controlled by or under common control (within the meaning of Rule
405 of the Securities Act)
<PAGE>
with any such entity. Notwithstanding the foregoing, during the calendar year
1996, Stephan Weiss, Donna Karan, Frank R. Mori and Tomio Taki shall not be
considered Eligible Directors and may not be granted any Options under the Plan
for calendar year 1996.
I. "Fair Market Value" shall mean, for purposes of this Plan, unless
otherwise required by any applicable provision of the Code or any regulations
issued thereunder, as of any date, the last sales prices reported for the Common
Stock on the applicable date, (i) as reported by the principal national
securities exchange in the United States on which it is then traded, or (ii) if
not traded on any such national securities exchange, as quoted on an automated
quotation system sponsored by the National Association of Securities Dealers, or
if the sale of the Common Stock shall not have been reported or quoted on such
date, on the first day prior thereto on which the Common Stock was reported or
quoted.
J. "Option" means the right to purchase the number of Shares granted
in the Option agreement at a prescribed purchase price on the terms specified in
the Plan.
K. "Participant" means an Eligible Director who is granted an Option
under the Plan, which Option has not expired.
L. "Related Person" means, other than the Company (a) any corporation
that is defined as a subsidiary corporation in Section 424(f) of the Code; (b)
any corporation or trade or business (including, without limitation, a
partnership or limited liability company) which is controlled 50% or more by the
Company or one of its subsidiaries (whether by ownership of stock, assets or an
equivalent ownership interest); (c) any corporation that is defined as a parent
corporation in Section 424(e) of the Code; or (d) any corporation or trade or
business (including, without limitation, a partnership or limited liability
company) which controls 50% or more of the Company (whether by ownership of
stock, assets or an equivalent ownership interest).
M. "Securities Act" means the Securities Act of 1933, as amended, and
all rules and regulations promulgated thereunder.
N. "Share" means a share of Common Stock.
O. "Termination of Directorship" with respect to an individual means
that individual is no longer acting as a director (whether a non-employee
director or employee director) of the Company.
III. EFFECTIVE DATE
--------------
The Plan shall become effective as of [________________] (the
"Effective Date"). Grants of Options under the Plan will be made after the
Effective Date of the Plan pursuant to Article VI(B) of this Plan.
2
<PAGE>
IV. ADMINISTRATION
--------------
A. Duties of the Committee. The Plan shall be administered by the
-----------------------
Committee. The Committee shall have full authority to interpret the Plan and to
decide any questions and settle all controversies and disputes that may arise in
connection with the Plan; to establish, amend and rescind rules for carrying out
the Plan; to administer the Plan, subject to its provisions; to prescribe the
form or forms of instruments evidencing Options and any other instruments
required under the Plan and to change such forms from time to time; and to make
all other determinations and to take all such steps in connection with the Plan
and the Options as the Committee, in its sole discretion, deems necessary or
desirable. Any determination, action or conclusion of the Committee shall be
final, conclusive and binding on all parties.
B. Advisors. The Committee may employ such legal counsel,
--------
consultants and agents as it may deem desirable for the administration of the
Plan, and may rely upon any advice or opinion received from any such counsel or
consultant and any computation received from any such consultant or agent.
Expenses incurred by the Committee in the engagement of such counsel, consultant
or agent shall be paid by the Company.
C. Determinations. Each determination, interpretation or other
--------------
action made or taken pursuant to the provisions of this Plan by the Committee
shall be final, conclusive and binding for all purposes and upon all persons,
including, without limitation, the Participants, the Company, directors,
officers and other employees of the Company, and the respective heirs,
executors, administrators, personal representatives and other successors in
interest of each of the foregoing.
D. Disinterested or Non-Employee Directors. Notwithstanding anything
---------------------------------------
herein to the contrary and solely to the extent required under Section 16(b) of
the Act, the Committee may not take any action which would cause any Eligible
Director to cease to be a "disinterested person" or "non-employee director" for
purposes of Rule 16b-3 promulgated under the Act, as then in effect or any
successor provisions ("Rule 16b-3"), with regard to any stock option or other
equity plan of the Company.
V. SHARES; ADJUSTMENT UPON CERTAIN EVENTS
--------------------------------------
A. Shares to be Delivered; Fractional Shares. Shares to be issued
-----------------------------------------
under the Plan shall be made available, at the sole discretion of the Board,
either from authorized but unissued Shares or from issued Shares reacquired by
Company and held in treasury. No fractional Shares will be issued or
transferred upon the exercise of any Option nor will any compensation be paid
with regard to fractional shares.
B. Number of Shares. Subject to adjustment as provided in this
----------------
Article V, the maximum aggregate number of Shares authorized for issuance under
the Plan shall be 100,000. Where an Option is for any reason cancelled, or
expires or terminates unexercised, the Shares covered by such Option shall again
be available for the grant of Options, within the limits provided by the
preceding sentence.
3
<PAGE>
C. Adjustments; Recapitalization, etc. The existence of this Plan
-----------------------------------
and the Options granted hereunder shall not affect in any way the right or power
of the Board or the stockholders of the Company to make or authorize any
adjustment, recapitalization, reorganization or other change in the Company's
capital structure or its business, any merger or consolidation of the Company,
any issue of bonds, debentures, preferred or prior preference stocks ahead of or
affecting Common Stock, the dissolution or liquidation of the Company or any
sale or transfer of all or part of its assets or business, or any other
corporate act or proceeding, in which case the provisions of this Article V(C)
shall govern outstanding Options:
1. The Shares with respect to which Options may be granted are Shares
of Common Stock as presently constituted, but, if and whenever the Company shall
effect a subdivision, recapitalization or consolidation of Shares or the payment
of a stock dividend on Shares without receipt of consideration, the aggregate
number and kind of shares of capital stock issuable under this Plan shall be
proportionately adjusted, and each holder of a then outstanding Option shall
have the right to purchase under such Option, in lieu of the number of Shares as
to which the Option was then exercisable but on the same terms and conditions of
exercise set forth in such Option, the number and kind of shares of capital
stock which he or she would have owned after such sub-division,
recapitalization, consolidation or dividend if immediately prior thereto he had
been the holder of record of the number of Shares as to which such Option was
then exercisable.
2. If the Company merges or consolidates with one or more
corporations and the Company shall be the surviving corporation, thereafter upon
exercise of an Option theretofore granted, the Participant shall be entitled to
purchase under such Option in lieu of the number of Shares as to which such
Option shall then be exercisable, but on the same terms and conditions of
exercise set forth in such Option, the number and kind of shares of capital
stock or other property to which the Participant would have been entitled
pursuant to the terms of the agreement of merger or consolidation if,
immediately prior to such merger or consolidation, the Participant had been the
holder of record of the number of Shares as to which such Option was then
exercisable.
3. If the Company shall not be the surviving corporation in any
merger or consolidation, or if the Company is to be dissolved or liquidated,
then, unless the surviving corporation assumes the Options or substitutes new
Options which are determined by the Board in its sole discretion to be
substantially similar in nature and equivalent in terms and value for Options
then outstanding, upon the effective date of such merger, consolidation,
liquidation or dissolution, any unexercised Options shall expire without
additional compensation to the holder thereof; provided, that, the Committee
shall deliver notice to each Participant at least twenty (20) days prior to the
date of consummation of such merger, consolidation, dissolution or liquidation
which would result in the expiration of the Options and during the period from
the date on which such notice of termination is delivered to the consummation of
the merger, consolidation, dissolution or liquidation, each Participant shall
have the right to exercise in full effective as of such consummation all the
Options that are then outstanding (without regard to limitations on exercise
otherwise contained in the Options) but contingent on occurrence of the merger,
consolidation, dissolution or liquidation, and, provided that, if the
contemplated transaction does not take place within a ninety (90) day period
after giving such notice for any reason whatsoever,
4
<PAGE>
the notice, accelerated vesting and exercise shall be null and void and if and
when appropriate new notice shall be given as aforesaid. Notwithstanding the
foregoing and solely to the extent required by Section 16(b) of the Act, the
Options held by persons subject to Section 16(b) of the Act that would not have
vested under the Plan except pursuant to Article VI(F) prior to the effective
date of such merger, consolidation, liquidation or dissolution shall not expire
on such date but shall expire thirty (30) days after they would have otherwise
vested under the Plan and shall after the effective date of such merger,
consolidation, liquidation or dissolution represent only the right to receive
the number and kind of shares of capital stock or other property to which the
Participant would have been entitled if immediately prior to the effective date
of such merger, consolidation, liquidation or dissolution the Participant had
been the holder of record of the number of Shares as to which such Option was
then exercisable.
4. If as a result of any adjustment made pursuant to the preceding
paragraphs of this Article V(C), any Participant shall become entitled upon
exercise of an Option to receive any shares of capital stock other than Common
Stock, then the number and kind of shares of capital stock so receivable
thereafter shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock set forth in this Article V(C).
5. Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class, for cash, property, labor or services, upon direct sale,
upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or other securities, and in any case whether or not for
fair value, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the number of Shares subject to Options theretofore granted or
the purchase price per Share.
VI. AWARDS AND TERMS OF OPTIONS
---------------------------
A. Grant. Upon the date of the approval of the Plan by the Board
-----
(the "Initial Grant Date"), each Eligible Director shall be automatically
granted an Option to purchase [_________] Shares, subject to the terms of the
Plan. Any Eligible Director who is first elected to the Board after the Initial
Grant Date shall automatically be granted, on the date of such election, an
Option to purchase [_________] Shares, subject to the terms of the Plan.
Without further action by the Board or the stockholders (except as provided in
Article X) of the Company, each year, other than with respect to the year in
which an Eligible Director receives the initial grant of an Option, as of the
first day of the month following the annual meeting of the shareholders of the
Company (each such date, an "Annual Date of Grant"), each Eligible Director
shall be automatically granted an Option to purchase [_________] Shares, subject
to the terms of the Plan, provided that no such Option shall be granted if on
the date of grant the Company has liquidated, dissolved or merged or
consolidated with another entity in such a manner that it is not the surviving
entity (unless the Plan has been assumed by such surviving entity with regard to
future grants).
B. Date of Grant. If a grant of Options is to be made on a day on
-------------
which the principal national exchange or automated quotation system sponsored by
the National Association
5
<PAGE>
of Securities Dealers with respect to which Shares are traded is not open for
trading, the grant shall be made on the first day thereafter on which such
exchange or system is open for trading. Notwithstanding the foregoing, in the
event no Fair Market Value can be determined pursuant to the provisions hereof,
no annual grant shall be made for such fiscal year.
C. Option Agreement. Options shall be evidenced by Option agreements
----------------
in substantially the form annexed hereto as Exhibit A as modified from time to
time.
D. Option Terms:
------------
1. Exercise Price. The purchase price per share ("Purchase Price")
--------------
deliverable upon the exercise of an Option shall be 100% of the Fair Market
Value of such Share at the time of the grant of the Option, or the par
value of the Share, whichever is the greater.
2. Period of Exercisability for Options to Purchase Shares. Except
-------------------------------------------------------
as provided in Article VI(F), Options granted to Eligible Directors shall
vest and become exercisable on the first anniversary of the date of grant.
3. Procedure for Exercise. A Participant electing to exercise one or
----------------------
more Options shall give written notice to the Secretary of the Company of
such election and of the number of Options he or she has elected to
exercise. Shares purchased pursuant to the exercise of Options shall be
paid for at the time of exercise in cash or by delivery of unencumbered
Shares owned by the Participant for at least six months (or such longer
period as required by applicable accounting standards to avoid a charge to
earnings) or a combination thereof.
E. Expiration. Except as otherwise provided herein, if not
----------
previously exercised each Option shall expire upon the tenth anniversary of the
date of the grant thereof.
F. Acceleration of Exercisability.
------------------------------
All Options granted and not previously exercisable shall become fully
exercisable immediately upon the occurrence of a Change in Control (as defined
herein). For this purpose, a "Change in Control" shall be deemed to have
occurred upon any of the following:
(a) the acquisition by any "person" (as such term is used in
Section 13(d) or 14(d) of the Act) other than a person who is a stockholder
of the Company on the effective date of the registration statement filed
under the Securities Act relating to the first public offering of
securities of the Company (an "Initial Shareholder") of 30% or more of the
voting power of securities of Company or the acquisition by an Initial
Shareholder other than an affiliate of Gabrielle Studio, Inc. (and
excluding any such acquisition resulting from a purchase, sale or transfer
of Takinyo Inc. stock by and between any of the current stockholders of
Takihyo Inc.) of an additional 5% of the voting power of securities of the
Company over and above that owned immediately after the closing date of the
initial public offering of the Company's Common Stock; excluding,
6
<PAGE>
however, the following: (x) any acquisition by the Company or a Related
Person or an affiliate of any of the foregoing, or (y) any acquisition by
an employee benefit plan (or related trust) sponsored or maintained by the
Company or a Related Person; or
(b) any merger or sale of substantially all of the assets of the
Company under circumstances where the holders of 20% or more of the equity
securities of the surviving entity of such transaction were not holders of
the Common Stock of the Company immediately prior to the consummation of
such transaction; or
(c) any change in the composition of the Board of Directors of
the Company not approved by (i) a majority of the Board prior to such
change and (ii) by not less than two directors of the Company who were
directors prior to the time any person who was not an Initial Shareholder
acquired 30% or more of the voting power of securities of the Company.
VII. EFFECT OF TERMINATION OF DIRECTORSHIP
-------------------------------------
A. Death, Disability or Otherwise Ceasing to be a Director.
-------------------------------------------------------
Upon Termination of Directorship on account of Disability, death,
resignation or failure to stand for reelection or otherwise, all outstanding
Options then exercisable and not exercised by the Participant prior to such
Termination of Directorship shall remain exercisable by the Participant or, in
the case of death, by the Participant's estate or by the person given authority
to exercise such Options by his or her will or by operation of law, until the
earlier of (i) first anniversary of the Participant's Termination of
Directorship or (ii) the remaining term of the Option.
B. Cancellation of Options.
-----------------------
Except as provided in Article VI(F), Options that were not exercisable
during the period such person serves as a director shall not become exercisable
upon a Termination of Directorship for any reason whatsoever, and such Options
shall terminate and become null and void upon a Termination of Directorship.
VIII. NONTRANSFERABILITY OF OPTIONS
-----------------------------
No Option shall be transferable by the Participant otherwise than by
will or under applicable laws of descent and distribution and during the
lifetime of the Participant may be exercised only by the Participant or his or
her guardian or legal representative. In addition, except as provided above, no
Option shall be assigned, negotiated, pledged or hypothecated in any way
(whether by operation of law or otherwise), and no Option shall be subject to
execution, attachment or similar process. Upon any attempt to transfer, assign,
negotiate, pledge or hypothecate any Option, or in the event of any levy upon
any Option by reason of any execution, attachment or similar process contrary to
the provisions hereof, such Option shall immediately terminate and become null
and void.
7
<PAGE>
IX. RIGHTS AS A STOCKHOLDER
-----------------------
A Participant (or a permitted transferee of an Option) shall have no
rights as a stockholder with respect to any Shares covered by such Participant's
Option until such Participant (or permitted transferee) shall have become the
holder of record of such Shares, and no adjustments shall be made for dividends
in cash or other property or distributions or other rights in respect to any
such Shares, except as otherwise specifically provided in this Plan.
X. TERMINATION, AMENDMENT AND MODIFICATION
---------------------------------------
Subject to the number of Shares authorized for issuance under the Plan
as provided in Article V(B), the Plan shall continue in effect without limit
unless and until the Board otherwise determines. The termination of the Plan
shall not terminate any outstanding Options that by their terms continue beyond
such termination date. The Committee or the Board at any time or from time to
time may amend this Plan to effect (i) amendments necessary or desirable in
order that this Plan and the Options shall conform to all applicable laws and
regulations, and (ii) any other amendments deemed appropriate, provided that no
such amendment may be made if either the authority to make such amendment or the
amendment would cause the Eligible Directors to cease to be "disinterested
persons" or "non-employee directors" with regard to this Plan or any other stock
option or other equity plan of the Company for purposes of Rule 16b-3 and
further provided that solely to the extent required by Section 16(b) of the Act,
the provisions of the Plan relating to the amount, price and timing of, and
eligibility for, awards shall not be amended more than once every six (6) months
except to comport with changes in the Code and the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder. Notwithstanding the
foregoing, solely to the extent required by law, the Committee or the Board may
not effect any amendment that would require the approval of the stockholders of
the Company under Rule 16b-3 unless such approval is obtained. In no event,
unless no longer required as a condition of compliance with the requirements of
Rule 16b-3, shall the Committee or the Board, without the approval of
stockholders, normally entitled to vote for the election of directors of the
Company:
1. increase the number of Shares available for grants under this
Plan;
2. reduce the minimum exercise price at which any option may be
exercised;
3. change the requirements as to eligibility for participation under
this Plan;
4. change the number of Options to be granted or the date on which
such Options are to be granted; or
5. increase the benefits accruing to Participants hereunder.
This Plan may be amended or terminated at any time by the stockholders
of the Company.
8
<PAGE>
Except as otherwise required by law, no termination, amendment or
modification of this Plan may, without the consent of the Participant or the
permitted transferee of his Option, alter or impair the rights and obligations
arising under any then outstanding Option.
XI. USE OF PROCEEDS
---------------
The proceeds of the sale of Shares subject to Options under the Plan
are to be added to the general funds of the Company and used for its general
corporate purposes as the Board shall determine.
XII. GENERAL PROVISIONS
------------------
A. Right to Terminate Directorship. This Plan shall not impose any
-------------------------------
obligations on the Company to retain any Participant as a director nor shall it
impose any obligation on the part of any Participant to remain as a director of
the Company.
B. Trusts, etc. Nothing contained in the Plan and no action taken
------------
pursuant to the Plan (including, without limitation, the grant of any Option
thereunder) shall create or be construed to create a trust of any kind, or a
fiduciary relationship, between the Company and any Participant or the executor,
administrator or other personal representative or designated beneficiary of such
Participant, or any other persons. If and to the extent that any Participant or
such Participant's executor, administrator or other personal representative, as
the case may be, acquires a right to receive any payment from the Company
pursuant to the Plan, such right shall be no greater than the right of an
unsecured general creditor of the Company.
C. Notices. Any notice to the Company required by or in respect of
-------
this Plan will be addressed to the Company at 550 Seventh Avenue, New York, New
York 10018, Attention: General Counsel, or such other place of business as
shall become the Company's principal executive offices from time to time. Each
Participant shall be responsible for furnishing the Committee with the current
and proper address for the mailing to such Participant of notices and the
delivery to such Participant of agreements, Shares and payments. Any such
notice to the Participant will, if the Company has received notice that the
Participant is then deceased, be given to the Participant's personal
representative if such representative has previously informed the Company of his
or her status and address (and has provided such reasonable substantiating
information as the Company may request) by written notice under this Section.
Any notice required by or in respect of this Plan will be deemed to have been
duly given when delivered in person or when dispatched by telecopy or, in the
case of notice to the Company, by facsimile as described above, or one business
day after having been dispatched by a nationally recognized overnight courier
service or three business days after having been mailed by United States
registered or certified mail, return receipt requested, postage prepaid. The
Company assumes no responsibility or obligation to deliver any item mailed to
such address that is returned as undeliverable to the addressee and any further
mailings will be suspended until the Participant furnishes the proper address.
9
<PAGE>
D. Severability of Provisions. If any provisions of the Plan shall
--------------------------
be held invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provisions of the Plan, and the Plan shall be construed and
enforced as if such provisions had not been included.
E. Payment to Minors, Etc. Any benefit payable to or for the
-----------------------
benefit of a minor, an incompetent person or other person incapable of receipt
thereof shall be deemed paid when paid to such person's guardian or to the party
providing or reasonably appearing to provide for the care of such person, and
such payment shall fully discharge the Committee, the Company and their
employees, agents and representatives with respect thereto.
F. Headings and Captions. The headings and captions herein are
---------------------
provided for reference and convenience only. They shall not be considered part
of the Plan and shall not be employed in the construction of the Plan.
G. Controlling Law. The Plan shall be construed and enforced
---------------
according to the laws of the State of Delaware, without giving effect to rules
governing the conflict of laws.
H. Section 16(b) of the Act. All elections and transactions under
------------------------
the Plan by persons subject to Section 16 of the Act involving shares of Common
Stock are intended to comply with any applicable condition under Rule 16b-3. To
the extent any provision of the Plan or action by the Committee fails to so
comply, it shall be deemed null and void. The Committee may establish and adopt
written administrative guidelines, designed to facilitate compliance with
Section 16(b) of the Act, as it may deem necessary or proper for the
administration and operation of the Plan and the transaction of business
thereunder.
XIII. ISSUANCE OF STOCK CERTIFICATES;
LEGENDS; PAYMENT OF EXPENSES
----------------------------
A. Stock Certificates. Upon any exercise of an Option and payment
------------------
of the exercise price as provided in such Option, a certificate or certificates
for the Shares as to which such Option has been exercised shall be issued by the
Company in the name of the person or persons exercising such Option and shall be
delivered to or upon the order of such person or persons, however, in the case
of Options exercised pursuant to Section V(C)3 hereof, subject to the merger,
consolidation, dissolution or liquidation triggering the rights under that
section.
B. Legends. Certificates for Shares issued upon exercise of an
-------
Option shall bear such legend or legends as the Committee, in its sole
discretion, determines to be necessary or appropriate to prevent a violation of,
or to perfect an exemption from, the registration requirements of the Securities
Act or to implement the provisions of any agreements between the Company and the
Participant with respect to such Shares.
C. Payment of Expenses. The Company shall pay all issue or transfer
-------------------
taxes with respect to the issuance or transfer of Shares, as well as all fees
and expenses necessarily
10
<PAGE>
incurred by the Company in connection with such issuance or transfer and with
the administration of the Plan.
XIV. LISTING OF SHARES AND RELATED MATTERS
-------------------------------------
If at any time the Board or the Committee shall determine in its sole
discretion that the listing, registration or qualification of the Shares covered
by the Plan upon any national securities exchange or under any state or federal
law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of, or in connection with, the grant of
Options or the award or sale of Shares under the Plan, no Option grant shall be
effective and no Shares will be delivered, as the case may be, unless and until
such listing, registration, qualification, consent or approval shall have been
effected or obtained, or otherwise provided for, free of any conditions not
acceptable to the Board.
XV. WITHHOLDING TAXES
-----------------
The Company shall have the right to require, prior to the issuance or
delivery of any shares of Common Stock, payment by the Participant of any
federal, state or local taxes required by law to be withheld.
11
<PAGE>
EXHIBIT A
---------
DONNA KARAN INTERNATIONAL INC.
OPTION AGREEMENT
PURSUANT TO THE
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
--------------------------------------------
Dear [Eligible Director]:
Preliminary Statement
---------------------
As a director of the Donna Karan International Inc. (the "Company") on
the [Initial Grant Date/Annual Date of Grant] and pursuant to the terms of the
Donna Karan International Inc. 1996 Non-Employee Director Stock Option Plan,
annexed hereto as Exhibit 1 (the "Plan"), you, as an Eligible Director (as
defined in the Plan), have been automatically granted a nonqualified stock
option (the "Option") to purchase the number of shares of the Company's common
stock, par value $.01 per share (the "Common Stock"), set forth below.
The terms of the grant are as follows:
1. Tax Matters. No part of the Option granted hereby is intended to
-----------
qualify as an "incentive stock option" under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code").
2. Grant of Option. Subject in all respects to the Plan and the
---------------
terms and conditions set forth herein, you are hereby granted an Option to
purchase from the Company up to [_________] Shares (as defined in the Plan), at
a price per Share of $_________ (the "Option Price").
3. Exercisability. Except as provided in Article VI(F) of the Plan
--------------
in the event of a Change in Control, you may exercise all or any part of your
Option on or after the six months and one day after the date of grant; provided,
however, that your Option may be exercised only after you have served as a
director to the Company for at least one year. Upon the occurrence of a Change
in Control (as defined in the Plan), the Option shall immediately become
exercisable with respect to all Shares subject thereto, regardless of whether
the Option has vested with respect to such Shares.
4. Termination. Unless terminated as provided below or otherwise
-----------
pursuant to the Plan, the Option shall expire on the tenth anniversary of this
grant.
5. Restriction on Transfer of Option. The Option granted hereby is
---------------------------------
not transferable otherwise than by will or under the applicable laws of descent
and distribution and during your lifetime may be exercised only by you or your
guardian or legal representative. In addition, the Option shall not be
assigned, negotiated, pledged or hypothecated in any way (whether by operation
of law or otherwise), and the Option shall not be subject to execution,
attachment or similar process. Upon any attempt to
<PAGE>
transfer, assign, negotiate, pledge or hypothecate the Option, or in the event
of any levy upon the Option by reason of any execution, attachment or similar
process contrary to the provisions hereof, the Option shall immediately become
null and void.
6. Rights as a Shareholder. You shall have no rights as a
-----------------------
shareholder with respect to any Shares covered by the Option until you shall
have become the holder of record of the Shares, and no adjustments shall be made
for dividends in cash or other property, distributions or other rights in
respect of any such Shares, except as otherwise specifically provided for in the
Plan.
7. Provisions of Plan Control. This grant is subject to all the
--------------------------
terms, conditions and provisions of the Plan and to such rules, regulations and
interpretations relating to the Plan as may be adopted by the Committee and as
may be in effect from time to time. Any capitalized term used but not defined
herein shall have the meaning ascribed to such term in the Plan. The annexed
copy of the Plan is incorporated herein by reference. If and to the extent that
this grant conflicts or is inconsistent with the terms, conditions and
provisions of the Plan, the Plan shall control, and this grant shall be deemed
to be modified accordingly.
8. Notices. Any notice or communication given hereunder shall be in
-------
writing and shall be deemed to have been duly given when delivered in person or,
in the case of notice to the Company, by facsimile to the facsimile number set
forth below, or when dispatched by telecopy, or one business day after having
been dispatched by a nationally recognized courier service or three business
days after having been mailed by United States registered or certified mail,
return receipt requested, postage prepaid, to the appropriate party at the
address (or, in the case of notice to the Company, facsimile number) set forth
below (or such other address as the party shall from time to time specify in
accordance with Article XII(C) of the Plan.):
If to the Company, to:
Donna Karan International Inc.
550 Seventh Avenue
New York, New York 10018
Attention: General Counsel
2
<PAGE>
If to you, to:
the address indicated on the signature page at the end of this
grant.
Sincerely,
DONNA KARAN INTERNATIONAL INC.
By:______________________________
Name:
Title:
Accepted:
- -----------------------------
[PARTICIPANT]
Address:
3
<PAGE>
EXHIBIT 10.4
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of this
---------
____ day of ______, 1996 among Donna Karan International Inc., a Delaware
corporation (the "Company"), each of Frank R. Mori, Christopher Mori, Heather
-------
Mori, Tomio Taki and Takihyo Inc., a Delaware corporation (each, an "Investor"
--------
and, collectively, the "Investors"), and each of Donna Karan, Stephan Weiss, the
---------
trust under trust agreement for the benefit of Lisa Weiss Keyes, Corey Weiss and
Gabrielle Karan (the "Karan/Weiss Trust"), the trust under trust agreement for
-----------------
the benefit of Donna Karan (the "Karan Trust", and, together with the
-----------
Karan/Weiss Trust, the "KW Trusts"), and Gabrielle Studio, Inc., a New York
---------
corporation (each, a "Shareholder" and, collectively, the "Shareholders").
----------- ------------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Investors are the legal and beneficial owners of the shares
(together, the "Registrable Securities") of common stock, par value $.01 per
----------------------
share, of the Company (the "Common Stock") as set forth in Exhibit A hereto; and
------------
WHEREAS, the Shareholders are the legal and beneficial owners of the shares
of Common Stock (together, the "Shareholders' Shares") as set forth in Exhibit B
--------------------
hereto; and
WHEREAS, the Company has agreed to provide to the Investors and (i) each
person controlling, controlled by or under common control with such Investor and
(ii) their respective spouses, children (or trusts for any of their benefit) and
estates (the Investors and any person or entity identified in (i) or (ii) above
individually, an "Investor Holder", and, collectively, the "Investor Holders")
--------------- ----------------
the registration rights with respect to the Registrable Securities as set forth
in this Agreement; and
WHEREAS, the Company has agreed to provide to the Shareholders and (i) each
person controlling, controlled by or under common control with such Shareholder
and (ii) their respective spouses, children (or trusts for any of their benefit)
and estates (the Shareholders and any person or entity identified in (i) or (ii)
above individually, a "DK Holder", and, collectively, the "DK Holders") the
--------- ----------
<PAGE>
registration rights with respect to the Shareholders' Shares as set forth in
this Agreement;
NOW, THEREFORE, for and in consideration of the premises and the mutual
representations and covenants hereinafter set forth, the parties hereto do
hereby agree as follows:
1. REGISTRATION RIGHTS
1.1 Demand Registration.
-------------------
(a) If at any time, but not before the date that is six months after the
effective date of an initial public offering of the Common Stock (the "IPO"),
---
the Company shall receive a written request from any record Investor Holder or
Investor Holders of Registrable Securities representing an aggregate of more
than 5% of the then outstanding shares of Common Stock requesting registration
of such Registrable Securities under the Securities Act of 1933, as amended (the
"Act"), the Company, at its option, either (i) on or prior to the 30th day
---
following receipt of such written request, shall purchase or cause its designee
to purchase such Registrable Securities from the Investor Holder or Investor
Holders thereof at a price per Registrable Security equal to the average closing
price of the Common Stock on the New York Stock Exchange during the 10 trading
days immediately preceding the date of such written request and the 10 trading
days immediately following the date of such written request, or (ii) promptly
shall prepare and file with the Securities and Exchange Commission (the
"Commission") a registration statement under the Act covering such Registrable
- -----------
Securities which are the subject of such request and shall use its best efforts
to cause such registration statement to become effective under the Act as
expeditiously as possible.
Upon the receipt of such request, the Company, if it elects to prepare and
file with the Commission a registration statement under the Act covering such
Registrable Securities, promptly shall give written notice to all other record
Investor Holders of the Registrable Securities and to all other record DK
Holders of the Shareholders' Shares that such registration is to be effected.
(As used in this Agreement, the term "record Investor Holders" shall mean the
Investors and those persons or entities as to whom or which the Investors shall
have notified the Company (prior to the receipt of such request and in writing
-2-
<PAGE>
pursuant to Section 2.1) are Investor Holders, and the term "record DK Holders"
shall mean the Shareholders and those persons or entities as to whom or which
the Shareholders shall have notified the Company (prior to the receipt of such
request and in writing pursuant to Section 2.1) are DK Holders.) The Company
shall include in such registration statement such Registrable Securities for
which it has received written requests to register from such other record
Investor Holders and such Shareholders' Shares for which it has received written
requests to register from such other record DK Holders within 30 days after the
delivery of the Company's written notice to such other record Investor Holders
and to such other record DK Holders. In the event that the Investor Holders of a
majority of the Registrable Securities for which registration has been requested
pursuant to this Section 1.1 determine for any reason not to proceed with such
registration at any time before the registration statement has been declared
effective by the Commission, and such registration statement, if theretofore
filed with the Commission, is withdrawn with respect to the Registrable
Securities covered thereby, and the Investor Holders of such Registrable
Securities agree to bear their own expenses incurred in connection therewith and
to reimburse the Company for the reasonable expenses incurred by it in
connection with such registration of such Registrable Securities, then the
Investor Holders of such Registrable Securities shall not be deemed to have
exercised their rights to require the Company to register such Registrable
Securities pursuant to this Section 1.1. If a registration statement covering
Registrable Securities for which the Investor Holders thereof have requested
registration pursuant to this Section 1.1 is not declared effective under the
Act for any other reason, including, without limitation, withdrawal of such
registration statement by the Company other than at the request of the Investor
Holders as set forth above, then the Investor Holders of such Registrable
Securities shall not be deemed to have exercised their rights to require the
Company to register such Registrable Securities pursuant to this Section 1.1,
and all expenses incurred in connection with the preparation and filing of such
registration statement shall be borne by the Company.
