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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-Q
-------------------------------
/X/QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 1997
OR
/ /TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-11805
---------------------------------------
DONNA KARAN INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3882426
(State of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
550 Seventh Avenue, New York, New York 10018
(Address of principal executive offices)
(Zip Code)
(212) 789-1500
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES x NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding as of May 7, 1997
---------------------------- ------------------------------
Common Stock, par value $.01 21,468,034
*Does not include 18 shares of Class A Common Stock, par value $.01 per share,
and two shares of Class B Common Stock, par value $.01 per share, outstanding as
of such date.
<PAGE>
DONNA KARAN INTERNATIONAL INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
PAGE
Statements of income for the three months ended
March 31, 1996 and March 30, 1997, respectively .......... 3
Balance sheets as of December 29, 1996 and March 30, 1997 .... 4
Statements of cash flows for the three months ended
March 31, 1996 and March 30, 1997, respectively .......... 5
Notes to Financial Statements ................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 12
Item 6. Exhibits and Reports on Form 8-K............................ 12
2
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 31, MARCH 30,
1996 1997
--------------------- ---------------------
(IN THOUSANDS)
<S> <C> <C>
Net revenues .......................... $ 159,585 $ 158,776
Cost of sales ......................... 106,724 113,738
--------------------- ---------------------
Gross profit .......................... 52,861 45,038
Selling, general and administrative
expenses .............................. 39,411 44,556
--------------------- ---------------------
Operating income ...................... 13,450 482
Other income (expense):
Equity in earnings of affiliates ... 988 732
Interest (expense) income, net ..... (2,047) 280
--------------------- ---------------------
Income before income taxes ............ 12,391 1,494
Provision for income taxes ............ 690 688
--------------------- ---------------------
Net income ............................ $ 11,701 $ 806
===================== =====================
PRO FORMA
Historical income before income taxes . $ 12,391
Pro forma adjustments other than income taxes 1,457
---------------------
Pro forma income before income taxes .. 10,934
Pro forma provision for income taxes .. 4,722
---------------------
Pro forma net income .................. $ 6,212
=====================
PER SHARE DATA (PRO FORMA FOR 1996)
Net income per share .................. $ 0.32 $ 0.04
===================== =====================
Weighted average common shares outstanding 16,017,032 21,468,034
===================== =====================
</TABLE>
See Notes to Financial Statements
3
<PAGE>
DONNA KARAN INTERNATIONAL INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 29, MARCH 30,
1996 1997
--------------------- --------------------
(AUDITED) (UNAUDITED)
(IN THOUSANDS)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................. $ 40,550 $ 223
Accounts receivable, net of
allowances of $26,757 at
December 29, 1996 and $25,895 at
March 30, 1997 ......................... 73,770 92,147
Inventories ............................... 100,680 101,863
Deferred income taxes ..................... 25,207 19,855
Prepaid expenses and other current
assets .................................... 14,466 17,779
--------------------- ----------------------
Total current assets .................. 254,673 231,867
Property and equipment, at cost-net ......... 32,402 35,507
Deferred income taxes ....................... 6,106 6,421
Deposits and other noncurrent assets ........ 18,514 16,364
--------------------- ----------------------
$311,695 $ 290,159
===================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................ $ 73,394 $ 45,783
Accrued expenses and other current
liabilities ........................... 34,192 27,740
Current portion of long-term debt ....... 282 250
--------------------- ----------------------
Total current liabilities ............ 107,868 73,773
Long-term debt .............................. 36 11,880
Stockholders' equity:
Common stock, $0.01 par value,
35,000,000 shares authorized, 21,468,034
shares issued and outstanding ........... 215 215
Common stock class A, $0.01 par
value,18 shares authorized, issued and
outstanding ........................... - -
Common stock class B, $0.01 par
value, 2 shares authorized, issued and
outstanding ............................ - -
Preferred stock, $0.01 par
value, 1,000,000 shares authorized, no shares
issued and outstanding ................. - -
Additional paid in capital .......... 186,899 186,899
Retained earnings ................... 17,487 18,293
