<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1996
REGISTRATION NO. 333-3600
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
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. DAVIS POLK &
1585 BROADWAY NEW YORK, NEW YORK 10036 WARDWELL 450 LEXINGTON AVENUE NEW
(212) 969-3000 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....... $265,794,000 $91,654(2)
</TABLE>
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
(1) Estimated pursuant to Rule 457 solely for the purpose of calculating the
registration fee.
(2) 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 May 28, 1996
10,750,000 Shares
Donna Karan International Inc.
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 $ AND
$ PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS
CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
-----------
THE COMPANY INTENDS TO MAKE APPLICATION TO LIST THE COMMON STOCK ON THE NEW
YORK STOCK EXCHANGE UNDER THE SYMBOL "DK."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 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................. 3
Risk Factors....................... 11
Reorganization..................... 19
Use of Proceeds.................... 21
Dividend Policy.................... 21
Capitalization..................... 22
Dilution........................... 24
Pro Forma Combined Financial Infor-
mation............................ 26
Selected Combined Financial Data... 30
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 31
Business........................... 38
Management......................... 58
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain Relationships and Related Transactions........................ 66
Principal Stockholders................................................ 69
Description of Capital Stock.......................................... 70
Shares Eligible for Future Sale....................................... 73
Certain United States Federal Tax
Consequences to Non-United States Holders of Common Stock............ 74
Underwriters.......................................................... 77
Legal Matters......................................................... 80
Experts............................................................... 80
Additional Information................................................ 80
Glossary.............................................................. 81
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."
2
<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.
3
<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.
4
<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. Combined
expenditures by the Company and its product licensees on advertising, public
relations, and marketing of the Company's products totaled $44.2 million in
1995 (and cumulatively, $124.9 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.
5
<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.
6
<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)............. 20,523,488 Shares
Use of Proceeds(2)..........
The net proceeds of the Offering will be used to
pay: (i) 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)
approximately $70.0 million to the Company's
lenders to repay the term loans under the
Company's Credit Agreement (as defined herein)
and to reduce the amount outstanding under the
Company's revolving line of credit; (iii)
approximately $17.4 million (approximately $26.9
million if the Underwriters' over-allotment
option is exercised in full) to members of the
Takihyo Group as partial consideration for the
contribution of their interests in the DK
Companies to the Company in connection with the
Reorganization; (iv) $5.0 million to Stephen L.
Ruzow, the President of the Company, representing
a one-time payment pursuant to his employment
agreement; and (v) an estimated $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 supersede
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). 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."
Proposed New York Stock
Exchange symbol............ "DK"
- - --------
(1) Excludes an aggregate of 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 at the initial public offering price
on the effective date of the Offering. Also excludes an aggregate of
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) Assumes an initial public offering price of $21.50 and no exercise of the
Underwriters' over-allotment option. If the initial public offering price
is other than $21.50 or if the Underwriters' over-allotment option is
exercised in whole or in part, the Common Stock to be outstanding after the
Offering and the amount of cash to be paid to members of the Takihyo Group
will be different. See "Reorganization."
7
<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 January 1, 1995. 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................................................. (926) (32) (152)
---------- ---------- ----------
Income before provision for income taxes.............................. 32,043 7,196 10,874
Provision for income taxes............................................ 13,668 3,108 4,696
---------- ---------- ----------
Net income............................................................ $ 18,375 $ 4,088 $ 6,178
========== ========== ==========
Pro forma per share information(7).................................... $ 1.11 $ .25 $ .37
========== ========== ==========
Number of common shares assumed outstanding(7)........................ 16,497,278 16,497,278 16,497,278
</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 $141,066
Total assets.......................................... 226,267 239,087
Total long-term debt, including current portion....... 72,724 2,724
Stockholders' equity and partners' capital............ 91,791 177,231
</TABLE>
8
<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 approximately $70.0 million 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 $1.5 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 approximately $70.0
million 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 $17.7 million (approximately $10.0 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 (estimated at $5.0 million), and (d)
the write-off of deferred financing costs related to the Company's Credit
Agreement ($2.7 million). In addition, the unaudited pro forma statement of
income data does not include 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.
9
<PAGE>
(7) Pro forma per share information is based on 9,773,488 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 and (b) the sale of 877,016 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 $17.4 million to members
of the Takihyo Group as partial consideration for the contribution of their
interests in the DK Companies to the Company in connection with the
Reorganization.
Supplementary pro forma per share information for the year ended December
31, 1995, and quarters ended April 2, 1995 and March 31, 1996 are $1.38,
$.31, and $.46, respectively, based on 9,773,488 shares of Common Stock
outstanding prior to the Offering, increased by the sale of 3,528,226
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 $70.0 million outstanding under the Company's credit
facility.
(8) The unaudited pro forma, as adjusted, balance sheet data reflects (a) the
Reorganization, (b) the issuance of the Distribution Notes and the
liability to members of the Takihyo Group for partial consideration of
their contribution of the DK Companies to the Company in connection with
the Reorganization, (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
as described under "Use of Proceeds," (e) the non-recurring pre-tax charge
of approximately $17.7 million (approximately $10.0 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.
10
<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, 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 TRADEMARKS
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, restate, and supersede 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 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 products
and offering of services, other than products and services for which Gabrielle
Studio has retained the right to use or license such trademarks. See "Certain
Relationships and Related Transactions--License
11
<PAGE>
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 and the sales and promotional
materials used with respect to the products bearing the Licensed Marks 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 45 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."