(b) The obligations of the Company under this Section 1.1 with respect to
the written request by the Investor Holders for registration of their
Registrable Securities under the Act shall be limited to two registration
statements which are declared effective under the Act by the Commission, the
written request for the first
-3-
<PAGE>
of which shall not be given by the Investor Holders earlier than the date which
is six months following the effective date of the IPO (the "First Demand"), and
------------
the written request for the second of which shall not be given by the Investor
Holders earlier than the date which is 12 months after the effective date of any
other offering of the Company's securities under the Act (the "Second Demand").
-------------
The Company shall pay the expenses described in Section 1.6 hereof for each
registration statement filed on behalf of the Investor Holders pursuant to this
Section 1.1, except for underwriting discounts and commissions payable with
respect to the Registrable Securities sold on behalf of the Investor Holders
thereof and any Shareholders' Shares sold on behalf of the DK Holders.
(c) Subject to the provisions of paragraphs (e) and (f) below, if, at any
time after any written request from the Investor Holders for registration of the
Registrable Securities is received by the Company pursuant to this Section 1.1,
the Company determines to proceed with the preparation and filing of a
registration statement under the Act in connection with the proposed offer and
sale of any of its securities by it or any of its security holders, including,
without limitation, the DK Holders, such written request shall be deemed to have
been given pursuant to Section 1.2 hereof rather than this Section 1.1, and the
rights of the Investor Holders of Registrable Securities covered by such written
request shall be governed by Section 1.2 hereof and shall not constitute an
exercise by such Investor Holders of their rights to require registration under
this Section 1.1.
(d) If the registration of the Registrable Securities pursuant to this
Section 1.1 is an underwritten offering of Registrable Securities, the managing
underwriter of such offering shall be selected by the Investor Holders of a
majority of the Registrable Securities for which registration has been requested
and shall be reasonably acceptable to the Company. With respect to any such
registration of the Registrable Securities pursuant to this Section 1.1
requested within the 12-month period following the IPO, neither the Company nor
any other holder of securities of the Company may include securities in such
registration if, in the good faith judgment of the managing underwriter of such
offering, the inclusion of such securities would adversely affect the success of
such offering or interfere with the successful marketing of the Registrable
Securities, or require the exclusion of any portion of the Registrable
Securities to be registered. Securities to be
-4-
<PAGE>
excluded from an underwritten public offering shall be selected in the manner
provided in Section 1.2 below.
(e) (i) If, at any time after the first anniversary of the effective date
of the IPO, the Company shall receive a written request for the First Demand
from the Investor Holders for registration of the Registrable Securities
pursuant to this Section 1.1, the Company, at its option, may either (A) elect
to proceed with the preparation and filing of a registration statement under the
Act in connection with the proposed offer and sale of any of its securities by
it, or (B) promptly prepare and file with the Commission a registration
statement under the Act covering such Registrable Securities which are the
subject of the First Demand and, in either event, shall use its best efforts to
cause such registration statement to become effective under the Act as
expeditiously as possible.
(ii) In the event the Company elects to proceed with the preparation and
filing of a registration statement under the Act in connection with the proposed
offer and sale of any of its securities by it in accordance with clause (A) of
paragraph (e)(i), then:
(A) such written request covering the First Demand shall be
deemed to have been given pursuant to Section 1.2 hereof rather than
this Section 1.1, and the rights of the Investor Holders of
Registrable Securities covered by such written request shall be
governed by Section 1.2 hereof and shall not constitute an exercise by
such Investor Holders of their rights to require registration under
this Section 1.1; and
(B) the Company shall give written notice of such election
to all record Investor Holders and to all record DK Holders, which
notice shall offer to the Investor Holders and the DK Holders the
opportunity to register the number of Registrable Securities and
Shareholders' Shares, as the case may be, as each Investor Holder and
DK Holder, as the case may be, may request in writing within 30 days
after receipt of such written notice from the Company. In connection
therewith, the Company shall, upon receipt of such written request,
cause the requested number of Registrable Securities and Shareholders'
Shares to be included in such registration statement.
-5-
<PAGE>
If, in the good faith judgment of the managing underwriter or underwriters
of such offering, the inclusion of all the Registrable Securities and
Shareholders' Shares requested for inclusion pursuant to this paragraph (e)(ii)
would adversely affect the success of such offering, reduce the number of
securities of the Company (the "Company Securities") to be offered or interfere
------------------
with the successful marketing of the Company Securities, then (1) the managing
underwriter or underwriters will determine the aggregate number of Registrable
Securities and Shareholders' Shares which, in its or their judgment, can be
included without having such an effect (collectively, the "Balance") and (2) the
-------
number of Registrable Securities and Shareholders' Shares requested for
inclusion in the offering will be reduced such that (a) the number of
Registrable Securities included in such registration statement represents 75% of
the Balance and (b) the number of Shareholders' Shares included in such
registration statement represents 25% of the Balance. In the event of any such
reduction, among the Investor Holders or DK Holders requesting shares to be
included in such offering, as the case may be, the number of Registrable
Securities or Shareholders' Shares shall be reduced on a pro rata basis based
upon the number of such Investor Holder's Registrable Securities or such DK
Holder's Shareholders' Shares with respect to which registration has been
requested. In the event that the Investor Holders elect to include in such
offering a number of Registrable Securities representing less than 75% of the
Balance, then the DK Holders shall have the opportunity to include in such
offering a number of Shareholders' Shares representing such number of
Registrable Securities not elected to be included in such offering by the
Investor Holders. In the event that the DK Holders elect to include in such
offering a number of Shareholders' Shares representing less than 25% of the
Balance, then the Investor Holders shall have the opportunity to include in such
offering a number of Registrable Securities representing such number of
Shareholders' Shares not elected to be included in such offering by the DK
Holders.
(iii) In the event the Company elects to prepare and file with the
Commission a registration statement under the Act covering such Registrable
Securities which are the subject of the First Demand in accordance with clause
(B) of paragraph (e)(i), then:
(A) the rights of the Investor Holders of Registrable
Securities covered by such written request shall be governed by this
Section 1.1; and
-6-
<PAGE>
(B) the Company shall give written notice of such election
to all record Investor Holders and to all record DK Holders, which
notice shall offer to the Investor Holders and the DK Holders the
opportunity to register the number of Registrable Securities and
Shareholders' Shares, as the case may be, as each Investor Holder and
DK Holder, as the case may be, may request in writing within 30 days
after receipt of such written notice from the Company. In connection
therewith, the Company shall, upon receipt of such written request,
cause the requested number of Registrable Securities and Shareholders'
Shares to be included in such registration statement.
The aggregate number of shares of Common Stock included in such
registration statement (the "Shares Offered") shall be apportioned among
--------------
Registrable Securities and Shareholders' Shares such that (1) the number of
Registrable Securities included in such registration statement represents 75% of
the Shares Offered and (2) the number of Shareholders' Shares included in such
registration statement represents 25% of the Shares Offered.
(f) (i) If, at any time after the first anniversary of the effective date
of the IPO, the Company receives a written request for the Second Demand from
the Investor Holders for registration of the Registrable Securities pursuant to
this Section 1.1, the Company, at its option, may either (A) elect to proceed
with the preparation and filing of a registration statement under the Act in
connection with the proposed offer and sale of any of its securities by it, or
(B) promptly prepare and file with the Commission a registration statement under
the Act covering such Registrable Securities which are the subject of the Second
Demand and, in either event, shall use its best efforts to cause such
registration statement to become effective under the Act as expeditiously as
possible.
(ii) In the event the Company elects to proceed with the preparation and
filing of a registration statement under the Act in connection with the proposed
offer and sale of any of its securities by it in accordance with clause (A) of
paragraph (f)(i), then:
(A) such written request for the Second Demand shall be
deemed to have been given pursuant to Section 1.2 hereof rather than
this Section 1.1, and the rights of the Investor Holders of
-7-
<PAGE>
Registrable Securities covered by such written request shall be
governed by Section 1.2 hereof and shall not constitute an exercise by
such Investor Holders of their rights to require registration under
this Section 1.1; and
(B) the Company shall give written notice of such election
to all record Investor Holders and to all record DK Holders, which
notice shall offer to the Investor Holders and the DK Holders the
opportunity to register the number of Registrable Securities and
Shareholders' Shares, as the case may be, as each Investor Holder and
DK Holder, as the case may be, may request in writing within 30 days
after receipt of such written notice from the Company. In connection
therewith, the Company shall, upon receipt of such written request,
cause the requested number of Registrable Securities and Shareholders'
Shares, to be included in such registration statement.
If, in the good faith judgment of the managing underwriter or underwriters
of such offering, the inclusion of all of the Registrable Securities and the
Shareholders' Shares requested for inclusion pursuant to this paragraph (f)(ii)
would adversely affect the success of such offering, reduce the number of
Company Securities to be offered or interfere with the successful marketing of
the Company Securities, then (1) the managing underwriter or underwriters will
determine the Balance and (2) the number of Registrable Securities and
Shareholders' Shares requested for inclusion in the offering will be reduced
such that (a) the number of Registrable Securities included in such registration
statement represents two-thirds of the Balance and (b) the number of
Shareholders' Shares included in such registration statement represents one-
third of the Balance. In the event of any such reduction, among the Investor
Holders or DK Holders requesting shares to be included in such offering, as the
case may be, the number of Registrable Securities or Shareholders' Shares shall
be reduced on a pro rata basis based upon the number of such Investor Holder's
Registrable Securities or such DK Holder's Shareholders' Shares with respect to
which registration had been requested. In the event that the Investor Holders
elect to include in such offering a number of Registrable Securities
representing less than two-thirds of the Balance, then the DK Holders shall have
the opportunity to include in such offering a number of Shareholders' Shares
representing such number of Registrable Securities not elected to be included
-8-
<PAGE>
in such offering by the Investor Holders. In the event that the DK Holders
elect to include in such offering a number of Shareholders' Shares representing
less than one-third of the Balance, then the Investor Holders shall have the
opportunity to include in such offering a number of Registrable Securities
representing such number of Shareholders' Shares not elected to be included in
such offering by the DK Holders.
(iii) In the event the Company elects to prepare and file a registration
statement under the Act covering such Registrable Securities which are the
subject of the Second Demand in accordance with clause (B) of paragraph (f)(i),
then:
(A) the rights of the Investor Holders of Registrable
Securities covered by such written request shall be governed by this
Section 1.1; and
(B) the Company shall give written notice of such election
to all record Investor Holders and to all record DK Holders, which
notice shall offer to the Investor Holders and the DK Holders the
opportunity to register the number of Registrable Securities and
Shareholders' Shares, as the case may be, as each Investor Holder and
DK Holder, as the case may be, may request in writing within 30 days
after receipt of such written notice from the Company. In connection
therewith, the Company shall, upon receipt of such written request,
cause the requested number of Registrable Securities and Shareholders'
Shares to be included in such registration statement.
The aggregate number of Shares Offered shall be apportioned among
Registrable Securities and Shareholders' Shares such that (1) the number of
Registrable Securities included in such registration statement represents 75% of
the Shares Offered, and (2) the number of Shareholders' Shares included in such
registration statement represents 25% of the Shares Offered.
(g) (i) If, at any time after the first anniversary of the effective date
of the IPO, the Company shall receive a written request from the DK Holders
requesting registration under the Act of the Shareholders' Shares, the Company,
at its option, may (but shall not be obligated to) either (A) elect to proceed
with the preparation and filing of a registration statement under the
-9-
<PAGE>
Act in connection with the proposed offer and sale of any of its securities by
it, or (B) promptly prepare and file with the Commission a registration
statement under the Act covering such Shareholders' Shares, and, in either
event, shall use its best efforts to cause such registration statement to become
effective under the Act as expeditiously as possible.
Upon the receipt of such request, the Company, if it elects to prepare and
file with the Commission a registration statement under the Act covering such
Shareholders' Shares, promptly shall give written notice to all other record DK
Holders of the Shareholders' Shares and all other record Investor Holders of the
Registrable Securities that such registration is to be effected. The Company
shall include in such registration statement such Shareholders' Shares for which
it has received written requests to register from such other record DK Holders
and such Registrable Securities for which it has received written requests to
register from such other record Investor Holders within 30 days after the
delivery of the Company's written notice to such other record DK Holders and
such other record Investor Holders. In the event that the DK Holders of a
majority of the Shareholders' Shares for which registration has been requested
pursuant to this Section 1.1(g) determine for any reason not to proceed with
such registration at any time before the registration statement has been
declared effective by the Commission, and such registration statement, if
theretofore filed with the Commission, is withdrawn with respect to the
Shareholders' Shares covered thereby, and the DK Holders of such Shareholders'
Shares agree to bear their own expenses incurred in connection therewith and to
reimburse the Company for the reasonable expenses incurred by it in connection
with such registration of such Shareholders' Shares, then the DK Holders of such
Shareholders' Shares shall not be deemed to have exercised their rights to
request the Company to register such Shareholders' Shares pursuant to this
Section 1.1(g). If a registration statement covering Shareholders' Shares for
which the DK Holders thereof have requested registration pursuant to this
Section 1.1(g) is not declared effective under the Act for any other reason,
including, without limitation, withdrawal of such registration statement by the
Company other than at the request of the DK Holders as set forth above, then the
DK Holders of such Shareholders' Shares shall not be deemed to have exercised
their right to request the Company to register such Shareholders' Shares
pursuant to this Section 1.1(g), and all expenses incurred in connection with
the
-10-
<PAGE>
preparation and filing of such registration statement shall be borne by the
Company.
(ii) In the event the Company elects to proceed with the preparation and
filing of a registration statement under the Act in connection with the proposed
offer and sale of any of its securities by it in accordance with clause (A) of
paragraph (g)(i), the Company shall give written notice of such election to all
record Investor Holders and to all record DK Holders, which notice shall offer
to the Investor Holders and the DK Holders the opportunity to register the
number of Registrable Securities and Shareholders' Shares, as the case may be,
as each Investor Holder and DK Holder, as the case may be, may request in
writing within 30 days after receipt of such written notice from the Company.
In connection therewith, the Company shall, upon receipt of such written
request, cause the requested number of Registrable Securities and Shareholders'
Shares to be included in such registration statement. If, in the good faith
judgment of the managing underwriter or underwriters of such offering, the
inclusion of all the Registrable Securities and Shareholders' Shares requested
for inclusion pursuant to this paragraph (g)(ii) would adversely affect the
success of such offering, reduce the number of Company Securities to be offered
or interfere with the successful marketing of the Company Securities, then (1)
the managing underwriter or underwriters will determine the Balance and (2) the
number of Registrable Securities and Shareholders' Shares requested for
inclusion in the offering will be reduced such that (a) the number of
Registrable Securities included in such registration statement represents one-
third of the Balance and (b) the number of Shareholders' Shares included in such
registration statement represents two-thirds of the Balance. In the event of
any such reduction, among the Investor Holders or DK Holders requesting shares
to be included in such offering, as the case may be, the number of Registrable
Securities or Shareholders' Shares shall be reduced on a pro rata basis based
upon the number of such Investor Holder's Registrable Securities or such DK
Holder's Shareholders' Shares with respect to which registration has been
requested. In the event that the Investor Holders elect to include in such
offering a number of Registrable Securities representing less than one-third of
the Balance, then the DK Holders shall have the opportunity to include in such
offering a number of Shareholders' Shares representing such number of
Registrable Securities not elected to be included in such offering by the
Investor Holders. In the event that the DK Holders elect to include in such
offering a number of
-11-
<PAGE>
Shareholders' Shares representing less than two-thirds of the Balance, then the
Investor Holders shall have the opportunity to include in such offering a number
of Registrable Securities representing such number of Shareholders' Shares not
elected to be included in such offering by the DK Holders.
(iii) In the event the Company elects to prepare and file with the
Commission a registration statement under the Act covering such Shareholders'
Shares in accordance with clause (B) of paragraph (g)(i), the Company shall give
written notice of such election to all record Investor Holders and to all record
DK Holders, which notice shall offer to the Investor Holders and the DK Holders
the opportunity to register the number of Registrable Securities and
Shareholders' Shares, as the case may be, as each Investor Holder and DK Holder,
as the case may be, may request in writing within 30 days after receipt of such
written notice from the Company. In connection therewith, the Company shall
cause the requested number of Shareholders' Shares and, upon receipt of such
written request from any Investor Holder, the requested number of Registrable
Securities, to be included in such registration statement. The aggregate number
of Shares Offered shall be apportioned among Registrable Securities and
Shareholders' Shares such that (A) the number of Registrable Securities included
in such registration statement represents one-third of the Shares Offered and
(B) the number of Shareholders' Shares included in such registration statement
represents two-thirds of the Shares Offered.
(iv) If the registration of Shareholders' Shares pursuant to this Section
1.1(g) is an underwritten offering of Shareholders' Shares, the managing
underwriter of such offering shall be selected by the DK Holders of a majority
of the Shareholders' Shares for which registration has been requested and shall
be reasonably acceptable to the Company.
(v) In the event of any inclusion by the Investor Holders of their
Registrable Securities in connection with a registration statement filed by the
Company in accordance with this Section 1.1(g), the rights of the Investor
Holders of Registrable Securities included in such offering shall be governed by
Section 1.2 hereof and shall not constitute an exercise by such Investor Holders
of their rights to require registration under this Section 1.1.
-12-
<PAGE>
(vi) The DK Holders shall be entitled to one request for registration of
their Shareholders' Shares under the Act pursuant to this paragraph (g), and the
obligations, if any, of the Company and the rights of the Investor Holders under
this paragraph (g) with respect to the written request by the DK Holders for
registration of their Shareholders' Shares under the Act shall be limited to one
registration statement which is declared effective under the Act by the
Commission. The Company shall pay the expenses described in Section 1.6 hereof
for any registration statement filed on behalf of the DK Holders pursuant to
this Section 1.1, except for underwriting discounts and commissions payable with
respect to the Shareholders' Shares sold on behalf of the DK Holders.
1.2 "Piggyback" Registration Rights.
-------------------------------
(a) If at any time the Company shall determine to proceed
with the preparation and filing of a registration statement under the Act with
respect to any of its securities by it or on behalf of any of its security
holders, including the Investor Holders or DK Holders (other than a registration
statement on Form S-4 or S-8, or any form substituting therefor, or filed in
connection with an exchange offer or an offering of securities solely to the
Company's existing stockholders or other limited purpose form), the Company will
give written notice of such determination to all record Investor Holders of the
Registrable Securities and all record DK Holders of the Shareholders' Shares,
which notice shall offer to such Investor Holders and DK Holders the opportunity
to register the number of Registrable Securities and Shareholders' Shares as
each Investor Holder or DK Holder, as the case may be, may request. Upon the
written request of a record Investor Holder of any of the Registrable Securities
or a record DK Holder of any of the Shareholders' Shares given within 30 days
after receipt of any such notice from the Company, the Company, except as
otherwise provided in this Section 1.2, will use its best efforts to cause all
such Registrable Securities and Shareholders' Shares, as the case may be, to be
included in such registration statement, all to the extent requisite to permit
the sale or other disposition by the prospective seller or sellers of
Registrable Securities or Shareholders' Shares to be so registered; provided,
--------
however, that nothing herein shall prevent the Company from abandoning or
- -------
delaying any such registration at any time. If any public offering pursuant to
this Section 1.2 shall be underwritten in whole or in part, the Company will use
its reasonable efforts to cause the managing underwriter or
-13-
<PAGE>
underwriters of such offering to permit such Registrable Securities or
Shareholders' Shares requested for inclusion pursuant to this Section 1.2 to be
included in the offering on the same terms and conditions as any similar
securities of the Company included therein. If such underwritten offering
includes securities of the Company similar to the Registrable Securities or the
Shareholders' Shares, then upon request by the Company and the managing
underwriter or underwriters of such offering given to the Investor Holders of
Registrable Securities and the DK Holders of Shareholders' Shares requested to
be included in such offering prior to the effective date thereof, such Investor
Holders and DK Holders shall enter into underwriting agreements with such
underwriter or underwriters providing for the inclusion of such Registrable
Securities and Shareholders' Shares in such offering on the terms and conditions
reasonably agreed to by the Company, such underwriters, such Investor Holders
and such DK Holders.
(b) Notwithstanding the foregoing:
--- -------------------------------
(i) if, in the good faith judgment of the managing underwriter or
underwriters of such public offering, the inclusion of the Shareholders' Shares
requested for inclusion pursuant to this Section 1.2, together with any other
securities of the Company which have similar "piggyback" registration rights,
would adversely affect the success of such offering, reduce the number of
securities to be offered by the Company, Investor Holders or such offering
security holders, as the case may be, or interfere with the successful marketing
of the securities offered by the Company, Investor Holders or such offering
security holders, as the case may be, then no Shareholders' Shares shall be
included in such underwritten public offering; and
(ii) if, in the good faith judgment of the managing underwriter or
underwriters of such public offering, the inclusion of the Registrable
Securities requested for inclusion pursuant to this Section 1.2, together with
any other securities of the Company which have similar "piggyback" registration
rights (collectively, the "Requested Securities"), would adversely affect the
--------------------
success of such offering, reduce the number of securities to be offered by the
Company or such offering security holders, as the case may be, or interfere with
the successful marketing of the securities offered by the Company or such
offering security holders, as the case may be, the number of shares of Requested
Securities otherwise to be included in the
-14-
<PAGE>
underwritten public offering may be reduced pro rata among the holders thereof
or excluded in their entirety if so required by the managing underwriter or
underwriters.
(iii) To the extent only a portion of the Requested Securities is included
in the underwritten public offering, those Requested Securities and
Shareholders' Shares which are excluded from, and Registrable Securities and
Shareholders' Shares the holders of which have not requested inclusion in, the
underwritten public offering, shall be withheld from the market by the holders
thereof for a period, not to exceed 180 days, which the managing underwriter
reasonably determines is necessary in order to effect the underwritten public
offering.
(c) The holders of Requested Securities shall not be responsible for any
expenses for any registration statement filed pursuant to this Section 1.2,
including the expenses described in Section 1.6 hereof, except for underwriting
discounts and commissions payable with respect to the Requested Securities sold
on behalf of the holders thereof.
1.3 Lock Up Provision. In connection with any underwritten public
-----------------
offering of the Company's securities subsequent to the IPO, each Investor Holder
and each DK Holder hereby agrees to be subject to a lock-up for such period, not
to exceed 180 days, following such public offering as may be required by the
underwriter or underwriters of such underwritten public offering and to give
such customary representations, opinions and indemnities in form and substance
reasonably satisfactory to the managing underwriter or underwriters of the
public offering. During such periods, each Investor Holder and each DK Holder
agrees not to sell or otherwise transfer any shares of Common Stock (other than
transfers to another Investor Holder or DK Holder, as applicable) without the
prior written consent of such underwriter or underwriters.
1.4 Registration Procedures. If and whenever the Company is required by
-----------------------
the provisions of Section 1.1 or 1.2 to effect the registration of Registrable
Securities or Shareholders' Shares under the Act, the Company will:
(a) prepare and promptly file with the Commission a registration statement
which includes such Registrable Securities or Shareholders' Shares and use its
best efforts to cause such registration statement to become
-15-
<PAGE>
and remain effective until such Registrable Securities or Shareholders' Shares
have been sold;
(b) prepare and promptly file with the Commission such amendments and post-
effective amendments to such registration statement and supplements to the
prospectus contained therein as may be necessary to keep such registration
statement effective and such registration statement and prospectus accurate and
complete until the Registrable Securities or Shareholders' Shares have been
sold, but in no event more than three months from the effective date of such
registration statement;
(c) if the offering is to be underwritten in whole or in part, enter into a
written underwriting agreement, including customary representations, opinions
and indemnities, in form and substance reasonably satisfactory to the managing
underwriter or underwriters of the public offering, the Investor Holders of a
majority of the Registrable Securities participating in such offering, and the
DK Holders of a majority of the Shareholders' Shares participating in such
offering;
(d) furnish to the Investor Holders of Registrable Securities and the DK
Holders of Shareholders' Shares included in such registration statement and to
the underwriter or underwriters, if any, such number of copies of the
registration statement, preliminary prospectus, final prospectus and such other
documents as such Investor Holders of Registrable Securities, underwriter or
underwriters and DK Holders of Shareholders' Shares may reasonably request in
order to facilitate the public offering of such securities;
(e) furnish to the Investor Holders of Registrable Securities and DK
Holders of Shareholders' Shares included in such registration statement copies
of all correspondence between the Company and the Commission with respect to
such registration statement;
(f) use its reasonable efforts to register or qualify the Registrable
Securities and, if applicable, Shareholders' Shares included in such
registration statement under such state securities or "blue sky" laws of such
jurisdictions as such Investor Holders of Registrable Securities and DK Holders
of Shareholders' Shares may reasonably request in writing within 10 days
following the original filing of such registration statement, except that (i)
the Company shall not for any purpose be required to qualify to do business as a
foreign corporation in any
-16-
<PAGE>
jurisdiction where it is not so qualified and (ii) the Company shall not have
any obligation, in connection with a registration of Registrable Securities or
Shareholders' Shares pursuant to Section 1.2 hereof, to register or qualify such
Registrable Securities or Shareholders' Shares in any jurisdictions other than
those in which it is registering or qualifying other securities of the Company
being offered pursuant to such registration;
(g) notify the Investor Holders of Registrable Securities and the DK
Holders of Shareholders' Shares included in such registration statement,
promptly after it shall receive notice thereof, of the date and time when such
registration statement and each post-effective amendment thereto has become
effective or a supplement to any prospectus forming a part of such registration
statement has been filed;
(h) notify such Investor Holders of Registrable Securities and DK Holders
of Shareholders' Shares promptly of any request by the Commission for the
amending or supplementing of such registration statement or prospectus or for
additional information;
(i) prepare and file with the Commission, promptly upon the request of any
such Investor Holders of Registrable Securities or DK Holders of Shareholders'
Shares, any amendments or supplements to such registration statement or
prospectus which, due to a change in the information contained in such
registration statement pertaining to the Investor Holders or the DK Holders or
the manner in which the Investor Holders or the DK Holders intend to distribute
their Registrable Securities or Shareholders' Shares in the opinion of counsel
for such Investor Holders of Registrable Securities or DK Holders of
Shareholders' Shares, is required under the Act or the rules and regulations
thereunder in connection with the distribution of Registrable Securities by such
Investor Holders or Shareholders' Shares by such DK Holders;
(j) prepare and promptly file with the Commission and promptly notify such
Investor Holders of Registrable Securities and DK Holders of Shareholders'
Shares of the filing of an amendment or supplement to such registration
statement or prospectus as may be necessary to correct any statements or
omissions if, at the time when a prospectus relating to the Registrable
Securities or Shareholders' Shares is required to be delivered under the Act,
any event shall have occurred as the result of which
-17-
<PAGE>
any such prospectus or any other prospectus as then in effect would include an
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading;
(k) in case any of such Investor Holders of Registrable Securities or DK
Holders of Shareholders' Shares or any underwriter for any of such Investor
Holders or DK Holders is required to deliver a prospectus at a time when the
prospectus then in circulation is not in compliance with the Act or the rules
and regulations of the Commission, prepare promptly upon request such amendments
or supplements to such registration statement and such prospectus as may be
necessary in order for such prospectus to comply with the requirements of the
Act and such rules and regulations;
(l) notify such Investor Holders of Registrable Securities or DK Holders of
Shareholders' Shares, promptly after it shall receive notice or obtain knowledge
thereof, of the issuance of any stop order by the Commission suspending the
effectiveness of such registration statement or the initiation or threatening of
any proceeding for that purpose and promptly use its best efforts to prevent the
issuance of any stop order or to obtain its withdrawal if such stop order should
be issued;
(m) not file any registration statement or prospectus or any amendment or
supplement to such registration statement or prospectus to which the Investor
Holders of a majority of the Registrable Securities or the DK Holders of a
majority of the Shareholders' Shares included or to be included in a
registration have reasonably objected on the grounds that such registration
statement or prospectus or amendment or supplement thereto does not comply in
all material respects with the requirements of the Act or the rules and
regulations thereunder, after having been furnished with a copy thereof at least
five business days prior to the filing thereof; provided, however, that the
-------- -------
failure of such Investor Holders, DK Holders or their respective counsel to
review or object to any registration statement or prospectus or any amendment or
supplement to such registration statement or prospectus shall not affect the
rights of such Investor Holders, DK Holders or their respective officers,
directors, representatives, agents, partners, legal counsel, accountants or
controlling persons or any underwriter or any controlling person of such
underwriter under Section 1.7 hereof;
-18-
<PAGE>
(n) make available for inspection upon request by any Investor Holder of
Registrable Securities or DK Holder of Shareholders' Shares covered by any such
registration statement, by any managing underwriter of any distribution to be
effected pursuant to such registration statement and by any attorney, accountant
or other agent retained by any such Investor Holder, DK Holder or any such
underwriter, all financial and other records, pertinent corporate documents and
properties of the Company, and cause all of the Company's officers, directors
and employees to supply all information reasonably required by any such Investor
Holder, DK Holder, underwriter, attorney, accountant or agent in connection with
such registration statement; provided, however, that as a condition to making
-------- -------
such information available, the Company may require any such Investor Holder, DK
Holder and its respective representatives to enter into an appropriate
confidentiality agreement;
(o) at the request of any such Investor Holder of Registrable Securities or
DK Holder of Shareholders' Shares, furnish on the effective date of the
registration statement, and, if such registration includes an underwritten
public offering, at the closing provided for in the underwriting agreement
relating thereto: (i) opinions, dated such respective dates, of the counsel
representing the Company for the purposes of such registration, addressed to the
underwriter or underwriters, if any, and to the Investor Holder or Investor
Holders of Registrable Securities and the DK Holder or DK Holders of
Shareholders' Shares making such request, covering such matters with respect to
the registration statement, the prospectus and each amendment or supplement
thereto, proceedings under state and federal securities laws, other matters
relating to the Company, the securities being registered and the offer and sale
of such securities as are customarily the subject of opinions of issuer's
counsel provided to underwriters in underwritten public offerings, and such
opinions of counsel shall additionally cover such legal and factual matters with
respect to the registration as such requesting Investor Holder or Investor
Holders or DK Holder or DK Holders may reasonably request; and (ii) "cold
comfort" letters, dated such respective dates, from the independent certified
public accountants of the Company, addressed to the underwriter or underwriters,
if any, and to the Investor Holder or Investor Holders of Registrable Securities
and the DK Holder or DK Holders of Shareholders' Shares making such request,
stating that they are independent certified public accountants within the
meaning of the Act and dealing with such matters
-19-
<PAGE>
as the underwriters may request, or if the offering is not underwritten, that in
the opinion of such accountants the financial statements and other financial
data of the Company included in the registration statement or the prospectus or
any amendment or supplement thereto comply in all material respects with the
applicable accounting requirements of the Act, and additionally covering such
other accounting and financial matters, including information as to the period
ending not more than five business days prior to the date of such letter with
respect to the registration statement and prospectus, as such requesting
Investor Holder or Investor Holders or DK Holder or DK Holders may reasonably
request; and
(p) use its reasonable efforts to take all other steps necessary to effect
the registration of the Registrable Securities and Shareholders' Shares
contemplated hereby.