Cumulative translation adjustment ... (331) (422)
--------------------- ----------------------
204,270 204,985
Less treasury stock, at cost (19,958
shares) ........................... (479) (479)
--------------------- ----------------------
Total stockholders' equity .......... 203,791 204,506
--------------------- ----------------------
$ 311,695 $ 290,159
===================== ======================
</TABLE>
See Notes to Financial Statements
4
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, MARCH 30,
1996 1997
--------------------- --------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
<S> <C> <C>
Net income ........................................ $ 11,701 $ 806
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization .................. 1,875 2,570
Provision for bad debts ........................ 127 192
Equity in earnings of affiliate ................ (988) (732)
Deferred taxes ................................. - 5,037
Changes in operating assets and liabilities:
Increase in accounts receivable ................ (24,910) (18,569)
Decrease (increase) in inventories ............. 2,889 (1,274)
Increase in prepaid expenses
and other current assets ..................... (1,141) (3,313)
(Increase) decrease in
deposits and other noncurrent assets ......... (738) 1,758
Decrease in accounts payable, accrued
expenses, and other current liabilities ...... (7,839) (34,063)
--------------------- --------------------
Net cash used in operating activities ............. (19,024) (47,588)
--------------------- --------------------
INVESTING ACTIVITIES
Purchase of property and equipment ................ (4,148) (4,551)
--------------------- --------------------
Net cash used in investing activities ............. (4,148) (4,551)
--------------------- --------------------
FINANCING ACTIVITIES
Net increase in borrowing under revolving credit
facility .......................................... 21,124 11,880
Payments under capital lease ...................... (63) (68)
Repayments of long-term debt ...................... (1,875) -
Distributions to partners ......................... (762) -
--------------------- --------------------
Net cash provided by financing activities ......... 18,424 11,812
--------------------- --------------------
Decrease in cash .................................. (4,748) (40,327)
Cash at beginning of period ....................... 12,153 40,550
--------------------- --------------------
Cash at end of period ............................. $ 7,405 $ 223
===================== ====================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid ..................................... $ 1,781 $ 65
===================== ====================
Taxes paid ........................................ $ 272 $ 8,831
===================== ====================
</TABLE>
See Notes to Financial Statements
5
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 30, 1997
(UNAUDITED)
1. UNAUDITED FINANCIAL STATEMENTS
The unaudited 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 consolidated financial statements.
In the opinion of management, the unaudited 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. On a quarter to quarter basis, the Company's
operations may vary as a result of, among other things, production and shipping
schedules, the introduction of new products, and variation in the timing of
certain holidays from year to year. The results of operations for the
three-month periods ended March 31, 1996 and March 30, 1997, are not necessarily
indicative of the operating results to be expected for a full year.
2. BASIS OF PRESENTATION
Donna Karan International Inc. ("DKI") was incorporated in Delaware in
April 1996. In connection with DKI's initial public offering of stock (the
"Offering") on July 3, 1996, the former principals of the predecessor group of
companies and certain of their affiliates simultaneously contributed to DKI all
of the outstanding stock and partnership interests in the entities that
comprised the predecessor group of companies, in exchange for common stock (the
"Reorganization"). The accompanying financial statements include the results of
operations for the period from January 1, 1996 to March 31, 1996 of The Donna
Karan Company, Donna Karan Studio, The Donna Karan Company Store G.P., DK
Footwear Partners, Takihyo Fashion Company, L.P., Takihyo Design Company, L.P.,
TFT Store Company, L.P., TFT Shoe Company, L.P., TFT Japan Company, L.P., and
DSTF Japan Company, which are affiliated general and limited partnerships; Gabby
Apparel, Inc., Tolara Tetragon Inc., Full Requirements Merchandising, Inc., The
Donna Karan Store Corporation, Tomio Tangents, Inc., Formal Reserve Management,
Inc., DK Shoe Corp., Tangents Two, Inc., First Run Management, Inc., Gabrielle
Japan, Inc., TT DK Japan, Inc., and FM DK Japan, Inc., which are affiliated
United States corporations; Donna Karan Canada Inc., Donna Karan (H.K.) Limited,
Donna Karan Italy, S.R.L., and Donna Karan Italy Shoe Company, S.R.L., which are
foreign corporations (together, the " Predecessor Company").