The Company devotes substantial resources to the registration, maintenance,
and protection of its trademarks (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 trademarks 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 trademark rights. There can be no assurance that all 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."
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.
12
<PAGE>
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
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
13
<PAGE>
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 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
14
<PAGE>
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 estimated at $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 are packaged.
Upon the closing of the Offering, Mr. Weiss will grant to the Company an
exclusive, royalty-free, worldwide, in perpetuity license for the use of the
designs for the bottles and a non-exclusive, royalty-free, worldwide license
for the term of the patents for use of the utility patents for the bottles.
Mr. Weiss will receive approximately $ , 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, and the KW Trusts will beneficially own in the
aggregate approximately 25.8% of the outstanding Common Stock, assuming an
initial public offering price of $21.50 per share and 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."
MATERIAL BENEFITS TO PRINCIPAL STOCKHOLDERS AND KEY PERSONNEL
The net proceeds of the Offering will be used to pay: (i) approximately
$58.0 million to Mr. Tomio Taki, Mr. Frank Mori, Takihyo Inc., and certain
affiliates of Messrs. Taki and Mori (collectively, the "Takihyo Group"), and
$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
15
<PAGE>
previously have been paid; (ii) approximately $70.0 million to the Company's
lenders to repay the term loans under the Company's Credit Agreement and to
reduce the amount outstanding under the Company's revolving line of credit;
(iii) assuming an initial public offering price of $21.50 per share,
approximately $17.4 million (approximately $26.9 million if the Underwriters'
over-allotment option is exercised in full) to certain members of the Takihyo
Group as partial consideration for the contribution of their interests in the
DK Companies to the Company in connection with the Reorganization; (iv) $5.0
million to the President of the Company representing a one-time payment
pursuant to his employment agreement; and (v) an estimated $5.0 million to
Gabrielle Studio, representing a one-time payment made in connection with the
License Agreement. In addition to the cash to be received by members of the
Takihyo Group from the net proceeds of the Offering, as part of the
Reorganization Ms. Karan, Mr. Weiss, the KW Trusts, and Gabrielle Studio,
considered as a group (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, assuming an initial public offering price
of $21.50 per share, Ms. Karan, Mr. Weiss, and the KW Trusts will beneficially
own, in the aggregate, approximately 25.8% of the outstanding Common Stock,
and the Takihyo Group will beneficially own approximately 21.8% of the
outstanding Common Stock (24.4% and 18.6%, respectively, of the outstanding
Common Stock if the Underwriters' over-allotment option is exercised in full).
As a result of the beneficial ownership of their stock, Ms. Karan, Mr. Weiss,
the KW Trusts, 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."
Ms. Karan, Mr. Weiss, and the KW Trusts 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
16
<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 Company intends to make application to list the Common Stock on the New
York Stock Exchange, but there can be no assurance that such application will
be approved. 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"). 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, assuming an initial public offering price
of $21.50 per share, the Company will have 20,523,488 shares of Common Stock
outstanding (21,694,193 shares if the Underwriters' over-allotment option is
exercised in full), of which 10,750,000 shares (12,362,500 shares if the
Underwriters' over-allotment option is exercised in full) 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. All the remaining 9,773,488 shares (9,331,693
shares if the Underwriters' over-allotment option is exercised in full) 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 and
a description of the shares available for future sale if the initial public
offering price is other than $21.50 per share. See "Shares Eligible for Future
Sale."
Upon completion of the Offering, assuming an initial public offering price
of $21.50 per share and no exercise of the Underwriters' over-allotment
option, Ms. Karan, Mr. Weiss, and the KW Trusts will beneficially own an
aggregate of 5,290,846 shares of restricted Common Stock and the Takihyo Group
will beneficially own 4,482,642 shares of restricted Common Stock (including
441,795 shares which the Takihyo Group has the right to receive if the
Underwriters' over-allotment option is not exercised). Assuming an initial
public offering price
17
<PAGE>
of $ per share and no exercise of the Underwriters' over-allotment option,
upon completion of the Offering the Takihyo Group will beneficially own
shares of restricted Common Stock (including shares which the
Takihyo Group has the right to receive if the Underwriters' over-allotment
option is not exercised). Assuming an initial public offering price of $ per
share and no exercise of the Underwriters' over-allotment option, upon
completion of the Offering, the Takihyo Group will beneficially own
shares of restricted Common Stock. If the Underwriters' over-allotment option
is exercised in full, the Takihyo Group will beneficially own 4,040,847 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."
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 will have the right to
join 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. It is expected that the
credit facility which the Company will enter into shortly following 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 $12.89 per share in the net tangible book value of the Common
Stock from the public offering price. See "Dilution."
18
<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 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, the Company will have
only one class of Common Stock authorized. 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 allocation of the amounts and forms of consideration to be received by
the Karan/Weiss Group and the Takihyo Group pursuant to the Contribution
Agreement were 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 5,290,846 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.
19
<PAGE>
As consideration for the contribution of their interests in the DK
Companies, members of the Takihyo Group will receive a combination of cash and
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.
Upon completion of the Offering, assuming an initial public offering price
of $21.50 per share and no exercise of the Underwriters' over-allotment
option, the Takihyo Group will beneficially own 4,482,642 shares of restricted
Common Stock (including 441,795 shares which the Takihyo Group has the right
to receive if the Underwriters' over-allotment option is not exercised).