1.5 Certain Obligations of the Investor Holders and the DK Holders.
--------------------------------------------------------------
(a) The Company may require each Investor Holder of Registrable Securities
and, if applicable, DK Holder of Shareholders' Shares as to which any
registration is being effected to furnish to the Company such information
regarding such Investor Holder, DK Holder or the distribution by such Investor
Holder or DK Holder of such Registrable Securities or such Shareholders' Shares,
as applicable, as the Company may from time to time reasonably request, in each
case, only as required by the Act.
(b) Each Investor Holder of Registrable Securities and DK Holder of
Shareholders' Shares agrees that, upon receipt of any notice from the Company of
the happening of any event of the kind described in Sections 1.4(h), (j) and (l)
hereof, such Investor Holder or, if applicable, DK Holder shall forthwith
discontinue disposition of Registrable Securities or Shareholders' Shares, as
applicable, pursuant to the registration statement including such Registrable
Securities or Shareholders' Shares until such Investor Holder or, if applicable,
DK Holder receives the copies of the supplemented or amended prospectus
contemplated by Sections 1.4(h), (j) and (l) hereof, and, if so directed by the
Company, such Investor Holder or, if applicable, DK Holder will deliver to the
Company (at the expense of the Company) all copies, other than permanent file
copies then in such Investor Holder's or DK Holder's possession, of the
-20-
<PAGE>
prospectus covering such Registrable Securities or Shareholders' Shares, as
applicable, current at the time of receipt of such notice. In the event the
Company shall give any such notice in connection with such a registration
statement, the Company shall keep such registration statement effective for the
period commencing on the date when each Investor Holder of Registrable
Securities and, if applicable, DK Holder of Shareholders' Shares included in
such registration statement shall have received the copies of the supplemented
or amended prospectus contemplated by Sections 1.4(h), (j) and (l) hereof and
continuing thereafter for a number of days equal to the number of days which
were remaining in the period during which the Company was otherwise required to
keep such registration statement effective pursuant to Section 1.4(b) hereof on
the date when the Company gave such notice pursuant to Sections 1.4(h), (j) or
(l) hereof.
1.6 Expenses.
--------
(a) With respect to the registrations requested by the Investor Holders or
DK Holders pursuant to Section 1.1 hereof and the inclusion of Registrable
Securities and Shareholders' Shares in a registration statement pursuant to
Section 1.1 or Section 1.2 hereof, all fees, costs and expenses of and
incidental to such registration, inclusion and public offering (as specified in
paragraph (b) below) in connection therewith shall be borne by the Company;
provided, however, that each Investor Holder and each DK Holder shall bear its
pro rata share of the underwriting discounts and commissions with respect to the
Registrable Securities or Shareholders' Shares, respectively, sold on its
behalf.
(b) The fees, costs and expenses of registration to be borne by the Company
as provided in paragraph (a) above shall include, without limitation, all
registration and filing fees, all fees and expenses associated with filings
required to be made with the National Association of Securities Dealers, Inc.
(the "NASD"), as may be required by the rules and regulations of the NASD,
----
printing expenses, transfer taxes, fees and disbursements of counsel and
accountants for the Company, and all legal fees and disbursements and other
expenses of complying with state securities or "blue sky" laws of any
jurisdictions in which the Registrable Securities and Shareholders' Shares, to
be offered are to be registered and qualified. Fees and disbursements of
counsel and accountants for the selling Investor Holders of Registrable
Securities and for the
-21-
<PAGE>
selling DK Holders of Shareholders' Shares and any other expenses incurred by
such selling Investor Holders or selling DK Holders not expressly included above
shall be borne by the selling Investor Holders of Registrable Securities and the
selling DK Holders of Shareholders' Shares, respectively.
1.7 Indemnification.
---------------
(a) The Company hereby agrees to indemnify and hold harmless each Investor
Holder of Registrable Securities and each DK Holder of Shareholders' Shares
which are included in a registration statement pursuant to the provisions of
Section 1.1 or 1.2 hereof, its officers, directors, representatives, agents,
partners, legal counsel and accountants, and any underwriter (as defined in the
Act) for such Investor Holder or DK Holder and each person, if any, who controls
such Investor Holder, DK Holder or such underwriter within the meaning of the
Act (each, an "Indemnified Person"), from and against, and hereby agrees to
------------------
reimburse such Indemnified Person with respect to, any and all claims, actions
(actual or threatened), demands, loss, damage, liability, cost and expense to
which such Indemnified Person may become subject under the Act or otherwise,
insofar as such claims, actions (actual or threatened), demands, losses,
damages, liabilities, costs or expenses are caused by any untrue statement or
alleged untrue statement of any material fact contained in such registration
statement, any prospectus contained therein or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading; provided, however, that the Company shall not be liable in any
-------- -------
such case to the extent that, and shall not be required to indemnify any
Investor Holder or DK Holder to the extent that, any such claim, action, demand,
loss, damage, liability, cost or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished by or on behalf of such Investor
Holder or DK Holder in writing specifically for use in the preparation thereof.
(b) Each Investor Holder of Registrable Securities and each DK Holder of
Shareholders' Shares included in a registration pursuant to the provisions of
Section 1.1 or 1.2 hereof hereby agrees, severally and not
-22-
<PAGE>
jointly, to indemnify and hold harmless the Company, its officers, directors,
representatives, agents, any controlling person and any underwriter from and
against, and hereby agrees to reimburse the Company, its officers, directors,
representatives, agents, partners, legal counsel, accountants, any controlling
person and any underwriter with respect to, any and all claims, actions,
demands, loss, damage, liability, cost or expense to which the Company, its
officers, directors, representatives, agents, partners, legal counsel,
accountants, or any controlling person and/or any underwriter may become subject
under the Act or otherwise, insofar as such claims, actions, demands, loss,
damages, liabilities, costs or expenses are caused by any untrue statement or
alleged untrue statement of any material fact contained in such registration
statement, any prospectus contained therein or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading; provided, however, that such Investor Holder or DK Holder will
-------- -------
be liable in any such case only to the extent that any such claim, action,
demand, loss, damage, liability, cost or expense arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged omission
so made in conformity with information furnished by or on behalf of such
Investor Holder or DK Holder, any underwriter for such Investor Holder or DK
Holder, and any controlling person of such Investor Holder or DK Holder in
writing specifically for use in the preparation thereof.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this Section 1.7 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of said paragraph
(a) or (b), promptly notify the indemnifying party of the commencement thereof;
provided, however, the omission to so notify the indemnifying party will not
- -------- -------
relieve it from any liability which it may have to any indemnified party
otherwise than hereunder, except to the extent that the defense of such action
is materially prejudiced by such omission to so notify the indemnifying party.
In case such action is brought against any indemnified party and it notifies the
indemnifying party of the commencement thereof, the indemnifying party shall
have the right to participate in, and, to the extent that it may wish, jointly
with any other indemnifying party similarly
-23-
<PAGE>
notified, to assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party (such approval of the choice of counsel not to be
unreasonably withheld); provided, however, if the defendants in any action
-------- -------
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or in addition to those available to the indemnifying party, or if there is
a conflict of interest which would prevent counsel for the indemnifying party
from also representing the indemnified party, the indemnified party or parties
have the right to select separate counsel to participate in the defense of such
action on behalf of such indemnified party or parties. After notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party pursuant to the provisions of said paragraph (a) or (b) for any legal or
other expense subsequently incurred by such indemnified party in connection with
the defense thereof other than reasonable costs of investigation, unless (i) the
indemnified party shall have employed counsel in accordance with the provisions
of the preceding sentence, (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after the notice of the commencement
of the action or (iii) the indemnifying party has authorized the employment of
counsel for the indemnified party at the expense of the indemnifying party. No
indemnifying party shall be liable to an indemnified party for any settlement of
any action or claim without the consent of the indemnifying party and no
indemnifying party may unreasonably withhold its consent to any such settlement.
No indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such indemnified party of a release from all
liability with respect to such claim or litigation.
(d) If the indemnification provided for in subsection (a) or (b) of this
Section 1.7 is held by a court of competent jurisdiction to be unavailable to a
party to be indemnified with respect to any claims, actions, demands, losses,
damages, liabilities, costs or expenses referred to therein, then each
indemnifying party under any such subsection, in lieu of indemnifying such
indemnified party thereunder, hereby agrees to contribute to the amount paid or
payable by such indemnified party as a result of such
-24-
<PAGE>
claims, actions, demands, losses, damages, liabilities, costs or expenses in
such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions which resulted in such claims,
actions, demands, losses, damages, liabilities, costs or expenses, as well as
any other relevant equitable considerations. The relative fault of the
indemnifying party and of the indemnified party shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the indemnifying party or by the indemnified
party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. Notwithstanding
the foregoing, the amount any Investor Holder of Registrable Securities or DK
Holder of Shareholders' Shares shall be obligated to contribute pursuant to this
subsection (d) shall be limited to an amount equal to the per share public
offering price (less any underwriting discount and commissions) multiplied by
the number of shares of Registrable Securities sold by such Investor Holder or
the number of shares of Shareholders' Shares sold by such DK Holder, as
applicable, pursuant to the registration statement which gives rise to such
obligation to contribute (less the aggregate amount of any damages which such
Investor Holder or DK Holder has otherwise been required to pay in respect of
such claim, action, demand, loss, damage, liability, cost or expense or any
substantially similar claim, action, demand, loss, damage, liability, cost or
expense arising from the sale of such Registrable Securities or Shareholders'
Shares).
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution hereunder from any
person who was not guilty of such fraudulent misrepresentation.
(e) In addition to its other obligations under this Section 1.7, the
Company further agrees to reimburse each Investor Holder of Registrable
Securities and each DK Holder of Shareholders' Shares included in a registration
statement pursuant to this Agreement (and each of such Investor Holder's or DK
Holder's controlling persons, officers, directors, partners, legal counsel,
accountants and underwriters (and controlling persons of such underwriters)) on
a monthly basis for all reasonable legal fees and other expenses incurred in
connection with
-25-
<PAGE>
investigating or defending any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or any
alleged statement or admission, described in subsection (a) of this Section 1.7,
notwithstanding the possibility that such payments might later be held to be
improper. To the extent that any payment is ultimately held to be improper,
each person receiving such payment shall promptly refund such payment.
1.8 Reporting Requirements Under the Exchange Act. When it is first
---------------------------------------------
legally required to do so, the Company agrees to register its Common Stock under
Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange
--------
Act") and agrees to keep effective such registration and to file timely such
information, documents and reports as the Commission may require or prescribe
under Section 13 of the Exchange Act. From and after the effective date of the
first registration statement filed by the Company under the Act, the Company
agrees to file timely (whether or not it shall then be required to do so) such
information, documents and reports as the Commission may require or prescribe
under Section 13 or 15(d) (whichever is applicable) of the Exchange Act. Upon
becoming subject to the reporting requirements of either Section 13 or 15(d) of
the Exchange Act, the Company forthwith upon request agrees to furnish to any
Investor Holder of Registrable Securities and any DK Holder of Shareholders'
Shares (a) a written statement by the Company that it has complied with such
reporting requirements, (b) a copy of the most recent annual or quarterly report
of the Company and (c) such other reports and documents filed by the Company
with the Commission as such Investor Holder or DK Holder may reasonably request
in availing itself of an exemption for the sale of Registrable Securities or
Shareholders' Shares without registration under the Act. The Company
acknowledges and agrees that the purposes of the requirements contained in this
Section 1.8 are (a) to enable any such Investor Holder or DK Holder to comply
with the current public information requirement contained in paragraph (c) of
Rule 144 under the Act should such Investor Holder or DK Holder ever wish to
dispose of any of the securities of the Company acquired by it without
registration under the Act in reliance upon Rule 144 (or any other similar
exemptive provision) and (b) to qualify the Company for the use of registration
statements on Form S-3. In addition, the Company agrees to take such other
measures and file such other information, documents and reports, as shall be
required of it hereafter by the Commission as a condition to the availability of
Rule 144 under the Act (or any similar exemptive provision hereafter
-26-
<PAGE>
in effect) and the use of Form S-3. The Company also covenants to use its best
efforts, to the extent that it is reasonably within its power to do so, to
qualify for the use of Form S-3.
1.9 Future Registration Rights. For so long as any rights of any Investor
--------------------------
Holder or any DK Holder remain outstanding under this Agreement and except (i)
as expressly permitted by this Agreement or (ii) an underwriting agreement
between the Company and one or more underwriters of securities in connection
with an underwritten offering of the Company's securities, the Company shall not
enter into any agreement to register any capital stock or similar security of
the Company or any security (whether capital stock or indebtedness for borrowed
money) convertible into or exchangeable for, with or without consideration, any
capital stock or similar security of the Company, or any security (whether
capital stock or indebtedness for borrowed money) carrying any warrant or right
to subscribe to or purchase any capital stock or similar security of the
Company, or any such warrant or right (collectively, "Equity Securities") under
-----------------
the Act unless such agreement specifically provides that (a) the holder of such
Equity Securities may not participate in any registration requested pursuant to
Section 1.1 hereof without the written consent of the Investor Holders who hold
a majority of the Registrable Securities and the DK Holders who hold a majority
of the Shareholders' Shares included in such registration unless (i) the sale of
the Registrable Securities is to be underwritten on a firm commitment basis and
the managing underwriter in its good faith judgment concludes that the public
offering or sale of such Equity Securities would not cause the number of
Registrable Securities, Shareholders' Shares and such Equity Securities to
exceed the number which can be sold in such offering, and (ii) the Investor
Holders of Registrable Securities and the DK Holders of the Shareholders' Shares
shall have the right to participate, to the extent that they may request, in any
registration statement initiated under a demand registration right exercised by
the holder of such Equity Securities, except that if the managing underwriter of
a public offering made pursuant to such a demand registration limits the number
of shares of Common Stock to be sold in such offering, the participation of the
Investor Holders of Registrable Securities, the DK Holders of the Shareholders'
Shares and the holders of all other Common Stock (other than the Equity
Securities held by such holder of Equity Securities) shall be pro rata based
upon the number of shares of Registrable Securities, Shareholders' Shares and
Common Stock held at
-27-
<PAGE>
the time of filing the registration statement, (b) the holder of such Equity
Securities may not participate in any registration requested pursuant to Section
1.2 hereof if the sale of Registrable Securities or Shareholders' Shares is to
be underwritten unless, if the managing underwriter limits the total number of
securities to be sold in such offering, the holders of such Equity Securities
and the Investor Holders and the DK Holders are entitled to participate in such
underwritten distribution pro rata based upon the number of Equity Securities,
Registrable Securities and Shareholders' Shares held at the time of filing the
registration statement, and (c) all Equity Securities excluded from any
registration as a result of the foregoing limitations shall not be included in
such registration and may not be sold or otherwise transferred for such period
as the managing underwriter of such registered distribution may request.
1.10 Rights of Investor Holders and DK Holders. Each Investor Holder and
-----------------------------------------
each DK Holder shall have the absolute right to exercise or refrain from
exercising any right or rights which such Investor Holder or DK Holder, as
applicable, may have by reason of this Agreement, any Registrable Security or
Shareholders' Share, including, without limitation, the right to consent to the
waiver of any obligation of the Company under this Agreement and to enter into
an agreement with the Company for the purpose of modifying this Agreement or any
agreement effecting any such modification, and such Investor Holder or DK Holder
shall not incur any liability to any other Investor Holder or DK Holder, as
applicable, with respect to exercising or refraining from exercising any such
right or rights.
2. GENERAL
2.1 Notices. Any notice or other communication given hereunder shall be
-------
deemed sufficient if in writing and sent by registered or certified mail, return
receipt requested, or delivered by hand against written receipt therefor,
addressed to the Company or any of the DK Holders at 550 Seventh Avenue, New
York, New York 10018, Attention: Stephan A. Weiss or to any of the Investor
Holders c/o Takihyo Inc., 205 West 39th Street, New York, New York 10018,
Attention: Tomio Taki and Frank R. Mori. Notices shall be deemed to have been
given three days after the date of mailing, except notices of change of address,
which shall be deemed to have been given when received.
-28-
<PAGE>
2.2 Amendments. This Agreement shall not be changed, modified or amended
----------
except by a writing signed by all parties hereto, and this Agreement may not be
discharged except by performance in accordance with its terms or by a writing
signed by all parties hereto.
2.3 Successors, Etc. This Agreement shall be binding upon and inure to
----------------
the benefit of the parties hereto and to their respective heirs, legal
representatives, successors and assigns. This Agreement sets forth the entire
agreement and understanding between the parties as to the subject matter thereof
and merges and supersedes all prior discussions, agreements and understandings
of any and every nature among them.
2.4 Governing Law. Notwithstanding the place where this Agreement may be
-------------
executed by any of the parties hereto, the parties expressly agree that all the
terms and provisions hereof shall be construed in accordance with and governed
by the laws of the State of New York, without regard to principles of conflicts
of law. The parties hereby agree that any dispute which may arise between them
arising out of or in connection with this Agreement shall be adjudicated before
a court located in New York City, and they hereby submit to the exclusive
jurisdiction of the courts of the State of New York located in New York, New
York and of the federal courts in the Southern District of New York with respect
to any action or legal proceeding commenced by any party, and irrevocably waive
any objection they now or hereafter may have respecting the venue of any such
action or proceeding brought in such a court or respecting the fact that such
court is an inconvenient forum, relating to or arising out of this Agreement or
any acts or omissions relating to the transactions contemplated hereby, and
consent to the service of process in any such action or legal proceeding by
means of registered or certified mail, return receipt requested, in care of the
address set forth in Section 2.1 hereof or such other address as any party
hereto shall furnish in writing to the other parties hereto.
2.5 Waiver of Jury Trial. The parties hereto hereby waive trial by jury
--------------------
in any action or proceeding involving, directly or indirectly, any matter
(whether sounding in tort, contract, fraud or otherwise) in any way arising out
of or in connection with this Agreement or the transactions contemplated hereby.
-29-
<PAGE>
2.6 Legal Fees. In order to discourage frivolous claims the parties
----------
hereto agree that unless a claimant in any proceeding succeeds in establishing
its claim and recovering a judgment against another party (regardless of whether
such claimant succeeds against one of the other parties to the action), then the
other party shall be entitled to recover from such claimant all of its legal
costs and expenses relating to such proceeding and incurred in preparation
therefor.
2.7 Severability. The holding of any provision of this Agreement to be
------------
invalid or unenforceable by a court of competent jurisdiction shall not affect
any other provision of this Agreement, which shall remain in full force and
effect.
2.8 Waiver. It is agreed that a waiver by any party of a breach of any
------
provision of this Agreement shall not operate, or be construed, as a waiver of
any subsequent breach by that same party.
2.9 Further Assurances. The parties agree to execute and deliver all such
------------------
further documents, agreements and instruments and take such other and further
action as may be necessary or appropriate to carry out the purposes and intent
of this Agreement.
2.10 Counterparts. This Agreement may be executed in one or more
------------
counterparts each of which shall be deemed an original, but all of which shall
together constitute one and the same instrument.
2.11 Reliance on Notices. The Company shall be entitled to rely upon any
-------------------
notice, instruction or instrument by any Investor Holder or any DK Holder, as
applicable, reasonably believed by the Company to be genuine and may assume that
any person purporting to give any notice, instruction or instrument in
connection with this Agreement on behalf of any Investor Holder or any DK
Holder, as applicable, is authorized to do so.
2.12 Effectiveness. This Agreement shall become effective (the "Effective
-------------
Date") upon the consummation of the Offering, as defined in that certain
Agreement and Plan of Contribution (the "Contribution Agreement"), dated as of
the date hereof, among the Company, the Investor Holders and the DK Holders. On
the Effective Date, the parties agree to execute and attach Exhibit A, which
shall set forth the shares of Common Stock received by each of the Investor
-30-
<PAGE>
Holders and DK Holders pursuant to the Contribution Agreement. The parties
further agree that upon the exercise of the Underwriters' Over-allotment Option
(as defined in the Contribution Agreement), they shall execute and attach to
this Agreement an amended and restated Exhibit A to reflect the receipt by the
Investor Holders of any additional shares of Common Stock pursuant to the
Contribution Agreement.
-31-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first set forth above.
DONNA KARAN INTERNATIONAL INC.
By:________________________
Name:
Title:
___________________________
Donna Karan
___________________________
Stephan Weiss
___________________________
Frank R. Mori
___________________________
Christopher Mori
___________________________
Heather Mori
___________________________
Tomio Taki
TAKIHYO INC.
By:________________________
Frank R. Mori
President
[Signature Page to Registration Rights Agreement]
<PAGE>
GABRIELLE STUDIO, INC.
By:________________________
Donna Karan
President
THE TRUST FOR THE BENEFIT OF LISA WEISS KEYES,
COREY WEISS AND GABRIELLE KARAN
By:________________________
Stephan Weiss
Trustee
THE TRUST FOR THE BENEFIT OF DONNA KARAN
By:________________________
Stephan Weiss
Trustee
[Signature Page to Registration Rights Agreement]
<PAGE>
EXHIBIT 10.5
AGREEMENT made as of this ___ day of June, 1996, by and between GABRIELLE
STUDIO, INC., a New York corporation with offices at 550 Seventh Avenue, New
York, New York 10018 ("Licensor"), and DONNA KARAN STUDIO, a New York general
partnership with offices at 550 Seventh Avenue, New York, New York 10018
("Licensee") which is, as of the date hereof, owned by DONNA KARAN INTERNATIONAL
INC., a Delaware corporation with offices at 550 Seventh Avenue, New York, New
York 10018 ("DKI").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, pursuant to that certain agreement dated as of December 21, 1984
by and between Ms. Donna Karan ("Karan") and Licensor as revised, amended and
restated, Licensor had, among other things, been granted the exclusive right to
use the mark DONNA KARAN and all variations thereof in connection with the
design, manufacture, distribution, sale (wholesale and retail sale), advertising
and promotion by Licensor of various products, including, without limitation,
the Products (as hereinafter defined); and
WHEREAS, pursuant to the terms of that certain Trademark Assignment dated
the date hereof by and between Karan and Licensor, Karan contributed, assigned,
transferred and conveyed to Licensor all of Karan's rights, title and interest
in and to the marks "DONNA KARAN", "DONNA KARAN NEW YORK", "DKNY" and "DK" and
all variations thereof that include the foregoing marks in whole or in part and
the trademark and servicemark registrations and applications for trademark and
servicemark registration listed in a disclosure schedule identified as
disclosure schedule A to be
<PAGE>
executed by the parties hereto (jointly and severally the "Licensed Mark"); and
WHEREAS, pursuant to the terms of that certain Irrevocable Consent
Agreement dated the date hereof by and between Karan and Licensor, Karan
consented to the exclusive, worldwide use in perpetuity, by Licensor its
successors, assigns, affiliated entities and sublicensees of her name, part of
her name, initials, signature and likeness ("collectively, the Name") in
connection with the design, manufacture, distribution, sale (both at retail and
at wholesale), advertising, marketing and promotion and provision of certain
store services of all products of any kind, nature or description except for
certain excluded products and except as relates to certain excluded rights; and
WHEREAS, Licensor had previously granted to Licensee, among other things,
an exclusive license to use the mark DONNA KARAN and all variations thereof
pursuant to that certain Agreement dated as of December 21, 1984 by and between
Licensor and Licensee as amended (the "Original License Agreement"); and
WHEREAS, the Licensor is a party to that certain Agreement and Plan of
Contribution dated the date hereof pursuant to which a reorganization (the
"Reorganization") of the businesses conducted by The Donna Karan Company, The
Donna Karan Company Store, G.P., DK Footwear Partners, Licensee and DSTF Japan
Company, all general partnerships, Donna Karan (H.K.) Limited, a Hong Kong
corporation and Donna Karan Italy, S.r.l., an Italian corporation will be
accomplished in conjunction with
<PAGE>
the initial public offering (the "Offering") of the common stock of Donna Karan
International Inc. as an integrated plan pursuant to Section 351 of the Internal
Revenue Service Code of 1986, as amended; and
WHEREAS, in connection with the potential impact of the Reorganization on
the terms and provisions of the Original License Agreement, Licensee and
Licensor desire to clarify and restate in its entirety the terms and provisions
of the Original License Agreement with the terms and provisions of this
Agreement pursuant to which Licensee desires to obtain and Licensor desires to
grant the exclusive worldwide right to use and sublicense the Licensed Mark and
the Name in connection with the design, manufacture, distribution, sale (both at
retail and at wholesale), advertising, marketing and promotion by Licensee, its
Subsidiaries (as hereinafter defined), its Affiliated Entities (as hereinafter
defined) and Sublicensees (as hereinafter defined) ("Sale" or "Sales") of
various Products (as hereinafter defined).
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth, Licensor and Licensee do hereby respectively agree that the Original
License Agreement shall be amended and restated in its entirety and do hereby
further respectively grant, covenant and agree as follows:
<PAGE>
1. Grant of License
----------------
1.1 Licensor hereby grants to Licensee an exclusive license throughout the
world (the "Territory") to use and, subject to the provisions of Section 14.2
below, sublicense the use of the Licensed Mark and Name, in connection with the
Sale of all products of any kind, nature or description, except for those
products as provided in Schedule 1 annexed hereto (the "Products") and with the
provision of Store Services (as defined herein) except for those Store Services
relating to the reserved rights as provided in Schedule 1 annexed hereto and
such other services as may be agreed to from time to time by Licensor and
Licensee. Products bearing the Licensed Mark or the Name which are sold (a) by
Licensee, or (b) by DKI or any other holding company or parent company of
Licensee or by any present or future entity (i) through which Licensee or DKI or
any other holding company or parent company of Licensee directly or indirectly
conducts its business (including, but not limited to, any partnerships or joint
ventures) or (ii) by any affiliate of DKI or any other holding company or parent
company of Licensee or any affiliate of Licensee (each entity described in this
subsection (b) an "Affiliated Entity"), or (c) by any present or future, direct
or indirect, subsidiary of Licensee or DKI or any other holding company or
parent company of Licensee (each a "Subsidiary"), or (d) by any present or
future, direct or indirect, sublicensee or sub-sublicensee of DKI or any other
holding company or parent company of Licensee or Licensee
<PAGE>
permitted hereunder ("Sublicensees") shall be referred to hereinafter
collectively as "Articles." The right to use and to sublicense the Name
provided in this Section 1.1 shall include the right to use the Name in the name
of the Licensee, any Subsidiary or any Affiliated Entity. The products excluded
from the Products and Store Services related thereto as set forth in Schedule A
annexed hereto are referred to herein as "Excluded Products". Upon execution of
this License Agreement, Licensee shall pay to Licensor a non-refundable one time
payment of $4,635,000.00.
1.2 Notwithstanding anything herein to the contrary, Licensor reserves
for itself and Karan all rights to the use of the Licensed Mark and the Name in
respect of the Excluded Products and with respect to the rights identified as
reserved rights in Schedule A annexed hereto (the "Reserved Rights"). Nothing
herein, however, shall be deemed to permit Licensor or Karan to use or to permit
others to use the Licensed Mark or the Name in connection with a business
competitive with the business of Licensee, any Subsidiary, any Affiliated Entity
or any Sublicensee hereunder or pursuant hereto.
1.3 Licensee shall use its best efforts, and shall cause its Subsidiaries,
its Affiliated Entities and its Sublicensees to use their best efforts,
consistent with the reputation and prestige of the Licensed Mark and the Name as
a designation for high quality products, to exploit the rights
<PAGE>
granted herein throughout the Territory and to maximize the Sale of the Articles
in the Territory in accordance with this Agreement and to manufacture or cause
to be manufactured, or in the case of store services necessary for the
establishment, operation and promotion of retail stores, outlet stores,
franchise stores, joint venture stores and all other stores through which the
Articles are sold ("Store Services") to provide or cause to be provided, the
Articles in sufficient volume to meet the demands therefor.
1.4 Except with regard to the Excluded Products and the Reserved Rights,
Licensee shall have the exclusive right to use the Licensed Mark and the Name in
connection with the Sale of the Articles and the provision of Store Services.
1.5 Licensor and Licensee acknowledge that the Licensee, the Subsidiaries,
the Affiliated Entities and the Sublicensees may design, manufacture,
distribute, sell, advertise, market and promote products and Store Services
under other trademarks or service marks which do not utilize the Licensed Mark
or the Name or any derivation or variation thereof and which products are not
designed, manufactured, distributed, sold, advertised, marketed or otherwise
promoted through the Licensee or through any entity (including any Subsidiary,
Affiliated Entity, or Sublicensee) utilizing the Name or the Licensed Mark or
forming a part of any entity utilizing the Name or the Licensed Mark in its name
(the "Non-Related Marks") and that the design, manufacture, distribution, sale,
advertising,
<PAGE>
marketing and promotion of any products or services bearing such Non-Related
Marks shall not be subject to the terms of this Agreement.
1.6 While Karan is the (i) Chairman of DKI and Chief Designer of DKI or
any of its Subsidiaries or (ii) Chief Executive Officer of DKI and Chief
Designer of DKI or any of its Subsidiaries, Licensee may use the Licensed Mark
for the Sale of Articles in any market segment (e.g., designer, bridge, better,
----
moderate, etc.) and for sales in any form or manner as approved by Karan.
However, at such time as Karan is not the (i) Chairman of DKI and Chief Designer
of DKI or any of its Subsidiaries (ii) or Chief Executive Officer of DKI and
Chief Designer of DKI and any of its Subsidiaries, a particular Licensed Mark
may thereafter only be used by Licensee for the Sale of Articles in the market
segment or segments in which Licensee had previously used such Licensed Mark.
(E.g., if, during the period during which Karan was the Chairman and Chief
----
Designer or Chief Executive Officer and Chief Designer as provided above, the
Licensed Mark "DONNA KARAN NEW YORK" was used only in connection with the Sale
of Articles in the "designer" market segment, after Karan is no longer the
Chairman and Chief Designer or the Chief Executive Officer and Chief Designer as
provided above, Articles bearing the Licensed Mark "DONNA KARAN NEW YORK" may be
sold only in such "designer" market segment.) The foregoing restriction,
however, shall not apply to Non-Related Marks. Further, notwithstanding the
foregoing, Licensee may continue to conduct
<PAGE>
Sales as conducted by Licensee in the ordinary course of business at the time
that Karan was the (i) Chairman of DKI and Chief Designer of DKI or any of its
Subsidiaries or (ii) Chief Executive Officer of DKI and Chief Designer of DKI or
any of its Subsidiaries.