For the period from December 30, 1996 through March 30, 1997, the
accompanying financial statements include the results of operations of Donna
Karan International Inc., as well as all entities that were included in the
Predecessor Company, except for Takihyo Fashion Company, L.P., Takhiyo Design
Company, L.P., TFT Store Company, L.P., TFT Shoe Company, L.P. and TFT Japan
Company, L.P., all of which were dissolved in connection with the Reorganization
(the "Company"). All companies other than The Donna Karan Company, Donna Karan
Studio, The Donna Karan Company Store, G.P., DK Footwear Partners, Donna Karan
Canada Inc., Donna Karan (H.K.) Limited, Donna Karan Italy, S.R.L., Donna Karan
Italy Shoe Company, S.R.L., and Donna Karan Japan are intermediate United States
holding companies.
The financial statements of the Predecessor Company 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. The equity method of accounting is used for Donna Karan Japan, K.K.,
a Japanese joint stock company, which is 70% owned by a nonaffiliated entity.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, EARNINGS PER SHARE, which is effective for both interim
and annual periods ending after December 15, 1997. At that time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
will be excluded. The impact of Statement 128 on the calculation of primary
and fully diluted earnings per share for the quarters ended March 30, 1997
and March 31, 1996 is not expected to be material.
3. DISTRIBUTION NOTES
On April 16, 1996, the Company issued to its former principals and
certain of their affiliates distribution notes totaling $114,484,000, which
represented an estimate of the cumulative undistributed taxable income (on which
taxes previously have been paid) of the Predecessor Company since its inception
through the anticipated closing date of the Offering. The notes bore interest at
a rate of 8% per annum, and were repaid with the proceeds from the Offering (see
Note 4).
6
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. INITIAL PUBLIC OFFERING
Effective July 3, 1996, the Company sold 10,750,000 shares of its common
stock in an initial public offering. Net proceeds of the Offering, after
deducting underwriting discounts and commissions, and professional fees
aggregated $236.0 million. Proceeds of the Offering were used to retire the
distribution notes and accrued interest thereon totaling approximately $116.4
million, to repay the Predecessor Company's term loans and the revolving line of
credit which totaled approximately $76.8 million, to pay a certain one-time
bonus under an employment agreement which amounted to approximately $5.0 million
and to pay a one-time fee under a license agreement which amounted to $4.6
million. The remaining $33.2 million was used for other general corporate
purposes.
5. PRO FORMA ADJUSTMENTS
The pro forma financial information on the income statement presents the
effects on the historical financial statements of certain transactions as if
they had occurred in 1995. The impact of these adjustments for the three month
period ended March 31, 1996 are: (i) increased royalty expense of $4.2 million
to be paid to a corporation owned by two of the Company's stockholders and their
affiliated trusts pursuant to a licensing agreement, (ii) reduced levels of
compensation of $0.8 million for two of the Company's executives pursuant to
their employment agreements, (iii) reduction in interest costs of $1.6 million
assuming the application of the proceeds from the Offering to reduce the actual
outstanding indebtedness under the Company's credit agreement, (iv) reduction in
amortization of deferred financing costs of $0.3 million which would have been
written off in connection with repayment of outstanding indebtedness under the
Company's credit agreement, and (v) increase in income taxes of $4.0 million as
if the Company had been subject to Federal and additional state income taxes for
the entire period (see Note 9).
6. PRO FORMA PER SHARE INFORMATION
Pro forma net income per share for the three months ended March 31, 1996
is based upon (a) 10,612,934 shares of common stock outstanding during the
period, (b) the number of shares of common stock (5,298,998) sold by the
Company, at an offering price of $24.00 per share ($21.96, net of expenses), the
proceeds of which would be necessary to pay approximately $116.4 million to the
former principals of the Company and certain of their affiliates in satisfaction
of the distribution notes previously issued (includes accrued interest thereon),
representing cumulative undistributed taxable income on which taxes previously
have been paid, and (c) 105,100 shares of common stock which the Company awarded
to certain employees pursuant to the Company's stock incentive plan. Per share
information for the quarter ended March 30, 1997 is based upon 21,468,034 shares
outstanding subsequent to the Offering. The net income used in the calculation
of pro forma per share information for the three months ended March 31,1996
excludes the reduction of interest costs of $1.6 million and the reduction in
amortization of deferred financing costs of $0.3 million and the related tax
effect of $0.8 million.