Assuming an initial public offering price of $ per share and no exercise of
the Underwriters' over-allotment option, upon completion of the Offering the
Takihyo Group will beneficially own shares of restricted Common Stock
(including shares which the Takihyo Group has the right to receive if the
Underwriters' over-allotment option is not exercised). Assuming an initial
public offering price of $ per share and no exercise of the Underwriters'
over-allotment option, upon completion of the Offering the Takihyo Group will
beneficially own shares of restricted Common Stock. If the
Underwriters' over-allotment option is exercised in full, the Takihyo Group
will beneficially own 4,040,847 shares of restricted Common Stock.
Upon completion of the Offering, assuming an initial public offering price
of $21.50 per share, the amount of cash to be received by the Takihyo Group
would be approximately $17.4 million (approximately $26.9 million, if the
Underwriters' over-allotment option is exercised in full). If the initial
public offering price is $ per share, the amount of cash to be received by
members of the Takihyo Group would be approximately $ million (approximately
$ million, if the Underwriters' over-allotment option is exercised in full).
If the initial public offering price is $ per share, the amount of cash to
be received by members of the Takihyo Group would be approximately $
million, whether or not the Underwriters' over-allotment option is exercised.
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.
20
<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 will
use such proceeds to pay: (i) 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) approximately $70.0 million to the Company's lenders to repay the
term loans under the Company's Credit Agreement and to reduce the amount
outstanding under the Company's revolving line of credit; (iii) approximately
$17.4 million (approximately $26.9 million if the Underwriters' over-allotment
option is exercised in full) to members of the Takihyo Group received by them
as consideration for the contribution of their interests in the DK Companies
to the Company in connection with the Reorganization; (iv) $5.0 million to
Stephen L. Ruzow, the President of the Company, pursuant to his employment
agreement; and (v) an estimated $5.0 million to Gabrielle Studio, representing
a one-time payment made in connection with the License Agreement (which by its
terms will restate, amend, and supersede 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). To the extent that there are excess net proceeds after
payment in full of all amounts payable to the Takihyo Group, such excess net
proceeds will be used by the Company 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. The amount of cash to be distributed to members of the
Takihyo Group may be different if the initial public offering price is other
than $21.50. See "Reorganization" for a description of the manner in which the
number of shares of Common Stock and amount of cash to be received by members
of the Takihyo Group will be determined, "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. It is expected that the credit facility which the Company will
enter into shortly following the closing date 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."
21
<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
the liability to members of the Takihyo Group for partial consideration for
the contribution of their interests in the DK Companies to the Company in
connection with the Reorganization, 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 $17.7 million (approximately
$10.0 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 (estimated at $5.0 million),
and (d) the write-off of deferred financing costs related to the Company's
Credit Agreement ($2.7 million). 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 --
Obligation for Takihyo
contribution(4)....................... -- 17,400 --
-------- -------- --------
Total current debt................... $ 7,759 $139,643 $ 259
======== ======== ========
Long-term debt........................... $ 64,965 $ 64,965 $ 2,465
Stockholders' equity and partners'
capital:
Preferred stock, $.01 par value;
1,000,000 shares authorized;
none issued and outstanding........... -- -- --
Common stock, $.01 par value;
shares authorized;
20,523,488 shares outstanding
proforma, as adjusted(5)(6)........... -- 98 205
Common stock of Intermediate Entities.. 1,146 -- --
Additional paid-in capital............. -- (24,649) 177,068
Retained earnings and partners' capital
(deficit)............................. 90,687 -- --
Cumulative translation adjustment...... (42) (42) (42)
-------- -------- --------
Total stockholders' equity(7)........ 91,791 (24,593) 177,231
-------- -------- --------
Total capitalization................. $156,756 $ 40,372 $179,696
======== ======== ========
</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, the recording of a deferred
tax asset concurrent with becoming subject to Federal and additional state
and local income taxes, and the liability to members of the Takihyo Group
for partial consideration for the contribution of their interests in the
DK Companies to the Company in connection with the Reorganization, but
without giving effect to the consummation of the Offering.
22
<PAGE>
(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 liability to members of the
Takihyo Group for the partial consideration for the contributions of their
interests in the DK Companies to the Company in connection with the
Reorganization, 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. 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) Represents the amount owed by the Company to the Takihyo Group as partial
consideration for the contribution of their interests in the DK Companies
to the Company in connection with the Reorganization.
(5) Excludes an aggregate of 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 at the initial public
offering price on the effective date of the Offering. Also excludes an
aggregate of 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."
(6) 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.
(7) 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 an estimate of million representing 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. Subject to such consent being
obtained, the Distribution Notes will be prepaid on the closing date of the
Offering out of the proceeds of the Offering. See "Use of Proceeds."
23
<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 10,581,692 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 $8.39 per share.
After giving effect to the issuance of the Distribution Notes, the liability
to members of the Takihyo Group for partial consideration for the contribution
of their interests in the DK Companies, 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 ($27.6 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, recording the liability to members of the Takihyo
Group for partial consideration for the contribution of their interests in the
DK Companies, 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 $17.7 million (approximately $10.0 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 $176.8
million, or $8.61 per share of Common Stock. This represents an immediate
increase in pro forma net tangible book value as adjusted of $11.04 per share
of Common Stock to existing stockholders and an immediate dilution of $12.89
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)........ $ 8.39
======
Pro forma net tangible book value deficit per share at March
31, 1996, after giving effect to the issuance of the
Distribution Notes, the liability to members of the Takihyo
Group and the recording of a deferred tax asset.............. (2.61)
Increase in net tangible book value per share attributable to
completion of the Reorganization and the Offering............ 11.22
------
Pro forma net tangible book value as adjusted per share after
giving effect to the Reorganization and the Offering(2)(3)(4).. 8.61
------
Dilution per share to purchasers in the Offering(5)............. $12.89
======
</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 10,581,692 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, Ms. Karan, Mr. Weiss, and the KW
Trusts will own beneficially 5,290,846 shares. The consideration to be
received by the members of the Takihyo Group for the contribution of their
interests in the DK Companies to the Company is equal to that to be
received by Ms. Karan, Mr. Weiss, and the KW Trusts. Therefore, solely for
purposes of computing dilution it is assumed that if members of the
Takihyo Group receive the maximum number of shares of Common Stock to
which they are entitled in the Reorganization and after giving effect to
the Offering (assuming no exercise of the Underwriters' over-allotment
option), members of the Takihyo Group would have owned beneficially
4,482,642 shares upon completion of the Offering and that such shares,
along with those to be beneficially
24
<PAGE>
owned by Ms. Karan, Mr. Weiss, and the KW Trusts, would have been issued
and outstanding as of March 31, 1996.