1.7 Licensee shall provide Licensor with prompt notice of any Sale by
Licensee, any Subsidiary, Affiliated Entity or Sublicensee to unaffiliated
discount or "off-price" stores.
2. Term
----
2.1 The term of this Agreement shall commence as of the date of
effectiveness and continue until terminated by either Licensor or Licensee in
accordance with the provisions hereof. The period from the date of
effectiveness hereof through December 29, 1996 and each fiscal period applicable
to the financial fiscal year of Licensee (presently a 52/53 week fiscal year)
thereafter during the term of this Agreement shall constitute and shall be
referred to herein as an "Annual Period."
3. Quality Control
---------------
3.1 (a) Except as provided in Section 3.1(c) hereof, the Articles
designed, manufactured, distributed, sold, (both at retail and at wholesale)
advertised, marketed or promoted under this Agreement shall bear the Licensed
Mark or the Name and, along with the Store Services offered by Licensee, the
Subsidiaries, the Affiliated Entities or the Sublicensees, shall meet the high
standards of quality, workmanship, material, design, size, color and style as
established by Licensor in
<PAGE>
accordance with the terms of this Section 3 and shall be consistent with the
reputation and prestige of the Licensed Mark and the Name for highest quality
Articles and highest quality Store Services in the applicable market segment.
Licensee will not knowingly cause or authorize any Articles not conforming to
the conditions of this Section 3 to be designed, manufactured, distributed, sold
(whether at retail or at wholesale), advertised, marketed or promoted under this
Agreement. All Articles made available for Sale shall conform to and comply
with, in all material respects, all domestic and foreign federal, state and
local laws, rules and regulations governing the design, quality or safety of
such Articles. Licensee shall not cause or authorize (i) the use of any
substandard or offensive materials in the Articles; (ii) any material violation
of any domestic or foreign federal, state or local law or regulation, in its
actions under or related to the license granted hereunder, including but not
limited to regulations imposing advertising or marketing standards or requiring
trade or content descriptions of the Articles; or (iii) the use of the Licensed
Mark or the Name in connection with any product or activity that is not the
subject of the license granted hereunder.
(b) Licensee shall, at its own expense, make available to Licensor or its
nominee, during the production cycle, for purposes of quality evaluation, at
least one signed and dated design prototype and production sample or equivalent
thereof for all Articles being manufactured for distribution,
<PAGE>
sale (both at retail and at wholesale) or being advertised, marketed or promoted
under this Agreement and one signed and dated design, prototype and production
sample or equivalent thereof acceptable to Licensor of each of the cartons,
containers, labels, wrappers, hangers, hangtags, packages or other inner or
outer packaging materials, artwork, printing, advertising, sales, marketing and
promotional materials of any kind used for identification and exploitation of
Articles (e.g. catalogs) and any other items bearing the Licensed Mark or the
Name (the "Wrapping Materials and Related Materials"). Licensee shall notify
Licensor that such prototypes, samples or equivalents thereof are available for
inspection prior to the need for the approval of such prototypes, samples or
equivalents. Licensee agrees not to commence or permit the Sale of or dealing
in Articles and Wrapping Materials and Related Materials until Licensee has
received (i) the written approval of Licensor, or its nominee, for such Articles
and such Wrapping Materials and Related Materials and (ii) a sample, prototype
or equivalent acceptable to Licensor that has been signed and dated by Licensor
as a record of its approval of the same.
(c) In addition to the provisions of Section 3.1(b) hereof, Licensee shall
further, within seven days of any demand from Licensor, make available to
Licensor at Licensee's expense, a reasonable number of design prototypes,
production samples or other samples or equivalents thereof of any of the
Articles or Wrapping Materials and Related Materials that
<PAGE>
Licensee is then designing, manufacturing, distributing, selling (both at retail
and at wholesale), advertising, marketing or promoting under the terms of this
Agreement for inspection. If, upon such inspection, Licensor determines that
any of such Articles or Wrapping Materials and Related Materials fail to meet
the standards evidenced by the previously approved design prototypes, production
samples or equivalents thereof, then Licensor shall have the right to notify
Licensee in writing, specifying in what respect Licensor disapproves; in such
event, Licensee shall, immediately upon receipt of notification of disapproval,
suspend all manufacture, sale and distribution of the disapproved Articles or
Wrapping Material and Related Material until it has made all necessary changes
and corrections to the satisfaction of Licensor and obtained Licensor's written
reapproval of such Articles or Wrapping Materials and Related Materials.
Articles and Wrapping Materials and Related Materials that do not conform to the
previously approved samples, other than incidental seconds or irregulars that
are so identified, shall not be sold, distributed or otherwise released by
Licensee unless, subject to the provisions of Section 3.1(f) hereof, all
references to the Licensed Mark and the Name shall have first been completely
obliterated or removed or otherwise made totally unidentifiable.
(d) Licensee shall: (i) affix to any Articles and Wrapping Materials and
Related Materials such trademark, copyright and patent notices, other
distinguishing
<PAGE>
marks and other notices of the sponsorship of Licensor or Karan as Licensor may
reasonably request from time to time during the term of this Agreement; (ii)
design, manufacture, sell, distribute or otherwise deal with Wrapping Materials
and Related Materials solely in connection with the Articles, and shall, upon
termination of this Agreement, assign to Licensor, and use its best efforts to
cause to be assigned to Licensor, without consideration, other than such nominal
consideration as may be required by domestic and foreign federal, state and
local laws to make valid any such assignment, the beneficial ownership of all
rights that Licensee, any Subsidiary, any Affiliated Entity or any Sublicensee
may have acquired to any word, device, formula, design or symbol (a) used by
Licensee, any Subsidiary, any Affiliated Entity or any Sublicensee on or
developed by Licensee particularly for use with or in any of the Articles or
Wrapping Materials and Related Materials during the term of this Agreement or
(b) which is a derivation or variation of the Licensed Mark or the Name, which
utilizes the Licensed Mark or the Name or which is connected to the design,
manufacture, distribution, sale, advertising, marketing or other promotion of
any product through the Licensee or through any entity (including any
Subsidiary, Affiliated Entity or Sublicensee) utilizing the Name or the Licensed
Mark or forming a part of any entity utilizing the Name or the Licensed Mark in
its name; (iii) not cause or grant permission to any third parties to acquire
any trademark, copyright or patent or other proprietary right in connection with
<PAGE>
any word, device, design or symbol used by Licensee as provided in subsection
(ii) above.
(e) In addition to the foregoing, Licensee, the Subsidiaries, the
Affiliated Entities and the Sublicensees shall provide Store Services only upon
the prior approval of the Licensor of the quality of any and all of the Store
Services to be provided, including without limitation Licensor's approval of the
Store's location, layout, display units, signs, furnishings and fixtures,
lighting and product lines sold. Licensee shall use its best efforts to cause
all stores providing Store Services to be open to reasonable inspection by
Licensor or its agent. If the provision of any Store Service fails to meet the
standards previously approved by Licensor, then Licensor shall have the right to
notify Licensee in writing, specifying in what respect Licensor disapproves; and
in such event, Licensee shall, within 30 days of receipt of notification of
disapproval, make or cause to be made all necessary changes and corrections to
the satisfaction of Licensor. If such changes are not made within such 30-day
period, Licensee shall suspend or cause to be suspended the rendering of any
Store Services which Licensor has disapproved (including all Sales of Articles)
unless and until Licensor shall have given Licensee its written reapproval of
such Store Services.
(f) Licensee agrees and acknowledges that the labels, hangtags, and other
identifying Wrapping Materials and Related Materials of any and all Articles
sold in off-price
<PAGE>
stores shall be redlined with indelible ink or some other equivilent form of
permanent marking indicating second grade quality; provided, however, that with
regard to currently existing sublicensing agreements, Licensee shall use its
best efforts to cause such sublicensee to comply with the foregoing consistent,
however, with such sublicensee's obligations under such sublicensing
agreements..
(g) Licensee shall use its best efforts to permit Licensor or its agent to
enter upon and inspect, at all reasonable hours in the day, any office, factory,
warehouse or other facility where any of the Articles or Wrapping Materials and
Related Materials are designed, manufactured, shipped, stored or otherwise dealt
with.
3.2 Licensor may take all reasonable actions which it deems necessary to
ensure that Articles manufactured or sold hereunder and Wrapping Materials and
Related Materials related thereto and the Store Services provided hereunder are
consistent with the reputation and prestige of the Licensed Mark as a
designation for high quality products. Licensee shall cooperate, and shall
cause the Subsidiaries, the Affiliated Entities and the Sublicensees to
cooperate, in all reasonable respects with Licensor in connection with the
foregoing, including, without limitation, providing Licensor with full and free
access to its facilities.
3.3 [Intentionally Deleted]
<PAGE>
3.4 Notwithstanding anything to the contrary herein:
(i) For so long as Karan is (a) Chairman of DKI and Chief Designer of DKI
or any of its Subsidiaries or (b) Chief Executive Officer of DKI and Chief
Designer of DKI or any of its Subsidiaries all uses of the Name (including,
without limitation, on or in connection with any Articles and any Wrapping
Materials and Related Materials but excluding specifically use of the name of
Donna Karan and her initials in connection with the right to use the Licensed
Mark granted hereby and the use of the name Donna Karan and her initials in the
name of Licensee, the Subsidiaries and the Affiliated Entities), shall be
subject to the prior written approval of Licensor and shall be submitted to
Licensor prior to the need for such approval. Any such material bearing the
Name submitted in writing for approval which is not disapproved in a writing
directed to the Board of Directors of DKI within a commercially reasonable
period of time under the facts and circumstances after availability thereof
shall be deemed approved for use by Licensee hereunder but only for the purpose
for which approval was sought. Notwithstanding the provisions of this Section
3.4(i) but in no way affecting the right of Licensee to use the name of Donna
Karan and her initials in connection with the right to use the Licensed Mark
granted hereby and the use of the name Donna Karan in the name of Licensee, its
Subsidiaries and its Affiliated Entities, (a) Licensee shall not use the Name in
any Articles, Wrapping
<PAGE>
Materials and Related Materials, without the prior written approval of Karan
after she is no longer (i) Chairman of DKI and Chief Designer of DKI or any of
its Subsidiaries (ii) or Chief Executive Officer and Chief Designer of DKI or
any of its Subsidiaries, or, without the prior written approval of her
testamentary designee after her death.
(ii) For so long as Karan is (i) Chairman of DKI and Chief Designer of DKI
or any of its Subsidiaries or (ii) Chief Executive Officer of DKI and Chief
Designer of DKI or any of its Subsidiaries, Articles, Wrapping Materials and
Related Materials and other materials used in connection with the Sale of
Articles shall be deemed to be in conformity with the quality standards set
forth herein, if samples, prototypes or equivalents thereof have been made
available to Karan in conformity with the terms and provisions of Section 3.1(b)
hereof and Karan does not disapprove of the particular items, within a
commercially reasonable period of time under the facts and circumstances after
availability thereof, in a writing directed to the Board of Directors of DKI,
which writing shall include an explanation for the reason for such disapproval.
Upon any such disapproval, Licensee may cure any problems identified as a reason
for disapproval and resubmit any such Article, Wrapping Materials and Related
Materials and other materials to Licensor for approval. Furthermore, any
approval required by this Section 3 hereof after such time as Karan is no longer
(a) Chairman of DKI and Chief Designer of DKI or any of its Subsidiaries or (b)
Chief Executive
<PAGE>
Officer of DKI and Chief Designer of DKI or any of its Subsidiaries shall be
deemed to have been given if Licensor does not indicate disapproval within a
commercially reasonable period of time under the facts and circumstances after
availability thereof in a writing directed to the Board of Directors of DKI
which writing shall include an explanation for the reason for such disapproval.
Upon any such disapproval, Licensee may cure any problems identified as a reason
for disapproval and resubmit any such Article, Wrapping Materials and Related
Materials and other materials to Licensor for approval.
4. Advertising
-----------
4.1 The expenditures of Licensee, its Subsidiaries, its Affiliated
Entities and its Sublicensees for advertising, marketing and promotion of the
various lines of Articles shall be consistent, throughout the term of this
Agreement, with industry standards for competitive lines of products.
5. Sales Royalty
-------------
5.1 (a) In consideration for the rights, licenses and privileges herein
granted to Licensee, Licensee shall pay to Licensor, during each Annual Period,
a sales royalty equal to 1.75% of the first $250 million of Net Sales (as
hereinafter defined) during such Annual Period, plus 2.5% of the next $500
million of Net Sales during such Annual Period, plus 3% of the next $750 million
of Net Sales during such Annual Period,
<PAGE>
plus 3.5% of all net Sales during such Annual Period in excess of $1.5 billion
(the "Sales Royalty").
(b) In the event that any such Annual Period is other than a twelve (12)
month or 52/53 week period (a "Non-Conforming Annual Period"), the dollar
threshold amounts on which the sales royalty is calculated shall be pro-rated by
multiplying such dollar amount by a fraction the numerator of which shall be the
number of days in such Non-Conforming Annual Period and the denominator of which
shall be 365.
5.2 "Net Sales" shall mean (a) the invoiced amount of any Articles shipped
by Licensee, any of its Subsidiaries, any of its Affiliated Entities or any of
its Sublicensees, bearing the Licensed Mark or the Licensed Mark and the Name,
whether or not together or in connection with any other name or mark plus (b)
the invoiced amount of any Articles shipped by Licensee, any of its
Subsidiaries, any of its Affiliated Entities or any of its Sublicensees bearing
the Name but not the Licensed Mark, whether or not together or in connection
with any other name or mark (e.g., "X" for Donna Karan) plus (c) the store
----
royalty amounts as determined pursuant to Schedule 2 hereof, minus, in each
case, (a) any amount of any trade or cash discounts for prompt payment actually
taken by customers authorized by Licensee and any accepted returns authorized by
the Licensee and any local taxes, freight charges and the like, to the extent
separately stated on the invoice and (b) any Acceptable Bad Debt Allowance (as
defined herein). Except as
<PAGE>
provided in the preceding sentence, no deduction shall be made for other
discounts (including anticipation discounts), allowances of any kind or for any
purpose, uncollectible accounts or any other costs or expenses incurred by the
seller of such Articles, including, without limitation, costs of collection.
For purposes of this Section 5.1, Acceptable Bad Debt Allowance shall mean the
lesser of any bad debt reserve amount provided for in the financial statements
of the Licensee or 2% of (a) the invoiced amount of any Articles shipped by
Licensee, any of its Subsidiaries, any of its Affiliated Entities or any of its
Sublicensees bearing the Licensed Mark or the Licensed Mark and the Name,
whether or not together or in connection with any other name or mark plus (b)
the invoiced amount of any Articles shipped by Licensee, any of its
Subsidiaries, any of its Affiliated Entities or any of its Sublicensees bearing
the Name but not the Licensed Mark, whether or not together or in connection
with any other name or mark (e.g., "X" for Donna Karan) plus (c) the store
----
royalty amounts as determined pursuant to Schedule 2 hereof, minus, in each
case, the amount of any trade or cash discounts for prompt payment actually
taken by customers authorized by the Licensee and any accepted returns
authorized by the Licensee and any taxes, freight charges and the like, to the
extent separately stated on the invoice. For purposes of clarity, Net Sales
shall not, under any circumstances, be reduced by any bad debt of any Affiliated
Entity, Subsidiary or Sublicensee of Licensee.
<PAGE>
5.3 Notwithstanding anything to the contrary herein except as set forth in
Section 10.1(c) hereof, "Net Sales" of Articles by a Sublicensee other than a
Subsidiary or Affiliated Entity ("Third Party Sublicensee") shall be calculated
in accordance with the definition of "Net Sales" set forth in such Third Party
Sublicensee's sublicense agreement.
5.4 The Sales Royalty shall be accounted for and paid quarterly within
forty-five (45) days after the close of each quarter during each Annual Period
during the term of this Agreement. In computing the Sales Royalty to be paid
hereunder for the second, third and fourth quarters of each Annual Period during
the term of this Agreement, the calculation of Net Sales for such second, third
and fourth quarter shall include Net Sales of all prior quarters and the
resulting Sales Royalty shall be adjusted for any prior quarterly payments of
Sales Royalty.
5.5 In the event that the Sales Royalty payable for an Annual Period is
less than the "Contingent Anti-Termination Payment" (as hereinafter defined) for
such Annual Period (pro-rated for the first Annual Period based upon the
percentage of the 1996 fiscal year during which this Agreement is in effect),
Licensor may terminate this Agreement by written notice thereof to Licensee,
unless Licensee pays to Licensor an amount equal to the excess of the Contingent
Anti-Termination Payment over the actual Sales Royalty for such Annual Period
(the "Contingent Anti-Termination Payment Amount") within sixty (60) days after
receipt by Licensee of notice from Licensor that the
<PAGE>
Sales Royalty paid for such Annual Period was less than the Contingent Anti-
Termination Payment for such Annual Period. The "Contingent Anti-Termination
Payment" for an Annual Period shall be an amount equal to the greatest of: (a)
$3 million plus the "Cost-of-Living Increase Adjustment" (as hereinafter
defined) plus 1/4 of the Average Annual Sales Royalty (as defined herein) for
such Annual Period and (b) 1/3 of the Average Annual Sales Royalty for such
Annual Period and (c) for each Contingent Anti-Termination Payment after the
first such Contingent Anti-Termination Payment Amount is made hereunder, the
amount of such first Contingent Anti-Termination Payment Amount plus the
Adjusted Cost-of-Living Increase Adjustment (as hereinafter defined). For
purposes hereof, the Average Annual Sales Royalty shall mean the average of the
Sales Royalty paid to Licensor for the three (3) Annual Periods prior to the
Annual Period for which a Contingent Anti-Termination Payment is to be made.
For purposes of calculating the average of the Sales Royalty in the Average
Annual Sales Royalty calculation for the preceding three (3) Annual Periods, the
actual Sales Royalty paid during each of the first two (2) of such Annual
Periods shall be increased by an amount equal to the percentage increase in the
"CPI-U" (as hereinafter defined) from the month of November preceding such
Annual Period through the month of November preceding the third of such Annual
Periods. The "Cost-of-Living Increase Adjustment" for an Annual Period shall be
equal to $3,000,000 multiplied by the percentage increase in the Consumer Price
Index for All Urban
<PAGE>
Customers ("CPI-U") for the month of November in the relevant Annual Period over
the CPI-U for the month of November in the preceding Annual Period. The
"Adjusted Cost-of-Living Increase Adjustment" for an Annual Period shall be
equal to the amount of the first Contingent Anti-Termination Payment made
hereunder multiplied by the percentage increase in the CPI-U for the month of
November in the relevant Annual Period over the CPI-U in the month of November
for the Annual Period for which the first Contingent Anti-Termination Payment
was made hereunder. The "CPI-U" referred to herein is that CPI-U published by
the Bureau of Labor Statistics, U.S. Department of Labor, for all United States
cities (U.S. city average), based upon 1982-4 equalling 100, or the successor or
supplement thereto if publication thereof should be discontinued or modified.
For purposes of calculating the average of annual Sales Royalties for any period
that includes a Non-Conforming Annual Period, the Sales Royalty for such Non-
Conforming Annual Period shall not only be adjusted as provided in Section
5.1(b) hereof but shall also be annualized by multiplying such Sales Royalty by
a fraction the numberator of which is 365 and the denominator of which is the
number of days in such Non-Conforming Annual Period.
6. Sales Statement
---------------
6.1 Licensee shall deliver to Licensor, at the time each Sales Royalty
payment is due, a statement certified by its chief financial officer setting
forth (a) gross sales of all Articles shipped or sold (including but not limited
to Articles
<PAGE>
shipped or sold through the provision of Store Services) during the period
covered by such Sales Royalty payments, (b) the amounts which properly may be
deducted from gross sales, and (c) a computation of the amount of Sales Royalty
payable hereunder for said period. Together with each such statement, Licensee
shall deliver to Licensor copies of all sales and royalty statements received
from Sublicensees, Subsidiaries and Affiliated Entities.
7. Books and Records; Audits
-------------------------
7.1 Licensee shall prepare and maintain complete and accurate books of
account and records covering all transactions arising out of or relating to this
Agreement. Licensor and its duly authorized representatives may, during regular
business hours and on reasonable advance notice, for the duration of this
Agreement and for one (1) year thereafter, audit said books of account and
records and examine and copy all documents and material in the possession or
under the control of Licensee with respect to the subject matter and terms of
this Agreement (any such audit, a "Licensor Audit"). Licensor and its duly
authorized representatives shall keep confidential and shall not use or
disclose, other than in connection with the enforcement of its rights hereunder,
any non-public information contained in any of such books of account and records
and any other non-public information regarding the business and operations of
Licensee learned in connection with any such audit. All such books of account,
records and documents shall be
<PAGE>
maintained by Licensee for at least seven (7) years after the end of the Annual
Period to which they relate. Nothing herein shall be deemed to prevent
Licensor, in the exercise of its reasonable discretion, from auditing and
examining any such books of account, records and documents more than seven (7)
years old, if available.
7.2 If Licensor determines, as a result of any Licensor Audit, that
Licensee's payments for the period covered by such Licensor Audit are less than
the amount which should have been paid, Licensor shall notify Licensee in
writing, of any such shortfall amount (such notice, the "Shortfall Notice").
Upon receipt of any such Shortfall Notice, Licensee shall have the right to
contest in writing the results of such Licensor Audit within seven (7) days of
the receipt of the Shortfall Notice. In the event Licensee contests in writing
such Licensor Audit within the required seven (7) day period, Licensee shall
then be entitled to select an independent auditor to conduct another audit to be
completed within forty-five (45) days after such seven (7) day period. If
Licensee fails to contest the Licensor Audit within the required time period or
if an independent auditor selected by Licensee determines that a payment
shortfall of $150,000 or more (a "material shortfall") exists, Licensee shall
pay to Licensor the amount of such material shortfall as well as the costs and
expenses incurred by Licensor in connection with the Licensor Audit and all
other costs and expenses incurred in connection with the provisions of this
Section 7.2. In
<PAGE>
addition, if any material shortfall to be paid by Licensee hereunder is equal to
five percent (5%) or more of the amount which should have been paid, Licensee
shall also pay to Licensor interest on such material shortfall amount equal to
the borrowing rate paid by Licensor to its principal lending institution or the
prime rate announced from time to time by Citibank N.A., whichever is greater,
plus three (3) percentage points, in each instance from time to time during the
period that such material shortfall remains or remained unpaid (the "Shortfall
Interest Amount"). In the event the independent auditor fails to confirm the
findings of the Licensor Audit or any dispute, controversy, or claim arises in
connection with the independent auditor's review of the Licensor Auditor, the
parties hereto agree that such dispute, controversy or claim shall be settled
and determined by arbitration in New York City, New York before the Commercial
Panel of the American Arbitration Association in accordance with and pursuant to
the then existing Commercial Arbitration Rules and as provided in Section 15.1
hereof. Licensee shall make all payments required to be made hereunder in
connection with any such material shortfall (including the amount of any
material shortfall due as well as any Shortfall Interest Amount and any costs
and expenses incurred by Licensor in connection with the Licensor Audit and all
other costs and expenses incurred in connection with the provisions of this
Section 7.2) within three (3) days after (i) the seven (7) day period available
to Licensee to contest such material shortfall;
<PAGE>
or (ii) the determination by the independent auditor that such material
shortfall exists as indicated by the Licensor Audit, or (iii) the determination
by the Commercial Panel of the American Arbitration Association of any material
shortfall due to Licensor hereunder, as the case may be.
8. The Licensed Mark
-----------------
8.1 Licensee acknowledges that, as between Licensor and Licensee, Licensor
is the owner of all right, title and interest in and to the Licensed Mark
throughout the Territory in any form or embodiment thereof and that it is also
the owner of the goodwill attached or which shall become attached to the
Licensed Mark in connection with the business and goods in relation to which the
same has been, is or shall be used. Sales of Articles shall be deemed to have
been made by Licensor for purposes of trademark registration and all uses of the
Licensed Mark by Licensee or any Subsidiary, Affiliated Entity or Sublicensee
and any additional goodwill attached to the Licensed Mark created through the
use of the Licensed Mark by Licensee or any Subsidiary, Affiliated Entity or
Sublicensee shall inure to the benefit of Licensor. To the extent that any
rights in and to the Licensed Mark are deemed to accrue to Licensee, or any
Subsidiary, Affiliated Entity or Sublicensee, Licensee hereby assigns any and
all right rights, and agrees to cause any Subsidiary, Affiliated Entity or
Sublicensee to assign any and all rights, at such time as they may be deemed to
accrue, to Licensor.
<PAGE>
8.2 Each of Licensor and Licensee shall execute any documents, including
registered user agreements, reasonably requested by the other to confirm
Licensor's ownership of all rights in and to the Licensed Mark throughout the
Territory and the respective rights of Licensor and Licensee hereunder.
Licensee shall cooperate with Licensor in connection with the filing and
prosecution by Licensor of applications in Licensor's name to register the
Licensed Mark throughout the Territory and the maintenance and renewal of any
registrations of the Licensed Mark as may currently exist or hereafter may
issue. Upon Licensee's request, Licensor shall (a) file and prosecute the
applications in Licensor's name to register the Licensed Mark in such countries
as may be requested by Licensee and (b) take such actions as may be requested in
connection with the maintenance and renewal of any registration of the Licensed
Mark as may currently exist or hereafter may issue. If Licensor fails to take
any action requested under Section (a) or (b) above, Licensee may take such act
on Licensor's behalf. All costs incurred in connection therewith, including,
without limitation, attorneys' and filing fees, shall be borne by Licensee.
Licensee shall use its reasonable, good faith efforts not to sell Articles in
any country before an application to register the applicable Licensed Mark for
the applicable Products has been filed in such country and/or, if appropriate, a
registered user or similar type agreement has been filed in such country, and in
no event shall Licensee sell Articles in or to customers located in any such
<PAGE>
country until thirty (30) days after it notifies Licensor of its intention to do
so. The foregoing shall not apply where "use" is a prerequisite to the filing
of an application to register a trademark. Where appropriate, the Licensee
shall cause to be attached to the label, tab, container or Wrapping Materials
and Related Materials for each Article designed, manufactured, distributed, sold
or otherwise disposed of under this Agreement, and to the advertising and
promotional materials for any such Article wherein the Licensed Mark appears,
either (i) the initial TM, (ii) the letter R encircled as indicated from time to
time by Licensor when appropriate to denote that the Licensed Mark has been
registered or (iii) the letter C encircled as indicated from time to time by
Licensor.
8.3 Licensee shall not challenge Licensor's ownership of or the validity
of the Licensed Mark or any application for registration thereof, or any
trademark registration thereof, or any rights of Licensor therein or assist any
person in any such action.
8.4 (a) Licensee shall promptly notify Licensor in writing of any actual,
suspected or apparent infringement or counterfeit of the Licensed Mark that may
come to the attention of Licensee. Licensor shall take such action in regard to
such infringement or counterfeit as Licensor, in consultation with Licensee,
deems appropriate or as may be reasonably requested by Licensee for the
protection of its and Licensee's rights in and to the Licensed Mark. Upon
notice from Licensor and pursuant to
<PAGE>
its instructions, Licensee shall undertake and pursue any such suit or assert
any such claim at Licensee's expense in the name of Licensor, or Licensee or in
both names as Licensor may direct. If Licensor fails to take any of the
foregoing actions, Licensee may take action as it deems appropriate for the
protection of its and Licensor's rights in and to the Licensed Mark. If
requested to do so by the party initiating such action, the other party shall
cooperate with the initiating party in all respects, including without
limitation by being the plaintiff or a co-plaintiff and by causing its officers
to execute pleadings and other necessary documents. Licensee shall bear all
costs and expenses incurred in connection with any such actions as may be
brought. No compromise or settlement of any such suit or claim, or any
preliminary negotiations with respect to any compromise or settlement, shall be
made or entered into by either party without the prior written approval of the
other party which approval shall not be unreasonably withheld.
(b) Any recovery for damages obtained as the result of any such suit or
claim shall first be used to repay the party bearing the costs of any such suit
or claim for the cost to such party of the suit or claim and the balance shall
be shared equally by Licensor and Licensee.
8.5 Nothing herein shall be deemed to prevent Licensee from recording a
short form memorandum of this Agreement in the United States Patent and
Trademark Office or any other similar governmental office in any other
jurisdiction in the
<PAGE>
Territory and Licensor shall cooperate with Licensee, at Licensee's expense, in
connection therewith upon request.
9. Indemnity; Insurance
--------------------
9.1 Licensee hereby saves and holds Licensor and Karan and each of its
agents, officers, directors, shareholders, counsel, independent contractors, and
any person who controls the Licensor within the meaning of Section 15 of the
Securities Act of 1933, as amended or Section 20 of the Securities Exchange Act
of 1934, as amended harmless of and from and indemnifies each of them against
any and all costs, claims, suits, losses, liability, damages and expenses
(including reasonable attorneys' fees and expenses) as and when incurred and
whether or not involving a third party which they, or any of them, may incur or
be obligated to pay, or for which they, or any of them, may become liable or be
compelled to pay in any action, claim or proceeding against them, or any of
them, (i) for or by reason of any acts, whether of omission or commission, that
may be committed or suffered by Licensee or any of its servants, agents or
employees in connection with Licensee's performance of this Agreement; (ii)
arising out of or related to any allegedly unauthorized use or infringement of
any patent, trademark, copyrights or other intellectual or tangible proprietary
right by Licensee, its Subsidiaries, its Affiliated Entities or its Sublicensees
in connection with the Sale or any other dealings whatsoever by Licensee, its
Subsidiaries, its Affiliated Entities or its Sublicensees with the Articles;
(iii) arising out of or related
<PAGE>
to any alleged defect in any of the Articles or non-conformity to or non-
compliance with any statutory or other regulations pertaining to the design,
quality, safety, advertising or marketing of the Articles or Wrapping Materials
and Related Materials or (iv) arising out of or related to the breach by
Licensee of any of its obligations hereunder (including but not limited to its
obligations with respect to Sublicensees and sublicensing arrangements as set
out in Section 14.2 hereof and any breach of the covenant set out in Section
12.6 hereof). The foregoing shall not be deemed to require Licensee to
indemnify Licensor or Karan or any other indemnitee identified in Section 9.1
hereof in connection with actions, claims, or proceedings based upon trademark
infringement against them, or either of them, arising solely out of the use by
Licensee of the Licensed Mark in accordance with the terms of this Agreement.
The provisions of this Section and Licensee's obligations hereunder shall
survive the termination of this Agreement.
9.2 Licensee shall, at its own expense, procure and maintain in full force
and effect at all times during which Articles are being sold, a public liability
insurance policy including products liability coverage with respect to Articles,
with a limit of liability of not less (i) $10,000,000 per occurrence for the
period commencing on the effectiveness of this Agreement and ending December 29,
1996 and (ii) $10,000,000 per occurrence plus the "Insurance Adjustment" for
each Annual Period thereafter. The "Insurance Adjustment" for an Annual Period
<PAGE>
shall be equal to $10,000,000 multiplied by the percentage increase in the CPI-U
for the month of November in the relevant Annual Period over the CPI-U for the
month of November in the preceding Annual Period. Such insurance policy shall
be written for the benefit of Licensee, Licensor and Karan, individually, and
shall provide for at least thirty (30) days' prior written notice to said
parties of the cancellation or substantial modification thereof. Such insurance
may be obtained by Licensee in conjunction with a policy of products liability
insurance which covers products other than Articles. Licensee shall deliver a
certificate of such insurance to Licensor promptly upon issuance of said
insurance policy and, from time to time upon reasonable request by Licensor,
promptly shall furnish to Licensor evidence of the maintenance of said insurance
policy. In addition, Licensee's policies of insurance shall provide that the
insurance carrier may take no action with respect to Articles or the Licensed
Mark or the Name if such action would constitute a breach by Licensee of any of
the provisions of this Agreement. Nothing contained in this Section 9.2 shall
be deemed to affect the indemnification provisions of Section 9.1 above.