Supplementary pro forma earnings per share for the three months ended
March 31, 1996 was $0.32. Supplementary pro forma per share information is based
upon 10,612,934 shares of common stock outstanding during the period increased
by (a) the sale of 5,298,998 shares of common stock at an offering price of
$24.00 per share ($21.96, net of expenses), the proceeds of which would be
necessary to pay approximately $116.4 in satisfaction of the distribution notes,
(b) the sale of 3,279,827 shares of common stock, at an offering price of $24.00
per share, ($21.96, net of expenses), the proceeds of which would be necessary
to repay approximately $72.0 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, and (c) 105,100 shares of common stock
which the Company awarded to certain employees pursuant to the Company's stock
incentive plan.
7. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 29, MARCH 30,
1996 1997
----------------- -----------------
Raw materials ..................... $ 16,780 $ 18,113
Work in process ................... 11,030 10,859
Finished goods .................... 72,870 72,891
----------------- -----------------
$ 100,680 $101,863
================= =================
7
<PAGE>
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 29, MARCH 30,
1996 1997
----------------- -----------------
<S> <C> <C>
Accrued operating expenses ................. $ 12,779 $ 8,631
Accrued income taxes ....................... 8,010 -
Accrued compensation ....................... 6,260 9,497
Accrued taxes other than income taxes ...... 948 2,950
Accrued royalties .......................... 5,133 5,194
Other ...................................... 1,062 1,468
----------------- -----------------
$ 34,192 $27,740
================= =================
</TABLE>
9. PRO FORMA INCOME TAXES
The entities in the Predecessor Company were partnerships, or
corporations that had elected to be taxed as S corporations pursuant to the
Internal Revenue Code. In connection with the Offering, the Company became
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
if the Company had been subject to Federal and additional state income taxes.
Concurrent with becoming subject to Federal and additional state income
taxes, the Company recorded a deferred tax asset and a corresponding tax benefit
in the statement of income in accordance with the provisions of SFAS No. 109.
This was approximately $19.0 million, and, as of the date of the Offering,
resulted in a total deferred tax asset of approximately $20.7 million which
includes certain state and local tax assets recorded on a historical basis.
Income tax expense for the three month period ended March 30, 1997
includes a provision for Federal, state and local taxes of approximately $0.7
million at an effective rate of approximately 46%. Pro forma income tax expense
for the three month period ended March 31, 1996 includes a provision for
Federal, state, and local taxes of approximately $4.7 million at an effective
rate of approximately 43%.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
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-Registered Trademark- and DKNY-Registered Trademark-
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-Registered Trademark- 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-Registered Trademark- and DKNY-Registered Trademark-brand names,
including hosiery, intimate apparel, eyewear and children's apparel under the
DKNY-Registered Trademark- brand name in Europe and the Middle East.
The following discussion provides information and analysis of the
Company's results of operations for the three months ended March 31, 1996 and
March 30, 1997. The Company utilizes a 52- or 53-week fiscal year ending on the
Sunday nearest December 31. Accordingly, the first quarters of 1996 and 1997
ended March 31, 1996 and March 30, 1997, respectively. The first quarters in
1996 and 1997 contained 13 weeks. As used in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the DONNA KARAN NEW
YORK-Registered Trademark- collections and the DKNY-Registered Trademark-
collections each include apparel, accessories, and shoes.
CERTAIN STATEMENTS CONTAINED HEREIN ARE FORWARD LOOKING STATEMENTS THAT
HAVE BEEN MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS AND UNCERTAINTIES WHICH MAY CAUSE THE COMPANY'S ACTUAL RESULTS IN
FUTURE PERIODS OR PLANS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM WHAT WAS
ANTICIPATED. THOSE RISKS INCLUDE, AMONG OTHERS, RISKS ASSOCIATED WITH THE
RECEIPT, PRICING AND TIMING OF CUSTOMER ORDERS; THE TIMING, TERMS AND
CONSUMMATION OF A JOINT-VENTURE, SALE OR LICENSING OF THE COMPANY'S BEAUTY
DIVISION; TIMING AND EXPENSE ASSOCIATED WITH COST CUTTING MEASURES; TIMING OF
AND COSTS ASSOCIATED WITH NEW STORE OPENINGS; GENERAL COMPETITIVE FACTORS; A
CHANGE IN RETAILER OR CONSUMER ACCEPTANCE OF THE COMPANY'S PRODUCTS; AND THE
VARIABILITY OF THE COMPANY'S RESULTS IN ANY PERIOD DUE TO THE SEASONAL NATURE OF
THE BUSINESS, THE TIMING AND LEVEL OF THE COMPANY'S SALES AND PROMOTIONS, THE
TIMING OF LAUNCHING NEW PRODUCTS AND COLLECTIONS AND OPENING OF NEW DOORS,
FASHION TRENDS, AND THE TIMING, TERMS AND CONSUMMATION OF ANY JOINT VENTURES,
LICENSES, OR OTHER DISPOSITIONS OF PRODUCT LINES.
As previously disclosed, the Company currently is exploring possible
strategic alternatives for its Beauty Division, including a joint venture,
license, and/or possible sale of the business. Currently, it is anticipated
that this process will be completed during 1997.
During the second quarter of 1997, the Company announced its
intention to formalize a cost cutting program to eliminate costs that are not
essential to running and growing its business. In connection with this
program, it is anticipated that there will be a restructuring charge during
the second quarter of 1997. The impact of this cost cutting program is not
expected to be realized until at least the second half of 1997.
9
<PAGE>
PRO FORMA STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1996 -
(UNAUDITED)
The following table sets forth for the three-month period ended March
31, 1996: (a) historical combined statement of income data; (b) pro forma
adjustments to reflect the Reorganization, the Offering, and certain other
adjustments as if they had occurred on January 1, 1996; and (c) pro forma
combined statement of income data.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
---------------------------------
HISTORICAL 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 expenses 39,411 750(ii) 38,661
------------------ ------------------
Operating income ........................ 13,450 10,038
Equity in earnings of affiliate ......... 988 988
Interest expense, net ................... (2,047) 320(iii) (92)
------------------ ------------------
1,635(iv)
Income before income taxes .............. 12,391 10,934
Provision for income taxes .............. 690 4,032(v) 4,722
------------------ ------------------
Net income .............................. $ 11,701 $ 6,212
================== ==================
Pro forma earnings per share ............ $ 0.29(vi)
==================
</TABLE>
(i) Royalties of $4.2 million payable to Gabrielle Studio pursuant to the
License Agreement.
(ii) Decrease in aggregate compensation from $1.3 million to
$0.5 million for two of the Company's executives pursuant to their
employment agreements.
(iii) Reduction of $0.3 million, in amortization of deferred financing costs,
which would have been written off in connection with repayment
of outstanding indebtedness under the Company's credit agreement.
(iv) Reduction in interest costs of $1.6 million, assuming the application of
up to $90.4 million (which amount represents the maximum amount
outstanding during the period) of the proceeds from the Offering to
reduce the actual outstanding indebtedness under the Company's credit
agreement.
(v) Increase of $4.0 million for income tax expense based upon pro forma
pre-tax income as if the Company had been subject to Federal and
additional state income taxes.
(vi) Pro forma earnings per share have been calculated using 21,468,034
shares, which assumes the number of shares outstanding after the
Offering were outstanding for the entire period.
COMPARISON OF THE THREE MONTHS ENDED MARCH 30, 1997 TO THE THREE MONTHS ENDED
MARCH 31, 1996
<TABLE>
<CAPTION>
1996 1997
---------------------------------------- -------------------
HISTORICAL PRO FORMA HISTORICAL
---------------- ---------------------- -------------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Net revenues ............ $ 159.6 100.0% $ 159.6 100.0% $ 158.8 100.0%
Gross profit ............ 52.9 33.1 48.7 30.5 45.0 28.4
Selling, general and
administrative expenses . 39.4 24.7 38.7 24.2 44.5 28.1
Operating income ........ 13.5 8.4 10.0 6.3 0.5 0.3
Equity in earnings of
affiliate ............... 1.0 0.6 1.0 0.6 0.7 0.5
Net income .............. 11.7 7.3 6.2 3.9 0.8 0.5
</TABLE>
NET REVENUES were $158.8 million in the first quarter of 1997
compared to net revenues of $ 159.6 million recorded in the first quarter of
1996. This slight decrease was due primarily to a $2.8 million, or 13.7%,
decrease in the DONNA KARAN NEW YORK-Registered Trademark-collections for
women; a $2.5 million, or 2.7%, decrease in the DKNY-Registered Trademark-
women's collections; and flat sales for the DKNY-Registered Trademark- men's
collections. These decreases were somewhat offset by a $1.2 million, or 9.2%,
increase in outlet stores and licensing; a $1.2 million, or 25.2%, increase
in beauty products; and a $1.1 million, or 9.3%, increase in the DONNA KARAN
NEW YORK-Registered Trademark- collections for men.
The decrease in net revenue in the DONNA KARAN NEW YORK-Registered
Trademark- collections for women resulted primarily from delayed shipments and
canceled orders due to production difficulties, and from the reduction of the
accessories business as it is refocused from a collection-coordinated line to a
"main floor" line. The decrease in the DKNY-Registered Trademark- women's
collections resulted primarily from a shift of certain spring shipments to the
second quarter of 1997 compared to the same periods in
10
<PAGE>
1996, a decreased focus in the jeanswear business due to the anticipated, but
since terminated, DKNY-Registered Trademark- Jeanswear license agreement, as
well as an increase in sales dilution mostly due to the difficult retail
environment. The flat sales for the DKNY-Registered Trademark- men's
collection resulted primarily from production delays, which resulted in
certain sales being recognized in the second quarter of 1997 rather than the
first quarter of this year. The increase in outlet store and licensing was
due to an increase in the number of outlet stores compared to the year earlier
period, somewhat offset by a decrease in comparable store sales. The increase
in the beauty division was due to an increase in the women's signature
fragrance, the new women's fragrance, CHAOS-TM-, and the home
fragrance collection. The increase in DONNA KARAN NEW YORK-Registered
Trademark-collections for men primarily resulted from international growth.
GROSS PROFIT as a percentage of sales decreased to 28.4% in 1997 from
33.1% in 1996 (30.5% on a pro forma basis). Gross profit was impacted by
certain planned margin reductions, primarily in the DKNY-Registered
Trademark- women's, men's and accessories' collections, increased design and
production costs, and the effect of the increased sales dilution earlier
described. The decrease in the historical gross margin was additionally
impacted by $4.6 million in royalty fees in 1997, which were paid in
connection with the license agreement (the "Gabrielle License") between Donna
Karan Studio and Gabrielle Studio, Inc., a corporation owned by two of the
Company's stockholders and their affiliated trusts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased to 28.1% of net
revenues in the first quarter of 1997 from 24.7% of net revenues for the same
period of 1996 (24.2% on a pro forma basis). The increase in selling, general
and administrative expenses was attributable primarily to the increase in the
Company's international sales force, the addition of eight new outlet stores,
the increased amortization of shop-in-shops, as well as the continued investment
in infrastructure to support future growth.
OPERATING INCOME decreased to $482,000 in the first quarter of 1997 from
$13.5 million in the same period in 1996. On a pro forma basis, operating income
was $10.0 million in the first quarter of 1996.
INTEREST (EXPENSE) INCOME, NET amounted to $280,000 of interest
income in the first quarter of 1997, as compared to interest expense of $2.0
million in the first quarter of 1996. Due to the proceeds from the Offering,
the Company was in an investing position for most of the first quarter of
1997, compared to a borrowing position in 1996.