(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 20,523,488 shares that will be outstanding,
including 441,795 shares that either will be sold by the Company pursuant
to the exercise of the Underwriters' over-allotment option or, to the
extent such over-allotment option is not exercised, issued by the Company
to the Takihyo Group. 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.
(4) Excludes an aggregate of 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 at 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 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 $ per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 9,773,488 48% $ 0(1) 0% $ 0.00
New investors............. 10,750,000 52% $231,125,000 100% $21.50
---------- --- ------------ ---
Total................. 20,523,488 100% $231,125,000 100%
========== === ============ ===
</TABLE>
- - --------
(1) 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."
25
<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.
26
<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) 6,150 (d) (926)
574 (e)
Gain on sale of interests in affiliate.. 18,673 (18,673)(a) --
-------- ----------
Income before provision for income
taxes.................................. 56,073 32,043
Provision for income taxes.............. 2,398 11,270 (f) 13,668
-------- ----------
Pro forma per share information......... $ 53,675 $ 18,375
======== ==========
Net income per share.................... $ 1.11
==========
Number of common shares assumed
outstanding(g)......................... 16,497,278
==========
</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
approximately $70.0 million of the proceeds from the Offering to reduce
the actual outstanding indebtedness, up to $70.0 million, 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 9,773,488 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 and (b) the sale of 877,016 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 $17.4 million to
members of the Takihyo Group as partial consideration for the contribution
of their interests in the DK Companies to the Company in connection with
the Reorganization.
Supplementary pro forma per share information for the year ended December
31, 1995 is $1.38 based on 9,773,488 shares of Common Stock outstanding
prior to the Offering, increased by the sale of 3,528,226 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
$70.0 million of the amounts outstanding under the Company's credit
facility.
27
<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) 1,575 (c) (152)
320 (d)
-------- ----------
Income before provision for income taxes.. 12,391 10,874
Provision for income taxes................ 690 4,006 (e) 4,696
-------- ----------
Net income................................ $ 11,701 $ 6,178
======== ==========
Pro forma per share information........... $.37
Number of common shares assumed outstand-
ing...................................... 16,497,278
<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........... $.25
Number of common shares assumed outstand-
ing...................................... 16,497,278
</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 approximately $70.0
million of the proceeds from the Offering to reduce the actual outstanding
indebtedness, by $70.0 million 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
28
<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.
Pro forma net income is based on 9,773,488 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 and (b)
the sale of 877,016 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 $17.4 members to the Takihyo Group as partial
consideration for the contribution of their interests in the DK Companies to
the Company in connection with the Reorganization.
Supplementary pro forma net income per the share for the quarters ended
April 2, 1995 and March 31, 1996 are $.31 and $.46, respectively, based on
9,773,488 shares of Common Stock outstanding prior to the Offering, increased
by the sale of 3,528,226 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 $70.0 million of the amounts outstanding
under the Company's Credit Agreement.
28_1
<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.
Pro forma net income is based on 9,773,488 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 and (b)
the sale of 877,016 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 $17.4 members to the Takihyo Group as partial
consideration for the contribution of their interests in the DK Companies to
the Company in connection with the Reorganization.
Supplementary pro forma net income per the share for the quarters ended
April 2, 1995 and March 31, 1996 are $.31 and $.46, respectively, based on
9,773,488 shares of Common Stock outstanding prior to the Offering, increased
by the sale of 3,528,226 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 $70.0 million of the amounts outstanding
under the Company's Credit Agreement.
28_1
<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) $ 7,385
(116,000)(c)
(70,000)(d)
(17,400)(e)
(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 (20) 200,457
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 $ (2,680) $239,087
======== ======== ======== ========= ========
Current liabilities:
Accounts payable...... $ 38,998 $ 38,998 $ 38,998
Accrued expenses and
other current
liabilities.......... 22,754 22,754 $ 5,000 (i) 20,134
(7,620)(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) --
Obligation for Takihyo
contribution......... 17,400 (a) 17,400 (17,400)(e) --
-------- -------- -------- --------- --------
Total current lia-
bilities........... 69,511 131,884 201,395 (142,004) 59,391
Long-term debt.......... 64,965 64,965 (62,500)(d) 2,465
Stockholders' equity and
partners' capital:
Common stock of Inter-
mediate Entities..... 1,146 (1,146)(k) -- --
Common Stock.......... -- 98 (k) 98 107 (b) 205
Additional paid-in
capital.............. -- (23,797)(a) (24,649) 213,273 (b) 177,068
(17,400)(a) (10,040)(j)
15,500 (g) (1,516)(c)
1,048 (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 (116,384) (24,593) 201,824 177,231
-------- -------- -------- --------- --------
$226,267 $ 15,500 $241,767 $ (2,680) $239,087
======== ======== ======== ========= ========
</TABLE>
- - --------
(a) Represents the Distribution Notes issued on April 16, 1996 to Takihyo Inc.
and the Principals or their affiliates and the liability to members of the
Takihyo Group for partial consideration for the contribution of their
interests in the DK Companies to the Company in connection with the
Reorganization. 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 an estimate of cash distributions of million 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 amount paid to the Takihyo Group as partial consideration
for the contribution of their interests in DK Companies to the Company in
connection with the Reorganization.