10. Defaults and Termination
------------------------
10.1 (a) If Licensee fails to make any payment when due hereunder in
full, (i) Licensee shall pay interest on any unpaid balance of such unpaid sum
from and including the date such payment becomes due until the date of payment
in full at a rate equal to the borrowing rate paid by Licensor to its
<PAGE>
principal lending institution or the prime rate announced from time to time by
Citibank, N.A., whichever is greater, during the period of delinquency plus
three (3) percentage points, and (ii) if such default continues uncured for a
period of sixty (60) days or more after notice thereof is received by Licensee,
Licensor may terminate this Agreement forthwith by and upon written notice
thereof to Licensee. Also, in the event that Licensee violates the quality
control provisions hereof and fails to initiate and thereafter pursue
appropriate corrective action within sixty (60) days after the final
unappealable decision of an arbitration tribunal or court of competent
jurisdiction that Licensee has violated the quality control provisions hereof,
Licensor may terminate this Agreement forthwith by notice thereof to Licensee.
(b) Notwithstanding anything to the contrary herein, while Karan is the
Chairman of DKI and Chief Designer of DKI or any of its Subsidiaries or Chief
Executive Officer of DKI and Chief Designer of DKI or any of its Subsidiaries,
Licensee shall not be deemed to have failed to have made a payment in full
hereunder unless (i) such default continues uncured for a period of sixty (60)
days or more after notice thereof is received by Licensee, and (ii) any such
failure to pay was known to and approved by a majority of the members of the
Board of Directors of DKI who are not also shareholders or directors of
Licensor.
(c) Notwithstanding anything to the contrary herein, Licensor may not
terminate this Agreement if any of Licensee's payments was not made in full by
reason of a failure
<PAGE>
of a Third Party Sublicensee to account for its Net Sales accurately. Also,
notwithstanding anything to the contrary herein, no payments of Sales Royalty
hereunder payable with respect to sales of Articles by a Third Party Sublicensee
shall be due and payable until payment of royalty on account thereof is made to
Licensee by such Sublicensee. However, Licensee shall use its commercially
reasonable efforts to require its Sublicensees to observe and perform all of the
terms and provisions of their respective sublicenses and shall take all actions
reasonably necessary in connection therewith. In addition, the Sales Royalty
payable by Licensee with respect to sales of Articles by a Third Party
Sublicensee shall be based upon the actual royalty receipts to Licensee from
such Sublicensee, net of costs of collection. (E.g., if the net royalty payment
----
received from a third party Sublicensee is "$X" and the royalty rate payable by
such Sublicensee is "Y%," "Net Sales" by such Sublicensee, with respect to such
payment, shall, notwithstanding the provisions of Section 5.3 above, be deemed
to be "$X divided by "Y%" and the Sales Royalty payable hereunder with respect
to such payment by such Sublicensee shall be equal to such "Net Sales" figure
multiplied by the Sales Royalty rate hereunder for the Annual Period in which
the "$X" payment is received by Licensee). For purposes hereof, receipts by
Licensee of insurance proceeds in lieu of a royalty payment from a Third Party
Sublicensee shall be deemed to be a royalty receipt from such Sublicensee.
<PAGE>
(d) Notwithstanding anything to the contrary herein, Licensee shall not be
deemed to have failed to make a payment in full hereunder if there is a good
faith dispute as to the amount owing, provided that (i) Licensee timely pays to
Licensor the full amount which it believes in good faith, is owing to Licensor,
and (ii) Licensee places in escrow with its attorneys, pending the resolution of
the dispute, an amount equal to eighty percent (80%) of the amount in dispute.
Licensee shall be in default hereunder, however, and Licensor may terminate this
Agreement, if, after the final resolution of the dispute, it does not promptly
pay to Licensor any amount determined to be owing by Licensee and such amount,
or any part thereof, remains unpaid for a period of sixty (60) or more days
after notice thereof is received by Licensee from Licensor. In addition,
Licensee shall not be deemed to have failed to make a payment in full hereunder
if its failure to make a payment is because of causes reasonably beyond its
control, provided that payment in full is made immediately after Licensee is
able to make such payment.
10.2 Licensee may terminate this Agreement, at any time and for any reason
or for no reason, on six (6) months prior written notice to the Licensor. With
regard to such termination by Licensee, any such election to terminate this
Agreement shall be effective only if approved by a majority of the members of
the Board of Directors of Licensee who are not also shareholders or directors of
Licensor.
<PAGE>
10.3 Licensor may terminate this Agreement at any time upon 3 months prior
notice to the Licensee in the event there has occurred a "change in control"
i.e., any of the following: (v) the acquisition by (i) any "person" (as such
term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended) other than a person who is a shareholder of DKI on the effective
date of the registration statement filed under the Securities Act of 1933
relating to the Offering of securities of DKI (an "Initial DKI Shareholder") of
30% or more of the voting power of securities of DKI, or (ii) the acquisition by
an Initial DKI Shareholder other than an affiliate of DKI (and excluding any
such acquisition resulting from a purchase, sale or transfer of Takihyo Inc.
stock by and between any of the current stockholders of Takihyo Inc.) of an
additional 5% of voting power of securities of DKI over and above that owned
immediately after the closing date of the Offering of DKI's common stock; (w)
the acquisition by any "person" (as such term is used in Section 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended) other than a person who, on
the effective date of the registration statement filed under the Securities Act
of 1933 relating to the first public offering of securities of DKI, is a holder
of any ownership interest in Licensee (an "Initial Licensee Interest Holder") of
30% or more of the voting power of Licensee or the acquisition by an Initial
Licensee Interest Holder other than an affiliate of Licensor of an additional 5%
of voting power of Licensee over and above that owned immediately after the
closing date of the Offering; (x) any merger or sale of substantially all of the
assets of DKI under circumstances where the holders of 20% or more of the equity
<PAGE>
securities of the surviving entity of such transaction were not holders of the
common stock of DKI immediately prior to consummation of such transaction; (y)
any merger or sale of substantially all of the assets of Licensee under
circumstances where the holders of 20% or more of the ownership interests of
Licensee immediately prior to consummation of such transaction were not holders
of an ownership interest in Licensee immediately prior to consummating such
transaction; or (z) any change in the composition of the Board of Directors of
DKI not approved by (i) a majority of the Board of Directors of DKI prior to
such change and (ii) by not less than two directors of DKI who were directors
prior to the time any "person" who was not an Initial DKI Shareholder acquired
30% or more of the voting power of securities of the Company.
10.4 This Agreement may be terminated at the option of the party which is
not the subject of the Bankruptcy Event (as hereinafter defined) upon five (5)
business days written notice upon the occurrence of any one or more of the
following events:
(a) Licensee or Licensor, as the case may be, shall commence any case,
proceeding or other action (i) under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief entered
with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment,
<PAGE>
winding-up, liquidation, dissolution, composition or other relief with respect
to it or its debts, or (ii) seeking appointment of a receiver, trustee,
custodian or other similar action.
(b) There shall be commenced against Licensee or Licensor, as the case may
be, any case, proceeding or other action of a nature referred to in clause (a)
above which (i) results in the entry of an order for relief or any such
adjudication or appointment or (ii) remains undismissed, undischarged or
unbonded for a period of 60 days. Events described in clauses (a) and (b) of
this Section 10.4 shall be referred to as a Bankruptcy Event. If a Bankruptcy
Event occurs, all amounts owing under this Agreement shall become immediately
due and payable, without any notice thereof.
10.5 Licensor's exclusive remedies upon a failure of the performance of
any of the obligations of Licensee hereunder (other than as specifically
provided in Section 5.5, Section 10.1(a), Section 10.1(d), Section 10.3 and
Section 10.4 hereof shall be monetary damages and injunctive relief. Such a
failure of performance (other than for matters described in Section 5.5, Section
10.1(a), Section 10.1(d), Section 10.3 and Section 10.4 hereof as relates to the
Licensee) shall be deemed a partial breach of this Agreement and Licensor may
not terminate this Agreement for such partial breach.
11. Rights on Termination
---------------------
11.1 Notwithstanding any termination in accordance with Section 10 hereof
or otherwise hereunder, Licensor shall
<PAGE>
have and hereby reserves all rights and remedies which it has, or which are
granted to it by operation of law, to enjoin the unlawful or unauthorized use of
the Licensed Mark or the Name (which injunctive relief may be sought in the
courts, notwithstanding the arbitration provisions of this Agreement, and also
may be sought prior to or in lieu of termination), to collect Sales Royalties
payable by Licensee pursuant to this Agreement and to be compensated for damages
for breach of this Agreement. In addition, nothing herein shall be deemed to
prevent Licensor from bringing an action for damages if a default in performance
by Licensee hereunder occurs and is not cured timely in accordance with the
provisions hereof.
11.2 (a) On the termination of this Agreement, all of the rights of
Licensee under this Agreement shall terminate and shall revert automatically to
Licensor, all Sales Royalties on Sales of Articles theretofore made shall become
due and payable and Licensee shall change its name to a name which is not
confusingly similar to the Licensed Mark or the Name, shall discontinue all use
of the Licensed Mark and the Name, shall no longer have the right to use the
Licensed Mark or the Name or any variation or simulation thereof in any respect,
shall transfer to Licensor, free of charge, all registrations, filings and
rights with regard to the Licensed Mark and the Name and the design,
manufacture, distribution, sale (whether at wholesale or retail), advertising
and promotion of the Articles and all sublicenses covering the Licensed Mark and
the Name then existing (which each
<PAGE>
such sublicense agreement executed after the date hereof shall so provide).
Licensee agrees that execution of this Agreement shall constitute a conditional
assignment of all future sublicenses granted by Licensee regarding the Licensed
Mark which assignment shall be automatically effective upon termination of this
Agreement. In addition, Licensee shall deliver to Licensor, free of charge all
archivable materials (including but not limited to designs, sketches, products,
advertising, photographs, layouts, etc.) bearing the Licensed Mark or the Name
or closely associated by the general public with the Licensed Mark or the Name
and the contents of the inspirational library bearing the Licensed Mark or the
Name or closely associated by the general public with the Licensed Mark or the
Name and all other materials in its possession used in connection with Articles,
including, without limitation, all samples of Articles, all technical
manufacturing specifications for Articles, all Wrapping Materials and Related
Materials and all other materials in its possession with the Licensed Mark, the
Name, its name or any variation or simulation thereof. Nothing herein shall be
deemed to prevent Licensee from selling off its inventory of Articles in the
ordinary course for a period of six months from the date of termination (which
sales shall be made in accordance with and subject to the provisions hereof);
provided, however, that Licensor shall have an option exercisable for forty-five
days after any termination of this Agreement to purchase all of (i) Licensee's
said inventory not required to fill open orders at forty percent off wholesale
with
<PAGE>
industry terms and (ii) Licensee's inventory of piece goods at cost. If
Licensor elects not to purchase Licensee's piece goods pursuant to the preceding
sentence, Licensee shall have the right to produce and sell finished goods from
said piece goods provided Licensor shall then have the option exercisable for
forty-five days after termination of this Agreement to purchase such finished
goods at forty percent off wholesale with industry terms. Licensee shall be
entitled to produce Articles in quantities to fulfill any orders in existence as
of the date of termination thereof. The provisions of this Section shall
survive the termination of this Agreement.
(b) Except as otherwise provided in presently existing license or
sublicense agreements with presently existing stores providing Store Services,
upon the termination of this Agreement, Licensee shall discontinue its use of
the Licensed Mark and all names, trademarks, signs, structures and forms of
advertising relating to such stores, and, if the premises of any such particular
store are not assigned to Licensor for use as a store operating under the
Licensed Mark, shall make or cause to be made such changes in signs, buildings
and structures to distinguish the appearance of the premises in which the new
business is to be conducted from the former appearance of said premises.
12. Covenants, Representations and Warranties
-----------------------------------------
12.1 Licensor shall not engage in any business other than the business
conducted by it hereunder, and shall not
<PAGE>
create any liabilities for itself other than in the ordinary course of business.
12.2 Licensor represents and warrants that it has full right, power and
authority to enter into this Agreement and to perform all of its obligations
hereunder. Licensor further represents and warrants that it is the assignee of
the record owner of, and that said record owner is obligated to transfer of
record to Licensor, all of its registrations and applications for the
registration of the Licensed Mark as set forth on Schedule 1 annexed hereto,
which registrations and applications constitute all of the registrations and
applications to register the Licensed Mark currently existing. Except as
permitted by Section 14.1 and Section 14.2 hereof and except for the grant of a
sublicense to The Donna Karan Company, Licensee shall not pledge or encumber, or
sell, transfer, grant an option on, or otherwise dispose of any of its rights in
and to any Licensed Mark or any registration of any Licensed Mark or any
application to register any Licensed Mark, or this Agreement or any of its
rights hereunder. Except as permitted by Section 14.1 hereof and except for the
grant of limited use licenses to the financial institutions party to the Credit
Agreement dated as of October 26, 1994 as amended and Citibank N.A. as agent for
such financial institutions, Licensor has not pledged or otherwise encumbered,
sold, transferred, granted an option on, or otherwise disposed of, any of its
rights in and to any Licensed Mark or any registration of any Licensed Mark or
any application to register
<PAGE>
any Licensed Mark, or this Agreement or any of its rights hereunder and there
are no current litigations or other proceedings in which the validity of any
such rights is being contested). Licensor will not pledge or otherwise
encumber, sell, transfer, grant an option on, or otherwise dispose of, any of
its rights in and to any Licensed Mark or any registration of any Licensed Mark
or any aplication to register any Licensed Mark, or this Agreement or any of its
rights hereunder.
12.3 If, for any reason, Licensee is prevented from using any Licensed
Mark in connection with the Articles, or any of them, in any country, same shall
not be deemed a breach or default by Licensor hereunder and Licensor shall not
be liable to Licensee on account thereof. In addition, Licensee shall use its
best efforts to ensure that no Licensed Mark is used in connection with any
particular Product in any country wherein the use of the applicable Licensed
Mark in connection with such Product would violate the trademark or any other
rights of any third party.
12.4 Licensee represents and warrants that it has full right, power and
authority to enter into this Agreement and to perform all of its obligations
hereunder.
12.5 Licensor shall not take or omit to take any action which would
subject the Licensed Mark to being declared invalid or to being cancelled or
deemed abandoned in any jurisdiction. The foregoing shall not be deemed to
create liability on the part of Licensor if Licensor omits to take an
<PAGE>
action and Licensee could have prevented the result, such as by requiring
Licensor to take an action or otherwise exercising its rights hereunder or
selling Articles in such jurisdiction.
13. Notice
------
13.1 All notices and other communications required or permitted by this
Agreement to be given to a party shall be in writing and shall be deemed to be
duly given if personally delivered, if mailed (by certified or registered mail,
return receipt requested) or if delivered by a nationally-recognized overnight
mail or courier service, to the party concerned at its address set forth on page
1 above (or at such other address as a party may specify by notice to the
other). Copies of all notices to Licensee hereunder also shall be sent to DKI's
general counsel and the chairman of DKI's Audit Committee.
14. Assignability; Sublicensing; Delegation of Duties
-------------------------------------------------
14.1 (a) Neither this Agreement nor any rights of a party hereunder may
be assigned or transferred by either party and any such attempted or purported
assignment or transfer, whether voluntary or by operation of law, shall be void
and of no force or effect. Notwithstanding the foregoing, (i) Licensee shall
not unreasonably withhold its consent to any such assignment or transfer which
Licensor desires to make, and (ii) Licensee may assign this Agreement to any
successor in interest in a transaction not constituting a "change of control" as
set forth in Section 10.4 hereof.
<PAGE>
(b) In the event that any of the current shareholders of Licensor or any of
its permitted transferees (as described in Section 14.1(c) hereof) desires to
sell, assign or transfer his or her shares of Licensor (whether by merger or
otherwise) other than to a permitted transferee as described in Section 14.1(c)
hereof, such shareholder (the "Notifying Shareholder") shall, within a
reasonable period of time prior thereto, notify Licensee thereof in writing,
which notice (the "Notice") shall set forth the identity of the proposed
transferee and the consideration for and other terms of the proposed transfer.
(c) Notwithstanding anything herein to the contrary, the shareholders of
Licensor or any of its permitted transferees under this Section 14.1(c) may
sell, assign or transfer his or her interest in Licensor or such permitted
transferee (whether by merger or otherwise) to a member or members of his or her
family, to family-controlled entities, to a trust or trusts primarily for the
benefit of such shareholder or any of such shareholder's permitted transferees,
to a charitable remainder trust, to a charitable lead trust or to a private
foundation.
(d) Licensor and Licensee hereby agree that the duties and obligations of
Licensee under this Agreement may be delegated by Licensee to DKI or The Donna
Karan Company or any other Subsidiary or Affiliated Entity and that in
connection therewith such Subsidiary or Affiliated Entity shall perform all
<PAGE>
such duties and obligations on behalf of Licensee; provided, however, that no
-------- -------
such delegation shall be deemed to release Licensee from its duties or
obligations hereunder if not satisfactorily performed by any such Subsidiary or
Affiliated Entity and Licensee shall remain responsible for the fulfillment or
satisfaction of all such duties and obligations if not satisfactorily performed
by any such Subsidiary or Affiliated Entity.
14.2 Licensee may sublicense to any of the Subsidiaries, the Affiliated
Entities and Third Party Sublicensees the right to use the Licensed Mark or Name
in connection with the Sale of any Articles and the provision of Store Services
in any country in the Territory, but no such sublicense shall reduce Licensee's
obligations hereunder and such sublicense to such third party may not be entered
into unless the proposed Third Party Sublicensee is of suitable experience,
reputation and financial position (i.e., possesses the qualities typically
----
demonstrated by licensees of companies competitive with Licensee) with respect
to the products and services covered by the proposed sublicense and unless and
until the form of sublicense agreement to be executed with such Sublicensee has
been approved in writing by Licensor. Notwithstanding anything to the contrary
in this Section 14.2, (i) for so long as Karan is (a) Chairman of DKI and Chief
Designer of DKI or any of its Subsidiaries or (b) Chief Executive Officer of DKI
and Chief Designer of DKI or any of its Subsidiaries, any such approval
<PAGE>
required in connection with any such sublicense agreement shall be deemed made
if Karan does not disapprove of such sublicense agreement, within a commercially
reasonable period of time under the facts and circumstances after receipt of
such sublicense agreement by Karan, in a writing directed to the Board of
Directors of DKI which writing may include an explanation for the reason for
such disapproval; and (ii) after such time as Karan is no longer (a) Chairman of
DKI and Chief Designer of DKI or any of its Subsidiaries or (b) Chief Executive
Officer of DKI and Chief Designer of DKI or any of its Subsidiaries, any such
any such approval required in connection with any such sublicense agreement
shall be deemed made if Licensor does not disapprove of such sublicense
agreement, within a commercially reasonable period of time under the facts and
circumstances after receipt of such sublicense agreement by Licensor, in a
writing directed to the Board of Directors of DKI which writing shall include an
explanation for the reason for such disapproval. Upon any such disapproval (in
either (i) or (ii) above), Licensee may cure any problems identified as a reason
for disapproval and resubmit any such sublicense agreement to Licensor for
approval.
Also, Licensee agrees to cause any prospective Sublicensee to agree to
comply in its activities as a sublicensee with, and to be bound by, all of the
provisions of this Agreement applicable to Sublicensee. Licensee shall act as
Licensor's agent for purposes of enforcing such rights, but not to the exclusion
of Licensor doing so itself in its sole discretion.
<PAGE>
14.3 This Agreement shall inure to the benefit and shall be binding upon
the parties, their respective successors, Licensor's transferees and assigns and
Licensee's permitted transferees and assigns.
15. Arbitration; Court Actions
--------------------------
15.1 All disputes, controversies and claims arising out of or relating to
this Agreement or concerning the respective rights or obligations hereunder of
the parties hereto except disputes, controversies and claims relating to or
affecting in any way Licensor's ownership of or the validity of the Licensed
Mark or any registration thereof, or any application for registration thereof
(hereinafter referred to as "Licensed Mark Disputes") shall be settled and
determined by arbitration in New York City, New York before the Commercial Panel
of the American Arbitration Association in accordance with and pursuant to the
then existing Commercial Arbitration Rules. The arbitrators shall have the
power to award fees and expenses to any party in any such arbitration and the
courts shall have similar power with regard to injunctive relief sought by
Licensor pursuant to Section 11.1 and Section 18.6 hereof and with regard to
Licensed Mark Disputes ("Court Actions"). However, in any arbitration
proceeding arising under this Agreement, the arbitrators shall not have the
power to change, modify or alter any express condition, term or provision hereof
in any respect, and to that extent the scope of their authority is expressly
limited. The arbitration award shall be final and binding upon
<PAGE>
the parties and judgment thereon may be entered in any court having jurisdiction
thereof. The service of any notice, process or motion or other document in
connection with an arbitration under this Agreement or for the enforcement of
any arbitration award hereunder may be effectuated in the manner in which
notices are to be given to a party pursuant to Section 13.1 above.
15.2 Any Court Action shall be brought in New York, New York in any court
having jurisdiction thereof, except that Licensor may bring an injunctive
proceeding in the courts in any jurisdiction as appropriate. Each of Licensor
and Licensee submits to the jurisdiction of said courts in any Court Action and
hereby waives any claim or defense of inconvenient forums.
16. Security Interest
-----------------
16.1 Licensor hereby grants to Licensee a first priority security
interest and lien in the Licensed Mark and the goodwill relating thereto (the
"Lien") to secure any claim for any and all loss, liability, damage or
deficiency (including interest, penalties and reasonable attorneys' fees) which
Licensee, the Subsidiaries, the Affiliated Entities, or the Sublicensees may
suffer or be subject to arising out of or related to (a) any material breach by
Licensor of any of its warranties, representations or covenants set forth in
this Agreement or (b) any termination of this Agreement by Licensor, including a
rejection, in whole or in part, pursuant to 42 U.S.C. Section 365. Licensor
agrees that the Lien shall be perfected as soon as reasonably possible to the
fullest extent possible under the Uniform Commercial Code ("UCC") and through
filings under the
<PAGE>
UCC with the United States Patent and Trademark office and with any other
filings in any other governmental office in any other jurisdiction in the
Territory in the discretion of Licensee. Licensor agrees to execute and deliver
to Licensee any UCC-1 forms and other instruments necessary to perfect the Lien
granted hereunder.
17. Effectiveness. This Agreement shall become effective upon or
-------------
simultaneous with the consummation of the Offering.
18. Miscellaneous
-------------
18.1 Licensee shall provide Karan and/or any of her agents with access to
its design, advertising and public relations archives and Karan and/or her
agents may borrow, photograph or otherwise copy any such design, advertising,
and public relations materials or articles for its own purposes, consistent with
her rights and obligations hereunder, but in no event in furtherance of the
operation of any business competitive with the business of Licensee hereunder.
18.2 This Agreement shall be construed and interpreted in accordance with
the laws of the State of New York applicable to agreements made and to be
performed in said State, contains the entire understanding and agreement between
the parties hereto with respect to the subject matter hereof, supersedes all
prior oral or written understandings and agreements relating thereto, and may
not be modified, discharged or terminated, nor may any of the provisions hereof
be waived, orally.
<PAGE>
18.3 Nothing herein shall be construed to constitute the parties hereto
as partners or as joint venturers, or either as agent of the other, and neither
party shall have any power to obligate or bind the other in any manner
whatsoever.
18.4 No waiver, whether express or implied, of any provision hereof, or
of any breach or default thereof, shall constitute a continuing waiver of any
such provision or of any other provision hereof. Acceptance of payments by
Licensor shall not be deemed a waiver by Licensor of any violation of or default
under any of the provisions hereof by Licensee.
18.5 If any provision or other portion of any provision hereof shall be
held to be void or unenforceable, the remaining provisions hereof and the
remaining portion of any provision held void or unenforceable in part shall
continue in full force and effect.
18.6 Licensee acknowledges and admits that there would be no adequate
remedy at law for its failure to comply with any of the terms and conditions
hereof, including without limitation its Sale of Articles after the termination
of this Agreement except as specifically provided herein, and Licensee agrees,
in the event of any such failure, that Licensor shall be entitled to equitable
relief by way of temporary restraining order, temporary or permanent injunction,
and such other further relief as any court with jurisdiction may deem proper
without the necessity that Licensor post any bond or prove any actual damages.
<PAGE>
18.7 This Agreement and the schedules and disclosure schedules related
hereto contains the entire understanding and agreement between the parties
hereto with respect to the subject matter hereof and supersedes all prior oral
or written understandings and agreements relating thereto.
18.8 Any approval or authorization required hereunder by any party hereto
shall not be unreasonably withheld or delayed.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
GABRIELLE STUDIO, INC.
By:_____________________________
Name: Donna Karan
Title: President
DONNA KARAN STUDIO
By: Takihyo Design Company L.P.
a General Partner
By:__________________________
Name:
Title:
By: Gabrielle Studio, Inc.
a General Partner
By:___________________________
Name:
Title:
For purposes solely of consenting
to the restatement in its entirety
of the Original License Agreement:
TAKIHYO DESIGN COMPANY L.P.
By: Full Requirements Merchandising Inc.,
a General Partner
By:________________________________
Name:
Title:
_______________________________
Donna Karan
<PAGE>
SCHEDULE 1
----------
Product Exclusions and Reserved Rights
--------------------------------------
1. Excluded Products - "Products" shall not include, and Licensee shall
-----------------
not use or license or otherwise permit the use of the Licensed Mark in
connection with the design, manufacture, distribution, advertising, promotion
and sale (whether at wholesale or at retail) of food products, health products
(other than beauty care products), depilatories, personal hygiene products,
products requiring FDA approval (other than beauty care products), non-
prescription medications, toys or games or in connection with any Store Services
(e.g., retail establishments) for the design, manufacture, distribution,
----
advertising, promotion and sale (whether at wholesale or at retail) of any of
the foregoing items.
2. Reserved Rights - Licensor and Karan may use and otherwise exploit, and
---------------
Licensor and Karan may license and otherwise permit third parties to use and
otherwise exploit, at any time, the Licensed Mark and Name, for their own and
sole benefit, in connection with (a) personal endorsements, personal
appearances, radio, television and theater programs, motion pictures, recordings
and video cassettes, laser disks and other similar items intended for viewing by
the general public, (b) biographical and autobiographical materials, (c) books
and other writings, (d) designing (including apparel designing) for stage,
films, television and other such media, (e) photography, (f) the fine arts, (g)
the operation and/or ownership of restaurants, health food shops and spas, (h)
architectural, industrial and interior design services (exclusive of home
furnishings other than samples), (i) the design, manufacture and sale of limited
editions of products based upon such architectural, industrial and interior
designs, (j) consultation services in connection with any of the foregoing
activities, and (k) the Excluded Products.
73763
<PAGE>
Schedule 2
----------
Store Royalty Schedule
----------------------
For "manufacturers' direct retail stores" (as defined below), off-price outlet
stores, and all catalog or other direct sales, in each case in which Licensee or
any of its Subsidiaries, Affiliated Entities or Sublicensees has an ownership
interest, the royalty shall be calculated based upon the retail selling price of
each such Article paid by the customer.
For all other stores, distributors and outlets, including (a) full price retail
stores (other than manufacturers' direct retail stores), whether or not Licensee
or any of its Subsidiaries, Affiliated Entities, or Sublicensees has a direct or
indirect ownership interest in such store and (b) off-priced retail outlets and
all catalog and direct sales, in each case in which neither Licensee nor any of
its Subsidiaries, Affiliated Entities, or Sublicensees has an ownership
interest, the royalty shall be calculated based upon the aggregate actual sale
price of such Article from Licensee, any of its Subsidiaries, any of its
Affiliated Entities, or any of its Sublicensees (subject to their sublicensee
agreement), to such store or off-price retail outlet.
. As used in this Schedule 2, a "manufacturers' direct retail store" shall
mean any store which Donna Karan International, Inc., any of its
Subsidiaries, Affiliated Entities or Sublicensees (for purposes of this
definition, the "DKI Group") has an ownership interest in, and which buys
directly from, the DKI Group at the DKI Group's F.O.B. contractor cost, or
F.O.B. cost plus agents' fees (therefore records its purchases at the
contractor's F.O.B. price plus any agent fees), and sells these Articles at
retail. As a result, no manufacturing profit at standard wholesale mark-
ups (or inter-company transfer of goods at standard wholesale mark-ups) is
recognized on the books of the DKI Group, except to the extent it is
included in the retail selling price.
It is the parties intention with respect to sales made by Third Party
Sublicensees to off-price outlet stores in which Licensee, a Subsidiary, or an
Affiliated Entity has an ownership interest, that the store royalty be based
upon the wholesale price of Articles sold by such Licensee, Subsidiary or
Affiliated Entity to such store and not the subsequent retail sale thereof.
73763
<PAGE>
EXHIBIT 10.6
WM&C DRAFT 6/6/96
GUARANTY OF DONNA KARAN INTERNATIONAL INC.
FOR VALUE RECEIVED, Donna Karan International Inc., a corporation
incorporated under the laws of the State of Delaware (the "Guarantor"),
guarantees to Gabrielle Studio, Inc., a corporation organized under the laws of
the State of New York (the "Beneficiary"), the payment or performance of all
obligations, monetary or otherwise, of Donna Karan Studio, a New York general
partnership (the "Company"), under that certain License Agreement dated as of
the date hereof, between the Beneficiary and the Company, and any amendments or
supplements thereto (the "Agreement"), in accordance with the terms thereof.
Notwithstanding anything to the contrary contained herein, to the
extent this Guaranty relates to the payment of sums due to Beneficiary under the
Agreement, it is a guaranty of payment and not of collection and a continuing
guaranty which will remain in full force and effect and be binding upon the
undersigned until payment in full by the Company to Beneficiary of all sums due
pursuant to the Agreement.
The representations, warranties, obligations, covenants, agreements
and duties of the Guarantor under this Guaranty in no way shall be affected or
impaired by reason of the happening from time to time of any of the following,
although without notice to or the further consent of Guarantor: (i) the waiver
by Beneficiary of the performance or observance by the
<PAGE>
Company of any agreement, covenant, warranty, representation, term or condition
contained in the Agreement; (ii) the extension, in whole or in part, of the time
for the payment or performance by the Company of any sums owing or payable or
any obligations due under the Agreement; or (iii) any failure, omission, delay
or lack on the part of Beneficiary to enforce, assert or exercise any right,
power or remedy conferred on Beneficiary in the Agreement or otherwise.