PROVISION FOR INCOME TAXES amounted to $688,000 in 1997, compared to
$690,000 during the same period in 1996, when the Company was not subject to
Federal and certain state income taxes. On a pro forma basis, income taxes were
recorded as if the Company had been subject to Federal and additional state
income taxes for the entire 1996 period.
NET INCOME for the first quarter was $806,000 in 1997 and $11.7
million in 1996 ($6.2 million on a pro forma basis).
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal need for funds is 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 uses cash flow from operations and borrowings under
the credit facility described below.
At March 30, 1997, the Company had working capital of $158.1 million,
compared to working capital of $146.8 million at December 29, 1996. Changes
in working capital included a decrease in cash of $40.3 million primarily
related to operations, $8.8 million for income tax payments and $10.5
million paid to Designer Holdings Ltd. in connection with the termination of
the DKNY-Registered Trademark- Jeans License; an increase in accounts
receivable of $18.4 million, an increase in inventories of $1.2 million, and
a decrease in accounts payable of $27.6 million, in each case, with the
exception of amounts paid in connection with the termination of the
DKNY-Registered Trademark- Jeans License, due to revenue growth and the
effects of seasonality; a decrease of $5.4 million of deferred income taxes
primarily related to the amounts paid to Designer Holdings Ltd.; and a
decrease in accrued expenses of $6.5 million primarily due to the payment of
income taxes described above.
The Company has a $150.0 million, three-year revolving credit
facility (the "Credit Facility"). The Company is currently negotiating an
amendment to the Credit Facility which, among other things, is expected to
increase the effective interest rate and eliminate the required 45-day clean
down period. The Credit Facility is used for working capital needs and
general corporate purposes.
Capital expenditures, primarily for leasehold improvements, equipment,
machinery, computers, office furniture, and outlet stores, were approximately
$4.6 million and $4.1 million for the quarters ended March 30, 1997 and March
31, 1996, respectively. As of May 1, 1997, the Company had committed to
additional capital expenditures during 1997 of approximately $3.2 million.
The Company anticipates that it will be able to satisfy its ongoing cash
requirements for the foreseeable future, primarily with cash flow from
operations and borrowings under the Credit Facility.
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 (or higher net losses) 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 its credit
agreement, historically, have been lower on or about its fiscal year end. On a
quarter to quarter basis, the Company's operations may vary with production and
shipping schedules, the introduction of new products, and variation in the
timing of certain holidays from year to year. To the extent the Company
continues to expand its business, the Company's operating performance may not
reflect the typical seasonality of the apparel and beauty industries.
The Company historically has experienced lower net revenues 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. To the extent the Company retains the
Beauty Division and 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. The Company is in the process of exploring
strategic alternatives for the Beauty Division, which may reduce or eliminate
the impact of the seasonality of the beauty business to the Company.
PART II. OTHER INFORMATION
Item 1. Legal Procedings
On April 21, 1997, the Company, Donna Karan, Stephen Weiss, and
Stephen L. Ruzow, directors and officers of the Company, and Joseph B.
Parsons, an officer of the Company, were named as defendants in an action
filed in the United States District Court for the Eastern District of New
York. The action, which seeks unspecified damages, purports to be a class
action on behalf of all purchasers of Common Stock during the period from
September 30, 1996 through March 5, 1997. The complaint alleges that the
Company and the other defendants violated certain provisions of the
Securities Exchange Act of 1934, as amended, and the rules thereunder by
disseminating a press release and filing with the Securities and Exchange
Commission documents allegedly containing materially false and misleading
statements relating to the Jeans License. The Company and the other
defendants have not yet filed their answers but plan to deny liability and to
defend the action vigorously. Based on the information available to date,
management does not believe that the outcome of this action will have a
material adverse effect on the results of operatons and financial condition
of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended March 30, 1997.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DONNA KARAN INTERNATIONAL INC.
(Registrant)
Date: May 14, 1997 By: /s/ Stephen L. Ruzow
----------------------------
Stephen L. Ruzow, President &
Chief Operating Officer
Date: May 14, 1997
By: /s/ Joseph B. Parsons
----------------------------
Joseph B. Parsons, Executive Vice
President & Chief Financial Officer
13
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