(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 $5 million in connection with the License Agreement.
(g) Represents a deferred tax asset of approximately $15.5 million, net of
certain state and local deferred tax assets, 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 (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.
29
<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.
30
<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 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 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 $17.7 million (approximately $10.1 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 (estimated at $5.0 million), and (iv) the write-off of
deferred financing costs relating to the Company's Credit Agreement ($2.7
million). 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.
31
<PAGE>
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 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 0.8%
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%.
32
<PAGE>
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 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
33
<PAGE>
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>
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
34
<PAGE>
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 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.
35
<PAGE>
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. Shortly following the Offering, the Company expects to enter
into a new credit agreement. Although there can be no assurance, the Company
anticipates that the new credit agreement will have terms more favorable to
the Company than those of its existing Credit Agreement. Such new credit
agreement is expected to be a three-year $150.0 million revolving credit
facility. The Company anticipates that the new facility will be used to repay
any remaining amounts outstanding under the existing line of credit and for
working capital needs.
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 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.
36
<PAGE>
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.
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.
37
<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
38
<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>
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>
39
<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 consistent, classic, and sensual
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.
40
<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. 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
41
<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.
42
<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,
43
<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.
44
<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.
45
<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 11 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.
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>
46
<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.
47
<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 February 16, 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
---- ---- ---- ---- ----
(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.
48
<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 Hotel Properties Limited ("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, products
will be distributed 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, for cultural reasons, 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, who also have 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 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
49
<PAGE>
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, the Company is not entitled to distribute or sell its
apparel products in the Territories (other than Japan) other than through the
free-standing International Retail Stores in the Territories, except under
limited circumstances.
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 December 31, 1995, the Company operated 31 outlet stores in 18 states:
five in California; four each in New York and Florida; two each in Maine, New
Jersey, and Pennsylvania; and one each in Colorado, Hawaii, Indiana,
Massachusetts, Michigan, New Hampshire, New Mexico, Ohio, South Carolina,
Texas, Vermont, 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.
50
<PAGE>
SALES
As of February 16, 1996, the Company had a sales force of 136 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 account executives 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 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.
51
<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.
Combined expenditures by the Company and its product licensees on advertising,
public relations, and marketing totaled $44.2 million in 1995 (and
cumulatively, $124.9 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 February 16, 1996, the Company's Creative Services Department consisted
of 29 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 31 full-time employees as of February 16, 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
52
<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 a race car at the upcoming Indy 500 race to be held in
May 1996, 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 35
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.
53
<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.
54
<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."
55
<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 services, other than
those products and 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 February 16, 1996, the Company had approximately 1,515 employees,
including 1,270 in the United States and 245 in foreign countries. Of the
total, approximately 305 employees hold executive and administrative
positions, 115 are engaged in design, 200 are engaged in production, 430 are
engaged in sales (including the equivalent of 235 full-time sales personnel at
the various retail outlet stores), 275 are engaged in distribution, 130 are
engaged in merchandising activities, and 60 are engaged in creative services,
media, and public relations. Approximately 240 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>
56
<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 six 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 December 31, 1995, the Company operated 31 retail outlet stores in
leased premises. See "Outlet Stores" above in this section. The outlet stores
range in size from approximately 2,800 square feet to 7,200 square feet. The
leases for these stores expire between 1996 and 2004 and provide for aggregate
minimum-guaranteed annual rentals of approximately $2.5 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.
57
<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 and Chief Financial Officer
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.
58
<PAGE>
Mori has served on the Educational Foundation of the Fashion Institute of
Technology, and as a board member of The Young Playwrights Inc. and the
Purnell School. 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. 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. 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.
59
<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
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."
60
<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.
61
<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); (vii) the Company fails to pay Gabrielle Studio all amounts due
under the License Agreement; or (viii) 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
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,
62
<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 not more than
shares of Common Stock (subject to certain adjustments) may be granted from
time to time to key employees, officers, advisors, and independent consultants
to the Company or to any of its subsidiaries other than Ms. Karan, Mr. Weiss,
Mr. Mori,
63
<PAGE>
Mr. Taki, and directors who are neither officers nor employees of the Company
or its affiliates. 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 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).
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, amend them (in certain
cases only with the consent of the optionee), determine the individuals to
whom options 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 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 an optionee's rights under an option previously granted under
the Plan requires the consent of the optionee.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Prior to the consummation of the Offering, 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.
The Directors' Plan authorizes the issuance of up to 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.
64
<PAGE>
The options to purchase shares of Common Stock described above will be
exercisable on or after six months after the date of grant. Options may be
exercised only after the Eligible Director has served as a director of the
Company for at least one year. 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.
65
<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,
restate, and supersede 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 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 unrelated to the
Company's business, such as food products, restaurants, toys, and games. 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 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) 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 an estimated $5.0 million to Licensor in connection with
the License Agreement.
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
66
<PAGE>
and a non-exclusive, royalty-free worldwide license, for the term of the
patents, for the use of the utility patents for the bottles developed by Mr.
Weiss. Mr. Weiss will receive approximately $ , 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 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
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
67
<PAGE>
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
Trademarks."
68
<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 an initial public offering price of $21.50 and 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(2)
---------------- --------- ----------
<S> <C> <C>
Donna Karan(3)(4)..................................... 5,290,846 25.8%
Stephan Weiss(3)(4)................................... 5,290,846 25.8%
Frank Mori(5)......................................... 3,586,114(7) 17.5%
Tomio Taki(5)......................................... 3,586,114(7) 17.5%
Takihyo Inc.(5)....................................... 2,689,586(7) 13.1%
Stephen L. Ruzow...................................... -- --
Louis Praino.......................................... -- --
Patrick Spainhour(6).................................. -- --
David L. Bressman..................................... -- --
All directors and executive officers as a group (7
persons)(4)(5)....................................... 9,773,488(7) 47.6%
</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) 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.
(4) 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.
(5) Takihyo Inc. is beneficially owned by Mr. Taki, Mr. Mori, and their
affiliates. The shares attributed to Messrs. Taki and Mori include the
shares shown as owned by Takihyo Inc. The business address of Mr. Taki,
Mr. Mori, and Takihyo Inc. is 205 West 39th Street, New York, New York
10018.
(6) As of February 1996, Mr. Spainhour resigned from the Company.
(7) If the initial public offering price is $21.50 per share, the number of
shares which will be beneficially owned by Messrs. Taki and Mori
(including those to be owned by Takihyo Inc.) and Takihyo Inc. will be
3,586,114, 3,586,114, and 2,689,586, respectively) including 441,795
shares which the Takihyo Group has the right to receive if the
Underwriters' over-allotment option is not exercised (3,232,678,
3,232,678, and 2,424,508, respectively, if the Underwriters' over-
allotment option is exercised in full), and the number of shares that will
be held by all directors and executive officers as a group will be
9,773,488 (9,331,693 if the Underwriters' over-allotment option is
exercised in full).
69
<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. 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 provide for
authorized capital stock of 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 Company
has no plans to issue 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
70
<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 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
71
<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) those acts they would have been indemnified for if they
were acting as directors or officers and (ii) 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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
72
<PAGE>
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, assuming an initial public offering price
of $21.50 per share and no exercise of the Underwriters' over-allotment
option, Ms. Karan, Mr. Weiss, and the KW Trusts will beneficially own an
aggregate of 5,290,846 shares of restricted Common Stock and the Takihyo Group
will beneficially own 4,482,642 shares of restricted Common Stock (including
441,795 shares which the Takihyo Group has the right to receive if the
Underwriters' over-allotment option is not exercised). Assuming an initial
public offering price of $ per share and no exercise of the Underwriters'
over-allotment option, upon completion of the Offering the Takihyo Group will
beneficially own shares of restricted Common Stock (including
shares which the Takihyo Group has the right to receive if the Underwriters'
over-allotment option is not exercised). Assuming an initial public offering
price of $ per share, upon completion of the Offering the Takihyo Group
will beneficially own shares of restricted Common Stock. If the
Underwriters' over-allotment option is exercised in full, the Takihyo Group
will beneficially own 4,040,847 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."
73
<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.
74
<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.
75
<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.
76
<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 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,
77
<PAGE>
"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 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
78
<PAGE>
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 537,500 shares offered hereby for
directors, officers, employees, business associates, and related persons of
the Company. 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 provisions of Section (c) (8) of the Corporate Financing Rule under
Section 44 of Article III of the Rules of Fair practice of the National
Association of Securities Dealers, Inc. (the "NASD") apply to the Offering
since more than 10% of the net proceeds of the Offering may be paid to certain
persons associated with NASD members participating in the Offering. Section
(c) (8) requires, among other things, that the public offering price of the
securities be no higher than that recommended by a "qualified independent
underwriter," as such term is defined in Schedule E of the By-Laws of the
NASD. In accordance with such requirements, Bear, Stearns & Co. Inc. has
agreed to serve as a "qualified independent underwriter" and has conducted due
diligence and will recommend a maximum price for the Common Stock.
79
<PAGE>
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
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.
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.
80
<PAGE>
GLOSSARY
"Change in Control." For purposes of the employment agreements with Ms.
Karan and Mr.Weiss and the License Agreement, the acquisition 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 securities of the Company, or the acquisition by an
Initial Stockholder (other than members of the Karan/Weiss Group) of an
additional 5% of the voting securities of the Company over and above that
owned on the Effective 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 a
majority of the Board of Directors of the Company prior to such change.
"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 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.
81
<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 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.
82
<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 affiliate
(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..................................... 24,030
----------
Pro forma income before income taxes....... 32,043
Pro forma provision for income taxes (Note
13)....................................... 13,668
----------
Pro forma net income....................... $ 18,375
==========
Pro forma net income per common share...... $ 1.11
==========
Pro forma common shares outstanding........ 16,497,278
==========
</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 affiliate
(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 various combinations of common stock and cash
("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 5,290,846 shares of Common Stock. As
consideration for the contribution of their interests in the DK Companies,
member of the Takihyo Group will receive an aggregate of 4,040,847 shares of
Common Stock, $17.4 million in cash, assuming an initial public offering price
of $21.50 per share, and the rights to an additional 441,795 shares if the
over-allotment option is not exercised, or an additional $9.5 million in cash,
if the over-allotment is exercised in full.
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) 6,150 (iii) (926)
574 (iv)
Gain on sale of interests in affiliate.. 18,673 (18,673)(vi) --
-------- --------
Income before provision for income
taxes.................................. 56,073 32,043
Provision for income taxes.............. 2,398 11,270 (v) 13,668
-------- --------
Net income.............................. $ 53,675 $ 18,375
======== ========
</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
approximately $70.0 million of the proceeds from the Offering to reduce
the actual outstanding indebtedness, up to $70.0 million, 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 giving effect to the
liability to members of the Takihyo Group for the partial consideration for
the contribution of their interests in the DK Companies to the Company in
connection with the Reorganization 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............................................ 98
Additional Paid in Capital.............................. -- (35,488)
Retained earnings and partners' capital (deficit)....... 79,748 --
Cumulative translation adjustment....................... (48) (48)
------- --------
Total stockholders' equity and partners' capital
(deficit).............................................. $80,846 $(35,438)
======= ========
</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 Net Income Per Share
Pro forma net income per share is based upon (i) 9,773,488 shares of common
stock outstanding during the period, (ii) 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 (iii) the number of shares of common stock (877,016) 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 $17.4
million to members of the Takihyo Group received by them as partial
consideration for the contribution of their interests in the DK Companies to
the Company in connection with the Reorganization.
Supplementary pro forma net income per share is $1.38, based upon (i)
9,773,488 shares of common stock outstanding during the period and (ii) the
number of shares of common stock (3,528,226) 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 repay approximately $70.0 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.
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.
F-9
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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
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
F-10
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-11
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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>
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.
F-12
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
F-13
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-14
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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>
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.
F-15
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. SALE OF INTERESTS IN AFFILIATE
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>
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
F-16
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
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........................................................ $26,589
Foreign......................................................... 5,454
-------
$32,043
=======
</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................................................. $12,189
State and local taxes......................................... 4,925
Foreign taxes................................................. 643
-------
17,757
Deferred income taxes......................................... (4,089)
-------
$13,668
=======
</TABLE>
F-17
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 affiliate................ 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 1,517
---------- ----------
Pro forma income before income taxes.................... 7,196 10,874
Pro forma provision for income taxes.................... 3,108 4,696
---------- ----------
Pro forma net income.................................... $ 4,088 $ 6,178
========== ==========
Pro forma net income per common share................... $ .25 $ .37
========== ==========
Pro forma common shares outstanding..................... 16,497,278 16,497,278
========== ==========
</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
Obligation for Takihyo contribution................... -- 17,400
-------- --------
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.......................................... -- 98
Additional paid-in-capital............................ (24,649)
Retained earnings and partners' capital............... 90,687 --
Cumulative translation adjustment..................... (42) (42)
-------- --------
Total stockholders' equity and partners' capital.... 91,791 $(24,593)
-------- ========
$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 interest in affiliate................... (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., 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 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., D.K. 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 various combinations of common stock and cash
("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) 1,575 (iii) (152)
320 (iv)
-------- --------
Income before provision for income taxes.. 12,391 10,874
Provision for income taxes................ 690 4,006 (v) 4,696
-------- --------
Net income................................ $ 11,701 $ 6,178
======== ========
<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 approximately $70.0
million of the proceeds from the Offering to reduce the actual
outstanding indebtedness, up to $70.0 million, 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 and to the liability to members of the
Takihyo Group for the partial consideration for the contribution of their
interests in the DK Companies to the Company in connection with the
Reorganization. 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 Net Income Per Share
Pro forma net income per share is based upon (i) 9,773,488 shares of common
stock outstanding during the period, (ii) 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 (iii) the number of shares of common stock (877,016) 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 $17.4
million to members of the Takihyo Group received by them as partial
consideration for the contribution of their interests in the DK Companies to
the Company in connection with the Reorganization.
Supplementary pro forma net income per share for the quarters ended April 2,
1995 and March 31, 1996 are $.31 and $.46, respectively, based upon (i)
9,773,488 shares of common stock outstanding during the period and (ii) the
number of shares of common stock (3,528,226) 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 repay approximately $70.0 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.
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 AFFILIATE
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
------------------
MARCH 31, APRIL 2,
1996 1995
--------- --------
<S> <C> <C>
Domestic................................................ $ 9,877 $6,802
Foreign................................................. 997 394
------- ------
$10,874 $7,196
======= ======
</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
------------------
MARCH 31, APRIL 2,
1996 1995
--------- --------
<S> <C> <C>
Current income taxes:
Federal taxes........................................... $3,183 $2,802
State and local taxes................................... 1,333 1,162
Foreign taxes........................................... 50 61
------ ------
4,566 4,025
Deferred income taxes................................... 130 (917)
------ ------
$4,696 $3,108
====== ======
</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
------------------
MARCH 31, APRIL 2,
1996 1995
--------- --------
<S> <C> <C>
Federal statutory rate................................ 35.0% 35.0%
State and local taxes, net of Federal tax benefits.... 8.2 8.1
Other items, net, none of which individually exceeds
5% of Federal taxes at statutory rates............... (0.1) 0.1
----- ----
Effective tax rate.................................... 43.1% 43.2%
===== ====
</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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE INTERNATIONAL]
PROSPECTUS (Subject to Completion)
Issued May 28, 1996
10,750,000 Shares
Donna Karan International Inc.
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 $ AND $ PER SHARE. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS CONSIDERED IN DETERMINING
THE INITIAL PUBLIC OFFERING PRICE.
-----------
THE COMPANY INTENDS TO MAKE APPLICATION TO LIST THE COMMON STOCK ON THE NEW
YORK STOCK EXCHANGE UNDER THE SYMBOL "DK."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 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................. $91,654
New York Stock Exchange listing fee................................. *
NASD filing fee..................................................... 27,080
Blue Sky fees and expenses.......................................... 20,000
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Printing and engraving expenses..................................... *
Registrar and transfer agent's fee.................................. *
Miscellaneous....................................................... *
-------
Total............................................................... $ *
=======
</TABLE>
- - --------
* To be filed by Amendment.
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
those acts they would have been indemnified for if they were acting as
directors or officers.
See Item 17 below.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
See "Reorganization."
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(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(1) Form of Amended and Restated Certificate of Incorporation of the
Company
3.3(1) Form of Bylaws of the Company
5.1(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(1) Form of 1996 Stock Incentive Plan of the Company
10.3(1) Form of 1996 Non-Employee Director Stock Option Plan
10.4(1) 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
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
10.5(1) Form of License Agreement to be entered into between Gabrielle
Studio, Inc. and Donna Karan Studio
10.6(1) Form of Guaranties of License from the Company to Gabrielle Studio,
Inc.
10.7(1) Form of License Agreement to be entered into between Donna Karan
Studio and Stephan Weiss
10.8(1) Form of Employment Agreement between the Company and Donna Karan
10.9(1) Form of Employment Agreement between the Company and Stephan Weiss
10.10(1) 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(1) 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(1) Consent of Proskauer Rose Goetz & Mendelsohn LLP (included in its
opinion to be filed as Exhibit 5.1 to the Registration Statement)
27.1 Financial Data Schedule
</TABLE>
- - --------
(1) To be filed by Amendment.
*Previously filed.
(ii) Financial Statement Schedule
Report of Independent Auditors on Schedule
Schedule II--Valuation & Qualifying Accounts & Reserves
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
II-3
<PAGE>
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. 1 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 MAY 24, 1996.
Donna Karan International, Inc.
/s/ Donna Karan
By: _________________________________
DONNA KARANCHAIRMAN OF THE BOARD
AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
Chairman of the
/s/ Donna Karan Board and Chief May 24, 1996
- - ------------------------------------- Executive Officer
DONNA KARAN (principal
executive officer)
Vice Chairman and
/s/ Stephan Weiss Director May 24, 1996
- - -------------------------------------
STEPHAN WEISS
President, Chief
/s/ Stephen L. Ruzow Operating Officer, May 24, 1996
- - ------------------------------------- and Director
STEPHEN L. RUZOW
Executive Vice
/s/ Joseph B. Parsons President and Chief May 24, 1996
- - ------------------------------------- Financial Officer
JOSEPH B. PARSONS (principal
accounting and
financial officer)
Director
/s/ Frank R. Mori May 24, 1996
- - -------------------------------------
FRANK R. MORI
Director
/s/ Tomio Taki May 24, 1996
- - -------------------------------------
TOMIO TAKI
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>
REGISTRATION NO. 333-
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
EXHIBITS
TO
AMENDMENT
NO.1
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)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS PAGE NO.
------- ----------------------- --------
<C> <S> <C>
1.1 Form of Underwriting Agreement*
2.1(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(1) Form of Amended and Restated Certificate of Incorporation
of the Company
3.3(1) Form of Bylaws of the Company
5.1(1) Opinion of Proskauer Rose Goetz & Mendelsohn LLP
10.5(1) Form of License Agreement to be entered into between
Gabrielle Studio, Inc. and Donna Karan Studio
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(1) Form of 1996 Stock Incentive Plan of the Company
10.3(1) Form of 1996 Non-Employee Director Stock Option Plan
10.4(1) 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
10.6(1) Form of Guaranties of License from the Company to
Gabrielle Studio, Inc.
10.7(1) Form of License Agreement to be entered into between
Donna Karan Studio and Stephan Weiss
10.08(1) Form of Employment Agreement between the Company and
Donna Karan
10.09(1) Form of Employment Agreement between the Company and
Stephan Weiss
10.10(1) 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(1) 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(1) Consent of Proskauer Rose Goetz & Mendelsohn LLP
(included in its opinion to be filed as Exhibit 5.1 to
the Registration Statement)
27.1 Financial Data Schedule
</TABLE>
- - --------
(1) To be filed by Amendment.
* Previously filed.
<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
May 23, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-29-1996
<PERIOD-START> JAN-02-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 12,153 7,404
<SECURITIES> 0 0
<RECEIVABLES> 84,738 111,365
<ALLOWANCES> 22,507 24,351
<INVENTORY> 85,655 82,771
<CURRENT-ASSETS> 169,985 188,277
<PP&E> 45,367 49,515
<DEPRECIATION> 22,862 24,177
<TOTAL-ASSETS> 203,975 226,267
<CURRENT-LIABILITIES> 77,350 69,511
<BONDS> 53,538 72,724
0 0
0 0
<COMMON> 1,146 1,146
<OTHER-SE> 79,700 90,645
<TOTAL-LIABILITY-AND-EQUITY> 203,975 226,267
<SALES> 510,126 159,585
<TOTAL-REVENUES> 510,126 159,585
<CGS> 330,689 106,724
<TOTAL-COSTS> 330,689 106,724
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 3,122 127
<INTEREST-EXPENSE> 7,650 2,047
<INCOME-PRETAX> 56,073 12,391
<INCOME-TAX> 2,398 690
<INCOME-CONTINUING> 53,675 11,701
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 53,675 11,701
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