No failure on the part of Beneficiary to exercise, and no delay in the
exercise of, any right, remedy or power hereunder will operate as a waiver
thereof, nor will any single or partial exercise by Beneficiary of any right,
remedy or power hereunder, preclude any other or future exercise of any other
right, remedy or power.
Guarantor hereby waives notice of any obligations or liabilities
contracted by the Company in the performance or observance of any agreement,
covenant, term or condition under the Agreement or in the payment of any sums
payable by it thereunder.
If, by reason of the Federal bankruptcy laws, or any other applicable
Federal or state law, claim is ever made against Beneficiary for repayment or
recovery of any amount or amounts received by Beneficiary pursuant to the
Agreement and Beneficiary repays to the Company (or remits, with the Company's
consent, to any third party) any part of such amount by reason of any judgment,
decree or order of any court or administrative body or
<PAGE>
any settlement or compromise by the Beneficiary of any such claim consented to
by the Company, the Guarantor shall be liable to Beneficiary for the full amount
so repaid or recovered.
This Guaranty cannot be modified, discharged or terminated except by a
writing signed by the Beneficiary.
The Guarantor represents and warrants to Beneficiary that the
execution, delivery and performance on the part of the Guarantor of this
Guaranty and the consummation of the transactions contemplated hereby are within
its corporate power and have been duly authorized by all necessary corporate
action on its part. This Guaranty has been duly executed and delivered by the
Guarantor and constitutes the legal, valid and binding obligation of the
Guarantor enforceable against the Guarantor in accordance with its terms.
This Guaranty shall be governed by and construed in accordance with
the laws of the State of New York, without giving effect to the choice of law
principles thereof.
DONNA KARAN INTERNATIONAL INC.
By:____________________________
Name:
Title:
Dated as of ________, 1996
- 3 -
<PAGE>
EXHIBIT 10.7
LICENSE AGREEMENT
This License Agreement, made and entered into this ___ day of June, 1996
(hereinafter called "Agreement Date") is by and between Stephan Weiss
(hereinafter called "Licensor"), having a principal residence at
_______________________________ and Donna Karan Studio (hereinafter called
"Licensee"), a corporation organized under the laws of the State of Delaware,
and having its principal place of business at 550 Seventh Avenue, New York, New
York 10018.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Licensor is the owner of Intellectual Property Rights including
Design Patents, Utility Patents, Copyrights, Trade Dress Rights, Trademark
Rights and Know How (each as defined below);
WHEREAS, Licensor is willing to grant Licensee an exclusive license to
certain Intellectual Property Rights and a nonexclusive license to the remaining
Intellectual Property Rights; and
WHEREAS, Licensee desires to obtain the exclusive license and the
nonexclusive license;
NOW THEREFORE, in consideration of the promises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. Definitions.
-----------
1.1 The term "Limited Use Nonexclusive Intellectual Property Rights" shall
mean any process, machine, manufacture, composition or improvement thereof in
the Field invented or developed by Licensor and any and all other intellectual
property rights related thereto within or outside of the United States including
any utility patent rights, know how, trade secrets, unpatented and/or
unpatentable technical information, devices, models, things, methods, documents
and other materials or other confidential or non-confidential information. A
list of current Utility Patents and Patent Applications is included in Schedule
A.
1.2 The term "Exclusive Intellectual Property Rights" shall mean any
designs and any pictorial, graphic and sculptural works in the Field developed
or authored by Licensor in the form and manner as exists at the date hereof and
any and all other
<PAGE>
intellectual property rights related thereto within or outside of the United
States including any design patent rights, utility model and industrial design
rights, trade dress rights, trademark rights, copyright and related rights, know
how, trade secrets, unpatented and/or unpatentable technical information,
devices, models, things, methods, documents and other materials or other
confidential or non-confidential information. A list of current Design Patents,
Design Patent Applications and Copyright Registrations is included in Schedule
B.
1.3 The term "Field" shall mean the beauty division of the Licensee.
1.4 The term "Licensed Products" shall mean the beauty products of
Licensee that as of the date hereof incorporate or otherwise utilize or have
incorporated or have otherwise utilized the Limited Use Nonexclusive
Intellectual Property Rights or the Exclusive Intellectual Property Rights.
1.5 The term "the Parties" shall mean Licensee and Licensor.
1.6 The term "the Territory" shall mean the world.
2. Grant of Licenses.
-----------------
2.1 Licensor hereby grants to Licensee a nonexclusive, royalty free right
and license, with the right to grant sublicenses to the DKI Group (as
hereinafter defined), to use the Limited Use Intellectual Property Rights
throughout the Territory to design, manufacture, market, advertise, distribute
and sell the Licensed Products in the Field.
2.2 Licensor further grants Licensee an exclusive, royalty free right and
license, with the right to grant sublicenses to the DKI Group (as hereinafter
defined), to use the Exclusive Intellectual Property Rights throughout the
Territory to design, manufacture, market, advertise, distribute and sell the
Licensed Products in the Field.
2.3 The DKI Group shall mean (a) Licensee, its parent company Donna Karan
International Inc. ("DKI") or any other holding company or parent company of
Licensee and (b) any present or future, direct or indirect, subsidiary of
Licensee or DKI or any other holding company or parent company of Licensee and
(c) any present or future entity (i) through which Licensee or DKI or any other
holding company or parent company of Licensee directly or indirectly conducts
its business (including, but not limited to, any partnerships or joint ventures)
and (ii) any affiliate of Licensee, DKI or any other holding company or parent
company of Licensee and (d) any present or future, direct or indirect,
sublicensee or sub-sublicensee of Licensee permitted hereunder.
-2-
<PAGE>
3. Reasonable Efforts. Licensee shall use reasonable efforts to
------------------
manufacture, market, distribute and sell Licensed Products in the Field in a
manner consistent with reasonable business practices and judgment. The parties
recognize that, in view of changing styles over time in the beauty field,
Licensee in its sole discretion may continue or discontinue and subject to
Paragraph 8.5 hereof the manufacture, marketing, distribution or sale of any of
the Licensed Products and that upon any such discontinuance the rights granted
hereunder to Licensee as relate to such discontinued Licensed Products shall
automatically revert to Licensor.
4. Payment. In consideration of the licenses granted to Licensee,
-------
Licensee shall pay to Licensor contemporaneously with the execution of this
License Agreement the sum of $392,560, representing reimbursement of Licensor's
out-of-pocket costs and expenses incurred in the development of the Limited Use
Nonexclusive Intellectual Property Rights and the Exclusive Intellectual
Property Rights.
5. Reports and Quality Control.
---------------------------
5.1 Upon reasonable notice to Licensee and at the request of Licensor,
Licensee shall provide Licensor with a list of the Licensed Products that are in
production by Licensee at the time of Licensor's request. Licensor may request
such a list up to two times in each calendar year.
5.2 The Licensed Products shall meet the high standards of quality,
workmanship, material, and style as presently established by Licensor unless
otherwise agreed upon by Licensor and Licensee. Licensee will not knowingly
cause or authorize any Licensed Products not conforming to the conditions of
this Paragraph 5.2 to be available for sale as doing so may adversely affect the
Limited Use Nonexclusive Intellectual Property Rights and Exclusive Intellectual
Property Rights. All Licensed Products shall conform to and comply with, in all
material respects, all foreign, federal, state and local laws, rules and
regulations governing the design, quality or safety of such Licensed Products.
Licensee shall not cause or authorize (i) the use of any substandard materials
in the manufacture of the Licensed Products; (ii) any violation of any foreign,
federal, state or local law or regulation, in its actions under or related to
the license granted hereunder, including but not limited to regulations imposing
advertising or marketing standards or requiring trade or content descriptions of
the Licensed Products; or (iii) the use of the Limited Use Nonexclusive
Intellectual Property Rights and the Exclusive Intellectual Property Rights in
connection with any product or activity that is not the subject of this license.
-3-
<PAGE>
5.3 In order to provide Licensor with assurance that the Licensed Products
manufactured and sold meet the high standards described in Paragraph 5.2,
Licensee shall cooperate and shall cause its sublicensees to cooperate in all
reasonable respects including the right of Licensor to inspect the Licensed
Products and the facilities used to manufacture Licensed Products. Any such
inspection shall be arranged upon reasonable notice and during normal business
hours, shall relate only to the inspection of that portion of the facilities
used in connection with the Licensed Products and shall not interfere with or
include portions of the facility utilized for other proprietary activities which
are not the subject of this license.
6. Patents and Infringement.
-- ------------------------
6.1 Licensee shall be responsible for all costs and expenses related to
procuring and maintaining statutory protection of the Limited Use Nonexclusive
Intellectual Property Rights or Exclusive Intellectual Property Rights.
Licensor shall not take any action or fail to take action that will result in
abandonment, cancellation, lapse or the like of any statutory rights in the
Limited Use Nonexclusive Intellectual Property Rights or Exclusive Intellectual
Property Rights. Moreover, at Licensee's request and expense, Licensor shall
fully cooperate with Licensee to procure or maintain statutory protection of any
of the Limited Use Nonexclusive Intellectual Property Rights or Exclusive
Property Rights.
6.2 If it is believed in good faith that the Limited Use Nonexclusive
Intellectual Property Rights or Exclusive Intellectual Property Rights are
infringed or otherwise violated by a third party, the party to this License
Agreement first having knowledge of such infringement shall promptly notify the
other in writing, which notice shall set forth the facts in reasonable detail.
Licensor shall have the initial right, but not the obligation, to institute and
prosecute at its own expense any such infringement and to select counsel in
connection with the prosecution of any such infringement. If Licensor fails to
bring such action within a period of one (1) month after receiving written
notice or otherwise having knowledge of such infringement, then Licensee shall
have the right, but not the obligation, to prosecute at its own expense any such
infringement and to select counsel in connection with the prosecution of any
such infringement. Each of Licensor and Licensee agree that each shall, at the
request of the other, take all appropriate or necessary actions to assist in the
prosecution of any such proceeding instituted by the other party (including, but
not limited to, consenting to being jointed in such proceeding). Any recovery of
damages and costs in such suit shall be apportioned as follows: the party
bringing suit shall first recover an amount equal to two (2) times the cost and
expense incurred by such party directly related to the prosecution of such
action and the
-4-
<PAGE>
remainder shall be divided equally between Licensor and Licensee. The foregoing
infringement provisions shall survive termination or expiration of this License
Agreement.
Both Licensor and Licensee shall agree upon any disposition or settlement
of any such action which is a final judgment on the merits.
Furthermore, notwithstanding this provision, Licensee may take immediate
action against a third party without the consent of Licensor to prevent
activities such as diversion or counterfeiting of the Licensed Products in order
to avoid the immediate and often irreparable harm that Licensee would suffer
from such activities. Licensee shall provide Licensor with prompt notice that
Licensee has taken any such action.
7. Sublicensees. Licensee shall be responsible for its sublicensees and
------------
shall not grant any rights which are inconsistent with the rights granted to and
obligations of Licensee hereunder. If any act or omission of a sublicensee
would be a breach of this License Agreement if performed by Licensee, Licensee
shall take the necessary action to cause the sublicensee to cure the breach or
shall terminate any license rights of the sublicensee. Licensee shall give
Licensor prompt notification of the identity and address of each sublicensee
with whom it concludes a sublicense agreement and shall supply Licensor with a
copy of each such sublicense agreement.
8. Termination.
-----------
8.1 Unless earlier terminated, this License Agreement shall extend in
perpetuity.
8.2 In the event of the default or failure by either Party to perform any
of the terms, covenants or provisions of this License Agreement to be done and
performed by such Party which default shall have a material adverse effect on
the business of the non-performing party, the non-performing Party shall have
one hundred and eighty (180) days after the giving of written notice by the
other Party of such default within which to correct such default. If such
default is not corrected within the said one hundred and eighty (180) day period
after notice, the performing Party shall have the right, at its option, to
cancel and terminate this entire License Agreement. Notwithstanding, Licensee
shall not be in default for failure to perform based upon any act by a
sublicensee, if Licensee takes action as required under Paragraph 7 against the
sublicensee and such default does not have a material adverse effect on the
business of Licensor or does not adversely effect the rights of Licensor to the
Limited Use Nonexclusive Intellectual Property Rights or the Exclusive
Intellectual Property Rights. Either Party shall have the right, at its option,
upon ten days prior written notice, to cancel and terminate this entire License
Agreement in the event that the other Party shall become involved in insolvency,
dissolution, bankruptcy or receivership proceedings affecting the operation of
its business or in the event that the other Party shall discontinue its business
for any reason.
-5-
<PAGE>
8.3 In the event of any termination or expiration of this License
Agreement pursuant to Paragraphs 8.1 or 8.2, all rights licensed by Licensor to
Licensee hereunder shall revert to Licensor.
8.4 No termination or expiration of this License Agreement or any portion
thereof shall constitute a termination or expiration or a waiver of any rights
of either Party against the other Party accruing at or prior to the time of such
termination or expiration.
8.5 If this License Agreement or any portion thereof is terminated,
Licensee shall be permitted to fill orders in existence at the time of
termination and additionally shall for a period of three months be permitted to
sell existing inventory of the Licensed Products.
9. Assignability. This License Agreement shall be binding upon and shall
-------------
inure to the benefit of Licensor and his heirs and shall be binding upon and
shall inure to the benefit of Licensee and the successor to the entire beauty
business of DKI, but shall not otherwise be assignable or assigned by either
Party without prior approval by the other Party being first obtained in writing,
which approval shall not be unreasonably withheld.
10. Governing Law. This License Agreement shall be construed according to
-------------
the laws of the State of New York and any and all disputes arising hereunder
shall be resolved in the courts of the State of New York without giving effect
to the principles of the Conflict of laws provision thereof; provided, however,
that any patent question or controversy shall be resolved in the courts having
jurisdiction over the patent or patents in question and in accordance with the
laws applicable to such patent or patents.
11. Notices; Addresses. All notices and other communications required or
------------------
permitted by this License Agreement to be given to any Party hereto shall be in
writing and shall be deemed to be duly given if personally delivered, if mailed
(by certified or registered mail, return receipt requested) or if delivered by a
nationally-recognized overnight mail or courier service, to the party concerned
at its address. For the purpose of providing any such notices and other
communications, the addresses set forth in the introductory paragraph of this
License Agreement shall be used unless changed by written notification to the
other Party.
12. Additional Provisions.
---------------------
12.1 Use of Licensor Name. Except as required by law, Licensee agrees
--------------------
that it may not use in any way the Licensor's name or any logotypes or symbols
associated with the Licensor in connection with Licensed Products without the
prior written consent of Licensor.
-6-
<PAGE>
12.2 Confidentiality. Licensee agrees to use reasonable efforts (which
---------------
shall be at least as great as the efforts it uses to maintain the
confidentiality of its own confidential information) to maintain in confidence
any confidential information relating to the Limited Use Nonexclusive
Intellectual Property Rights and Exclusive Intellectual Property Rights, and to
use the same only in accordance with this License Agreement. Such obligation of
confidentiality shall not apply to information which Licensee can demonstrate:
(i) was at the time of disclosure in the public domain; (ii) has come into the
public domain after disclosure through no fault of Licensee or its sublicensees;
or (iii) was known to Licensee or its sublicensees prior to disclosure thereof
by Licensor. Notwithstanding, the following acts shall not be deemed to be a
breach of confidentiality by Licensee: (i) disclosure required to procure,
maintain or enforce statutory protection of the Limited Use Nonexclusive
Intellectual Property Rights or Exclusive Intellectual Property Rights; (ii)
disclosure required by law or by a court; (iii) disclosure occurring by use,
inspection or the like of products incorporating the Limited Use Nonexclusive
Intellectual Property Rights or Exclusive Intellectual Property Rights; (iv)
disclosure by a sublicensee in violation of the terms of this License Agreement
or the sublicense agreement (subject to Licensee's obligations under paragraph 7
hereof); and (v) disclosures necessary to bona fide subcontractors to enable
them to perform their contract or to bid for a contract. The foregoing
obligations of confidentiality shall survive termination or expiration of this
License Agreement.
12.3 Indemnity. Each Party shall notify the other of any claim, lawsuit
---------
or other proceeding related to the Licensed Products. Subject to the following
sentence, Licensee agrees that it will defend, indemnify and hold harmless
Licensor, from and against any and all claims, causes of action, lawsuits or
other proceedings filed or otherwise instituted against the Licensor by third
parties related directly or indirectly to or arising out of the design,
manufacture, distribution, sale or use of the Licensed Products or any other
embodiment of the Limited Use Nonexclusive Intellectual Property Rights or
Exclusive Intellectual Property Rights by Licensee, or its sublicensees.
Licensee will also assume responsibility for all costs and expenses related to
such claims and lawsuits for which it is obligated to indemnify Licensor
pursuant to this Paragraph 12.3, including, but not limited to, the payment of
all reasonable attorneys' fees and costs of litigation or other defense.
Licensor shall promptly notify Licensee of any such claim or action which is to
be indemnified and Licensee shall have the right to control the defense,
settlement or compromise thereof. The foregoing obligation of indemnity shall
survive termination or expiration of this License Agreement.
-7-
<PAGE>
12.4 Insurance. Licensee and each of its Affiliates and sublicensees,
---------
shall, for so long as Licensee, its Affiliates, or sublicensees manufacture, use
or sell any Licensed Product(s), maintain in full force and effect policies of
(i) general liability insurance (with Broad Form General Liability endorsement)
with limits of not less than those generally acceptable under industry standards
and (ii) products liability insurance, with limits of not less than those
generally acceptable under industry standards. Such coverage(s) shall be
purchased from a carrier or carriers deemed acceptable to Licensor. Upon
request by Licensor, Licensee shall provide certificate(s) evidencing the
coverage(s) maintained.
12.5 Disclaimers. Licensor shall not assume any responsibility for the
-----------
design, manufacture, product specifications, or use of the Licensed Products
which are manufactured by or for or sold by Licensee or its sublicensees. All
warranties in connection with the Licensed Products shall be made by Licensee
(or the particular licensee or sublicensee that is involved) as the manufacturer
or seller thereof and none of such warranties shall directly or by implication
in any way obligate Licensor.
12.6 Disclaimer of Warranty. Licensor makes no warranties or
----------------------
representations, expressed or implied, including but not limited to, warranties
of fitness or merchantability, regarding the Licensed Products.
12.7 Failure to Enforce; Exercise of Rights. The failure of either Party
--------------------------------------
to enforce at anytime any of the provisions of this License Agreement or any
rights with respect thereto, or to exercise any election herein provided, shall
in no way be considered to be a waiver of such provisions, rights or elections,
or in any way to affect the validity of this License Agreement. Exercise by
either Party of any of its rights herein or any of its elections under the terms
and covenants herein shall not preclude either Party from exercising the same or
any other rights in this License Agreement irrespective of any previous action
or proceeding taken by either Party hereunder.
12.8 Severability. If any provision of this License Agreement is
------------
judicially or in an arbitration proceeding determined to be void or
unenforceable, such provision shall be deemed to be severable from the other
provisions of this License Agreement which shall remain in full force and
effect. Either Party may request that a provision otherwise void or
unenforceable be reformed so as to be valid and enforceable to the maximum
extent permitted by law.
12.9 Entire Agreement; Amendments. The terms and conditions herein
----------------------------
constitute the entire agreement between the Parties and shall supersede all
previous agreements, either oral
-8-
<PAGE>
or written, between the Parties hereto with respect to the subject matter
hereof. No agreement of understanding bearing on this License Agreement and no
change, modification or amendment relating to the License Agreement shall be
binding upon either Party hereto unless it shall be in writing and signed by the
duly authorized officer or representative of each of the Parties and shall
expressly refer to this License Agreement.
-9-
<PAGE>
This License Agreement shall be effective as of the day and year first
above written.
LICENSEE:
DONNA KARAN STUDIO
By:________________________________
Name:
Title:
LICENSOR:
By:________________________________
Name: Stephan Weiss
73771
-10-
<PAGE>
SCHEDULE A
----------
Utility Patents and Patent Applications
- ---------------------------------------
-11-
<PAGE>
SCHEDULE B
----------
Design Patents, Design Patent Applications and Copyright Registrations
- ----------------------------------------------------------------------
-12-
<PAGE>
EXHIBIT 10.8
WM&C DRAFT 6/6/96
EMPLOYMENT AGREEMENT
AGREEMENT entered as of the ____ day of June, 1996 by and
between DONNA KARAN INTERNATIONAL INC., a Delaware corporation, having an office
at 550 Seventh Avenue, New York, NY 10018 (the "Company") and DONNA KARAN
("Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Executive was the founder of the predecessor entities of the
Company and has acted as chief executive and Chief Designer for such entities
for more than ten years; and
WHEREAS, the Company recognizes that Executive's talents and abilities
are unique, and have been integral to the success of such predecessor entities;
and
WHEREAS, the Company wishes to secure the ongoing services of
Executive on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, it is agreed as
follows:
1. Employment. The Company hereby employs Executive and Executive
----------
hereby accepts employment by the Company on the terms and conditions hereinafter
set forth, to act as Chairman of the Board of Directors, Chief Executive Officer
and Chief Designer for the Company, its subsidiaries and affiliated companies,
and, if so elected, to act as Chairman of the Board of
<PAGE>
Directors of the Company and of its subsidiaries and affiliated companies.
2. Duties and Scope of Authority. The Company hereby agrees that,
-----------------------------
except to the extent that Executive otherwise consents in writing, during the
term of this Agreement:
(a) Executive shall be the sole Chairman, sole Chief Executive Officer
and sole Chief Designer for the Company, its subsidiaries and affiliated
companies;
(b) The Company shall cause Executive to be nominated as a director of
the Company on management's slate of nominees;
(c) All executives of the Company, its divisions, subsidiaries and
affiliates shall report directly or indirectly to Executive;
(d) Executive's authority, jurisdiction and responsibility as
Chairman, Chief Executive Officer and Chief Designer shall not be diminished in
form or substance from the authority, jurisdiction and responsibility that is
presently provided to the predecessor entities of the Company she presently
enjoys;
(e) Executive shall have ultimate creative and artistic control over
any and all items produced by the Company or any of its subsidiaries and
licensees, including ultimate control of the design, presentation, advertising,
marketing, licensing, sublicensing and other exploitation (including, but not
limited to, for so long as Executive is Chairman, Chief Executive Officer or
Chief Designer, sole authority to execute any and all license and
-2-
<PAGE>
sublicense agreements or agreements of any kind relating to licensing and
sublicensing) of such products and brands;
(f) Executive shall have the right to approve or disapprove any and
all of the Company's strategic plans, products, licenses, new divisions, new
brands, and organizational structure; and
(g) No action will be taken by the Company to diminish the scope of
Executive's responsibility and authority as set forth herein, or to render it
difficult or impossible for Executive to carry out her duties.
3. Location; Office and Staff. During the term of this Agreement,
--------------------------
the Company's principal executive offices shall be in New York City and
Executive shall not be required to relocate to any other location. During the
term of this agreement the Company shall provide Executive with an office and
staff in the Company's New York City executive headquarters no less favorable to
Executive than that presently provided to her.
4. Devotion of Time. During the term hereof, the Executive shall
----------------
devote substantially all of her business time and attention to the business and
affairs of the Company and its subsidiaries and affiliated companies and use her
best efforts to promote the business and reputation thereof, except that
Executive may engage in the following activities during the term of her
employment for her own personal benefit: (i) personal endorsements, personal
appearances, radio, television and theater programs, motion pictures, recordings
and video cassettes, laser
-3-
<PAGE>
disks and other similar items intended for viewing by the general public
(provided that the subject matter does not relate principally to products sold
by the Company, its subsidiaries, affiliates or its sub-licensees), (ii)
creation of biographical and autobiographical materials, (iii) writing books and
other writings, (iv) speaking and teaching engagements, (v) photography, (vi)
the fine arts, (vii) designing (including apparel designing) for stage, films,
television and other such media, (viii) the operation and/or ownership of
restaurants, health food shops and spas, (ix) architectural, industrial and
interior design services (exclusive of home furnishings other than samples), (x)
the design, manufacture and sale of limited editions of products of the Company
based upon such architectural, industrial and interior designs, (xi)
consultation services in connection with any of the foregoing activities;
provided, that such activities shall not interfere with Executive's primary
obligations to the Company. Executive shall have no interest in, and will not
perform any service for, any other business entity which is in direct
competition with the Company's principal product lines and price points, which
activity could reasonably be anticipated to have a material adverse effect on
the Company's business or operations taken as a whole, except that this
prohibition shall not apply to passive investments by Executive in publicly-
traded companies or Executive's investment in Gabrielle Studio, Inc.
-4-
<PAGE>
5. Term. The term of this Agreement shall commence as of the date
----
hereof with respect to Executive's role as Chairman, Chief Executive Officer and
Chief Designer, and shall continue for an initial term ending on December 31,
1999. Such initial term (the "Initial Term") shall continue thereafter in
automatically renewable successive terms of three year periods as Chairman of
the Board of Directors, Chief Executive Officer and Chief Designer, unless
terminated (i) by the Company for "cause" as provided in paragraph 9(c) hereof,
or (ii) by Executive as provided in paragraphs 9(a) or 9(b) hereof. All aspects
of this Agreement shall remain in full force and effect as long as Executive
continues to serve as either Chairman of the Board of Directors, Chief Executive
Officer or Chief Designer hereunder (or any combination thereof).
6. Compensation. In consideration for the services to be rendered by
------------
Executive for any capacity for which she is employed hereunder, the Company
agrees to:
(a) pay to Executive a base salary at the rate of $500,000 per annum,
such amount to be paid in equal installments on the Company's regular payroll
dates. In years subsequent to 1996, such salary shall be adjusted by the
percentage increase in the Consumer Price Index for All Urban Customers ("CPI-
U") for the month of November immediately preceding the relevant annual period
over the CPI-U of the preceding annual period. The "CPI-U" referred to herein
is that CPI-U published by the Bureau of Labor Statistics, U.S. Department of
Labor, for all United States
-5-
<PAGE>
cities (U.S. city average), based upon 1982-4 equalling 100, or the successor or
supplement thereto if publication thereof should be discontinued or modified.
(b) in respect of each fiscal year of the Company during the term of
employment commencing with the 1996 fiscal year, pay to Executive an incentive
bonus equal to a percentage of Executive's then current salary, which percentage
shall be equal to: the Company's Adjusted Pretax Profit (as defined below) for
the fiscal year in question divided by $50,000,000 (which quotient shall be
expressed as a percentage) less 60 percentage points, which resulting percentage
will then by multiplied by 2.5. The incentive bonus shall not be less than zero
nor more than 100% of Executive's then current base salary. If this Agreement
terminates at any time other than the end of a fiscal year, then the Executive
shall be entitled to an incentive bonus equal to the product of the amount of
the incentive bonus payable for the fiscal year ended prior to the termination
of the Executive's employment multiplied by a fraction, the numerator of which
is the number of days from the commencement of the Company's fiscal year in
question to the date of termination, and the denominator of which is 365. Such
incentive bonus shall be paid within fifteen (15) days of the completion of the
Company's audited financial statements with respect to any fiscal year but not
later than April 15 of the succeeding year.
For purposes hereof, the "Adjusted Pretax Profit" of the Company for
any fiscal year shall mean the pretax income from
-6-
<PAGE>
continuing operations before (i) extraordinary items, (ii) cumulative effect of
changes in accounting principles for such fiscal year, (iii) royalties payable
for such year by the Company and any of its subsidiaries and affiliates to
Gabrielle Studio, Inc. (iv) the incentive bonuses payable to Donna Karan and
Stephan Weiss (but only to the extent these incentive bonuses have been
accrued), (v) those costs associated with operating a public company (i.e.,
----
directors' and officers' insurance, preparation of
Securities and Exchange Commission filings, etc.), and (vi) such other
adjustments as may be necessary to make the components of pretax income of the
Company for any fiscal year subsequent to 1996 comparable to the components of
pretax income of the Company for 1995.
(c) include Executive in the Company's employee benefit and stock
option plans, if any, upon terms commensurate with, and in a manner consistent
with, Executive's position in the Company, Executive's stature in the industry,
and the terms of such plans, which benefits to Executive shall be at least equal
to or greater than benefits received by any other employee of the Company,
except that Executive shall not participate in the Company's 1996 Stock
Incentive Plan or the 1996 Non-Employee Director Stock Option Plan (but shall be
eligible to participate in any subsequent Plans and except for the 1996 Non-
Employee Director Stock Opton Plan).
7. Expenses; Benefits. The Company shall pay or reimburse Executive
------------------
for all reasonable out-of-pocket expenses incurred in the performance of her
services hereunder, in accordance with the Company's applicable expense
reimbursement and related policies and procedures as in effect from time to
-7-
<PAGE>
time. In addition to Executive's base salary, incentive bonus and employee
benefits, which shall be reviewed periodically by the Compensation Committee of
the Board of Directors of the Company, Executive shall be entitled to
participate in all group life, health, hospital, medical and dental and
disability insurance programs maintained by the Company and made available to
senior executive officers of the Company generally. Executive shall also be
entitled to receive from the Company such benefits and perquisites as are
consistent with her position in the Company and her stature in the industry,
which benefits and perquisites shall be at least equal to or greater than those
received by any other employee of the Company. Such benefits provided by the
Company shall include, but not be limited to:
(a) the use by Executive of a late model top of the line automobile
selected by her; payment by the Company or reimbursement to Executive of all
expenses incurred for maintaining and garaging such automobile; a driver for
such automobile, who, in order to protect the Company's interest in Executive,
may also be required to serve as Executive's bodyguard; and payment to Executive
annually of such amount as is required to gross up the Executive for Federal,
state and local taxes payable as a result of these benefits.
(b) in all business travel, first-class transportation and lodging for
Executive and any of her family members traveling with her, if any, of a style
and nature which
-8-
<PAGE>
reflects the importance of Executive's position in the Company and in the
fashion industry.
8. Vacation. Executive shall be entitled to take such vacations and
--------
attend such meetings, conferences and conventions as she, in her sole
discretion, shall determine to be consistent with her responsibilities
hereunder, but shall not be less than the time that has been available to her
for such vacation and other activities on behalf of the predecessor entities of
the Company.
9. Termination.
-----------
(a) This Agreement may be terminated by Executive without reason (i)
during the Initial Term in her capacity as Chief Executive Officer, provided
that during such Initial Term she remains as Chairman and Chief Designer
hereunder, and (ii) at any time after the Initial Term. Such termination shall
be by written notice effective not less than four (4) months after the giving of
such notice. For a period of one year after termination of this Agreement by
Executive pursuant to this Section 9(a), Executive shall not participate or
engage, directly or indirectly, for herself or on behalf of or in conjunction
with any person, partnership, corporation or other entity, in any business
activities that are directly competitive with the Company's current principal
product lines and price points and could reasonably be expected to have a
material adverse effect on the Company; provided, however, subject to the terms
-------- -------
and provisions of that certain Stockholders Agreement dated the date hereof by
and among the Company, the Executive, Stephan Weiss, the Trust under Trust
Agreement for the benefit of Lisa Weiss Keyes, Corey Weiss and Gabrielle Karan,
and the Trust under Trust Agreement for the benefit of Donna Karan, that this
Section 9(a) shall in no way limit Executive's ability to participate or engage,
-9-
<PAGE>
directly or indirectly, for herself or on behalf of or in conjunction with any
person, partnership, corporation or other entity in the business of Gabrielle
Studio, Inc.
(b) This Agreement may be terminated by Executive at any time after
the date hereof for "good reason" by written notice effective immediately. A
termination for "good reason" shall include:
(i) if at any time Executive shall (without her prior written consent)
not be Chairman of the Board and the sole Chief Executive Officer and the
sole Chief Designer;
(ii) the assignment of duties and responsibilities to Executive, or the
assignment of duties and responsibilities to others, that reduce or are
otherwise inconsistent with Executive's duties and responsibilities as set
forth herein, in any such instance without her prior written consent;
(iii) the Company's failure to pay to Executive all amounts duly
required to be paid to her hereunder in accordance with the terms hereof
(including all benefits under pension, retirement, benefits, etc.);
(iv) any other breach by the Company of a material provision of this
Agreement;
(v) a "change in control" of the Company, i.e., any of the following:
----
(x) the acquisition by any "person" (as such term is used in Section 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended) other than a
person who is a shareholder of the Company on the effective date of the
-10-
<PAGE>
registration statement filed under the Securities Act of 1933 as amended
relating to the first public offering of securities of the Company (an
"Initial Shareholder") of 30% or more of the voting power of securities of
the Company, or the acquisition by an Initial Shareholder other than
Executive (and excluding any such acquisition resulting from a purchase,
sale, or transfer of Takihyo Inc. stock by and between any of the current
stockholders of Takihyo Inc.) of an additional 5% of voting power of
securities of the Company over and above that owned immediately after the
closing date of the initial public offering of the Company's common stock;
(y) any merger or sale of substantially all of the assets of the Company
under circumstances where the holders of 20% or more of the equity
securities of the surviving entity of such transaction were not holders of
the Common Stock of the Company immediately prior to consummation of such
transaction; or (z) any change in the composition of the Board of Directors
of the Company not approved by: (i) a majority of the Board of Directors of
the Company prior to such change; and (ii) by not less than two directors
of the Company who were directors prior to the time any "person" who was
not an Initial Shareholder acquired 30% or more of the voting power of
securities of the Company;
(vi) any fundamental change to the business or operations of the
Company that is material to the Company as a whole and to which Executive
has not given her prior written consent; and
-11-
<PAGE>
(vii) a physician of acknowledged competency shall confirm in writing
to the Board of Directors of the Company that, in his professional opinion,
the demands of Executive's responsibilities hereunder are such that it
would materially and adversely affect her health for her to be required to
discharge the material aspects of her responsibilities hereunder.
In the event of a termination by Executive for "good reason", the Company shall
pay to Executive a lump sum cash payment promptly (but in any event within ten
days) after termination equal to the sum of Executive's base salary, as then in
effect, and incentive bonus (equal to the incentive bonus paid to Executive in
the fiscal year preceding the year in which such termination occurred) for the
greater of (i) a period of one year and (ii) the period which is remaining in
the term of her employment agreement. In such event, the Company shall also pay
to Executive an amount equal to three times the average incentive bonus paid to
Executive pursuant to paragraph 5(b) hereof in the three years preceding the
year (or in the event Executive has been employed hereunder for less than three
years, for such number of years as the incentive bonus has been paid if less
than three) in which such termination occurred.
(c) This Agreement may be terminated as provided in Section 9(e)
hereof and by the Company as provided in Section 9(e) hereof and at any time
after the date hereof only for "cause" (as hereinafter defined) by written
notice to Executive. The Company recognizes that for a period of years it (and
its predecessor entities) has been fully familiar with Executive's ability,
competence and judgment. Accordingly, "incompetence", "lack of
-12-
<PAGE>
diligence or judgment", "insubordination" and similar faults shall not
constitute grounds for termination for cause. For purposes of this Agreement,
"cause" shall mean only Executive's conviction in a court of law of a crime
involving money or other property of the Company. For a period of one year after
termination of this Agreement by the Company for cause, Executive agrees not to
participate or engage, directly or indirectly, for herself or on behalf of or in
conjunction with any person, partnership, corporation or other entity, in any
business activities that are directly competitive with the Company's current
principal product lines and price points and could reasonably be expected to
have a material adverse effect on the Company. After the date of termination of
Executive's employment for cause, the Company shall not be obligated to pay
Executive her base salary or incentive bonus paid, except for amounts due to the
date of termination.
(d) This Agreement shall terminate automatically upon Executive's
death. In the event of termination of Executive's employment as a result of her
death the Company shall pay to Executive's estate a lump sum cash payment
promptly after termination, equal to Executive's base salary as then in effect
and incentive bonus (equal to the incentive bonus paid to Executive in the
fiscal year preceding the year in which such termination occurred) for the
greater of (i) a period of one year and (ii) the period which is remaining in
the term of her employment agreement.
-13-
<PAGE>
(e) This Agreement shall terminate at the option of the Company if
Executive shall suffer "disability". For purposes hereof, "disability" shall
mean the inability of Executive, due to physical, mental or other cause, to
perform her material duties hereunder for a consecutive period of six (6)
months. The Company shall notify Executive in writing of its decision to
terminate the Agreement due to Executive's disability. If Executive disputes
that she is "disabled," Executive shall submit to the examination of a physician
appointed by the mutual agreement of the Company and Executive for the purpose
of determining whether Executive is able to perform her material duties and the
physician's decision shall be final and binding. In the event of termination of
Executive's employment as a result of disability, the Company shall pay to
Executive a lump sum cash payment promptly after termination equal to the sum of
Executive's base salary as then in effect and incentive bonus (equal to the
incentive bonus paid to Executive in the fiscal year preceding the year in which
such termination occurred) for the greater of (i) a period of one year and (ii)
the period which is remaining in the term of her employment agreement.
(f) Upon termination of Executive's employment under this Section 9
with respect to all positions and offices to which this Agreement relates,
Executive shall be deemed to have resigned as an officer of the Company and its
affiliates, if then so acting.
-14-
<PAGE>
10. Confidential Information. (a) The Executive acknowledges that
------------------------
because of her experience, knowledge and expertise and because of her duties and
her position of trust under this Agreement, she will be able to develop the
trust, confidence and good will of, and close relationships with, the customers
of the Company and will become familiar with the trade secrets and other
confidential information of the Company which are valuable assets and property
rights of the Company and its affiliates. Executive therefore agrees that she
will not, during the term of this Agreement or at any time thereafter, either
directly or indirectly, disclose to any person, firm or corporation such trade
secrets or other confidential information. The Executive agrees to retain all
such trade secrets and other confidential information in a fiduciary capacity
for the sole benefit of the Company, its successors and assigns. Upon
termination of her employment by the Company or at any time that the Company may
so request, Executive will surrender to the Company all records, papers, notes,
reports and other documents (and all copies thereof) relating to the business of
the Company and its affiliates, which she may then possess or have under her
control; except that Executive shall be permitted to retain copies of all papers
which relate to those activities in which Executive is permitted to engage
pursuant to the terms of the License Agreement dated the date hereof by and
between Gabrielle Studio, Inc. and Donna Karan Studio and, except that Executive
shall retain the right to have access to and make copies and
-15-
<PAGE>
extracts of the Company's design, advertising and public relations archives and
to borrow products from the Company's archives for temporary use, provided that
in no event shall such access be used in any business competitive with that of
the Company. A matter shall no longer be deemed a trade secret or confidential
when it becomes publicly known through no fault of Executive. The provisions
of this paragraph shall survive the expiration or termination of this Agreement.
(b) In the event that any of the covenants set forth in this paragraph
or in paragraph 9 hereof are more restrictive than permitted by the laws of the
jurisdiction in which the Company seeks enforcement thereof, each of such
covenants shall be deemed limited to the extent permitted by such laws and
modified to conform therewith by the Court or other tribunal before which an
enforcement action is brought, in the exercise of its equitable jurisdiction.
11. Equitable Remedies. The services of the Executive are of a
------------------
unique nature and of extraordinary value and of such a character that a breach
by Executive of the non-compete provisions of paragraph 9 hereof will result in
irreparable damage and injury to the Company for which the Company will not have
any adequate remedy at law. Therefore, in the event that Executive commits or
threatens to commit a breach of her agreement not to compete, the Company shall
have the right and remedy to have the provisions of this Agreement specifically
enforced by any court having equity jurisdiction, it being agreed
-16-
<PAGE>
that in any proceeding for an injunction, Executive's ability to answer in
damages shall not be a bar or interposed as a defense to the granting of such
injunction. The right and remedy enumerated above shall be in addition to, and
not in lieu of, any other rights and remedies available to the Company under law
or equity. The provisions of this paragraph 11 shall survive any expiration or
termination of this Agreement.
12. Separability. In the event that any provision or any portion of
------------
any provision of this Agreement shall be held to be void or unenforceable, the
remaining provisions of this Agreement (and the balance of any provisions held
void or unenforceable in part only) shall continue in full force and effect.
13. Authority to Enter Agreement. The Executive represents and
----------------------------
warrants that she is not subject to any existing employment agreement and that
she has made no commitment of any kind whatsoever inconsistent with the
provisions of this Agreement.
14. No Mitigation. In the event Executive's employment is
-------------
terminated, Executive shall have no duty to mitigate the Company's financial
obligations to her, and any amounts she receives that might otherwise be
considered to mitigate such obligations shall not be deemed to do so.
15. Indemnification. The Company will indemnify Executive to the
---------------
fullest extent permitted by law against all charges and expenses (including
reasonable legal expenses) in connection with any action or proceeding she
-17-
<PAGE>
is made a party by reason of her being an employee, officer or director of the
Company.
16. Reimbursement of Expenses. In the event it becomes necessary for
-------------------------
Executive to sue on any aspect of this Agreement, and the Company does not fully
prevail, then the Company shall reimburse Executive for all of her legal fees
and expenses (on a grossed-up basis to give effect to any taxes to Executive on
such reimbursed amount) in pursuing such matter.
17. Assignment. This Agreement may not be assigned by Executive, but
----------
may be assigned by the Company to any successor in interest in a transaction not
constituting a "change of control" as set forth in paragraph 9(b)(v) hereof.
This Agreement shall inure to the benefit of, and shall be binding upon the
Company, its permitted successors and assigns, and Executive, her legal
representatives, executors and administrators.
18. Entire Agreement. This Agreement contains the full and complete
----------------
understanding and agreement of the parties with respect to the subject matter
hereof and supersedes all prior agreements and understandings between the
parties with respect to the subject matter hereof.
19. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York, without giving effect to
the conflicts of law provisions thereof.
20. Waiver; Amendments and Consents. No waiver by either party of
-------------------------------
any breach of any provision of this Agreement shall be deemed a waiver of any
preceding or succeeding breach of
-18-
<PAGE>
such provision or of any other provision herein contained. Any amendment to
this Agreement, and any consent or waiver by a party hereto to any provision of
this Agreement, shall be in writing and delivered to both parties to this
Agreement.
21. Notices. Except as otherwise specifically provided herein, any
-------
notice or other communication given hereunder shall be deemed sufficient if
delivered personally or sent by registered or certified mail, return receipt
requested, as follows:
If to the Company:
Donna Karan International Inc.
550 Seventh Avenue
New York, New York 10018
Attention: President
If to the Executive:
Ms. Donna Karan
550 Seventh Avenue
New York, New York 10018
The foregoing addresses may be changed by notice given in the manner
set forth in this paragraph 21.
-19-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
DONNA KARAN INTERNATIONAL INC.
By:
-------------------------------
Name:
Title:
----------------------------------
DONNA KARAN
-20-
<PAGE>
EXHIBIT 10.9
WM&C DRAFT 6/6/96
EMPLOYMENT AGREEMENT
AGREEMENT entered as of the ____ day of June, 1996 by and between
DONNA KARAN INTERNATIONAL INC., a Delaware corporation, having an office at 550
Seventh Avenue, New York, NY 10018 (the "Company") and STEPHAN WEISS
("Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Executive has provided valuable services to predecessor
entities of the Company for a period of years; and
WHEREAS, the Company wishes to secure the ongoing services of
Executive on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, it is agreed as
follows:
1. Employment. The Company hereby employs Executive and Executive
----------
hereby accepts employment by the Company on the terms and conditions hereinafter
set forth, to act as Vice Chairman of the Board of Directors of the Company and
its subsidiaries and affiliated companies.
2. Duties and Scope of Authority. The Company hereby agrees that,
-----------------------------
except to the extent that Executive otherwise consents in writing, during the
term of this Agreement:
(a) Executive shall have principal executive responsibility for
strategic planning for the Company, for the Company's beauty products operations
and for supervising legal matters as they relate to the Company;
<PAGE>
(b) Executive shall be the sole Vice Chairman of the Board of
Directors of the Company;
(c) The Company shall cause Executive to be nominated as a
director of the Company on management's slate of nominees;
(d) No action will be taken by the Company to diminish the scope
of Executive's responsibility and authority as set forth herein, or to render it
difficult or impossible for Executive to carry out his duties.
3. Location; Office and Staff. During the term of this Agreement,
--------------------------
the Company's principal executive offices shall be in New York City and
Executive shall not be required to relocate to any other location. During the
term of this agreement the Company shall provide Executive with an office and
staff in the Company's New York City executive headquarters no less favorable to
Executive than that presently provided to him.
4. Devotion of Time. During the term hereof, Executive shall devote
----------------
such portion of his business time and attention to the business and affairs of
the Company and its subsidiaries and affiliated companies as he shall deem
necessary and use his best efforts to promote the business and reputation of the
Company and its subsidiaries and affiliated companies, provided that Executive
may devote a substantial portion of his business time and attention to other
activities, including the business and affairs of Gabrielle Studio, Inc.,
Stephan Weiss Studios, and Weiss & Sons, provided, that such activities shall
- 2 -
<PAGE>
not interfere with Executive's obligations to the Company. Executive shall have
no interest in, and will not perform any service for, any other business entity
which is in direct competition with the Company's principal product lines and
price points, which activity could reasonably be anticipated to have a material
adverse effect on the Company's business or operations taken as a whole, except
that this prohibition shall not apply to passive investments by Executive in
publicly-traded companies or Executive's investment in Gabrielle Studio, Inc.
5. Term. The term of this Agreement shall commence as of the date
----
hereof and shall continue for an initial term ending on the date which is twelve
months from the date hereof. Such initial term (the "Initial Term") shall
continue thereafter in automatically renewable successive terms of one year
periods as Vice-Chairman of the Board, unless terminated (i) by the Company for
"cause" as provided in paragraph 9(c) hereof, or (ii) by Executive as provided
in paragraphs 9(a) or 9(b) hereof.
6. Compensation. In consideration for the services to be rendered by
------------
Executive for any capacity for which he is employed hereunder, the Company
agrees to:
(a) pay to Executive a base salary at the rate of $500,000 per annum,
such amount to be paid in equal installments on the Company's regular payroll
dates. In years subsequent to 1996, such salary shall be adjusted by the
percentage increase in the Consumer Price Index for All Urban Customers ("CPI-
U") for the month of November immediately preceding the relevant annual
- 3 -
<PAGE>
period over the CPI-U of the preceding annual period. The "CPI-U" referred to
herein is that CPI-U published by the Bureau of Labor Statistics, U.S.
Department of Labor, for all United States cities (U.S. city average), based
upon 1982-4 equalling 100, or the successor or supplement thereto if publication
thereof should be discontinued or modified.
(b) pay to Executive an incentive bonus at the rate of $500,000 per
annum for the period commencing the date hereof and ending December 31, 1996,
and, in respect of each fiscal year of the Company during the term of employment
commencing with the 1997 fiscal year, pay to Executive an incentive bonus equal
to a percentage of Executive's then current annual salary, which percentage
shall be equal to: the Company's Adjusted Pretax Profit (as defined below) for
the fiscal year in question divided by $50,000,000 (which quotient shall be
expressed as a percentage) less 60 percentage points, which resulting percentage
will then be multiplied by 2.5. The incentive bonus shall not be less than zero
nor more than 100% of Executive's then current salary. If this Agreement
terminates at any time other than the end of a fiscal year, then Executive shall
be entitled to an incentive bonus equal to the product of the amount of the
incentive bonus payable for the fiscal year ended prior to the termination of
Executive's employment multiplied by a fraction, the numerator of which is the
number of days from the commencement of the Company's fiscal year in question to
the date of termination and the denominator of which
- 4 -
<PAGE>
is 365. Such incentive bonus shall be paid within fifteen (15) days of the
completion of the Company's audited financial statements with respect to any
fiscal year but not later than April 15 of the succeeding year.
For purposes hereof, the "Adjusted Pretax Profit" of the Company for
any fiscal year shall mean the pretax income from continuing operations before
(i) extraordinary items, (ii) cumulative effect of changes in accounting
principles for such fiscal year, (iii) royalties payable for such year by the
Company, its subsidiaries and affiliates to Gabrielle Studio, Inc. (iv) the
incentive bonuses payable to Donna Karan and Stephan Weiss (but only to the
extent these incentive bonuses have been accrued), (v) those costs associated
with operating a public company (i.e., directors' and officers' insurance,
preparation of Securities and Exchange Commission filings, etc.), and (vi) such
other adjustments as may be necessary to make the pretax income of the Company
for any fiscal year subsequent to 1996 comparable to the components of pretax
income of the Company for 1995.
(c) include Executive in the Company's employee benefit and stock
option plans, if any, upon terms commensurate with and in a manner consistent
with Executive's position in the Company and the terms of such plans, except
that Executive shall not participate in the Company's 1996 Stock Incentive Plan
and the 1996 Non-Employee Director Stock Option Plan (but shall be eligible to
participate in any subsequent Plans).
7. Expenses; Benefits. The Company shall pay or reimburse Executive
------------------
for all reasonable out-of-pocket expenses
- 5 -
<PAGE>
incurred in the performance of his services hereunder, in accordance with the
Company's applicable expense reimbursement and related policies and procedures
as in effect from time to time. In addition to Executive's base salary,
incentive bonus and employee benefits (if any), which shall be reviewed
periodically by the Compensation Committee of the Board of Directors of the
Company, Executive shall be entitled to participate in all group life, health,
hospital, medical and dental and disability insurance programs maintained by the
Company made available to senior executive officers of the Company generally.
Executive shall also be entitled to receive from the Company such benefits and
perquisites as are consistent with his position in the Company. Such benefits
provided by the Company shall include, but not be limited to:
(a) the use by Executive of a late model top of the line automobile
selected by him; payment by the Company or reimbursement to Executive of all
expenses incurred for maintaining and garaging such automobile; a driver for
such automobile; and payment to Executive annually of such amount as is required
to gross up the Executive for Federal, state and local taxes payable as a result
of these benefits.
(b) in all business travel, first-class transportation and lodging for
Executive and any of his family members traveling with him, if any, of a style
and nature which reflects the importance of Executive's position in the Company
and in the fashion industry.
- 6 -
<PAGE>
8. Vacation. Executive shall be entitled to take such vacations
--------
and attend such meetings, conferences and conventions as he, in his sole
discretion, shall determine to be consistent with his responsibilities
hereunder, but shall not be less than the time that has been available to him
for such vacation and other activities on behalf of the predecessor entities of
the Company.
9. Termination. (a) This Agreement may be terminated by Executive
-----------
at any time without reason by written notice effective not less than four (4)
months after the giving of such notice. For a period of one year after
termination of this Agreement by Executive pursuant to this Section 9(a),
Executive shall not participate or engage, directly or indirectly, for himself
or on behalf of or in conjunction with any person, partnership, corporation or
other entity, in any business activities that are directly competitive with the
Company's current principal product lines and price points and could reasonably
be expected to have a material adverse effect on the Company; provided, however,
-------- -------
that subject to the terms and provisions of that certain Stockholders Agreement
dated the date hereof by and amoung the Company, the Executive, Stephan Weiss,
the Trust under Trust Agreement for the benefit of Lisa Weiss Keyes, Corey Weiss
and Gabrielle Karan, and the Trust under Trust Agreement for the benefit of
Donna Karan this Section 9(a) shall in no way limit Executive's ability to
participate or engage, directly or indirectly, for himself or on behalf of or in
conjunction with any person, partnership, corporation or other entity, in the
business of Gabrielle Studio, Inc.
(b) This Agreement may be terminated by Executive at any time after
the date hereof for "good reason" by written
- 7 -
<PAGE>
notice effective immediately. A termination for "good reason" shall include:
(i) if at any time Executive shall (without his prior written
consent) not be a director or the Vice Chairman of the Board;
(ii) the assignment of duties and responsibilities to Executive,
or the assignment of duties and responsibilities to others, that reduce or
are otherwise inconsistent with Executive's duties and responsibilities as
set forth herein, in any such instance without his prior written consent;
(iii) the Company's failure to pay to Executive all amounts duly
required to be paid to him hereunder in accordance with the terms hereof
(including all benefits under pension, retirement, benefits, etc.);
(iv) any other breach by the Company of a material provision of
this Agreement;
(v) a "change in control" of the Company, i.e., any of the
following: (x) the acquisition (i) by any "person" (as such term is used in
Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
other than a person who is a shareholder of the Company on the effective
date of the registration statement filed under the Securities Act of 1933
as amended relating to the first public offering of securities of the
Company (an "Initial Shareholder") of 30% or more of the voting power of
securities of the
- 8 -
<PAGE>
Company, or (ii) the acquisition by an Initial Shareholder other than
Executive (and excluding and such acqusition resulting from a purchase,
sale or transfer of Takihyo Inc. stock by and between any of the current
stockholders of Takihyo Inc.) of an additional 5% of voting power of
securities of the Company over and above that owned immediately after the
closing date of the initial public offering of the Company's common stock;
(y) any merger or sale of substantially all of the assets of the Company
under circumstances where the holders of 20% or more of the equity
securities of the surviving entity of such transaction were not holders of
the Common Stock of the Company immediately prior to consummation of such
transaction; or (z) any change in the composition of the Board of Directors
of the Company not approved by: (i) a majority of the Board of Directors of
the Company prior to such change; and (ii) not less than two directors of
the Company who were directors prior to the time any "person" who was not
an Initial Shareholder acquired 30% or more of the voting power of
securities of the Company; and
(vi) a physician of acknowledged competency shall confirm in
writing to the Board of Directors of the Company that, in his professional
opinion, the demands of Executive's responsibilities hereunder are such
that it would materially and adversely affect his health for him to be
required to discharge the material aspects of his responsibilities
hereunder.
In the event of a termination by Executive for "good reason", the Company shall
pay to Executive a lump sum cash payment promptly
- 9 -
<PAGE>
(but in any event within ten days) after termination equal to the sum of
Executive's base salary, as then in effect, and incentive bonus (equal to the
incentive bonus paid to Executive in the fiscal year preceding the year in which
such termination occurred) for a period of one year. In such event, the Company
shall also pay to Executive an amount equal to three times the average incentive
bonus paid to Executive pursuant to paragraph 5(b) hereof in the three years
preceding the year (or in the event Executive has been employed for less than
three years for such number of years as the incentive bonus has been paid if
less than three) in which such termination occurred.
(c) This Agreement may be terminated by the Company as provided in
section 9(e) hereof and at any time after the date hereof only for "cause" (as
hereinafter defined) by written notice to Executive. The Company recognizes that
for a period of 10 years it (and its predecessor entities) has been fully
familiar with Executive's ability, competence and judgment. Accordingly,
"incompetence", "lack of diligence or judgment", "insubordination" and similar
faults shall not constitute grounds for termination for cause. For purposes of
this Agreement, "cause" shall mean only Executive's conviction in a court of law
of a crime involving money or other property of the Company. For a period of one
year after termination of this Agreement by the Company for cause, Executive
agrees not to participate or engage, directly or indirectly, for himself or on
behalf of or in conjunction with any person, partnership, corporation or other
entity, in any business activities that are directly competitive with the
Company's current principal product lines and price points and could
- 10 -
<PAGE>
reasonably be expected to have a material adverse effect on the Company. After
the date of termination of Executive's employment for cause, the Company shall
not be obligated to pay Executive his base salary or incentive bonus paid,
except for amounts due to the date of termination.
(d) This Agreement shall terminate automatically upon Executive's
death. In the event of termination of Executive's employment as a result of his
death, the Company shall pay to Executive's estate a lump sum cash payment
promptly after termination, equal to Executive's base salary as then in effect
and incentive bonus (equal to the incentive bonus paid to Executive in the
fiscal year preceding the year in which such termination occurred) for the
period which is remaining in the term of his employment agreement.
(e) This Agreement shall terminate at the option of the Company if
Executive shall suffer "disability". For purposes hereof, "disability" shall
mean the inability of Executive, due to physical, mental or other cause, to
perform his usual and normal duties hereunder for a consecutive period of six
(6) months. The Company shall notify Executive in writing of its decision to
terminate the Agreement due to Executive's disability. If Executive disputes
that he is "disabled," the Company may require Executive to submit to the
examination of a physician appointed by the Company for the purpose of
determining whether Executive is able to perform his material duties, and the
physician's decision shall be final and binding. In the event of
- 11 -
<PAGE>
termination of Executive's employment as a result of disability, the Company
shall pay to Executive a lump sum cash payment promptly after termination equal
to the sum of Executive's base salary as then in effect and incentive bonus
(equal to the incentive bonus paid to Executive in the fiscal year preceding the
year in which such termination occurred) for the period which is remaining in
the term of his employment agreement.
(f) Upon termination of Executive's employment under this Section 9
with respect to all positions and offices to which this Agreement relates,
Executive shall be deemed to have resigned as an officer of the Company and its
affiliates, if then so acting.
10. Confidential Information. (a) Executive acknowledges that
------------------------
because of his experience, knowledge and expertise and because of his duties and
his position of trust under this Agreement, he will be able to develop the
trust, confidence and good will of, and close relationships with, the customers
of the Company and will become familiar with the trade secrets and other
confidential information of the Company which are valuable assets and property
rights of the Company and its affiliates. Executive therefore agrees that he
will not, during the term of this Agreement or at any time thereafter, either
directly or indirectly, disclose to any person, firm or corporation such trade
secrets or other confidential information. Executive agrees to retain all such
trade secrets and other confidential information in a fiduciary capacity for the
sole
- 12 -
<PAGE>
benefit of the Company, its successors and assigns. Upon termination of his
employment by the Company or at any time that the Company may so request,
Executive will surrender to the Company all records, papers, notes, reports and
other documents (and all copies thereof) relating to the business of the Company
and its affiliates, which he may then possess or have under his control; except
that Executive shall be permitted to retain copies of all papers which relate to
those activities in which Executive is permitted to engage pursuant to the terms
of the License Agreement dated the date hereof by and between Gabrielle Studio,
Inc. and Donna Karan Studio and, except that Executive shall retain the right to
have access to and make copies and extracts of the Company's design, advertising
and public relations archives and to borrow products from the Company's archives
for temporary use, provided that in no event shall such access be used in any
business competitive with that of the Company. A matter shall no longer be
deemed a trade secret or confidential when it becomes publicly known through
no fault of Executive. The provisions of this paragraph shall survive the
expiration or termination of this Agreement.
(b) In the event that any of the covenants set forth in this paragraph
or in paragraph 9 hereof are more restrictive than permitted by the laws of this
jurisdiction in which the Company seeks enforcement thereof, each of such
covenants shall be deemed limited to the extent permitted by such laws and
modified to conform therewith by the Court or other
- 13 -
<PAGE>
tribunal before which an enforcement action is brought, in the exercise of its
equitable jurisdiction.
11. Equitable Remedies. The services of Executive are of a
------------------
unique nature and of extraordinary value and of such a character that a breach
by Executive of the non-compete provisions of paragraph 4 hereof will result in
irreparable damage and injury to the Company for which the Company will not have
any adequate remedy at law. Therefore, in the event that Executive commits or
threatens to commit a breach of his agreement not to compete, the Company shall
have the right and remedy to have the provisions of this Agreement specifically
enforced by any court having equity jurisdiction, it being agreed that in any
proceeding for an injunction, Executive's ability to answer in damages shall not
be a bar or interposed as a defense to the granting of such injunction. The
right and remedy enumerated above shall be in addition to, and not in lieu of,
any other rights and remedies available to the Company under law or equity. The
provisions of this paragraph 11 shall survive any expiration or termination of
this Agreement.
12. Separability. In the event that any provision or any
------------
portion of any provision of this Agreement shall be held to be void or
unenforceable, the remaining provisions of this Agreement (and the balance of
any provisions held void or unenforceable in part only) shall continue in full
force and effect.
- 14 -
<PAGE>
13. Authority to Enter Agreement. Executive represents and
----------------------------
warrants that he is not subject to any existing employment agreement, that he
has made no commitment of any kind whatsoever inconsistent with the provisions
of this Agreement.
14. No Mitigation. In the event Executive's employment is
-------------
terminated, Executive shall have no duty to mitigate the Company's financial
obligations to him, and any amounts he receives that might otherwise be
considered to mitigate such obligations shall not be deemed to do so.
15. Indemnification. The Company will indemnify Executive to
---------------
the fullest extent permitted by applicable law against all charges and expenses
(including reasonable legal expenses) in connection with any action or
proceeding he is made a party by reason of his being an employee, officer or
director of the Company.
16. Reimbursement of Expenses. In the event it becomes
-------------------------
necessary for Executive to sue on any aspect of this Agreement, and the Company
does not fully prevail, then the Company shall reimburse Executive for all of
his legal fees and expenses (on a grossed-up basis to give effect to any taxes
to Executive on such reimbursed amount) in pursuing such matter.
17. Assignment. This Agreement may not be assigned by
----------
Executive, but may be assigned by the Company to any successor in interest in a
transaction not constituting a "Change of Control" as set forth in paragraph
9(b)(v) hereof. This Agreement shall inure to the benefit of, and shall be
binding upon the Company,
- 15 -
<PAGE>
its permitted successors and assigns, and Executive, his legal representatives,
executors and administrators.
18. Entire Agreement. This Agreement contains the full and
----------------
complete understanding and agreement of the parties with respect to the subject
matter hereof and supersedes all prior agreements and understandings between the
parties with respect to the subject matter hereof.
19. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York, without giving
effect to the principles of conflicts of law provisions thereof.
20. Waiver; Amendments and Consents. No waiver by either party
-------------------------------
of any breach of any provision of this Agreement shall be deemed a waiver of any
preceding or succeeding breach of such provision or of any other provision
herein contained. Any amendment to this Agreement, and any consent or waiver by
a party hereto to any provision of this Agreement, shall be in writing and
delivered to both parties to this Agreement.
21. Notices. Except as otherwise specifically provided herein,
-------
any notice or other communication given hereunder shall be deemed sufficient if
delivered personally or sent by registered or certified mail, return receipt
requested, as follows:
If to the Company:
Donna Karan International Inc.
550 Seventh Avenue
New York, New York 10018
Attention: President
- 16 -
<PAGE>
If to Executive:
Mr. Stephan Weiss
550 Seventh Avenue
New York, New York 10018
The foregoing addresses may be changed by notice given in the manner
set forth in this paragraph.
- 17 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
DONNA KARAN INTERNATIONAL INC.
By:________________________________
Name:
Title:
-----------------------------------
STEPHAN WEISS
- 18 -
<PAGE>
EXHIBIT 10.10
WM&C DRAFT 6/6/96
STOCKHOLDERS' AGREEMENT
THIS AGREEMENT AMONG STOCKHOLDERS (the "Agreement") is made and
entered into as of the ____ day of June, 1996, by and among Donna Karan
International Inc., a Delaware corporation (the "Company"), each of Frank R.
Mori ("Mori"), Christopher Mori, Heather Mori, Tomio Taki ("Taki") and Takihyo
Inc., a Delaware corporation ("Takihyo") (collectively, the "Takihyo Group"),
Donna Karan ("Karan"), Stephan Weiss ("Weiss"), Gabrielle Studio, Inc., a New
York corporation, the trust under trust agreement for the benefit of Lisa Weiss
Keyes, Corey Weiss and Gabrielle Karan and the trust under trust agreement for
the benefit of Donna Karan (collectively the "Karan/Weiss Group") (each member
of the Takihyo Group and the Karan/Weiss Group, a "Stockholder" and collectively
the "Stockholders").
W I T N E S S E T H:
WHEREAS, the Company was incorporated under the laws of the State of
Delaware on April 10, 1996 and, upon consummation of the Offering (as defined
below) will have authorized capital consisting of 35,000,000 shares of common
stock, par value $.01 per share (the "Common Stock");
WHEREAS, the Company and the Stockholders have entered into an
Agreement and Plan of Contribution (the "Contribution Agreement") dated the date
hereof in order to accomplish a restructuring (the "Restructuring") of the
businesses conducted by The Donna Karan Company, The Donna Karan Company Store,
G.P., DK Footwear Partners, Donna Karan Studio and DSTF Japan Company, all
general partnerships, Donna Karan (H.K.) Limited, a Hong Kong corporation and
Donna Karan Italy, S.r.l. (collectively the "Donna Karan Companies"), in
conjunction with the initial public offering (the "Offering") of the Company's
Common Stock as an integrated plan pursuant to Section 351 of the Internal
Revenue Code of 1986, as amended;
WHEREAS, as part of the Restructuring and pursuant to the Contribution
Agreement, upon the effectiveness of the Contribution Agreement, the
Stockholders will contribute their respective equity interests in each of the
Donna Karan Companies to the Company;
WHEREAS upon consummation of the Offering, Taki and Mori will resign
from the Board of Directors of the Company, which will result in such Board of
Directors consisting of three members; and
WHEREAS, as provided in that Section of the Company By-laws attached
hereto as Exhibit I, the Company intends that a
<PAGE>
full Board of Directors of the Company (the "Board of Directors") consist of
nine persons; and
WHEREAS, the Company and the Stockholders desire to enter into this
Agreement for the purpose of setting forth their respective rights and
obligations in connection with the appointment and election of members of the
Board of Directors.
NOW, THEREFORE, for and in consideration of the premises and the
mutual representations and covenants hereinafter set forth, the parties hereto
do agree as follows:
1. Board of Directors Appointment Rights
-------------------------------------
(a) The parties intend that:
(i) within three months following the completion of the Offering, the
Company will appoint to the Board of Directors two additional directors (neither
of whom will be an officer or employee of the Company or any of its Affiliates)
(as defined below) (each, a "Company Designated Director"); and
(ii) thereafter, within six months following the consummation of the
Offering, (1) the director designated by the Karan/Weiss Group pursuant to
paragraph 1(e) of this Agreement shall become a member of the Board of Directors
and (2) the Board of Directors shall appoint a third director who shall not be a
designee or an officer or employee of an Affiliate of either the Takihyo Group
or the Karan/Weiss Group (also a "Company Designated Director"). For purposes of
this Agreement, the term "Affiliate" shall mean a person that directly, or
indirectly through one or more intermediaries, controls or is controlled by, or
is under common control with, the person specified.
(b) The parties agree that the individuals designated as members of
the Board of Directors by the Takihyo Group pursuant to paragraph 1(c) of this
Agreement shall become members of the Board of Directors concurrently with the
appointment of the second such Company Designated Director designated pursuant
to paragraph 1(a)(i) hereof.
(c) The Takihyo Group shall have the right hereunder to designate two
members of the Board of Directors. The two members of the Board of Directors
designated by the Takihyo Group shall serve until such time after the
consummation of the Offering as any member of the Takihyo Group sells any shares
of Common Stock owned by it, whether by a registration statement, in a private
sale or otherwise (other than the distribution of any shares of Common Stock to
a person who as of
- 2 -
<PAGE>
the date hereof is a shareholder of Takihyo). Thereafter, the Takihyo Group
shall have the right hereunder to designate one member of the Board of
Directors, as long as the combined ownership of shares of Common Stock held by
the members of the Takihyo Group is not less than ten (10%) percent of the then
total outstanding shares of Common Stock; provided, that if either Taki or Mori
--------
is eligible to serve, and is serving, as the designee of the Takihyo Group to
the Board of Directors, then such person shall be entitled to continue to serve
as a member of the Board of Directors for so long as the combined ownership of
shares of Common Stock held by the members of the Takihyo Group is not less than
five (5%) percent of the then total outstanding shares of Common Stock. Any
person who is appointed a member of the Board of Directors as a designee of the
Takihyo Group and who is not otherwise a signatory to this Agreement shall, as a
condition of assuming such directorship, agree to observe the provisions of this
paragraph 1(c).
(d) Notwithstanding anything herein to the contrary, the Takihyo Group
designees referred to in paragraph 1(c) of this Agreement shall not be Taki or
Mori, or any other Affiliate of the Takihyo Group, as long as the Takihyo Group
has an ownership interest in, or such person is an officer or director of, Anne
Klein & Company or any other competitor of the Company. Absent such ownership
interest or relationship, Taki or Mori shall be satisfactory designees of the
Takihyo Group.
(e) The Karan/Weiss Group shall have the right hereunder to designate
Karan and Weiss as members of the Board of Directors. The Karan/Weiss Group
shall also have the right hereunder to designate one additional member of the
Board of Directors, as long as the combined ownership of the shares of Common
Stock held by the members of the Karan/Weiss Group is not less than twenty (20%)
percent of the then total outstanding shares of Common Stock. Any person who is
appointed a member of the Board of Directors as an additional designee of the
Karan/Weiss Group (other than Karan and Weiss) and who is not otherwise a
signatory to this Agreement shall, as a condition of assuming such directorship,
agree to observe the provisions of this paragraph 1(e).
(f) As long as the Takihyo Group shall have the right hereunder to
designate one or more members of the Board of Directors, each member of the
Karan/Weiss Group agrees to vote the shares of Common Stock owned by it in favor
of the election to the Board of Directors of the designee(s) of the Takihyo
Group.
(g) Each member of the Takihyo Group agrees to vote the shares of
Common Stock owned by it in favor of the election to the Board of Directors of
(i) each of Karan and (ii) Weiss and, for so long as the Karan/Weiss Group shall
have the
- 3 -
<PAGE>
right hereunder to designate one or more members of the Board of Directors, the
additional designee of the Karan/Weiss Group.
(h) At such time as either the Karan/Weiss Group or the Takihyo Group
shall lose its rights to designate one or more members of the Board of
Directors (i.e., by virtue of a decrease in the ownership of Common Stock of
----
such group) the Karan/Weiss Group or the Takihyo Group, as applicable, shall
promptly direct one or more of its designees, as applicable, to promptly resign
from the Board of Directors pursuant to paragraph 1(c) or paragraph 1(e) hereof,
as applicable, notwithstanding the fact that such designee's term may not have
expired.
(i) Notwithstanding the foregoing provisions set forth in paragraphs
1(b) - 1(h) of this Agreement, any member of the Board of Directors designated
by either the Karan/Weiss Group or the Takihyo Group (other than Karan, Weiss,
Taki or Mori), must be reasonably satisfactory to a majority of the members of
the then current Board of Directors.
(j) The parties hereby consent under Section 2.1 of the Bylaws of the
Company to the increases and decreases in the number of directors of the Company
expressly provided for herein.
2. Effectiveness. This Agreement shall become effective upon or
-------------
simultaneous with the consummation of the Offering.
3. Miscellaneous Provisions
------------------------
(a) Entire Agreement. This Agreement embodies the entire agreement
----------------
and understanding of the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings, whether written
or oral, relating to such subject matter.
(b) Notices. Any notice hereunder shall be in writing and shall
-------
become effective if delivered or tendered either in person or by facsimile, when
received (and, in the case of a facsimile, receipt of such facsimile is
confirmed to the sender) or, if sent by mail, five business days after being
deposited in the United States mail, in a sealed envelope, registered or
certified, with first class postage prepaid, in each case, addressed to the
person to whom such notice is being given at such person's address appearing on
the records of the Company or such other address as may have been given by such
person to the Company for the purposes of notice in accordance with this
subsection.
- 4 -
<PAGE>
(c) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York without regard to the
conflicts of law provisions thereof.
(d) Jurisdiction; Convenience of Forum. Each party to this Agreement,
----------------------------------
acting for itself and for its respective successors and assigns, without regard
to domicile, citizenship or residence, hereby expressly and irrevocably elects
as the sole judicial forum for the adjudication of any matters arising under or
in connection with this Agreement, and consents and subjects itself to the
jurisdiction of, the courts of the State of New York located in New York City,
and/or the United States District Court for the Southern District of New York,
in respect of any matter arising under this Agreement. Service of process,
notices and demands of such courts may be made upon any party to this Agreement
by personal service at any place where it may be found or giving notice to such
party as provided in Section 3(b) hereof.
(e) Successors. Any transferee, successor, or assignee, whether
----------
voluntary, by operation of law, or otherwise, of the Common Stock (other than a
transferee who has purchased Common Stock in a registered public offering or
pursuant to Rule 144 under the Securities Act of 1933, as amended) of the
Company from a party to this Agreement (other than the Company) shall be subject
to and bound by the terms and conditions of this Agreement as fully as though
such person were a signatory hereto. The certificates representing the Common
Stock held by the parties to this Agreement (other than the Company) shall bear
a legend referring to this Agreement and the obligations hereunder.
(f) Further Assurances. The Company and each of the Stockholders
------------------
agree that during the term of this Agreement each such party shall take such
actions as shall be reasonably necessary to effect the purposes of this
Agreement.
(g) Severability. Any provision hereof prohibited by or unlawful or
------------
unenforceable under any applicable law of any jurisdiction shall as to such
jurisdiction be ineffective without affecting any other provision of this
Agreement. To the full extent, however, that the provisions of such applicable
law may be waived, they are hereby waived to the end that this Agreement be
deemed to be a valid and binding agreement enforceable in accordance with its
terms.
(h) Remedies. The parties hereto shall have all remedies for breach
--------
of this Agreement available to them provided by law or equity. Without limiting
the generality of the foregoing, the parties agree that in addition to all other
rights and remedies available at law or in equity, the parties shall be entitled
to obtain specific performance of the obligations of
- 5 -
<PAGE>
each party to this Agreement and immediate injunctive relief and that in the
event any action or proceeding is brought in equity to enforce the same, no
Stockholder will urge, as a defense, that there is an adequate remedy at law.
(i) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
(j) Headings. The headings contained in this Agreement are solely for
--------
convenience of reference and shall not affect the meaning or interpretation of
this Agreement or of any term or provision hereof.
(k) Waiver. No waiver, whether express or implied, of any provision
------
hereof, or of any breach or default thereof, shall constitute a continuing
waiver of any such provision or of any other provision hereof.
(l) Amendments. This Agreement shall not be changed, modified or
----------
amended except by a writing signed by all parties hereto.
- 6 -
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY:
DONNA KARAN INTERNATIONAL INC.
By:_______________________________
Name:
Title:
STOCKHOLDERS:
___________________________________
Tomio Taki
___________________________________
Frank Mori
___________________________________
Christopher Mori
___________________________________
Heather Mori
TAKIHYO INC.
By:________________________________
Name: Frank R. Mori
Title: President
___________________________________
Donna Karan
___________________________________
Stephan Weiss
[Stockholders' Agreement Signatures continued on the next page]
- 7 -
<PAGE>
[Stockholders' Agreement Signatures continued from previous page]
GABRIELLE STUDIO, INC.
By:_______________________________
Name:
Title:
THE TRUST UNDER TRUST AGREEMENT FOR
THE BENEFIT OF DONNA KARAN
By:_______________________________
Stephan Weiss, Trustee
THE TRUST UNDER TRUST AGREEMENT FOR
THE BENEFIT OF LISA WEISS KEYES,
COREY WEISS AND GABRIELLE KARAN
By:______________________________
Stephan Weiss, Trustee
- 8 -
<PAGE>
EXHIBIT I
Company By-Laws
- 9 -
<PAGE>
EXHIBIT 10.11
THE DONNA KARAN COMPANIES
INCENTIVE COMPENSATION PLAN
1. Purpose; Effective Date
-----------------------
1.1 Purpose. The purpose of this Plan is to provide additional
-------
compensation as an incentive to key employees of the DK Companies, upon whose
efforts and commitment depend the continued success and growth of the DK
Companies, and as a means by which such employees can share in such growth.
1.2 Effective Date. The Plan is effective as of January 1, 1996.
--------------
2. Definitions. For purposes of this Plan, the following definitions
------------
shall apply:
2.1 "Accomplishments" shall mean, with regard to any Participant
for any Year, those performance factors evaluated by the Committee in its sole
discretion, after the end of such Year pursuant to Section 6.
2.2 "Accountants" shall mean the independent certified public
accounting firm then auditing the books of the Company (currently Ernst &
Young).
2.3 "Bonus" shall mean, with regard to any Participant for any
Year, the Bonus awarded by the Committee to such Participant pursuant to Section
7.
2.4 "Bonus Criteria" shall mean Accomplishments, and/or such other
criteria that may be established by the Committee, if any, to determine the
Bonus for a Participant for any Year.
2.5 "Chief Executive Officers" shall mean the co-Chief Executive
Officers of the Company or the Chief Executive Officer of the Company if there
is only one such officer.
2.6 "Chief Financial Officer" shall mean the chief financial
officer of the Company.
2.7 "Company" shall mean The Donna Karan Company, a New York
general partnership and any successor thereto. In the event the DK Companies
are the subject of an initial public offering, where the context requires the
term "Company" shall refer to the public corporation that directly or indirectly
owns the controlling interests in the DK Companies.
2.8 "Committee" shall mean the committee responsible for
administering the Plan as provided in Section 3 hereof.
<PAGE>
2.9 "DK Company" or "DK Companies" shall mean, as the context may
require, any one or more of the following: (i) the Company, (ii) The Donna Karan
Studio, a New York partnership, (iii) The Donna Karan Company Store, G.P., a New
York partnership, (iv) DK Footware Partners, a New York partnership, (v) DSTF
Japan Company, a New York partnership, and (vi) such other affiliated companies,
corporations or partnerships or successors to any of such entities to the extent
so designated by the Chief Executive Officers.
2.10 "Division" shall mean, with regard to any Participant during
any whole or partial Year, the division of a DK Company managed by such
Participant or by which such Participant is employed.
2.11 "Earned Bonus Criteria" shall mean such of the Bonus Criteria
as are actually achieved by a Participant for any Year as determined in
accordance with Section 5 and (with regard to Accomplishments) Section 6.
2.12 "Employment Agreement" shall mean, in the case of any
Participant, any employment agreement between any DK Company and such
Participant, as such agreement may be amended and/or extended from time to time.
2.13 "Participant" shall mean any officer or employee of a DK
Company who, in the opinion of the Committee, makes or is likely to make an
important contribution to the growth and success of any or all of the DK
Companies and has been designated by the Committee to participate in the Plan;
provided, that any such officer or employee shall have been employed by one of
- --------
the DK Companies on or before June 30 of any Year in order to be designated as a
Participant in the Plan for such Year.
2.14 "Plan" shall mean this Incentive Compensation Plan, as the
same may be amended from time to time.
2.15 "Restrictive Agreement" shall mean, in the case of any
Participant, any agreement between a DK Company and such Participant obligating
such Participant with regard to any covenant or restriction relating to non-
solicitation, confidentiality or non-competition, as such agreement may be
amended and/or extended from time to time.
2.16 "Target Bonus" shall mean the Bonus which a Participant will
earn if 100% of all Target Bonus Criteria Allocations established for such
Participant are achieved.
2.17 "Target Bonus Criteria Allocations" shall mean that portion of
the Target Bonus which a Participant will earn if 100% of a particular Bonus
Criterion established for such Participant is achieved.
2
<PAGE>
2.18 "Termination Date" shall mean the effective date of the
termination of a Participant's employment by a DK Company, or, if the
termination of a Participant's employment shall occur as the result of such
Participant's failure to return from a leave of absence authorized by law or by
any DK Company, the Termination Date shall mean the date upon which such leave
of absence commenced.
2.19 "Year" shall mean a calendar year.
3. Committee; Administration of Plan
---------------------------------
3.1 Administration. The Plan will be administered by a Committee
--------------
comprised of such persons designated by the Chief Executive Officers not later
than January 15 of each Year, provided, however, that the members of the
Committee shall consist of the Chief Operating Officer of the Company, the Chief
Financial Officer and the Vice President of Human Resources of the Company in
the event that the Chief Executive Officers shall fail to designate the members
of the Committee by such date. Notwithstanding, the above, if the Chief
Executive Officers wish, they may designate different Committee(s) to
administer the Plan insofar as it applies to different divisions of the DK
Companies. The Committee will have exclusive power to designate Participants to
participate in the Plan on such basis and for such period(s) as the Committee
shall determine in its sole discretion.
3.2 Authority of the Committee. The Committee shall have the
--------------------------
authority to establish, adopt, and revise such rules, regulations and
procedures, and to make all determinations, relating to the allocation of
amounts payable to Participants under the Plan as it, in its sole discretion,
may deem necessary or advisable.
3.2.1 The Committee shall take into account such factors as
it deems relevant in determining the Bonus, in accordance with Sections 4, 5 and
6 hereof, for Participants who work for more than one Division.
3.3 Interpretation of the Plan. The Committee's interpretation of
--------------------------
the Plan, including but not limited to, the selection of Participants, the
selection of Bonus Criteria, the determination and calculation of any Bonus to
any Participant hereunder, and all decisions and determinations with respect
thereto, shall be final, binding and conclusive on all Participants and other
interested parties.
3.4 Committee Action. All action taken by the Committee shall be
----------------
taken by vote of not less than a majority of all Committee members. The
Committee shall not have the right to amend the Plan in a manner adverse to any
Participant without the
3
<PAGE>
approval of the Chief Executive Officers, subject to the provisions of Section
10.1.1.
4. Selection of Participants; Establishment of Bonus Criteria, Target
------------------------------------------------------------------
Bonus Criteria Allocations and Adjustments.
- ------------------------------------------
4.1 Selection of Participants. Subject to Section 4.3, not later
-------------------------
than January 31 of each Year (or June 30 with regard to any employee of a DK
Company whose employment commenced after January 31 of such Year), the Committee
shall, in its sole discretion, designate the Participants in the Plan for that
Year.
4.2 Establishment of Target Bonus, Bonus Criteria, Target Bonus
-----------------------------------------------------------
Criteria Allocations, and Adjustments for each Participant. Subject to Section
- ----------------------------------------------------------
4.3, not later than January 31 of each Year (or June 30 with regard to any
employee of a DK Company whose employment commenced after January 31 of such
Year), with regard to each Participant for such Year, the Committee shall, in
its sole discretion:
4.2.1 assign a Target Bonus;
4.2.2 assign Bonus Criteria and Target Bonus Criteria
Allocations (which may consist of any one or more of the Bonus Criteria);
4.2.3 determine what factors or adjustments, if any, shall
be used to calculate the Bonus; and
4.2.4 deliver to such Participant a written statement
setting forth the Target Bonus, Bonus Criteria and Target Bonus Criteria
Allocations applicable to such Participant and explaining in reasonable detail
any factors or adjustments to be taken into account in the relevant
calculations.
4.3 Revisions if Budget Approved after January 31.
---------------------------------------------
Notwithstanding the foregoing, if the Committee shall have taken the action
specified in Sections 4.1 and 4.2 by January 31 of any Year and the budget for
the DK Companies is approved thereafter, the Committee shall have the right to
revise and, if necessary, rescind any such action taken with regard to such
Participant (including such Participant's designation as such), within thirty
(30) days after the budget shall have been approved.
5. Determination of Earned Bonus Criteria (Other than Accomplishments).
-------------------------------------------------------------------
All Earned Bonus Criteria for each Year (other than Accomplishments), shall be
determined (the "Annual Determination") by the Chief Financial Officer in
accordance with U.S. generally accepted accounting principles ("GAAP"), and the
DK Companies accounting practices, consistently applied, and shall be reviewed
following each Year by the Accountants. In preparing and reviewing the Annual
Determination the Chief Financial Officer and
4
<PAGE>
the Accountants may adjust or amend the financial and accounting reports and
results submitted by any Division as they may deem necessary to reflect GAAP and
the Company's accounting practices, consistently applied. The Annual
Determination for each Participant shall be provided by the Chief Financial
Officer to the Committee not later than 15 days after completion of the audited
financial statements for the DK Companies.
6. Determination of Actual Accomplishments. Within 30 days after the
---------------------------------------
Committee receives an Annual Determination, it shall review each Participant's
performance for the Year to which the Annual Determination relates and it shall
determine, in its sole discretion, such Participant's actual Accomplishments for
such Year. In so doing, the Committee shall take into account such factors as
it may deem relevant, including without limitation such Participant's individual
importance to the DK Companies, the relative importance to the DK Companies of
such Participant's Division, such Participant's performance and the evaluation
of such Participant's supervisors.
7. Determination of Bonus. Within 15 days after the Committee determines
----------------------
the actual Accomplishments for each Participant, the Committee shall deliver a
written statement to the Chief Financial Officer, the Chief Executive Officers,
and each Participant setting forth the dollar amount awarded to such Participant
with regard to each of the Earned Bonus Criteria determined for such
Participant, the total Bonus payable to such Participant under this Plan, and
the amount of the adjustments made to payments pursuant to Section 8.
7.1 Any Participant whose employment by a DK Company has commenced
after January 1 but before July 1 of any Year shall be entitled to receive a
pro-rata portion of the Bonus for such Year, determined by multiplying the
amount of the Bonus to which such Participant would have been entitled had he
been employed by such DK Company for the entire Year (and remained so employed
on the Payment Date) by a fraction, the numerator of which is the number of days
during such Year that he was employed by such DK Company, and the denominator of
which is 365.
8. Payment of Bonus.
----------------
8.1 Payment of each Participant's Bonus will be made by the DK
Company which employs such Participant by not later than the tenth business day
(the "Payment Date") following receipt by the Chief Financial Officer of the
Committee's written statement as to the calculation thereof in accordance with
Section 7; provided, that with regard to a Participant on a leave of absence
--------
authorized by law or by such DK Company the Payment Date shall be the date that
such Participant resumes full time employment with such DK Company.
5
<PAGE>
8.2 Any such payments shall be net of:
8.2.1 applicable withholdings for payroll taxes and other
payroll deductions; and
8.2.2 any bonus or other incentive compensation payable to
such Participant pursuant to such Participant's Employment Agreement (or any
other agreement providing therefor); provided, that if the Bonus payable
--------
hereunder is less than any such other bonus or incentive compensation such DK
Company shall be obligated to pay the full amount of such other bonus or
incentive compensation and no part of the Bonus otherwise payable hereunder.
9. Limitations on Right to Payment. Except as provided in Section 9.1
-------------------------------
below, a Participant shall have no right to receive payment of any Bonus, and
such payment shall be forfeited, unless such Participant remains an employee of
a DK Company in good standing (i.e., not subject to any notice of prospective
----
termination) through the last day of the Year to which such Bonus relates and on
the Payment Date (regardless of the cause of such Participant's termination,
including death, disability or other termination).
9.1 Non-Competition; Forfeiture; Offset; Prohibited Payments.
--------------------------------------------------------
9.1.1 Notwithstanding anything to the contrary contained
herein, each Participant's entitlement to a Bonus shall be conditioned upon and
subject to such Participant's full and continuing compliance with the provisions
of any Employment Agreement or Restrictive Agreement between such Participant
and any DK Company. Without limiting any rights that any DK Company may have
thereunder or otherwise, at law or in equity, the breach by a Participant of any
Employment Agreement or Restrictive Agreement shall result in the immediate
forfeiture of any further amounts payable under the terms of this Plan. No part
of such forfeited amount will be distributed to any of the other Participants.
9.1.2 Notwithstanding anything to the contrary contained
herein, if, at the time that a DK Company is obligated to make any payment (net
of amounts deducted pursuant to Section 8) to a Participant under this Plan,
such Participant is indebted to any DK Company, the DK Company so obligated may
offset against all or part of any such payments the amount of such indebtedness
until the full amount of such indebtedness has been repaid.
9.1.3 Notwithstanding anything to the contrary contained
herein, no DK Company shall be obligated to make any payment otherwise required
by this Plan if, at the time that such DK Company is obligated to do so, such DK
Company is prohibited from making such payment by law or by any loan or
financing agreement to which any DK Company is subject.
6
<PAGE>
10. Amendment and Termination of Plan; Vesting.
------------------------------------------
10.1 Amendment of Plan; Vesting. The Plan may be amended by the
--------------------------
Committee in any respect for any reason or no reason at any time.
10.1.1 If the Plan is amended after January 31 of any Year,
(i) such amendments shall not be effective with regard to such Year and (ii)
Participants will be eligible to receive 100% of the Bonus they would otherwise
be eligible to receive hereunder for such Year notwithstanding such amendment.
10.1.2 Notwithstanding any of the provisions of the Plan, in
the event of a merger, reorganization or other consolidation of any or all of
the DK Companies or of some or all of the partners of any or all of the DK
Companies (including, but not limited to, a transfer of the equity interests in
a partner to a corporation in connection with an initial public offfering
relating to the DK Companies) or of any similar type of transaction entered into
in connection with a public offering relating to the DK Companies, the Committee
shall make such adjustments in determining the Bonus as it deems appropriate, in
its sole discretion.
10.2 Termination of Plan by Company; Vesting. The Plan may be
---------------------------------------
terminated by the Company for any reason or no reason at any time.
10.2.1 If the Plan is terminated prior to January 31 any
Year, no amounts will be payable hereunder to any Participant with regard to
such Year. If the Plan is terminated after January 31 of any Year, Participants
will be eligible to receive 100% of the Bonus they would otherwise be eligible
to receive hereunder for such Year notwithstanding such termination.
11. Miscellaneous.
-------------
11.1 Definitions/Calculations. None of the terms defined herein
------------------------
nor the calculations made pursuant to the terms of this Plan shall be binding
upon any DK Company for any purpose other than for the purposes hereof,
including, without limitation, the definitions, determinations or calculations
of Earned Bonus Criteria and Target Bonus Criteria Allocations.
11.2 No Responsibility for Action of the Committee. No DK Company
---------------------------------------------
shall have any liability or obligation for any act or omission of the Committee
hereunder.
11.3 No Right to Continued Employment or Participation in Plan.
---------------------------------------------------------
The existence of the Plan or the participation herein by any Participant shall
not give any Participant any right to continue in the employ or service of any
DK Company, and the right
7
<PAGE>
of the DK Companies to terminate the employment of a Participant at any time,
with or without notice, for any or no reason, is specifically reserved, except
as might otherwise be provided in a Participant's Employment Agreement. No
person shall have any claim or right to be made a Participant under the Plan.
No person shall have any claim or right to be made a Participant under the Plan
in any Year by virtue of participation in the Plan in a previous Year.
11.4 No Rights as an Equity Owner. Nothing contained herein shall
----------------------------
be deemed to confer upon any Participant or other person the rights of an owner
of any equity interest in any DK Company.
11.5 Non-Transferability. No right or interest of any Participant
-------------------
in the Plan shall be assignable or transferable, or subject to any lien.
11.6 No Duty of Disclosure or Right to Information. No DK Company
---------------------------------------------
shall have any duty or obligation to affirmatively disclose to any Participant,
and no Participant shall have the right to be advised of or to review, any
information regarding any DK Company to which such Participant does not
ordinarily have access in connection with the performance of his duties and
responsibilities as an officer or employee of any of the DK Companies at any
time prior to, upon, or in connection with the determination of the amount of
any payment to be made to the Participant hereunder except as expressly provided
herein (including without limitation any documents, information or calculations
prepared by the Accountants or the Chief Financial Officer in connection with
the Annual Determination).
11.7 Survival. The provisions of Sections 9, 10 and 11.6 will
--------
survive the termination of the Plan.
11.8 Withholding. Each DK Company shall be entitled to withhold
-----------
from any amounts payable to Participants under the Plan, such taxes and other
amounts as may be required by applicable law.
11.9 Tax Liability. No DK Company shall have any liability for any
-------------
tax imposed on a Participant as a result of amounts paid or payable to such
Participant under the Plan.
11.10 Unfunded Character of the Plan. The benefits payable by each
------------------------------
DK Company under the Plan shall be paid by such company out of its general
assets.
11.11 Governing Law. The rights and obligations of all persons
-------------
affected hereby shall be construed and determined in accordance with the laws of
the State of New York and the place of administration of the Plan shall be
conclusively deemed to be within the State of New York.
8
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Combined Financial Data" and to the use of our reports dated April
16, 1996, relating to the predecessor combined financial statements in the
Registration Statement (Form S-1 No. 333-3600) and related Prospectus of Donna
Karan International, Inc. for the registration of 10,750,000 shares of its
Common Stock.
Ernst & Young LLP
New York, New York
June 6, 1996
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, Tomio Taki, does
hereby make, constitute and appoint each of Frank R. Mori, Daniel G. Bergstein
and Leigh P. Ryan, or any nominee of any of them (each, an "Attorney") his true
and lawful Attorney-in-Fact for the undersigned, on his behalf and in his name
or in the Attorney's own name or names to do any and all things and to execute
any and all notices, agreements, corporate resolutions, instruments,
certificates, or documents of any kind which such Attorney may deem necessary or
advisable in connection with (i) any corporate or partnership action taken or
proposed to be taken by any corporation or partnership of which Tomio Taki
serves as a director, officer, stockholder or partner, (ii) the proposed
amendment to the Amended and Restated Credit Agreement among The Donna Karan
Company, certain other borrowers and the financial institutions party thereto,
(iii) the proposed initial public offering (the "Offering") of common stock of
Donna Karan International Inc., a Delaware corporation (the "Company"), (iv) the
proposed amendment, termination or restructuring of certain partnerships and
corporations affiliated with the Company (the "Restructuring"), (v) the proposed
escrow arrangement contemplated in connection with the Offering and the
Restructuring, and (vi) all matters relating to, or deemed necessary or
appropriate by such Attorney in connection with any of the foregoing.
This Power of Attorney shall be irrevocable until December 31, 1996 and
shall be at all times both during and after such period conclusively binding on
the undersigned in favor of third parties who have not received notice of
revocation hereof.
The undersigned irrevocably and unconditionally undertakes to indemnify the
Attorneys and each of their nominees and agents and their estates against all
actions, proceedings, claims, costs, expenses and liabilities of every
description arising from the exercise, or the purported exercise, in good faith
of any of the powers conferred by this Power of Attorney. This Power of
Attorney shall be governed by and construed in accordance with the laws of the
State of New York.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this ___ day of May, 1996.
/s/ Tomio Taki
------------------------
Tomio Taki
Witnessed by:
- ----------------------------
Name:
