<PAGE>
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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 SEPTEMBER 28, 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)
<TABLE>
<S> <C>
DELAWARE 13-3882426
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
</TABLE>
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.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AS OF NOVEMBER 6, 1997
--------------------------------------- ---------------------------------------
<S> <C>
Common Stock, par value $.01 21,597,764
</TABLE>
*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.
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<PAGE>
DONNA KARAN INTERNATIONAL INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Statements of operations for the three months and nine months ended September 29, 1996 and
September 28, 1997, respectively................................................................ 3
Balance sheets as of December 29, 1996 and September 28, 1997..................................... 4
Statements of cash flows for the nine months ended September 29, 1996 and September 28, 1997,
respectively.................................................................................... 5
Notes to Financial Statements..................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................. 16
Item 6. Exhibits and Reports on Form 8-K.................................................................. 17
</TABLE>
2
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28,
1996 1997 1996 1997
------------- ------------- ------------- -------------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenues........................................ $ 173,415 214,870 $ 450,641 $ 484,691
Cost of sales....................................... 117,909 158,069 305,129 360,241
------------- ------------- ------------- -------------
Gross profit........................................ 55,506 56,801 145,512 124,450
Selling, general and administrative expenses........ 52,386 54,409 129,829 146,753
Restructuring charges............................... -- -- -- 1,571
------------- ------------- ------------- -------------
Operating income (loss)............................. 3,120 2,392 15,683 (23,874)
Other income (expense):
Equity in earnings of affiliates.................. 1,180 649 2,789 1,358
Interest expense, net............................. (2,518) (1,331) (6,814) (1,470)
Interest expense on distribution notes............ (75) -- (1,957) --
------------- ------------- ------------- -------------
Income (loss) before income taxes................... 1,707 1,710 9,701 (23,986)
Provision (benefit) for income taxes................ (14,737) 787 (14,292) (11,034)
------------- ------------- ------------- -------------
Net income (loss)................................... $ 16,444 $ 923 $ 23,993 $ (12,952)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
PRO FORMA
Historical income (loss) bbefore income taxes....... $ 1,707 9,701
Pro forma adjustments other than income taxes....... -- (1,436)
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Pro forma income (loss) before income taxes......... 1,707 8,265
Pro forma provision (benefit) for income taxes...... 755 3,601
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Pro forma net income (loss)......................... $ 952 $ 4,664
------------- -------------
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PER SHARE DATA (PRO FORMA FOR 1996)
Net income (loss) per share......................... $ 0.77 $ 0.04 $ 0.15 $ (0.60)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average common shares outstanding.......... 21,447,764 21,554,907 16,017,032 21,483,478
------------- ------------- ------------- -------------
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</TABLE>
See Notes to Financial Statements
3
<PAGE>
DONNA KARAN INTERNATIONAL INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 29, SEPTEMBER 28,
1996 1997
------------ -------------
<S> <C> <C>
(AUDITED) (UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 40,550 $ 3,057
Accounts receivable, net of allowances of $26,757 at December 29, 1996 and $43,976
at September 28, 1997........................................................... 73,770 104,948
Inventories....................................................................... 100,680 116,745
Deferred income taxes............................................................. 25,207 24,962
Prepaid expenses and other current assets......................................... 14,466 24,442
------------ -------------
Total current assets............................................................ 254,673 274,154
Property and equipment, at cost-net................................................. 32,402 34,879
Deferred income taxes............................................................... 6,106 6,983
Deposits and other noncurrent assets................................................ 18,514 19,058
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$ 311,695 $ 335,074
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 73,394 $ 42,377
Accrued expenses and other current liabilities.................................... 34,192 41,595
Current portion of long-term debt................................................. 282 109
------------ -------------
Total current liabilities....................................................... 107,868 84,081
Long-term debt...................................................................... 36 60,094
Stockholders' equity:
Common stock, $0.01 par value, 35,000,000 shares authorized, 21,618,034 shares
issued, 21,597,764 shares outstanding........................................... 215 216
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........................................................ 186,899 188,491
Retained earnings................................................................. 17,487 4,535
Cumulative translation adjustment................................................. (331) (350)
------------ -------------
204,270 192,892
Less: Treasury stock, at cost (20,270 shares)..................................... (479) (479)
Unearned compensation........................................................ -- (1,514)
------------ -------------
Total stockholders' equity...................................................... 203,791 190,899
------------ -------------
$ 311,695 $ 335,074
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------------ -------------
</TABLE>
See Notes to Financial Statements
4
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
<S> <C> <C>
SEPTEMBER 29, SEPTEMBER 28,
1996 1997
------------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................................................... $ 23,993 $ (12,952)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization..................................................... 6,072 9,265
Provision for bad debts........................................................... (97) 492
Equity in earnings of affiliate................................................... (2,789) (1,358)
Deferred taxes.................................................................... (18,500) (632)
Stock award grant................................................................. 2,522 --
Provision for restricted stock compensation....................................... -- 79
Changes in operating assets and liabilities:
Increase in accounts receivable................................................. (23,499) (31,670)
Increase in inventories......................................................... (8,455) (16,084)
Increase in prepaid expenses and other current assets........................... (3,159) 1,072
Increase in deposits and other noncurrent assets................................ (4,043) (3,001)
Increase (decrease) in accounts payable, accrued expenses, and other current
liabilities................................................................... 821 (34,662)
------------- -------------
Net cash used in operating activities............................................... (27,134) (89,451)
------------- -------------
INVESTING ACTIVITIES
Purchase of property and equipment.................................................. (10,003) (7,927)
------------- -------------
Net cash used in investing activities............................................... (10,003) (7,927)
------------- -------------
FINANCING ACTIVITIES
Net increase (decrease) in borrowing under revolving credit facility................ (7,961) 60,094
Payments under capital lease........................................................ (192) (209)
Repayment of distribution notes..................................................... (114,484) --
Repayments of long-term debt........................................................ (45,000) --
Distributions to partners........................................................... (25,387) --
Issuance of common stock............................................................ 236,020 --
------------- -------------
Net cash provided by financing activities........................................... 42,996 59,885
------------- -------------
Increase (decrease) in cash......................................................... 5,859 (37,493)
Cash at beginning of period......................................................... 12,153 40,550
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Cash at end of period............................................................... $ 18,012 $ 3,057
------------- -------------
------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid....................................................................... $ 6,145 $ 1,641
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------------- -------------
Taxes paid.......................................................................... $ 474 $ 9,278
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</TABLE>
See Notes to Financial Statements
5
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 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 and nine-month periods ended September 29, 1996 and September 28,
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 June 30, 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 July 3, 1996 through September 29, 1996, and for the
period from December 30, 1996 through September 28, 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.
6
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 28, 1997
(UNAUDITED)
2. BASIS OF PRESENTATION (CONTINUED)
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 ("FASB") 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 three-month and nine-month periods ended September 29, 1996
and September 28, 1997 is not expected to be material.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income". This new standard requires reclassification of financial statements for
earlier periods provided for comparative purposes, and will be effective
beginning with the Company's fiscal year ending January 3, 1999. The Company
expects that the effect of adopting this new standard will not be material.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information". This new standard significantly
changes the way that public business enterprises report information about
operating segments in financial statements and will be effective beginning with
the Company's fiscal year ending January 3, 1999. The Company has not yet
determined the impact of Statement 131 on disclosures in its financial
statements.
3. RESTRUCTURE AND OTHER CHARGES
During the three-month period ended June 29, 1997, the Company implemented a
multi-step plan aimed at containing costs and restructuring certain of its
operations. In connection with this plan, the Company recorded a pre-tax
restructuring charge of $1.6 million, relating primarily to severance costs and
other related benefits. In addition, the Company recorded several other pre-tax
charges in this three-month period aggregating $3.6 million. These charges,
which are included in selling, general and administrative expenses, relate to
additional severance costs, a provision for the estimated economic impairment of
DONNA KARAN NEW YORK-Registered Trademark- Accessories inventory and receivables
not qualifying as a restructuring charge as a result of the Company's decision
to reduce operations to a level to meet existing commitments, as well as certain
other charges recorded during the cost containment process.
4. 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 had 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
5).
7
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 28, 1997
(UNAUDITED)
5. 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.
6. 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 on January 1, 1996. The impact of these adjustments for the
three-and nine-month periods ended September 29, 1996 are: (i) increased royalty
expense to be paid to a corporation owned by two of the Company's stockholders
and their affiliated trusts pursuant to a license agreement, (ii) reduced levels
of compensation for two of the Company's executives pursuant to their employment
agreements, (iii) reduction in interest costs 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 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 as if the Company had been subject to Federal and
additional state income taxes for the entire period.
7. PRO FORMA PER SHARE INFORMATION
Pro forma net income per share for the nine months ended September 29, 1996
is based on the weighted average of the pro forma shares outstanding for the
period prior to the Offering, and 16,017,032 shares for the period subsequent to
the Offering. Pro forma shares outstanding for the period prior to the Offering
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. The net
income used in the calculation of pro forma per share information for the nine
months ended September 29, 1996 excludes the reduction of interest costs of $3.5
million and the reduction in amortization of deferred financing costs of $0.8
million and the related tax effect of $1.8 million.
Supplementary pro forma earnings per share for the three months and nine
months ended September 29, 1996 were $0.04 and $0.23, respectively.
Supplementary pro forma per share information prior to the Offering 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 million in satisfaction of
8
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 28, 1997
(UNAUDITED)
7. PRO FORMA PER SHARE INFORMATION (CONTINUED)
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. Supplementary pro forma per share
information for the quarter ended September 29, 1996 is based upon 21,447,764
shares outstanding subsequent to the Offering. Supplementary pro forma per share
information for the nine months ended September 29, 1996 is based upon the
weighted average number of shares outstanding during the period.
8. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 29, 1996 SEPTEMBER 28, 1997
----------------- ------------------
<S> <C> <C>
Raw materials.......................................... $ 16,780 $ 12,062
Work in process........................................ 11,030 11,221
Finished goods......................................... 72,870 93,462
-------- --------
$ 100,680 $ 116,745
-------- --------
-------- --------
</TABLE>
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 29, 1996 SEPTEMBER 28, 1997
----------------- ------------------
<S> <C> <C>
Accrued operating expenses............................. $ 12,779 $ 9,789
Accrued income taxes................................... 8,010 --
Accrued compensation................................... 6,260 11,060
Accrued royalties...................................... 5,133 7,333
Accrued restructure and other charges.................. -- 2,746
Accrued taxes other than income taxes.................. 948 5,060
Other.................................................. 1,062 5,607
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$ 34,192 $ 41,595
------- -------
------- -------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with key executives which provide for
guaranteed minimum compensation, minimum cash bonuses, stock options, and
termination payments and benefits. In one such agreement, the Company has
granted 150,000 shares of restricted common stock to a key employee. These
shares are subject to certain restrictions on transferability and a risk of
forfeiture. The forfeiture provisions expire at the earlier of five years from
the date of grant, or upon the attainment of certain market value goals for the
common stock. As of September 28, 1997, all 150,000 shares were subject to the
forfeiture provisions. These shares have been recorded as unearned stock grant
compensation and are
9
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 28, 1997
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
presented as a separate component of shareholders' equity. The unearned
compensation is being charged to selling, general and administrative expenses
over the five-year vesting period, until such time as the market value goals are
attained, in which case the expense will be accelerated to match the amounts
earned. Total expense for the three and nine-month periods ended September 28,
1997 amounted to approximately $79,000.
11. 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 and nine-month periods ended
September 28, 1997 includes a provision (benefit) for Federal, state and local
taxes of approximately $0.8 million and ($11.0) million, respectively, at an
effective rate of approximately 46%. Pro forma income tax expense for the
three-month and nine-month periods ended September 29, 1996 includes a provision
for Federal, state and local taxes of approximately $0.8 million and $3.6
million, respectively, at an effective rate of approximately 44%.
12. SUBSEQUENT EVENTS
On November 10, 1997, the Company and Estee Lauder Inc. ("ELI") consummated
the transaction previously announced on September 30, 1997, whereby the Company
granted to ELI exclusive worldwide rights to the DONNA KARAN NEW
YORK-Registered Trademark- and DKNY-Registered Trademark- trademarks for the
manufacture, marketing, distribution and sale of beauty and beauty-related
products, including fragrances, cosmetics, skincare products, and beauty-related
accessories. In connection therewith and with the sale to ELI of certain usable
inventory and other assets relating to the existing business, the Company will
receive up to $31 million and additional royalties from ELI based on sales of
such beauty and beauty-related products. On November 10, 1997, the Company
received from ELI $25 million. Under certain circumstances, the Company is
obligated to repay to ELI a portion of these payments plus a penalty amount if
certain products are not launched in accordance with an agreed-upon schedule.
As a result of the closing of this transaction, the Company anticipates that
it will record a loss of approximately $30 million, which represents reserves to
be recorded, primarily related to inventories, receivables and severance to
cover the wind- down of its existing beauty business, net of certain amounts to
be recorded by the Company in connection with the transaction.
10
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 28, 1997
(UNAUDITED)
12. SUBSEQUENT EVENTS (CONTINUED)
The following table presents certain pro forma condensed financial
information for the fiscal year ended December 28, 1996, and for the nine months
ended September 28, 1997, as if the beauty business had been shutdown prior to
these periods:
<TABLE>
<CAPTION>
DECEMBER 28, 1996 SEPTEMBER 28, 1997
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS REPORTED BEAUTY PRO FORMA AS REPORTED BEAUTY PRO FORMA
----------- --------- ---------- ----------- --------- -----------
Net sales........................................ $ 612,840 $ 43,769 $ 569,071 484,691 19,730 464,961
Operating income (loss).......................... 13,302 (6,748) 20,050 (23,874) (9,253) (14,621)
Pro forma net income (loss)...................... 4,243(1) (3,644) 7,887 (12,952) (4,996) (7,956)
Current assets................................... 254,673 26,032 228,641 274,154 23,567 250,587
Total assets..................................... 311,695 27,601 284,094 335,074 24,704 310,370
</TABLE>
- ------------------------
(1) For the year ended December 28, 1996, the Company's net income included the
recognition of a deferred tax asset of approximately $19.0 million,
concurrent with becoming subject to Federal and additional state income
taxes. For purposes of comparison, the Company has presented pro forma net
income for this period which excludes the recognition of this asset, and
also assumes that the Company was subject to Federal and additional state
taxes for the entire period.
On November 11, 1997, the Company announced that it expects to take a
pre-tax charge in the fourth quarter of approximately $20 million to reflect
restructuring initiatives and other charges.
The Company also announced that it is actively pursuing a licensing
agreement for its jeans business and anticipates recording a pre-tax charge of
approximately $14 million upon consummation of this agreement.
11
<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. 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
beauty and beauty-related products, 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 and nine months ended September 29,
1996 and September 28, 1997. The Company utilizes a 52- or 53-week fiscal year
ending on the Sunday nearest December 31. Accordingly, the third quarters and
first nine months of 1996 and 1997 ended September 29, 1996 and September 28,
1997, respectively. The second quarters in 1996 and 1997 contained 13 weeks and
the first nine months in 1996 and 1997 contained 39 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; TIMING AND EXPENSE ASSOCIATED
WITH, AND EFFECTS OF, COST CUTTING MEASURES AND STRATEGIC INITIATIVES; THE
TIMING, TERMS AND CONSUMMATION OF THE LICENSING OF THE COMPANY'S JEANS BUSINESS;
TIMING OF AND COSTS ASSOCIATED WITH NEW STORE OPENINGS, INCLUDING FREE-STANDING
RETAIL STORES; 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, INCLUDING A PROPOSED LICENSE FOR JEANS.
On November 10, 1997, the Company and Estee Lauder Inc. ("ELI") consummated
the transaction previously announced on September 30, 1997, whereby the Company
granted to ELI exclusive worldwide rights to the DONNA KARAN NEW
YORK-Registered Trademark- and DKNY-Registered Trademark- trademarks for the
manufacture, marketing, distribution and sale of beauty and beauty-related
products, including fragrances, cosmetics, skincare products, and beauty-related
accessories. In connection therewith and with the sale to ELI of certain usable
inventory and other assets relating to the existing business, the Company will
receive up to $31 million and additional royalties from ELI based on sales of
such beauty and beauty-related products. On November 10, 1997, the Company
received from ELI $25 million. Under certain circumstances, the Company is
obligated to repay to ELI a portion of these payments plus a penalty amount if
certain products are not launched in accordance with an agreed-upon schedule.
PRO FORMA STATEMENT OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 29, 1996
- -(UNAUDITED)
The following table sets forth for the three-month period ended September
29, 1996: (a) historical combined statement of income data; (b) pro forma
adjustments to reflect the Reorganization, the Offering,
12
<PAGE>
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 SEPTEMBER 29, 1996
------------------------------------------------------
<S> <C> <C> <C>
HISTORICAL PRO FORMA
COMBINED ADJUSTMENTS PRO FORMA COMBINED
---------- ------------------- -------------------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net revenues................................................ $ 173,415 $ 173,415
---------- --------
Gross profit................................................ 55,506 4,635(i) 60,141
Selling, general and administrative expenses................ 52,386 (5,347)(ii) 44,517
---------- --------
(2,522)(iii)
Operating income............................................ 3,120 15,624
Equity in earnings of affiliate............................. 1,180 1,180
Interest (expense) income, net.............................. (2,518) 197(iv) 99
2,420(v)
Interest expense on distribution notes...................... (75) 75(vi) --
---------- --------
Income before income taxes.................................. 1,707 16,903
Provision (benefit) for income taxes........................ (14,737) 22,069 (vii 7,332
---------- --------
Net income.................................................. $ 16,444 $ 9,571
---------- --------
---------- --------
Pro forma earnings per share................................ $ 0.77(viii)(ix)
--------
--------
</TABLE>
- ------------------------
(i) One-time fee of $4.6 million paid to a corporation owned by two of the
Company's stockholders and their affiliated trusts pursuant to a licensing
agreement.
(ii) One-time bonus under an employment agreement which amounted to $5.0
million, and additional one-time bonuses of $0.3 million paid to key
executives relating to the Offering.
(iii) One-time charge of $2.5 million representing the award of 105,100 shares
of common stock to certain employees pursuant to the Company's 1996 Stock
Incentive Plan.
(iv) Reduction of $0.2 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.
(v) Reduction in interest expense of $2.4 million related to the write-off of
deferred financing costs in connection with repayment of outstanding
indebtedness under the Company's credit agreement.
(vi) Reduction in interest expense on distribution notes of $0.1 million,
assuming the distribution notes would not have been outstanding during the
period.
(vii) Increase of $22.1 million (including $15.5 million of deferred tax assets
recognized) 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.
(viii) Pro forma net income per share is based upon (a) 10,612,934 shares of
common stock outstanding during the period, (b) the number of shares of
common stock (5,298,998) 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.
13
<PAGE>
(ix) Earnings per share would have been $0.45 if calculated using 21,447,764
shares, which assumes the number of shares outstanding after the Offering
were outstanding for the entire period.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 28, 1997
TO THE THREE MONTHS ENDED SEPTEMBER 29, 1996
<TABLE>
<CAPTION>
1996 1997
-------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL PRO FORMA HISTORICAL
------------------------ ------------------------ ------------------------
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues....................................... $ 173.4 100.0% $ 173.4 100.0% $ 214.9 100.0%
Gross profit....................................... 55.5 32.0 60.1 34.7 56.8 26.4
Selling, general and administrative expenses....... 52.4 30.2 44.5 25.7 54.4 25.3
Operating income................................... 3.1 1.8 15.6 9.0 2.4 1.1
Equity in earnings of affiliate.................... 1.2 0.7 1.2 0.7 0.6 0.3
Net income......................................... 16.4 9.5 9.6 5.5 0.9 0.4
</TABLE>
NET REVENUES were $214.9 million for the three months ended September 28,
1997 compared to net revenues of $173.4 million for the three months ended
September 29, 1996. This increase was due primarily to a $22.7 million, or
26.5%, increase in the DKNY-Registered Trademark- women's collections, a $7.1
million, or 31.3%, increase in the DONNA KARAN NEW YORK-Registered Trademark-
collections for women, and a $6.2 million, or 31.1%, increase in the
DKNY-Registered Trademark- Men's collections, somewhat offset by a $4.3 million,
or 37.9%, decrease in beauty products.
The increase in net revenue in the DKNY-Registered Trademark- women's
collections resulted primarily from off-price sales and an increase in the sales
of athletic footwear. The increase in net revenue in the DONNA KARAN NEW
YORK-Registered Trademark- collections for women resulted primarily from sales
of its Signature line, both internationally and domestically, which was not in
full operation during the same period last year. The increase in net revenue in
the DKNY-Registered Trademark- Men's collections resulted primarily from an
increase in sales to specialty retailers, as well as increased international
sales. The decrease in beauty products is primarily due to the launch of Chaos
in the prior year.
GROSS PROFIT as a percentage of sales decreased to 26.4% in 1997 from 32.0%
in 1996 (34.7% on a pro forma basis). Gross profit was primarily impacted by the
increase in off-price sales, which have lower gross margins, and lower gross
margins at the retail outlet stores. To a lessor extent, gross profit was
impacted by lower initial gross margins, new product lines and segmented lines
at lower gross margins, lower gross margins on beauty products and increased
product development costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased to 25.3% of net
revenues in the third quarter of 1997 from 30.2% of net revenues for the same
period of 1996 (25.7% on a pro forma basis). Total selling, general and
administrative expenses increased by $2.0 million ($9.9 million on a pro forma
basis). The increase in selling, general and administrative expenses was
attributable primarily to increased personnel expense, international division
expense, the continued investment in infrastructure, especially in the Company's
new businesses, the addition of 11 new outlet stores compared to the third
quarter of 1996, and the increased amortization expense due to additional
shop-in-shops.
OPERATING INCOME decreased to $2.4 million in the third quarter of 1997 from
$3.1 million in the same period in 1996. On a pro forma basis, operating income
was $15.6 million in the third quarter of 1996.
INTEREST EXPENSE, net amounted to $1.3 million in the third quarter of 1997,
as compared to $2.5 million in the third quarter of 1996.
PROVISION FOR INCOME TAXES amounted to $0.8 million in the third quarter of
1997, compared to a benefit of $14.7 million during the same period in 1996. The
1996 benefit reflects the recognition of a deferred tax asset of approximately
$19.0 million, concurrent with becoming subject to Federal and additional state
14
<PAGE>
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 third quarter was $0.9 million in 1997 and $16.4 million
in 1996 ($9.6 million on a pro forma basis).
PRO FORMA STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 29,
1996--(UNAUDITED)
The following table sets forth for the nine-month period ended September 29,
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>
NINE MONTHS ENDED SEPTEMBER 29, 1996
-----------------------------------------------------
<S> <C> <C> <C>
HISTORICAL PRO FORMA
COMBINED ADJUSTMENTS PRO FORMA COMBINED
---------- ------------------- ------------------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net revenues.......................................... $ 450,641 $450,641
---------- --------
Gross profit.......................................... 145,512 (7,248)(i) 142,899
4,635(ii)
Selling, general and administrative expenses.......... 129,829 (1,500)(iii) 120,460
---------- --------
(5,347)(iv)
(2,522)(v)
Operating income...................................... 15,683 22,439
Equity in earnings of affiliate....................... 2,789 2,789
Interest expense, net................................. (6,814) 837(vi) (82)
3,475 (vii
2,420 (viii
Interest expense on distribution notes................ (1,957) 1,957(ix) --
---------- --------
Income before income taxes............................ 9,701 25,146
Provision for income taxes............................ (14,292) 25,202(x) 10,910
---------- --------
Net income............................................ $ 23,993 $ 14,236
---------- --------
---------- --------
Pro forma earnings per share.......................... $ 0.15(xi)(xii)
--------
--------
</TABLE>
- ------------------------
(i) Royalties of $7.2 million to be paid to a corporation owned by two of the
Company's pricipal stockholders and their affiliated trusts pursuant to a
license agreement.
(ii) One-time fee of $4.6 million paid to a corporation owned by two of the
Company's stockholders and their affiliated trusts pursuant to a licensing
agreement
(iii) Decrease in aggregate compensation of $1.5 million for two of the
Company's executives pursuant to their employment agreements.
(iv) One-time bonus under an employment agreement which amounted to $5.0
million, and additional one-time bonuses of $0.3 million paid to key
executives relating to the Offering.
(v) One-time charge of $2.5 million representing the award of 105,100 shares of
common stock to certain employees pursuant to the Company's 1996 Stock
Incentive Plan.
(vi) Reduction of $0.8 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.
15
<PAGE>
(vii) Reduction in interest costs of $3.5 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.
(viii)Reduction in interest expense of $2.4 million related to the write-off of
deferred financing costs in connection with repayment of outstanding
indebtedness under the Company's credit agreement.
(ix) Reduction in interest expense on distribution notes of $2.0 million,
assuming the distribution notes would not have been outstanding during the
period.
(x) Increase of $25.2 million (including $15.5 million of deferred income tax
assets recognized) for income taxes based upon pro forma pre-tax income as
if the Company had been subject to Federal and additional state income
taxes.
(xi) Pro forma net income per share for the nine months ended September 29, 1996
is based on the weighted average of the pro forma shares outstanding for the
period prior to the Offering, and 21,447,764 shares for the period
subsequent to the Offering. Pro forma shares outstanding for the period
prior to the Offering 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. The net
income used in the calculation of pro forma per share information excludes
the reduction of interest costs of $3.4 million and the reduction in
amortization of deferred financing costs of $0.6 million and the related tax
effect of $1.7 million.
(xii) Earnings per share would have been $0.66 if calculated using 21,447,764
shares, which assumes the number of shares outstanding after the Offering
were outstanding for the entire period.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 28, 1997
TO THE NINE MONTHS ENDED SEPTEMBER 29, 1996
<TABLE>
<CAPTION>
1996 1997
------------------------------------------ --------------------
HISTORICAL PRO FORMA HISTORICAL
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Net revenues............................................... $ 450.6 100.0% $ 450.6 100.0% $ 484.7 100.0%
Gross profit............................................... 145.5 32.3 142.9 31.7 124.5 25.7
Selling, general and administrative expenses............... 129.8 28.8 120.5 26.7 146.8 30.13
Restructuring charges...................................... 1.6 0.3
Operating income (loss).................................... 15.7 3.5 22.4 5.0 (23.9) (4.9)
Equity in earnings of affiliate............................ 2.8 0.6 2.8 0.6 1.4 0.3
Net income (loss).......................................... 24.0 5.3 14.2 3.2 (13.0) (2.7)
</TABLE>
NET REVENUES were $484.7 million in the nine months ended September 28,
1997, an increase of 7.6% from the net revenues of $450.6 million recorded in
the nine months ended September 29, 1996. This increase was due primarily to a
$15.7 million, or 6.6%, increase in the DKNY-Registered Trademark- women's
collections, a $6.8 million, or 14.0%, increase in outlet stores and licensing,
a $6.1 million, or 11.5%, increase in DONNA KARAN NEW YORK-Registered Trademark-
collections for women, $5.2 million from the DKNY-Registered Trademark- kids
collection which was introduced in 1997, and a $5.0 million, or 9.9%, increase
in the DKNY-Registered Trademark- mens collections. These increases were
somewhat offset by a $4.6 million, or 19.3%, decrease in beauty products.
16
<PAGE>
The increase in net revenues in the DKNY-Registered Trademark- women's
collections resulted primarily from off-price sales and an increase in sales of
athletic footwear. The increase in outlet stores and licensing is primarily due
to an 11-store increase in the number of outlet stores, despite a decrease in
comparable store sales, and an increase in licensing revenue. The increase in
the DONNA KARAN NEW YORK-Registered Trademark- collections for women was
primarily due to the launch of the Signature label. The increase in the
DKNY-Registered Trademark- mens collections were primarily due to an increase in
international sales and off price sales. The decrease in beauty products was due
primarily to the prior year's launch of the Chaos fragrance line and the
difficult performance of certain of the beauty products.
GROSS PROFIT as a percentage of sales decreased to 25.7% in 1997 from 32.3%
in 1996 (31.7% on a pro forma basis). Gross profit was primarily impacted by:
the increased sales dilution recorded in the first and second quarter, primarily
in the DKNY-Registered Trademark- women's collections; off-price sales which
have lower gross margins; and lower gross margins at the outlet stores. To a
lessor extent, gross profit was impacted by: lower initial gross margins; new
product lines and segmented lines at lower gross margins; lower gross margins on
beauty products; and increased product development costs. The decrease in the
historical gross profit was additionally impacted by $14.0 million in royalty
fees in 1997, which were recorded in connection with the Company's license with
Gabrielle Studio compared to $9.3 million of royalty fees recorded in 1996 on a
historical basis.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased to 30.3% of net
revenues in the first nine months of 1997 from 28.8% of net revenues for the
same period of 1996 (26.7% on a pro forma basis). The increase in selling,
general and administrative expenses was attributable primarily to continued
investment in infrastructure, especially in the Company's new businesses,
increased amortization expense due to additional shop-in-shops, increased
personnel expense, the addition of 11 new outlet stores compared to 1996 and
planned increased beauty expenses. In addition, selling, general and
administrative expenses included several other charges in the second quarter of
1997 totaling $3.6 million, related primarily to severance costs, provisions for
the estimated economic impairment of DONNA KARAN NEW YORK-Registered Trademark-
accessories inventory and accounts receivable, as well as certain other charges
identified during the cost containment process. Excluding these charges,
selling, general and administrative expenses would have been 29.5% of net
revenues in the first nine months of 1997.
17
<PAGE>
RESTRUCTURING CHARGES amounted to $1.6 million in 1997 and primarily related
to severance costs and other related benefits in connection with the Company's
program aimed at containing costs and restructuring certain of its operations.
OPERATING INCOME (LOSS) decreased from operating income of $15.7 million in
1996 ($22.4 million on a pro forma basis) to an operating loss of $23.9 million
in 1997.
INTEREST EXPENSE, NET amounted to $1.5 million in 1997, compared to $6.8
million during the same period in 1996. Primarily from the receipt of the
proceeds from the Offering, the Company was in an investing position for most of
the first quarter of 1997, and generally had less amounts outstanding under its
revolving credit facility than during the similar periods of 1996.
PROVISION (BENEFIT) FOR INCOME TAXES amounted to $11.0 million benefit for
the nine month period ended September 28, 1997 compared to a benefit of $14.3
million for the nine month period ended September 29, 1996. The 1996 benefit
reflects the recognition of a deferred tax asset of approximately $19.0 million,
concurrent with becoming subject to Federal and additional 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 (LOSS) was a loss of $13.0 million for the nine month period
ended September 28, 1997 compared to net income of $24.0 million for the nine
month period ended September 29, 1996 (net income of $4.7 million on a pro forma
basis).
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 September 28, 1997, the Company had working capital of $190.1 million,
compared to working capital of $146.8 million at December 29, 1996. Changes in
working capital include a decrease in cash of $37.5 million primarily related to
operations, revenue growth and the effects of seasonality, $9.3 million for
income tax payments, $10.5 million paid to Designer Holdings Ltd. in connection
with the termination of the DKNY Jeans License, $7.9 million for the purchase of
property and equipment, all offset by $60.1 million of increased borrowings
under revolving credit facility.
In May 1997 and September 1997, the Company amended its $150 million,
three-year revolving credit facility (the "Amended Credit Facility"). Borrowings
under the Amended Credit Facility bear interest at the lead bank's prime rate
plus a margin (ranging from 0.125% to 1.0%) or, at the option of the Company, at
a fixed margin (ranging from 1.0% to 2.25%) over LIBOR, and are limited to a
borrowing base calculated on eligible accounts receivable and inventory. The
Amended Credit Facility eliminated the need for a 45-day clean down period. The
Amended Credit Facility is secured by accounts receivable, inventory, and
certain intangibles of the Company and a pledge of all the equity interests of
the subsidiaries of the Company. The Amended Credit Facility also contains
certain restrictive covenants which, among other things, restrict the Company
from making investments, additional indebtedness, and payment of dividends. The
September 1997 amendment waives certain financial ratio covenants for the period
until January 30, 1998. The Company believes that it will be able to obtain
necessary amendments to its credit agreement or obtain alternative financing
prior to January 30, 1998, although there can be no assurance of its ability to
do so or on favorable terms. The Amended 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
$7.9 million and $10.0 million for the nine month periods
18
<PAGE>
ended September 28, 1997 and September 29, 1996, respectively. As of November 1,
1997, the Company had committed to additional capital expenditures during 1997
of approximately $.7 million.
On November 11, 1997, the Company announced several one-time charges related
to new strategic initiatives being implemented by the Company.
As a result of the closing of the transaction with ELI and as previously
announced, the Company anticipates that it will record a loss of approximately
$30 million, which represents reserves to be recorded, primarily related to
inventories, receivables and severance to cover the wind-down of its existing
beauty business, net of certain amounts to be recorded by the Company in
connection with the transaction.
On November 11, 1997, the Company announced that it expects to take a
pre-tax charge in the fourth quarter of approximately $20 million to reflect
restructuring initiatives and other charges.
The Company also announced that it is actively pursuing a licensing
agreement for its jeans business and anticipates recording a pre-tax charge of
approximately $14 million upon consummation of this agreement.
The Company anticipates that its pre-tax loss will be approximately $80
million in the fourth quarter of 1997 and approximately $100 million for the
full year, including these charges. Among the operating factors causing the
increased loss over the previously announced projected loss for the fiscal year
ending December 28, 1997 are: lower-than-planned sales and margins in the
Company's outlet stores as the Company cleared out old inventory in preparation
for a change in the merchandise strategy, and below-plan performance in the
DONNA KARAN NEW YORK-REGISTERED TRADEMARK- men's, DKNY-REGISTERED TRADEMARK-
kids, and DKNY-REGISTERED TRADEMARK- Men's collection (although sales of such
collection will be higher than in the previous year), and in the Beauty
division.
Due to this anticipated annual loss, the Company will not be able to
recognize part or all of its tax benefit for the 1997 fiscal year.
The Company anticipates that it will be able to satisfy its ongoing cash
requirements for the foreseeable future, primarily with cash flow from
operations, licensing transactions, and borrowings under the Amended Credit
Facility or any alternative financing it obtains (as contemplated above).
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.
19
<PAGE>
DONNA KARAN INTERNATIONAL INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about April 21, 1997, a purported class action was commenced against
the Company and certain of its officers (collectively, the "DK Defendants") in
the United States District Court for the Eastern District of New York (STEINMETZ
V. DONNA KARAN INTERNATIONAL INC., ET AL., 97 Civ. 2011), alleging violations of
sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange
Act"), and Rule 10b-5 promulgated thereunder, and New York common law. Plaintiff
claims that defendants made false and fraudulent statements and omissions of
material facts in connection with public disclosures and accounting treatment of
the Company's license agreement with Designer Holdings, Inc., which agreement
was entered into in or about September, 30, 1996 and terminated on or about
March 5, 1997 (the "Designer Holdings License"). Plaintiff seeks unspecified
damages on behalf of a purported class of all persons who purchased the
Company's common stock during the period September 30, 1996 through March 5,
1997 (the "Exchange Act Claims Class").
On or about June 19, 1997, a second purported class action was commenced
against the DK Defendants in the United States District Court for the Eastern
District of New York (BUSBY, ET AL. V. DONNA KARAN INTERNATIONAL INC., ET AL, 97
Civ. 3597), alleging violations of (i) Sections 11 and 12 (a)(2) and 15 of the
Securities Act of 1933 (the "Securities Act") on the grounds that the Company's
Registration Statement and Prospectus for its June 27, 1996 initial public
offering (the "IPO") allegedly contained untrue statements and omissions of
material facts with respect to the business, management and financial condition
of the Company, and (ii) Sections 10(b) and 20(a) of the Exchange Act and Rule
10b-5 on the grounds that the Company allegedly made false and fraudulent
statements and omissions of material fact in connection with public disclosures
regarding and accounting treatment of the Designer Holdings License. Plaintiffs
seek unspecified damages on behalf of (i) a purported class of all persons who
purchased the Company's common stock during the period June 27, 1996 and May 7,
1997 pursuant to or traceable to the Registration statement and Prospectus for
the IPO and (the "Securities Act Claims Class"); and (ii) a purported subclass
identical to the Exchange Act Claims Class in the STEINMETZ action. Also named
as defendants in the Busby litigation are Morgan Stanley & Co., Bear Stearns &
Co., Merrill Lynch & Co. and Smith Barney Inc., the lead underwriters in the IPO
(the "Lead Underwriters").
On or about June 20, 1997, a third purported class action was commenced
against the DK Defendants and the Lead Underwriters (PORTANNESE V. DONNA KARAN
INTERNATIONAL INC., ET AL., 97 Civ. 3631). Plaintiff's claims are substantively
identical to the Securities Act claims asserted in the Busby action, and the
purported class is identical to Securities Act Claims Class in the Busby action.
By motion filed on or about June 27, 1997, plaintiffs in the STEINMETZ,
BUSBY and PORTANNESE actions (collectively, the "Class Action") moved to
consolidate the three actions and to appoint lead plaintiffs and co-lead counsel
(the "Consolidation Motion"). The DK Defendants do not intend to oppose the
Consolidation Motion. By stipulation dated July 10, 1997, counsel for plaintiffs
in the Class Action and counsel for the DK Defendants agreed, INTER ALIA, that,
following the court's disposition of the Consolidation Motion, plaintiffs would
file an amended consolidated complaint and that the DK defendants would have 45
days to answer, move or otherwise plead in response thereto.
On or about July 31, 1997, a fourth purported class action was commenced
against the DK Defendants in the United States District Court for the Eastern
District of New York (ROSALEE BAIN ET AL V DONNA KARAN INTERNATIONAL INC. ET AL,
97 Civ. 4396). Plaintiff's claims are substantively identical to the Exchange
Act claims asserted in the STEINMETZ action, and the purported class is
identical to the Exchange Act Claims Class in the STEINMETZ action. While this
action initially was assigned to a different judge, it is anticipated that this
action will be consolidated with the others.
20
<PAGE>
In or about September 1997, the court issued an order consolidating all of
the above-referenced actions and directing the service of an amended
consolidated complaint, which subsequently has been served.
The DK Defendants believe that the allegations contained in the foregoing
actions are without merit and intend to defend the litigation vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <C> <S>
3.1 -- Amendment to By-laws
10.1 -- Second Amendment, dated as of September 26, 1997, to the Company's Amended and
Restated Credit Agreement, dated as of May 30, 1997.
10.2 -- Amendment No. 1 to Employment Agreement between the Company and Donna Karan.
10.3 -- Amendment No. 1 to Employment Agreement between the Company and Stephan Weiss.
10.4 -- Amendment No. 2 to Employment Agreement between the Company and Stephan Weiss.
10.5 -- Employment Contract, dated as of July 25, 1997, among the Company, The Donna
Karan Company and John D. Idol, and related bonus programs.
27 -- Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
September 28, 1997.
21
<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: November 12, 1997 By: /s/ JOHN D. IDOL
-----------------------------------------
John D. Idol, Chief Executive Officer
Date: November 12, 1997 By: /s/ JOSEPH B. PARSONS
-----------------------------------------
Joseph B. Parsons, Executive Vice
President &
Chief Financial Officer
22
<PAGE>
Exhibit 3.1
AMENDMENT TO BYLAWS OF
DONNA KARAN INTERNATIONAL INC.
So long as, and only for so long as John D. Idol serves as Chief
Executive Officer of the Corporation, Sections 3.2, 3.4, 3.5, 3.6, 3.7, 3.8 and
3.9 of the Company's ByLaws shall be and are hereby is amended and restated as
follows:
Section 3.2 Chairman of the Board
The Chairman of the Board shall preside at all meetings of the
stockholders and the Board of Directors. The Chairman of the Board,
provided the Chairman is Ms. Donna Karan, shall, jointly with the
Chief Executive Officer, have authority and responsibility with
respect to the development of the annual design budgets, creative
budgets and the Corporation's strategic plans (including licensing
strategies consistent with the Corporation's License Agreement dated
July 3, 1996 with Gabrielle Studio, Inc.) for presentation to the
Board for its approval, public relations activities, and hiring and
firing of key executive officers of the Corporation. The Chairman of
the Board, provided the Chairman is Ms. Donna Karan, shall have
control over the creative and artistic aspects, including hiring and
firing of creative personnel, of the Corporation and such affiliated
companies, partnerships, and successors thereof (together with the
Company, the "DK Companies"), in accordance with the DK Companies'
strategic plan and annual plan.
Section 3.4 Chief Executive Officer
The Chief Executive Officer of the Corporation shall have general
supervision of the business, affairs and property of the Corporation,
and over its several officers. In general, the Chief Executive
Officer shall have all authority incident to the office of Chief
Executive Officer and shall have such other authority and perform such
other duties as may from time to time be assigned by the Board of
Directors or by any duly authorized committee of directors.
Notwithstanding the foregoing, so long as Ms. Donna Karan is either
the Chairman of the Board or Chief
<PAGE>
Designer of the Corporation, the Chief Executive Officer shall not
have authority over, and shall not be responsible for creative and
artistic matters, including, but not limited to the creative and
artistic aspects of design, advertising, marketing, and exploitation
of all items and programs produced by the Corporation. The Chief
Executive Officer shall prepare and, so long as Ms. Donna Karan is
either the Chairman of the Board or Chief Designer of the Corporation,
after collaboration with Ms. Karan with respect to the creative and
artistic aspects of the DK Companies propose for the approval of the
Board, an annual financial and operating plan ("annual plan") and upon
the Board's written approval of any annual plan, the Chief Executive
Officer shall have the authority and responsibility for implementing
such annual plan. So long as Ms. Donna Karan is either the Chairman
of the Board or Chief Designer of the Corporation, the Chief Executive
Officer shall have joint authority and responsibility with the
Chairman of the Board and the Chief Designer with respect to the
development of the annual design budgets, creative budgets and the
Corporation's strategic plans(including licensing strategies
consistent with the Corporation's License Agreement, dated July 3,
1996, with Gabrielle Studio, Inc.) for presentation to the Board for
its approval, public relations activities, and hiring and firing of
key executive officers of the Corporation. All officers of the
Corporation, other than the Chief Designer (so long as Ms. Donna Karan
occupies such position), the Chairman of the Board and the
Vice-Chairman, shall report directly or indirectly to the Chief
Executive Officer. The Chief Executive Officer shall, in the absence
or disability of the President or Chief Operating Officer, perform the
duties and exercise the powers of such officers.
Section 3.5 President
The President shall be the chief operating officer of the Corporation
and, subject to the direction of the Board of Directors, or any duly
authorized committee of directors, and the Chief Executive Officer,
and subject to any contractual restriction, shall have such other
authority and perform such other duties as may from time to time be
assigned by the Board of Directors or by any duly authorized committee
of directors or by the Chief Executive Officer.
2
<PAGE>
Section 3.6 Chief Designer
The Chief Designer (so long as Ms. Donna Karan occupies such position)
shall be responsible for and shall have ultimate authority over the
creative and artistic aspects of the Corporation, including, but not
limited to, control over the creative and artistic aspects of design,
advertising, marketing, and exploitation of all items and programs
produced by the Corporation. The Chief Designer shall carry out her
responsibilities in accordance with the strategic plan and the annual
plan, shall collaborate with the Chief Executive Officer prior to his
submitting the annual plan to the Board, and, so long as Ms. Karan
occupies the position of Chief Designer, shall be jointly responsible
with the Chief Executive Officer with respect to the development of
the annual design budgets, creative budgets and the Corporation's
strategic plans (including licensing strategies consistent with the
Corporation's License Agreement, dated July 3, 1996, with Gabrielle
Studio, Inc.) for presentation to the Board for its approval, public
relations activities, and hiring and firing of key executive officers
of the Company. The Chief Designer, provided the Chief Designer is
Ms. Donna Karan, shall have control of over the creative and artistic
aspects of the Corporation and such affiliated companies,
partnerships, and successors, DK Companies which responsibilities
including hiring and firing creative personnel in accordance with the
DK Companies' strategic plan and annual plan. The Chief Designer
shall report to the Chairman of the Board or, in the absence of the
Chairman, the Vice Chairman.
Section 3.7 Vice Presidents
Each vice president shall have such powers and duties as the Board,
the Chief Executive Officer or the President assigned to him.
Section 3.8 Chief Financial Officer
The Chief Financial Officer of the Corporation shall be in charge of
the corporation books and accounts. Subject to the control of the
Board, he shall have such other powers and duties as the Board, the
Chief Executive Officer or the President assigns to him.
Section 3.9 Secretary
3
<PAGE>
The Secretary shall be the secretary of, and keep the minutes of, all
meetings of the Board and the stockholders, and shall have such other
powers and duties as the Board, the Chief Executive Officer or the
President assigns to him. In the absence of the Secretary from any
meeting, the minutes shall be kept by the person appointed for that
purpose by the chairman of the meeting.
GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflicts of law provisions thereof.
WAIVER; AMENDMENTS AND CONSENTS. No waiver of any breach of any
provision of this Amendment shall be deemed a waiver of any preceding or
succeeding breach of such provision or of any other provision herein contained.
Any amendment to this Amendment, and any consent or waiver by the Board of
Directors to any provision of this Amendment, shall be in writing and delivered
to the Board of Directors.
THE BYLAWS. Except as expressly set forth herein, all other
provisions of the ByLaws shall remain in full force and effect.
4
<PAGE>
Exhibit 10.1
SECOND AMENDMENT
Dated as of September 26, 1997
This SECOND AMENDMENT among The Donna Karan Company, a New York
general partnership, The Donna Karan Company Store, G.P., a New York general
partnership, Donna Karan Studio, a New York general partnership, and DK Footwear
Partners, a New York general partnership (collectively, the "Borrowers"), the
financial institutions from time to time parties thereto as lenders (the
"Lenders"), the financial institutions from time to time parties thereto as
issuing banks (the "Issuing Banks"), Citibank, N.A., in its capacity as
administration agent for the Lenders and the Issuing Banks (the "Administrative
Agent"), The Chase Manhattan Bank and Nationsbank, N.A., in their capacity as
co-agents (the "Co-Agents").
PRELIMINARY STATEMENTS:
(1) The Borrowers, the Lenders, the Issuing Banks, the Co-Agents and
the Administrative Agent have entered into an Amended and Restated Credit
Agreement dated as of May 30, 1997 (the "Credit Agreement"). Unless otherwise
defined herein, the terms defined in the Credit Agreement shall be used herein
as therein defined.
(2) The Borrowers and the Lenders have agreed to amend the Credit
Agreement as hereinafter set forth.
SECTION 1. AMENDMENT TO CREDIT AGREEMENT. The Credit Agreement is,
effective as of the date hereof and subject to the satisfaction of the
conditions precedent set forth in Section 3 hereof, hereby amended as follows:
(a) The definition for "Applicable Fixed Rate Margin" in Section 1.01
of the Credit Agreement is amended in full to read as follows:
"APPLICABLE FIXED RATE MARGIN" means initially a rate equal to 2.25%
per annum until the last day of the first fiscal quarter of 1998.
Thereafter, such rate will fluctuate quarterly on the first day of
each fiscal quarter, commencing with the second fiscal
<PAGE>
quarter of 1998, based upon the Fixed Charge Coverage Ratio for the
preceding twelve-month period, calculated as of the last day of such
preceding twelve-month period, as set forth below:
If the Fixed Charge Applicable Fixed
Coverage Ratio is: Rate Margin
------------------- ----------------
Less than 3.0 2.25%
Greater than or equal to
3.0 but less than 4.0 1.75%
Greater than or equal to
4.0 but less than 5.0 1.50%.
Greater than or equal to
5.0 but less than 6.0 1.25%
Greater than or equal to
6.0 1.00%."
(b) The definition for "Applicable Floating Rate Margin" in Section
1.01 of the Credit Agreement is amended in full to read as follows:
"APPLICABLE FLOATING RATE MARGIN" means initially a rate equal to
1.00% per annum until the last day of the first fiscal quarter of
1998. Thereafter, such rate will fluctuate quarterly on the first day
of each fiscal quarter, commencing with the second fiscal quarter of
1998, based upon the Fixed Charge Coverage Ratio for the preceding
twelve-month period, calculated as of the last day of such preceding
twelve-month period, as set forth below:
-2-
<PAGE>
If the Fixed Charge Applicable Floating
Coverage Ratio is: Rate Margin
------------------- -------------------
Less than 3.0 1.0000%
Greater than or equal to
3.0 but less than 4.0 0.5000%
Greater than or equal to
4.0 but less than 5.0 0.2500%.
Greater than or equal to
5.0 but less than 6.0 0.1875%
Greater than or equal to
6.0 0.1250%"
(c) Clause (b) in the definition for "Borrowing Base" in Section 1.01
of the Credit Agreement is amended in full to read as follows:
"(b) up to eighty percent (80%) of Eligible Receivables (other than
those Eligible Receivables described in clause (a) of this definition)
LESS such reserves as the Administrative Agent, in its sole
discretion, deems appropriate PLUS"
(d) Section 1.03 of the Credit Agreement is amended in full to read
as follows:
"1.03. ACCOUNTING TERMS. For purposes of this Agreement, all
accounting terms not otherwise defined herein shall have the meanings
assigned to them in conformity with GAAP. For purposes of calculating
the financial covenants herein, (i) the leases of the Borrowers with
respect to their computer equipment shall be treated as operating
leases in accordance with Borrowers' past practices and (ii) any gain
or loss that results from the sale of the beauty division shall not be
taken into account."
(e) Subsection (e) of Section 7.01 of the Credit Agreement is amended
in full to read as follows:
-3-
<PAGE>
"(e) BUDGETS; BUSINESS PLANS; FINANCIAL PROJECTIONS. As soon as
practicable and in any event not later than (i) June 30, 1997 with
respect to Fiscal Year 1997, (ii) December 1, 1997 with respect to
Fiscal Year 1998 and (iii) with respect to each Fiscal Year
thereafter, thirty (30) days after the beginning of each such fiscal
year of Donna Karan International, (A) a monthly budget for such
Fiscal Year; (B) an annual business plan for such Fiscal Year,
substantially in the form of the business plan heretofore delivered to
the Administrative Agent and the Lenders, accompanied by a report
reconciling all changes and departures from the business plan
delivered to the Administrative Agent and the Lenders for the
preceding Fiscal Year and (C) a consolidated and consolidating plan
and financial forecast, prepared in accordance with Donna Karan
International's normal accounting procedures applied on a consistent
basis, for each succeeding Fiscal Year until the Commitment
Termination Date, including, without limitation, (I) a forecasted
consolidated balance sheet, and the related consolidated statements of
income, stockholders' equity and cash flows of Donna Karan
International and its Subsidiaries for and as of the end of such
Fiscal Year, and the forecasted consolidating statements of income of
each Borrower for such Fiscal Year, (II) forecasted consolidated
balance sheets, and the related consolidated statements of income,
stockholders' equity and cash flows of Donna Karan International and
its Subsidiaries for and as of the end of each fiscal month of such
Fiscal Year, and the forecasted consolidating statements of income of
each Borrower for and as of the end of each fiscal month of such
Fiscal Year, (III) the amount of forecasted Capital Expenditures for
such Fiscal Year and (IV) forecasted compliance with the provisions of
ARTICLE X."
(f) Subsection (a) of Section 7.02 of the Credit Agreement is amended
in full to read as follows:
"(a) The Borrowers shall provide the Administrative Agent and each
Lender with a Borrowing Base Certificate, certified as being true and
correct by the Borrowers' chief financial officer, controller or any
-4-
<PAGE>
other officer acceptable to the Administrative Agent, (i) with respect
to the period from September 26, 1997 to January 30, 1998, on the
seventh Business Day following the last day of each week and (ii)
with respect to all time thereafter, on the seventh Business Day
following the last day of each fiscal month, or more frequently if
requested by the Administrative Agent. Each subsequent Borrowing Base
Certificate shall be based upon, with respect to Receivables and
Inventory, information as of the last day of the immediately preceding
week or fiscal month, as the case may be. Each such Borrowing Base
Certificate shall set forth Borrowing Base calculations since the date
of the last prior Borrowing Base Certificate and shall include a
weekly summary aging of Receivables or monthly summary aging of
Receivables, as the case may be, a weekly or monthly schedule, as the
case may be, of each category of Eligible Inventory and all Eligible
Inventory that has become ineligible, specifying the applicable
category of ineligibility and such other information as the
Administrative Agent may request from time to time."
(g) Article VIII of the Credit Agreement is amended by adding at the
end thereof a new section to read as follows:
"8.13. AVAILABILITY. The Borrowers shall have at all times
Availability in an amount of at least $10,000,000; PROVIDED, HOWEVER,
that the Borrowers shall be permitted to have Availability in an
amount of less than $10,000,000 for a period of not more than five
consecutive days."
(h) Subsection (vii) of Section 9.01 of the Credit Agreement is
amended in full to read as follows:
"(vii) Accommodation Obligations in respect of performance guaranties
made by Donna Karan International (A) on behalf of any of its
Subsidiaries or Donna Karan Japan K.K. in an aggregate amount not to
exceed $10,000,000 at any one time outstanding or (B) on behalf of
Donna Karan Studio and The Donna Karan Company in connection with the
sale of the beauty division in an aggregate amount not to exceed
-5-
<PAGE>
$21,000,000 plus the amount of the indemnities owing by Donna Karan
Studio and The Donna Karan Company relating thereto;"
(i) Section 9.01 of the Credit Agreement is amended by deleting the
period at the end of subsection (viii) and substituting therefor "; and"
and by adding at the end thereof a new subsection (ix) to read as follows:
"(ix) subordinated indebtedness in an approximate amount of
$6,500,000 incurred by Donna Karan Studio owing to Donna Karan
individually containing terms and conditions satisfactory to the
Agent.
(j) Section 9.03 of the Credit Agreement is amended by deleting the
period at the end of subsection (vi) and substituting therefor "; and" and
by adding at the end thereof a new subsection (vii) to read as follows:
"(vii) the Lien of any financial institution in the computer hardware
of the Donna Karan Group in connection with such financial
institution's refinancing of the Indebtedness secured by such
property."
(k) Subsection (vii) of Section 9.08 of the Credit Agreement is
amended in full to read as follows:
"(vii) the on-going royalty fees payable to Gabrielle Studio, Inc.
pursuant to the terms of the License Agreement, PROVIDED, HOWEVER,
that the royalty fees payable in November 1997 shall be payable in
cash only to the extent that an equivalent amount is made available to
Donna Karan Studio on a subordinated basis as permitted in Section
9.01(ix);"
(l) Article IX of the Credit Agreement is amended by adding at the
end thereof a new section to read as follows:
"9.18. MAXIMUM CREDIT. The Borrowers shall not permit, at any time
during the periods set forth below, the sum of (i) the Revolving
Credit Obligations at such time PLUS (ii) the amount of the Foreign
Exchange Exposure at such time PLUS (iii) the amount of the
-6-
<PAGE>
Obligations at such time attributable to corporate credit cards or
cash management functions, including Automated Clearing House (ACH)
functions, performed by Citibank, to EXCEED the amount set forth
opposite such Period:
Period Amount
------ ------
September 1-30, 1997 $120,000,000
October 1-31, 1997 $120,000,000
November 1-30, 1997 $120,000,000
December 1, 1997 to
January 19, 1998 $115,000,000
January 20-30, 1998 $ 75,000,000
All times thereafter $ 60,000,000"
(m) Section 10.01 of the Credit Agreement is amended by adding a
PROVISO at the end thereof that reads as follows:
"PROVIDED, HOWEVER, that (i) for all times during the period from
September 26, 1997 to January 30, 1998, the Adjusted Net Worth of
Donna Karan International and its Subsidiaries on a consolidated basis
shall not be less than $140,000,000 and (ii) as of January 31, 1998,
Borrowers shall be in compliance with the Adjusted Net Worth
requirements for the fourth fiscal quarter of 1997 as set forth
above."
SECTION 2. WAIVERS. The Lenders hereby waive, effective as of the
date hereof and subject to the satisfaction of the conditions precedent set
forth in Section 3 hereof, compliance by the Borrowers with the provisions of
Sections 10.02, 10.03, 10.04 and 10.05 of the Credit Agreement during the period
from the date hereof until January 30, 1998; PROVIDED, HOWEVER, that as of
January 31, 1998, the Borrowers shall be in compliance with the provisions of
such Sections for the fourth fiscal quarter of 1997.
SECTION 3. CONDITIONS OF EFFECTIVENESS. This Second Amendment shall
become effective when (i) the Administrative Agent shall have received
counterparts of this Second Amendment executed by the Borrowers and the
Requisite Lenders and (ii) the Borrowers shall have paid to the Agent for the
benefit of each
-7-
<PAGE>
Lender that has executed this Amendment, a fee equal to 0.125% of such Lender's
Commitment.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE BORROWERS. Each
Borrower represents and warrants as follows:
(a) After giving effect to this Second Amendment, all of the
representations and warranties contained in Section 6.01 of the Credit
Agreement and in the other Loan Documents shall be true in all material
respects.
(b) After giving effect to this Second Amendment, no Default or Event
of Default shall have occurred and be continuing.
(c) As of the date hereof, no material adverse change shall have
occurred in the condition (financial or otherwise), performance,
properties, operations or prospects of the Borrowers or Donna Karan
International and its Subsidiaries, taken as a whole, since December 29,
1996 except as publicly disclosed prior to September 26, 1997.
SECTION 5. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. (a) Upon
the effectiveness of this Second Amendment, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or
words of like import referring to the Credit Agreement, and each reference in
the other Loan Documents to "the Credit Agreement", "thereunder", "thereof" or
words of like import referring to the Credit Agreement, shall mean and be a
reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement and
all other Loan Documents, are and shall continue to be in full force and effect
and are hereby in all respects ratified and confirmed. Without limiting the
generality of the foregoing, the Loan Documents and all of the Collateral
described therein do and shall continue to secure the payment of all obligations
of the Borrowers under the Credit Agreement, the Notes and the other Loan
Documents, in each case as amended hereby.
(c) The execution, delivery and effectiveness of this Second
Amendment shall not, except as expressly provided herein,
-8-
<PAGE>
operate as a waiver of any right, power or remedy of any Lender or the Agent
under any of the Loan Documents, nor constitute a waiver of any provision of any
of the Loan Documents.
SECTION 6. EXECUTION IN COUNTERPARTS. This Second Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute but
one and the same agreement.
SECTION 7. GOVERNING LAW. This Second Amendment shall be governed
by, and construed in accordance with, the laws of the State of New York.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be executed as of the date first above written.
THE DONNA KARAN COMPANY
By: Donna Karan International Inc., a general
partner
By: /s/
-------------------------------------
Title:
-------------------------------
DONNA KARAN STUDIO
By: Donna Karan International Inc., a general
partner
By: /s/
-------------------------------------
Title:
-------------------------------
THE DONNA KARAN COMPANY STORE, G.P.
By: Donna Karan International Inc., a general
partner
By: /s/
-------------------------------------
Title:
-------------------------------
DK FOOTWEAR PARTNERS
By: Donna Karan International Inc., a general
partner
By: /s/
-------------------------------------
-10-
<PAGE>
Title:
-------------------------------
CITIBANK, N.A., as Administrative Agent
and Lender
By: /s/
--------------------------------------
Vice President
THE CHASE MANHATTAN BANK, as Co-Agent
and Lender
By: /s/
--------------------------------------
Vice President
NATIONSBANK N.A., as Co-Agent and Lender
By: /s/
--------------------------------------
Vice President
BANKBOSTON N.A.
By: /s/
--------------------------------------
Vice President
UNION BANK OF CALIFORNIA
By: /s/
--------------------------------------
Vice President
-11-
<PAGE>
Exhibit 10.2
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
Amendment No. 1 ("Amendment") dated as of the 25th day of July, 1997,
by and between DONNA KARAN INTERNATIONAL INC., a Delaware corporation, having an
office at 550 Seventh Avenue, New York, New York 10018 (the "Company") and
DONNA KARAN (the "Executive") to Employment Agreement (the "Agreement") dated as
of the 3rd day of July, 1996, by and between the Company and the Executive.
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Company and the Executive wish to amend the Agreement on
the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, it is hereby agreed as
follows:
1. So long as, but only so long as, John D. Idol, serves as Chief
Executive Officer of the Company, the following amendments to the Agreement are
hereby adopted:
a. AMENDMENT OF SECTION 1. Section 1 of the Agreement is hereby
amended and restated to read in its entirety as follows:
"1. EMPLOYMENT. The Company hereby employs the Executive and
Executive hereby accepts employment by the Company on the terms
and conditions hereinafter set forth, to act as Chairman of the
Board of Directors and Chief Designer for the Company, its
subsidiaries and affiliated companies, and, if so elected, to act
as Chairman of the Board of the Company, its subsidiaries and
affiliated companies."
b. AMENDMENT OF SECTION 2. Section 2 of the Agreement is hereby
amended and restated to read in its entirety as follows:
"2. DUTIES AND SCOPE OF AUTHORITY. The Company hereby agrees that,
except to the extent that the Executive otherwise consents in
writing, during the term of this Agreement:
(a) Executive shall be the sole Chairman of the Board and sole
Chief Designer for the Company, its
<PAGE>
subsidiaries and affiliated companies (together with the Company,
the 'DK Companies'). At all times that Executive holds the
position of either Chief Designer or Chairman of the Board, she
shall have equal authority and responsibility with the Chief
Executive Officer with respect to the development of the annual
design budgets, creative budgets and the Company's strategic
plans (including licensing strategies consistent with the
Company's License Agreement dated July 3, 1996 with Gabrielle
Studio, Inc.) for presentation to the Board of Directors for its
approval, public relations policies, and hiring and firing of key
executive officers of the Company; have control over all creative
and artistic aspects relating to the DK Companies, including, but
not limited to, control over the creative and artistic aspects of
design, advertising, marketing, exploitation of all items and
programs produced by the DK Companies and control over hiring and
firing of creative personnel, and shall carry out such
responsibilities in accordance with the DK Companies' strategic
plan and annual financial and operating plan; and the budget
relating to such creative and artistic aspects of the DK
Companies as set forth in the Company's annual plan shall be
prepared and presented to the Board for its approval by the Chief
Executive Officer after collaboration with Executive.
(b) The Company shall cause the Executive to be nominated as a
director of the Company on management's slate of nominees;
(c) Except as expressly permitted herein, Executive's authority,
jurisdiction and responsibility as Chairman of the Board and
Chief Designer shall not be diminished in form or substance from
the authority, jurisdiction and responsibility as set forth
herein;
(d) No action will be taken by the Company to diminish the scope
of the Executive's responsibility and authority, or to render it
difficult or impossible for Executive to carry out her duties."
c. AMENDMENT OF SECTION 5. Section 5 of the Agreement is hereby
amended and restated to read in its entirety as follows:
"5. TERM. The term of this Agreement shall commence as of the
date hereof with respect to the
2
<PAGE>
Executive's role as Chairman of the Board and Chief Designer and
shall continue for an initial term ending on December 31, 1999
(the 'Initial Term'). Such Initial Term shall continue thereafter
in automatically renewable successive terms of three year periods
as Chairman of the Board and Chief Designer, unless terminated
(i) by the Company for 'cause' as provided in paragraph 9(c)
hereof, or (ii) by Executive as provided in paragraph 9(a) or
9(b) hereof. All aspects of this Agreement shall remain in full
force and effect as long as the Executive continues to serve as
either Chairman of the Board or Chief Designer (or both)
hereunder."
d. AMENDMENT OF SECTION 9(A). (a) The first sentence of Section
9(a) of the Agreement is hereby deleted in its entirety and the
following is hereby inserted in place thereof:
"(a) This Agreement may be terminated by the Executive without
reason at any time after the Initial Term."
e. AMENDMENT OF SECTION 9(B). Section 9(b)(i) of the Agreement is
hereby amended and restated in its capacity as follows:
"(i) if at any time the Executive shall (without her prior
written consent) not be Chairman of the Board and the sole Chief
Designer."
2. ACKNOWLEDGMENT. Executive hereby expressly acknowledges and
agrees that the changes in her duties and responsibilities as set forth in this
Amendment and the appointment of John D. Idol as Chief Executive Officer of the
Company do not constitute "good reason" as set forth in Section 9(b)(ii) of the
Agreement.
3. SEPARABILITY. In the event that any provision or any portion of
any provision of this Amendment shall be held to be void or unenforceable, the
remaining provisions of this Amendment (and the balance of any provisions held
void or
3
<PAGE>
unenforceable in part only) shall continue in full force and effect.
4. ASSIGNMENT. This Agreement may not be assigned by Executive, but
may be assigned by the Company to any successor in interest in a transaction not
constituting a "change of control" as set forth in paragraph 9(b)(v) of the
Agreement. This Amendment shall inure to the benefit of, and shall be binding
upon the Company, its permitted successors and assigns, and Executive, her legal
representatives, executors and administrators.
5. ENTIRE AGREEMENT. This Amendment, together with the Agreement
(as amended hereby), contains the full and complete understanding and agreement
of the parties with respect to the subject matter hereof and supercedes all
prior agreements and understandings between the parties with respect to the
subject matter hereof.
6. GOVERNING LAW. This Amendment shall be governed by and construed
in accordance with the laws of the State of New York, without giving effect to
the principles of conflicts of law provisions thereof.
7. WAIVER; AMENDMENT AND CONSENTS. No waiver by either party of any
breach of any provision of this Amendment shall be deemed a waiver of any
preceding or succeeding breach of such provision or of any other provision
herein contained. Any amendment to this Amendment, and any consent or waiver by
a party
4
<PAGE>
hereto to any provision of this Amendment, shall be in writing and delivered to
both parties to this Amendment.
8. NOTICES. Except as otherwise specifically provided herein, any
notice or other communication given hereunder shall be deemed sufficient if
delivered personally or sent by registered or certified mail, return receipt
requested, as follows:
If to the Company:
Donna Karan International Inc.
550 Seventh Avenue
New York, New York 10018
Attention: President
If to Executive:
Ms. Donna Karan
550 Seventh Avenue
New York, New York 10018
The foregoing addresses may be changed by notice given in the manner
set forth in this paragraph 8.
9. THE AGREEMENT. Except as expressly set forth herein, all other
provisions of the Agreement shall remain in full force and effect.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed
this Amendment as of the day and year first above written.
DONNA KARAN INTERNATIONAL INC.
By: /s/
---------------------------
Name:
Title:
/s/
------------------------------
DONNA KARAN
6
<PAGE>
Exhibit 10.3
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
Amendment No. 1 dated as of July 25, 1997 ("Amendment") by and between
DONNA KARAN INTERNATIONAL INC. a Delaware corporation, having an office at 550
Seventh Avenue, New York, New York 10018 (the "Company") and STEPHAN WEISS (the
"Executive") to Employment Agreement (the "Agreement") dated as of the 3rd day
of July, 1996, by and between, the Company and the Executive.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company and the Executive wish to amend the Agreement on
the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, it is hereby agreed as
follows:
1. So long as, but only so long as, John D. Idol, serves as Chief
Executive Officer of the Company the following amendments to the Agreement are
hereby adopted:
a. AMENDMENT OF SECTION 2. Section 2 of the Agreement is hereby
amended by deleting paragraph 2(a)in its entirety.
2. ACKNOWLEDGMENT. The Executive hereby acknowledges and agrees
that the changes to his duties and responsibilities to the Company as set forth
in this Amendment and the appointment of John D. Idol as Chief Executive Officer
of the Company do not constitute "good reason" as set forth under Section
9(b)(ii) of the Agreement.
<PAGE>
3. SEPARABILITY. In the event that any provision or any portion of
any provision of this Amendment shall be held to be void or unenforceable, the
remaining provisions of this Amendment (and the balance of any provisions held
void or unenforceable in part only) shall continue in full force and effect.
4. ASSIGNMENT. This Amendment may not be assigned by Executive, but
may be assigned by the Company to any successor in interest in a transaction not
constituting a "change of control" as set forth in paragraph 9(b)(v) of the
Agreement. This Amendment shall inure to the benefit of, and shall be binding
upon the Company, its permitted successors and assigns, and Executive, his legal
representatives, executors and administrators.
5. ENTIRE AGREEMENT. This Amendment, together with the Agreement,
contains the full and complete understanding and agreement of the parties with
respect to the subject matter hereof and thereof and supersedes all prior
agreements and understandings between the parties with respect to the subject
matter hereof.
6. GOVERNING LAW. This Amendment shall be governed by and construed
in accordance with the laws of the State of New York, without giving effect to
the principles of conflicts of law provisions thereof.
2
<PAGE>
7. WAIVER; AMENDMENTS AND CONSENTS. No waiver by either party of
any breach of any provision of this Amendment shall be deemed a waiver of any
preceding or succeeding breach of such provision or of any other provision
herein contained. Any amendment to this Amendment, and any consent or waiver by
a party hereto to any provision of this Amendment, shall be in writing and
delivered to both parties to this Amendment.
8. NOTICES. Except as otherwise specifically provided herein, any
notice or other communication given hereunder shall be deemed sufficient if
delivered personally or sent by registered or certified mail, return receipt
requested, as follows:
If to the Company:
Donna Karan International Inc.
550 Seventh Avenue
New York, New York 10018
Attention: President
If to Executive:
Mr. Stephan Weiss
550 Seventh Avenue
New York, New York 10018
The foregoing addresses may be changed by notice given in the manner set forth
in this paragraph 8.
9. THE AGREEMENT. Except as expressly set forth herein, all other
provisions of the Agreement shall remain in full force and effect.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
DONNA KARAN INTERNATIONAL INC.
By: /s/
-------------------------------
Name:
Title:
/s/
----------------------------------
STEPHAN WEISS
4
<PAGE>
Exhibit 10.4
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
Amendment No. 2 dated as of August 11, 1997 ("Amendment No. 2") by and
between DONNA KARAN INTERNATIONAL INC. a Delaware corporation, having an office
at 550 Seventh Avenue, New York, New York 10018 (the "Company") and STEPHAN
WEISS (the "Executive") to Employment Agreement (the "Agreement") dated as of
the 3rd day of July, 1996, as amended on July 25, 1997, by and between, the
Company and the Executive.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company and the Executive have amended the Agreement on
July 25, 1997 ("Amendment No. 1"); and
WHEREAS, Stephan Weiss deems it in the best interests of the Company
to further amend the Agreement to voluntarily forego his compensation to be
received from the Company, on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, it is hereby agreed as
follows:
1. So long as, but only so long as, John D. Idol, serves as Chief
Executive Officer of the Company, the following amendments to the Agreement are
hereby adopted:
a. AMENDMENT OF SECTION 6. Section 6 of the Agreement is hereby
amended and restated in its entirety as follows:
"6. COMPENSATION. In consideration for the services to be rendered
by Executive for any capacity for which he is employed hereunder, Executive
agrees that he will receive no compensation for such services, and the
Company agrees to include Executive in the Company's employee benefit and
stock option plans, if any, upon terms commensurate with and
<PAGE>
in a manner consistent with Executive's position in the Company and the
terms of such plans, except that Executive shall not participate in the
Company's 1996 Stock Incentive Plan or the 1996 Non-Employee Director Stock
Option Plan (but shall be eligible to participate in any subsequent
Plans)."
2. SEPARABILITY. In the event that any provision or any portion of
any provision of this Amendment No. 2 shall be held to be void or unenforceable,
the remaining provisions of this Amendment No. 2 (and the balance of any
provisions held void or unenforceable in part only) shall continue in full force
and effect.
3. ASSIGNMENT. This Amendment No. 2 may not be assigned by
Executive, but may be assigned by the Company to any successor in interest in a
transaction not constituting a "change of control" as set forth in paragraph
9(b)(v) of the Agreement. This Amendment No. 2 shall inure to the benefit of,
and shall be binding upon the Company, its permitted successors and assigns, and
Executive, his legal representatives, executors and administrators.
4. ENTIRE AGREEMENT. This Amendment No. 2, together with the
Agreement and Amendment No. 1 thereto, contains the full and complete
understanding and agreement of the parties with respect to the subject matter
hereof and thereof and supersedes all prior agreements and understandings
between the parties with respect to the subject matter hereof.
2
<PAGE>
5. GOVERNING LAW. This Amendment No. 2 shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the principles of conflicts of law provisions thereof.
6. WAIVER; AMENDMENTS AND CONSENTS. No waiver by either party of
any breach of any provision of this Amendment No. 2 shall be deemed a waiver of
any preceding or succeeding breach of such provision or of any other provision
herein contained. Any amendment to this Amendment No. 2, and any consent or
waiver by a party hereto to any provision of this Amendment No. 2, shall be in
writing and delivered to both parties to this Amendment No. 2.
7. NOTICES. Except as otherwise specifically provided herein, any
notice or other communication given hereunder shall be deemed sufficient if
delivered personally or sent by registered or certified mail, return receipt
requested, as follows:
If to the Company:
Donna Karan International Inc.
550 Seventh Avenue
New York, New York 10018
Attention: President
If to Executive:
Mr. Stephan Weiss
550 Seventh Avenue
New York, New York 10018
3
<PAGE>
The foregoing addresses may be changed by notice given in the manner set
forth in this paragraph 8.
8. THE AGREEMENT. Except as expressly set forth herein, all other
provisions of the Agreement and Amendment No. 1 thereto shall remain in full
force and effect.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
No. 2 as of the day and year first above written.
DONNA KARAN INTERNATIONAL INC.
By:
--------------------------------
Name:
Title:
-----------------------------------
STEPHAN WEISS
5
<PAGE>
Exhibit 10.5
EMPLOYMENT CONTRACT
EMPLOYMENT CONTRACT, dated as of July 25, 1997 among Donna Karan
International Inc., a Delaware corporation with offices at 550 Seventh Avenue,
New York, New York 10018 (the "Company"), The Donna Karan Company, a New York
partnership with offices at 550 Seventh Avenue, New York, New York 10018
("DKCo."), and John D. Idol residing at 225 Elderfields Road, Manhasset, New
York 11030 ("Executive"). The Company, DKCo. (to the extent expressly set forth
herein), and Executive agree as follows:
1. TERM. The Company agrees to employ Executive, and Executive
agrees to serve, on the terms and conditions of this Agreement, for a period
commencing as of August 11, 1997 and ending on June 30, 2002, unless earlier
terminated pursuant to the terms hereof; provided, however, that this Agreement
will automatically renew for an indefinite term (the "Renewal Term") unless and
until either party gives the other 12 months' written notice of termination at
any time to be effective on June 30, 2002 or any time thereafter or this
Agreement is otherwise terminated as provided for herein. The period during
which Executive is employed hereunder (including the Renewal Term) is
hereinafter referred to as the "Employment Period." During the Renewal Term,
Executive shall have the same duties and responsibilities as described
hereunder, and receive the same base salary, bonus, and benefits set forth in
Section 3 hereof as in effect on the last day of the preceding period.
2. DUTIES AND SERVICES.
(a) During the Employment Period, Executive shall be employed as
Chief Executive Officer of the Company and if the individual serving on the date
hereof as President and Chief Operating Officer of the Company shall cease to
hold either such position,
<PAGE>
Executive shall also be employed in such capacity or capacities, and shall
perform all duties and services consistent with such positions, when and as
requested by the Board of Directors of the Company (the "Board"), for the
Company and for each of the affiliated companies or partnerships set forth on
Schedule A attached hereto and such other affiliated companies or partnerships
or successors to any thereof, in whole or in part, which may be designated by
the Board (such affiliated companies, partnerships, and successors, together
with the Company, shall be referred to herein as the "DK Companies"). Except as
set forth in the remainder of this paragraph, the Executive shall (subject to
the direction of the Board) have executive authority over all aspects of the
business and affairs of the Company and all of the DK Companies.
Notwithstanding the foregoing, so long as (but only for so long as) Ms. Donna
Karan shall serve in the position of either Chief Designer or Chairman of the
Board of the Company, Executive shall not have authority over, and shall not be
responsible for, creative and artistic matters, including, but not limited to,
control over the creative and artistic aspects of design, advertising,
marketing, and exploitation of all items and programs produced by the DK
Companies. Notwithstanding anything to the contrary in the preceding portions
of this Section, so long as (but only for so long as) Ms. Donna Karan shall
serve in the position of either Chief Designer or Chairman of the Board, Ms.
Karan shall have control over the creative and artistic aspects of the DK
Companies as described in the preceding sentence, which responsibilities
including hiring and firing of creative personnel shall be carried out in
accordance with the DK Companies' strategic plan and annual plan described
herein; and the budget relating to such creative and artistic aspects of the DK
Companies as set forth in the Company's annual plan shall be prepared and
presented to the Board for its approval by Executive after collaboration with
Ms. Karan
-2-
<PAGE>
(provided Ms. Karan shall serve in the position of either Chief Designer or
Chairman of the Board). Executive shall have equal authority and responsibility
with Ms. Karan (provided Ms. Karan shall serve in the position of either the
Chief Designer or Chairman of the Board) with respect to the development of the
annual design budgets, creative budgets and the Company's strategic plans
(including licensing strategies consistent with the Company's License Agreement
dated July 3, 1996 with Gabrielle Studio, Inc.) for presentation to the Board
for its approval, public relations policies, and hiring and firing of key
executive officers of the Company. Executive shall perform his duties and
services hereunder, within his expertise and experience, as may be assigned to
him by, and subject to the direction of, the Board.
(b) Executive shall prepare and propose, for approval of the
Board, an annual financial and operating plan ("annual plan") at the time and in
the detail prescribed by the Board, which annual plan shall be prepared in
conformity with the Board-approved overall strategic plan of the Company. Each
annual plan shall include financial, operating and licensing plans with respect
to the DK Companies' business relating to each DK Company and each division and
subsidiary thereof. Upon the Board's written approval of any annual plan,
Executive shall have the authority and responsibility for implementing such
annual plan, and such annual plan may be changed only by the Board.
(c) Executive agrees to his employment as described in this
Section 2 and shall devote all of his normal working time and efforts to the
performance of his duties under this Agreement, excepting disabilities, illness,
and vacation time; provided, however, that Executive may devote reasonable
amounts of time to serving as a director or a member of charitable, religious,
educational, or business organizations, as long as, in the opinion of the
-3-
<PAGE>
Board, such services do not result in a conflict of interest with the interests
of the DK Companies and the services do not interfere with the performance of
Executive's services hereunder. Executive shall travel on behalf of the Company
as the needs of the business require.
(d) All executives of the Company and each DK Company, other
than the Chief Designer (so long as Ms. Donna Karan occupies such position),
Chairman of the Board and the present Vice Chairman of the Board, shall report
to Executive. If the Company acquires or forms a new company, the reporting
structure for executives of such new company shall be as set forth in the
preceding sentence.
(e) During the Employment Period, the Company shall nominate
Executive for election to the Board and shall use its best efforts to cause
Executive to be elected as a member of the Board.
3. COMPENSATION AND OTHER BENEFITS.
(a) BASE SALARY. As compensation for his services hereunder,
the Company and DKCo. jointly and severally, agree to pay Executive, during the
Employment Period, commencing with the 1997 fiscal year (I.E., the year ending
December 28, 1997), a base salary (the "Base Salary") for the periods indicated,
payable in equal installments on the regular payroll dates of the Company, as
follows: $345,206 for the period from August 11, 1997 through December 28,
1997; $900,000 for the 1998 and 1999 fiscal years; $950,000 for the 2000 and
2001 fiscal years; $475,000 for the period from the beginning of the 2002 fiscal
year through June 30, 2002 if this Agreement is not renewed as set forth in
Section 1 hereof; and $950,000 for each fiscal year thereafter (except as
modified by the Board pursuant to this Agreement).
-4-
<PAGE>
Notwithstanding the foregoing, Executive's Base Salary shall be
subject to review by the Board and may be increased (but not decreased) at any
time, in which event Base Salary for any subsequent year shall be not less than
the increased Base Salary, and, provided further, that, in the event Executive
remains employed during the Renewal Term, the Board shall review and set his
Base Salary every year of such Renewal Term (provided that such Base Salary may
not be less than $950,000 in any year during such Renewal Term).
(b) PERFORMANCE BONUS. Subject to Section 10 hereunder and in
accordance with, and subject to, the provisions of this Section 3(b), Executive
shall be entitled to receive, commencing with the 1998 fiscal year, a
performance bonus (the "Performance Bonus") based on satisfying the criteria,
and in the amounts, set forth in the Performance Bonus Award established by the
Incentive Compensation Sub-Committee of the Board (the "Committee") (and signed
by the parties for identification purposes) for each fiscal year which ends
during the Employment Period (or a partial fiscal year in the case of death or a
Disability termination). For purposes of this Section 3, "fiscal year" shall
mean the current fiscal year period even if the Company changes its fiscal year.
The Performance Bonus, if any, for each fiscal year, except as otherwise
provided herein in the case of death or a Disability termination, shall be paid
in cash after the close of each fiscal year at the same time and in the same
manner as bonuses are paid to other executives of the Company, but only after
the Committee has certified achievement of the applicable criteria in writing
and any necessary stockholder approval has been obtained. The calculation of
the amounts to be received by Executive pursuant to the Performance Bonus Award
shall be determined from the Company's books and records as audited by the
Company's principal auditing firm. In no event shall the amount of the
Performance Bonus for any fiscal
-5-
<PAGE>
year exceed $750,000. Notwithstanding anything else herein, the Performance
Bonus shall be subject to the terms of the Performance Bonus Award, which by its
terms includes the provisions delineated in this Section 3(b) and elsewhere in
this Agreement with regard to the Performance Bonus (all of which have been
approved as part of the Award by the Committee). The Company agrees to submit
to the stockholders the Performance Bonus for approval at the annual
stockholders meeting in 1998. The Performance Bonus Award shall be subject to
stockholder approval at such time or times as required by Section 162(m) of the
Code. It is agreed that the Committee may revise the Performance Bonus Award
document setting forth the provisions of such Performance Bonus to include the
provisions of the Performance Bonus set forth herein and made part of the Award,
as well as any other provision required for compliance with the
performance-based compensation exemption from Section 162(m) of the Code and
administrative provisions (but not change the current substance of the
Performance Bonus Award).
(c) INCENTIVE BONUS. Subject to Section 10 hereunder and in
accordance with, and subject to, the provisions of this Section 3(c), in
addition to any other compensation to be received pursuant to this Agreement,
Executive shall be entitled to receive, commencing with the 1998 fiscal year, an
incentive bonus (the "Incentive Bonus") based on satisfying the criteria, and in
the amounts set forth in the Incentive Bonus Award established by the Committee
(and signed by the parties for identification purposes) for each fiscal year
ending during the Employment Period as specifically provided in this Agreement
and for the fiscal year in which the Employment Period ends The Incentive Bonus,
if any, for any fiscal year shall be paid in cash after the close of each fiscal
year, at the same time and in the same manner as
-6-
<PAGE>
bonuses are paid to other executives of the Company, but only after the
Committee has certified achievement of the applicable criteria in writing and
any necessary stockholder approval has been obtained. The calculation of the
amounts to be received by Executive pursuant to the Incentive Bonus Award shall
be determined from the Company's books and records as audited by the Company's
principal auditing firm. In no event shall the amount of the Incentive Bonus
for any full fiscal year (prorated for any partial fiscal year) exceed $2
million. Notwithstanding anything else herein, the Incentive Bonus plan shall
be subject to the terms of the Incentive Bonus Award, which by its terms
includes the provisions delineated in this Section 3(c) and elsewhere in this
Agreement (all of which have been approved as part of the Award by the
Committee). The Company agrees to submit to the stockholders the Incentive
Bonus Award for approval at the annual stockholders' meeting in 1998. The
Incentive Bonus Award shall be subject to stockholder approval at such time or
times as required by Section 162(m) of the Code. It is agreed that the
Committee may revise the Incentive Bonus Award document setting forth the
provisions of such Incentive Bonus to include the provisions of the Incentive
Bonus set forth herein and made part of the Award, as well as with any other
provision required for compliance with the performance-based compensation
exemption from Section 162(m) of the Code and administrative provisions (but not
change the current substance of the Incentive Bonus Award).
(d) DEFERRED COMPENSATION. In addition to any other compensation to
be received pursuant to this Agreement, Executive shall be entitled to receive
from the Company and DKCo., jointly and severally, $750,000 plus accrued
interest at the annual rate of 8% compounded monthly, payable in a single lump
sum in cash within thirty (30) days of the earliest
-7-
<PAGE>
to occur of (A) the third anniversary of this Agreement, (B) termination of
Executive's employment for any reason, including termination for Disability (as
defined in Section 10(a)(i)), or (C) a Change of Control (as defined in Section
11(b)).
(e) SPECIAL BONUS. In addition to any other compensation to be
received pursuant to this Agreement, Executive shall be entitled to receive from
the Company and DKCo., jointly and severally, $535,000 as a special bonus
payable in a lump sum in cash no later than December 28, 1997.
(f) PARTICIPATION IN BENEFIT PLANS AND OTHER BENEFITS. During the
Employment Period, Executive shall be entitled to participate (subject to any
waiting periods) in all group health and insurance programs, and all other
benefits, fringe benefits, and perquisites available generally to senior
executives of the Company, which plans, benefits, fringe benefits, and
perquisites in existence on the date hereof are set forth on Schedule B attached
hereto.
(g) OPTIONS. The Company hereby undertakes to recommend to the
Committee at the applicable time that Executive be granted (i) options (the
"Options") as follows: (A) Options to purchase 200,000 shares of common stock
of the Company (as presently constituted) upon commencement of Executive's
employment hereunder or as soon thereafter as practicable; (B) on or about
August 1, 1998, Options to purchase 100,000 shares of common stock of the
Company (as presently constituted) irrespective of profitability; and (C) on or
about April 1, 1999, 2000 and 2001, Options to purchase 100,000 shares of common
stock of the Company (as presently constituted), provided that the Company has
any income before income taxes and as adjusted for extraordinary items occurring
in the prior fiscal year, calculated by the
-8-
<PAGE>
Company's principal auditing firm in accordance with then-applicable generally
accepted accounting principles as consistently applied by the Company, and whose
determination shall be binding on the parties hereto, and further provided that
the Company shall have the discretion to recommend to the Committee the grant,
and the Committee shall have discretion to grant, whether or not recommended,
such Options even if the Company has no such income before income taxes and
extraordinary items; and (ii) special options (the "Special Options") to
purchase 200,000 shares of Common Stock of the Company (as presently
constituted) upon commencement of Executive's employment hereunder or as soon
thereafter as practicable. For purposes of this Agreement "extraordinary items"
shall mean all items of gain, loss or expense for the fiscal year determined to
be extraordinary or unusual in nature or infrequent in occurrence or related to
the disposal of a segment of a business or related to a change in accounting
principle all as determined in accordance with standards established by opinion
No. 30 of the Accounting Principles Board. The Options shall be incentive stock
options (within the meaning of Section 422 of the Code), to the maximum extent
possible, subject to qualification of such Options or any portion thereof for
treatment as incentive stock options under Section 422 of the Code. The Options
shall each vest at the rate of 25% per year commencing on the first anniversary
of the date of grant provided the Executive is employed by DK Companies on the
vesting date, provide for accelerated vesting as set forth elsewhere in this
Agreement have an exercise price equal to the fair market value (as determined
under the Company's 1996 Stock Incentive Plan (the "Plan")) of the common stock
of the Company on the date of grant and have a ten (10) year term (subject to
earlier termination upon ceasing of the Executive to be an employee of the DK
Companies based on the "default" provisions in the Plan.) The Special Opt ions
shall vest five
-9-
<PAGE>
years from the date of grant; provided Executive is then employed by any of the
DK Companies and further provided, such vesting shall accelerate as follows:
(i) if for any fiscal year income before income taxes and extraordinary items
(using the same definition as in the Performance Bonus Award) ("IBT") is at
least $30 million, one third of the Special Options less the amount previously
vested, shall vest; (ii) if for any fiscal year IBT is at least $50 million, two
thirds of the Special Options, less the amount previously vested, shall vest,
and (iii) if for any fiscal year IBT is at least $75 million, all of the Special
Options shall vest but only in each case if Executive is employed by any of the
DK Companies on the last day of the fiscal year. The exercise price of the
Special Options shall be equal to the fair market value (as determined under the
Plan) on the date of grant. The special Options shall have a ten (10) year
term, subject to earlier termination upon ceasing of Executive to be an employee
of the DK Companies based on the "default provisions" in the Plan.
(h) RESTRICTED STOCK. The Company hereby undertakes to recommend to
the Committee that Executive be granted 150,000 shares of restricted common
stock under the Plan (the "Restricted Stock") upon commencement of Executive's
employment hereunder or as soon thereafter as practicable. The Restricted Stock
shall vest as follows; provided the Executive is then employed by any of the DK
Companies: 20% upon the price per share of the common stock attaining $16; $20%
upon the price per share of the common stock attaining, $18; 20% upon the price
per share of the common stock attaining $20; 20% upon the price per share of the
Common Stock attaining $22; and 20% upon the price per share of the common stock
attaining $24; and shall vest in any case at the end of five (5) years from the
date of grant. The recommended grant shall provide that upon the termination of
employment of the Executive
-10-
<PAGE>
from the DK Companies, any unvested restricted stock shall be forfeited, except
as specifically provided elsewhere herein. The measurement of "attaining" shall
be on the same basis as the restricted stock grants being made on or about the
date hereof.
4. EXPENSES. Executive shall be entitled to reimbursement for all
reasonable travel and other out-of-pocket expenses incurred in the performance
of his duties hereunder ("Reimbursable Expenses"), upon submission and approval
of written statements and bills in accordance with the then regular procedures
of the Company as approved by the Board. Notwithstanding the foregoing, after
notice of termination by the Company or Executive pursuant to Section 10,
Executive shall be entitled to reimbursement for material Reimbursable Expenses
incurred by Executive after the date of such notice of termination, only if such
expenses are approved in advance by the Board, or any member thereof, excluding
Executive.
5. REPRESENTATIONS AND WARRANTIES OF EXECUTIVE. Executive
represents and warrants to the Company that Executive has provided to the
Company all material employment, compensation, non-compete, restrictive and
similar agreements or arrangements to which he was subject prior to execution of
this Agreement or which may continue in force or may restrict his activities or
employment in any manner subsequent to the execution of this Agreement.
6. NON-COMPETITION.
(a) In view of the unique and valuable services it is expected
Executive will render to the DK Companies and their affiliates, Executive's
knowledge of the customers, trade secrets, and other proprietary information
relating to the business of the DK Companies and their affiliates and their
customers, suppliers, and licensees and similar knowledge regarding the DK
Companies and their affiliates which Executive has obtained and
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will continue to obtain during his employment, and in consideration of the
compensation to be received hereunder, Executive agrees (i) that he will not
during the Employment Period Participate In (as herein defined) any other
business or organization, whether or not such business or organization now is or
shall then be competing with or of a nature similar to the business of such DK
Companies, unless the Board consents to such participation, and (ii) for a
period of one year after the date of the termination of Executive's employment
under this Agreement or otherwise, for any reason other than Good Reason (as
defined in Section 10(b)), he will not compete with or be engaged in, or
Participate In (to the extent such participation could reasonably be expected to
have a material adverse effect on any of the DK Companies) any other business or
organization which competes with or is engaged in, the same business as the
Company, any other DK Company, or any licensee of the DK Companies to which
Executive renders services hereunder, with respect to any product or service
sold or activity in which the Company, such other DK Company, or licensee
engages (a "DK Business"), up to the time of termination of employment in any
geographical area in which at the time of termination such DK Business is
engaged in by the Company, such other DK Company, or licensee, except that in
each case the provisions of this Section 6 will not be deemed breached merely
because Executive (a) beneficially owns (i) any publicly-traded debt securities
or (ii) not more than 5% of the outstanding common stock of a corporation if, at
the time of its acquisition by Executive, such stock is listed on a national
securities exchange, is reported on the Automated Quotation System of the
National Association of Securities Dealers Inc., or is regularly traded in the
over-the-counter market by a member of a national securities exchange, or (b)
serves as a director or member of a charitable, religious, or educational
organization.
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(b) For purposes of Section 6(a)(i), the term "Participate In" shall
mean: "directly or indirectly, for his own benefit or for, with, or through any
other person, firm, or corporation, own, manage, operate, control, loan money
to, or participate in the ownership, management, operation, or control of, or be
connected as a director, officer, employee, partner, consultant, agent,
independent contractor, or otherwise with, or acquiesce in the use of his name
in."
(c) Executive further agrees that, during the Employment Period and
until the first anniversary of the date of the termination of Executive's
employment by the Company or any other DK Company under this Agreement (the
"Restricted Period"), he will not directly or indirectly, solicit, or endeavor
to entice away from the Company or any other DK Company, any of its suppliers,
customers, senior level management employees (I.E., employees in a position
equivalent or senior to vice president), members of the design staff, licensees,
or agents (including in each case, any supplier, customer, senior level
management employee, member of the design staff, licensee, or agent of the
Company or any other DK Company who held any such position during the one year
period prior to the termination of Executive's employment by the Company or any
other DK Company under this Agreement). Executive agrees that, during the
Restricted Period, he will not directly or indirectly interfere with any
relationship, contract, arrangement or understanding between the Company or any
other DK Company and any of the persons or entities described in the preceding
sentence. During the Restricted Period, Executive will not directly or
indirectly employ any person who, at any time up to such termination, was a
senior level management employee or a member of the design staff
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of any of the DK Companies, within a period of one year after such person leaves
the employ of any such company.
(d) Executive agrees that the provisions of this Section 6 are
necessary and reasonable to protect the DK Companies in the conduct of their
business. If any restriction contained in this Section 6 shall be deemed to be
invalid, illegal, or unenforceable by reason of the extent, duration, or
geographical scope thereof, or otherwise, with respect to a particular set of
facts, then the parties agree that the court making such determination shall
reduce such extent, duration, geographical scope, or other provisions hereof to
the extent required to render them valid, legal, and enforceable, and in its
reduced form such restriction shall then be enforceable in the manner
contemplated hereby.
7. COPYRIGHTS, INVENTIONS, ETC. Any interest in patents, patent
applications, inventions, copyrights, developments, and processes ("Such
Inventions") which Executive may develop during the Employment Period relating
to the fields in which the DK Companies may then be engaged shall belong to the
DK Companies; and forthwith upon request of the DK Companies, Executive shall
execute all such assignments and other documents and take all such other action
as the DK Companies may reasonably request in order to vest in the DK Companies
all his right, title, and interest in and to Such Inventions free and clear of
all liens, charges, and encumbrances.
8. CONFIDENTIAL INFORMATION. All confidential information relating
to the business of the Company or any other DK Company or of any customer,
supplier, or licensee of the Company or any other DK Company or confidential
information relating to Ms. Donna Karan or Mr. Stephan Weiss, which Executive
may now possess, may obtain during or after
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(during the noncompetition period) the Employment Period, or may create prior to
the end of the Employment Period, shall not knowingly be furnished, published,
disclosed, or made accessible by him to any other person, firm, or corporation
either during or after the termination of his employment or used by him except
during the Employment Period in the business and for the benefit of the DK
Companies, in each case without the prior written permission of the Company. To
the extent required to do so by law, or by order of any governmental or
quasi-governmental agency, Executive shall have the right to disclose
"confidential information," provided that Executive gives the Company at least
10 days prior written notice (or such lesser time as may be practicable under
the circumstances) of his intent to disclose such information in order to
provide the DK Companies with a reasonable opportunity to obtain a temporary
restraining order, protective order, injunction, or similar relief and that
Executive agrees to reasonably assist the DK Companies, at the DK Companies'
expense, in obtaining such temporary restraining order, protective order,
injunction or similar relief, provided that such assistance shall not
unreasonably burden the Executive. Executive shall return all of such
confidential information to the DK Companies prior to or on the date of
termination of Executive's employment. As used in this Section 8, except as the
context otherwise requires, "confidential information" shall mean any
information relating to the business of any of the DK Companies, excluding
information which is or comes into the public domain through no fault of
Executive or which Executive obtains after the termination of his employment by
the DK Companies under this Agreement or otherwise from a third party who to the
knowledge of Executive has the right to disclose such information.
9. LIFE INSURANCE. During the Employment Period, the Company shall
maintain in force at its expense a life insurance policy (the "Insurance
Policy"), which policy
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shall be payable to Executive's beneficiaries in the amount of $5,000,000. If
Executive is determined to be suffering from a congenital defect or other
illness or condition which would preclude the Company, after reasonable efforts,
from obtaining such $5,000,000 insurance policy at a cost substantially
equivalent to the cost of obtaining such insurance for a healthy individual of
Executive's age and gender, the Company shall purchase the amount of insurance,
if any, that can be purchased at a cost substantially equivalent to the cost of
obtaining such insurance for a healthy individual of Executive's age and gender.
10. TERMINATION.
(a) TERMINATION BY THE COMPANY. This Agreement and the
Executive's employment shall terminate earlier than as provided in Section 1
hereof as follows:
(i) Executive shall be physically or mentally incapacitated
or disabled or otherwise unable fully to discharge his duties hereunder, as set
forth in a written determination by (A) a physician who is licensed to practice
in the State of New York, mutually selected by the Board and Executive, or (B)
if the Board and Executive cannot agree on a physician, a physician selected by
the Board who is a chairman of a department of medicine at a
university-affiliated hospital in the City of New York, for a period of six
consecutive months ("Disability"), then the Company shall have the right to give
notice of termination of Executive's services hereunder as of a date (not
earlier than 10 days from Executive's receipt of such notice) to be specified in
such notice and this Agreement and Executive's employment shall terminate on the
date so specified in such notice;
(ii) Either (A) Executive shall commit an illegal act or
acts, that were intended to and did defraud any DK Company, (B) Executive shall
be grossly negligent or
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engage in willful misconduct or dishonest activities in the discharge of his
duties hereunder, or (C) Executive shall breach Section 5, 6(a), 6(b), 6(c), 7,
or 8 and, if curable, fail to correct any such breach within 60 days after
written notice by the Company to Executive of his commission of the same,
specifying the particular act or acts or failure to act that is or are the basis
for the decision to so terminate the Executive's employment for Cause, then, and
in each such case, the Board shall have the right to terminate Executive's
services hereunder for any of the reasons described in Sections 10(a)(ii)(A)
through 10(a)(ii)(C) ("Cause") upon thirty (30) days notice in the case of (A)
or (B) above or upon the sixty (60) day notice referred to in the case of (C)
above. Within thirty (30) days after the aforesaid notice and prior to any such
termination, Executive shall be given an opportunity to make a presentation to
the Board at a meeting of the Board. Following such meeting, the Board shall
determine whether to terminate Executive's services for "Cause" pursuant to this
Section 10(a)(ii) and shall notify Executive of its determination. The Company
may suspend the Executive with pay pending such Board meeting without it being
deemed Good Reason or a breach hereunder.
(iii) Executive shall die, then this Agreement shall
terminate on the date of death; or
(iv) The Company shall terminate Executive's employment for
any reason other than the reasons provided above in clauses (i) and (ii)
("Without Cause"), then the Company shall give Executive not less than three
months' written notice of termination of his employment "Without Cause," and
this Agreement and Executive's employment shall terminate on the date so
specified in such notice.
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(b) TERMINATION BY EXECUTIVE FOR GOOD REASON. The Executive may
terminate his employment hereunder for Good Reason. For purposes of this
Agreement, the term "Good Reason" shall mean and shall be deemed to exist if,
without the prior written consent or waiver of the Executive, (i) the Executive
is assigned duties or responsibilities that are inconsistent in any material
respect with the scope of the duties or responsibilities associated with his
titles or position, as set forth in this Agreement (or which he may receive
during the Employment Period), (ii) the Executive's duties or responsibilities
are significantly reduced, except with respect to (A) sale of the Beauty
Division, and (B) any corporate action initiated or recommended by Executive and
approved by the Board, (iii) the Company fails to grant Executive the Options or
Special Options required to be recommended to be granted pursuant to Section
3(g) or the Restricted Stock required to be recommended to be granted pursuant
to Section 3(h), (iv) the Company fails to perform substantially any material
term or provision of this Agreement, (v) the Executive's office location is
relocated to one that is more than fifty (50) miles from the location at which
the Executive was based immediately prior to the relocation, (iv) the Company
fails to obtain the full assumption of this Agreement by a successor entity,
(vii) the Executive is not elected to the Board or is not reelected thereto or
is forced to resign therefrom for any reason not constituting Cause, or (viii)
either the Performance Bonus Award or the Incentive Bonus Award, as described in
Sections 3(b) and 3(c), respectively, is not approved by the stockholders at
such time or times as such approval is required; provided however, that
Executive first provides written notice to the Board within 60 days of any of
the events specified in this Section 10(b)(i-viii) of his intention to terminate
specifying the circumstances relating thereto, and the Company fails to cure any
such defects, as identified in such notice, within 60
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days of receipt of such notice, and Executive reaffirms in writing his election
to terminate within 10 business days of expiration of any curative period.
(c) SEVERANCE PAYMENTS.
(i) In the event of termination pursuant to Section
10(a)(ii), Executive shall receive no severance, and shall be entitled to
receive, in lieu of any other payments or benefits, (x) his accrued but unpaid
salary at the rate provided in Section 3(a), plus any amounts due but unpaid for
any prior completed fiscal year including any Performance Bonus or Incentive
Bonus ("Accrued Obligations"), (y) a special payment (the "Special Payment")
equal to the product of the ratio of the number of days in the fiscal year prior
to his termination to 365 days ("Pro Rata") times his Performance Bonus, if
any, for the prior fiscal year, and his accrued Pro Rata Incentive Bonus (if,
and to the extent the criteria of the Incentive Bonus Award are satisfied at the
end of the fiscal year in which termination takes place) to the date on which
termination shall take effect, and (z) any Reimbursable Expenses. Any such
Accrued Obligations, Special Payment or other amounts shall be promptly paid in
a lump sum in cash, provided, however, the Incentive Bonus shall be paid
subsequent to the fiscal year in which it is earned, at the same time and in the
same manner as Incentive Bonuses are paid to other executives of the Company for
such fiscal year and Accrued Obligations shall be paid in accordance with their
terms.
(ii) In the event of termination pursuant to Section
10(a)(iii), Executive's estate or beneficiaries, as the case may be, shall be
entitled to receive, in lieu of any other payments or benefits, the proceeds
from the Insurance Policy, any Accrued Obligations, a Pro Rata Performance Bonus
and a Pro Rata Incentive Bonus (based in the case of the
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Performance Bonus on $750,000, and, in the case of the Incentive Bonus on the
amount of Incentive Bonus that would have been paid for the full fiscal year if
he was employed for the full fiscal year), Reimbursable Expenses and, as
provided in the grants, all Options and Special Options that are unvested at the
date of termination shall, in accordance with their grants, vest, and the
restrictions on any Restricted Stock held by Executive shall terminate. Such
amounts shall be paid promptly in a lump sum, other than any amount which by its
terms is due thereafter, which shall be paid in accordance with its terms.
(iii) In the event of termination pursuant to Section
10(a)(iv) or by Executive for Good Reason, Executive shall be entitled to
receive in lieu of any other payments or benefits, (a) if prior to June 30,
2002, Accrued Obligations plus the sum of 2.99 times his Base Salary plus two
times his total bonus compensation (I.E., Performance Bonus and Incentive Bonus)
for the immediately preceding fiscal year (or if termination occurs prior to the
end of the 1998 fiscal year, then such total bonus compensation as doubled shall
be $1,500,000 ), payable (other than Accrued Obligations, which shall be paid in
accordance with their terms) in a lump sum in cash within 30 days after the date
of termination, continuation, at the Company's expense, of any group health
(which may be provided by payment of COBRA continuation coverage premiums) and
life insurance and long-term disability coverage at the level in effect on the
Executive's date of termination for a period of eighteen months following such
date of termination (or shall receive from the Company the economic equivalent
of such coverage in cash), all Options and Special Options that are unvested at
the date of termination shall, in accordance with their grants, vest, and the
restriction on any Restricted Stock held by Executive shall, in accordance with
their grants, terminate or (b) if on or after June 30, 2002, the amounts
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payable under Section 10(e) as if notice of nonrenewal has been given by the
Company and Executive had immediately thereafter terminated employment pursuant
to Section 10(e).
(iv) If Executive shall voluntarily resign for other than
"Good Reason," he shall be entitled only to Accrued Obligations, the Special
Payment, Pro Rata Incentive Bonus (if, and to the extent the criteria of the
Incentive Award are satisfied at the end of the fiscal year in which termination
takes place), and Reimbursable Expenses, through the date of such resignation or
termination, and that any such accrued but unpaid salary, Special Payment or
other amounts shall be promptly paid in a lump sum in cash (except with respect
to the Incentive Bonus which shall be paid subsequent to the fiscal year in
which it is earned, at the same time and in the same manner as Incentive Bonuses
are paid to other executives of the Company for such fiscal year and Accrued
Obligations which shall be paid in accordance with their terms).
(v) If the Executive's employment hereunder is terminated
as a result of Disability, in lieu of any other payments or benefits other than
any such disability benefits he may receive (but subject to Section 10(c)(vi),
and Accrued Obligations, he shall be paid a single lump sum in cash within
thirty (30) days of the date of his termination in an amount equal to one year's
Base Salary. In addition, in accordance with the grants, the nonvested portion
of any Options and Special Options held by the Executive on such date shall
become vested and exercisable and any restrictions on Restricted Stock held by
the Executive shall terminate.
(vi) The severance amounts in this Section 10(c) shall be
in lieu of any severance policies or payments otherwise applicable to Executive,
including those under
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Section 11; provided, however, that any payments made to Executive upon
termination of this Agreement as a result of the Disability (as defined in
Section 10(a)(i)) of Executive shall be reduced by any disability payments and
benefits which Executive receives pursuant to any disability plan or policy paid
for by the Company (or by Executive if the Company directly or indirectly
reimburses the Executive) otherwise applicable to Executive during the one-year
period for which the severance compensation is being paid (which benefits for
such one-year period Executive shall assign to the Company).
(vii) Prior to Executive's receipt of any severance payment
under this Section 10(c), Executive shall issue a general release to the
Released Parties, as defined on Schedule C, in such form as the Company may
reasonably require, which release shall extinguish all actual or potential
claims or causes of action he has, may have had, or hereafter may have against
the Released Parties; provided, however, that Executive shall not release any
indemnification or contribution rights or obligations that he may have under
this Agreement or any other agreement or any rights or obligations he may have
under this Agreement, unless otherwise agreed to by the parties in writing. The
Company shall simultaneously provide a release to Executive in the form MUTATIS
MUTANDIS given to the Company by Executive.
(d) OTHER PAYMENTS UPON TERMINATION. If notice of termination
of Executive is given by Executive or the Company, except as otherwise provided
in this Agreement, Executive shall continue to receive his Base Salary, bonus
payments, and benefits as provided in Section 3 until the date of termination,
and shall also be entitled to reimbursement for Reimbursable Expenses as set
forth in Section 4.
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(e) COMPANY'S OPTION TO TERMINATE EXECUTIVE AFTER NOTICE OF
TERMINATION. The Company, or, if notice is given by the Company, the Executive,
may, at any time during the period after notice of termination by Executive or
the Company and before the date of termination specified in the notice, given in
accordance with either Section 1 or Section 10(a)(iv), as the case may be (the
"Notice Period"), elect to terminate this Agreement immediately and Executive's
employment hereunder. In such event the Company shall pay Executive (i) his
Accrued Obligations, (ii) a lump sum equivalent to the Base Salary payments he
would have received for the duration of the Notice Period at the rate provided
in Section 3(a), (iii) a lump sum payment equal to the sum of his Performance
Bonus and Incentive Bonus, received with respect to the prior fiscal year and
(iv) his Reimbursable Expenses. Such lump sums shall be paid within thirty (30)
days after Executive's employment terminates. The foregoing shall be in lieu of
any other payment to Executive except as may be provided in any other non
severance employee benefit plan in which he participates.
(f) RESIGNATION OF OFFICES AND DIRECTORSHIPS. Effective upon
notice of termination by Executive or the Company, Executive shall be deemed to
have resigned as an officer and director, if applicable, of the Company and the
other DK Companies, if applicable, and shall execute any documents required by
the Company and the DK Companies to evidence the same.
(g) RETURN OF COMPANY PROPERTY. Upon termination of employment
hereunder or otherwise, Executive shall immediately return all property which
belongs to the DK Companies.
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11. MERGER, CHANGE OF CONTROL, ETC.
(a) In the event of a future disposition of the properties and
business of the Company substantially as an entirety by merger, consolidation,
sale of assets or otherwise, then the Company may elect:
(i) to assign this Agreement and all of its rights and
obligations hereunder to the acquiring or surviving entity; provided that such
entity shall assume in writing all of the obligations of the Company hereunder;
and provided, further, that the Company (in the event and so long as it remains
in existence) shall remain liable for the performance of its obligations
hereunder in the event of a breach by the acquiring entity of this Agreement; or
(ii) in addition to its other rights of termination, to
terminate this Agreement upon at least 90 days' written notice and by paying
Executive the sum of three times his Base Salary plus three times his total
bonus compensation (I.E., Performance Bonus and Incentive Bonus) for the
immediately preceding fiscal year (or if termination occurs prior to the end of
the 1998 fiscal year, then such aggregate total bonus compensation as trebled
shall be $2,250,000), payable in a single lump sum within 30 days after the
date of termination. In addition, (i) as provided in the grants, all Options
and Special Options which the Executive then holds which are not vested shall
vest and be exercisable immediately, (ii) as provided in the grants, the
restrictions on any Restricted Stock held by the Executive shall terminate,
(iii) Executive, at the Company's expense, shall continue to be a participant in
any group health (which may be provided by payment of the COBRA continuation
coverage premiums) and life insurance and long-term disability plan or program
maintained by the Company (or shall receive
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from the Company the economic equivalent of such coverage in cash) at the level
in effect on the Executive's date of termination for a period of eighteen months
following his date of termination.
(b) In the event Executive's employment hereunder is terminated
by the Company other than for Cause within 12 months following a change in
control, as defined in Section II.E.(a) or II.E.(b) of the Plan (a "Change in
Control"), or if Executive terminates his employment for Good Reason within 12
months following a Change in Control, the Company shall pay Executive, upon
Executive's execution of a general release of claims in the form attached hereto
as Schedule D, in lieu of any other payments or benefits, Accrued Obligations
and an amount equal to the sum of three times his Base Salary plus three times
his total bonus compensation (I.E., Performance Bonus and Incentive Bonus) for
the immediately preceding fiscal year (or if termination occurs prior to the end
of the 1998 fiscal year, then such total bonus compensation as trebled shall be
$2,250,000), payable in a single lump sum within 30 days after the date of
termination. In addition, (i) in accordance with the grants, all Options and
Special Options which the Executive then holds which are not vested shall vest
and be exercisable immediately, (ii) in accordance with the grants, the
restrictions on any Restricted Stock held by the Executive shall terminate,
(iii) Executive, at the Company's expense, shall continue to be a participant in
any group health (which may be provided by payment of COBRA continuation
coverage premiums) and life insurance and long-term disability plan or program
maintained by the Company (or shall receive from the Company the economic
equivalent of such coverage in cash) at the level in effect on the Executive's
date of termination for a period of eighteen months following his date of
termination.
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(c) In the event that the aggregate present value of the
Executive's payments under this Agreement, and any plan, program or arrangement
maintained by the Company constitutes an "excess parachute payment" (within the
meaning of Section 280G(b)(1) of the Code), and the excise tax on such payment
would cause the net parachute payments (after taking into account federal, state
and local income and excise taxes) to which the Executive otherwise would be
entitled to be less than what the Executive would have netted (after taking into
account federal, state and local taxes) had the present value of his total
parachute payments equalled $1.00 less than three times his "base amount"
(within the meaning of Section 280G(b)(2)(A) of the Code), his payments
hereunder (starting with any lump sum payment) shall be reduced (by the minimum
possible amount) so that the aggregate present value equals $1.00 less than
three times such base amount. For purposes of this calculation, it shall be
assumed that the Executive's tax rate is the maximum marginal federal, state and
local income tax rate on earned income, with such maximum federal rate to be
computed with regard to Code Section 1(g), if applicable. The determination of
the amount of any such reduction shall be made by the Executive in the first
instance but in the event the Company disagrees with such determination, the
Executive shall select, at the Company's expense, a law firm or accounting firm
from among those regularly consulted by the Company in the twelve months
preceding the Change in Control regarding federal income tax or employee benefit
matters and such law firm or accounting firm shall determine the amount of such
reduction and such determination shall be final and binding on the Executive and
the Company.
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(d) Any amounts paid pursuant to this Section 11 shall be in
lieu of any other severance policies or payments otherwise applicable to
Executive, including those under Section 10(c).
12. SURVIVAL. The covenants, agreements, representations, and
warranties contained in or made pursuant to this Agreement, which by their terms
imply survival after the termination of this Agreement because of post
employment obligations or rights of one of the parties, shall survive
termination of this Agreement and Executive's employment.
13. SPECIFIC PERFORMANCE. Executive acknowledges that since a breach
of the provisions of Sections 6, 7, or 8 could not adequately be compensated by
money damages, the Company shall be entitled, in addition to any other right and
remedy available to it, to an injunction restraining such breach or a threatened
breach, and in either case no bond or other security shall be required in
connection therewith, and Executive hereby consents to the issuance of such
injunction; provided that the foregoing shall not prevent Executive from
contesting the issuance of any such injunction on the ground that no violation
of this Agreement has occurred.
14. ENTIRE AGREEMENT; MODIFICATION. This Agreement and the Schedules
hereto set forth the entire understanding of the parties with respect to the
subject matter hereof, supersede all existing agreements between them concerning
such subject matter and may be modified only by a written instrument duly
executed by each party.
15. NO MITIGATION; NO OFFSET. In the event of Executive's
termination of employment, he shall be under no obligation to seek other
employment and there shall be no offset against any amounts due Executive
hereunder on account of any remuneration Executive
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may obtain from any subsequent employment. Any amounts due Executive hereunder
are in the nature of liquidated damages, and not in the nature of a penalty.
16. LEGAL FEES. The Company shall promptly pay or reimburse the
Executive for his reasonable costs of this Agreement, including, specifically,
the fees and expenses of his counsel.
17. NOTICES. Any notice or other communication required or permitted
to be given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or delivered by hand or overnight courier against
receipt to the party to whom it is to be given at the address of such party set
forth in the preamble to this Agreement (or to such other address as the party
shall have furnished in writing in accordance with the provisions of this
Section 17) and (a) in the case of the Company or DKCo., with a copy to the
General Counsel of the Company at the address set forth in the preamble to this
Agreement (b) and in the case of Executive, with a copy to Kaye, Scholer,
Fierman, Hays & Handler, LLP, 425 Park Avenue, New York, New York 10022,
Attention: Arthur F. Woodard, Esq. Notice to the estate or beneficiaries of
Executive shall be sufficient if addressed to Executive as provided in this
Section 17. Any notice or other communication under this Agreement shall be
deemed given upon receipt, unless such notice or other communication was given
by certified mail, in which case it shall be deemed given three days after
mailing, except for a notice changing a party's address which shall be deemed
given at the time of receipt thereof.
18. WAIVER. Any waiver by either party of a breach of any provision
of this Agreement shall not operate as or be construed to be a waiver of any
other breach of such provision or of any breach of any other provision of this
Agreement. The failure of a party to
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insist upon strict adherence to any term of this Agreement on one or more
occasions shall not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term of
this Agreement. Any waiver must be in writing, signed by the party giving such
waiver.
19. BINDING EFFECT. Executive's rights and obligations under this
Agreement shall not be transferable by assignment or otherwise, such rights
shall not be subject to commutation, encumbrance, or the claims of Executive's
creditors, and any attempt to do any of the foregoing shall be void. Subject to
Section 11, the provisions of this Agreement shall be binding upon and inure to
the benefit of Executive and his heirs and personal representatives, and shall
be binding upon and inure to the benefit of the Company and its successors and
its assigns under Section 11.
20. NO THIRD PARTY BENEFICIARIES. Other than the DK Companies, this
Agreement does not create, and shall not be construed as creating, any rights
enforceable by any person not a party to this Agreement (except as provided in
Section 19).
21. HEADINGS. The headings in this Agreement are solely for
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
22. COUNTERPARTS; GOVERNING LAW. This Agreement may be executed in
any number of counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument. It shall be
governed by and construed in accordance with the laws of the State of New York,
without giving effect to its conflict of laws rules.
-29-
<PAGE>
23. ARBITRATION. Any and all disputes or controversies arising out
of or relating to this Agreement, other than injunctive relief pursuant to
Section 13, shall be resolved by arbitration at the American Arbitration
Association at its New York City offices before a panel of three arbitrators
under the then existing rules and regulations of the American Arbitration
Association. The parties agree that in any such arbitration, the arbitrators
shall not have the power to reform or modify this Agreement in any way and to
that extent their powers are so limited. The determination of the arbitrators
shall be final and binding on the parties hereto and judgment on it may be
entered in any court of competent jurisdiction. Except as required by law,
neither the DK Companies nor Executive shall issue any press release or make any
statement which is reasonably foreseeable to become public with respect to any
arbitration or dispute between the parties without receiving the prior written
consent of the other party to the content of such press release or statement.
In the event Executive prevails in such proceedings, as determined by the
arbitrators, the Company or any other DK Company shall reimburse Executive for
all expenses (including, without limitation, reasonable legal fees and expenses
of no more than one law firm at standard hourly rates) incurred by Executive in
connection with such proceeding or any other proceeding in which Executive
prevails in contesting or defending any claim or controversy arising out of or
relating to this Agreement. All such amounts shall be paid promptly, but in any
event within ten (10) business days after Executive provides the Company with a
statement of such amounts to be recovered. In the event Executive does not
prevail in such proceedings, as determined by the arbitrators, each party hereto
shall be responsible for their own expenses (including, without limitation,
legal fees and expenses) incurred in connection with such proceedings.
-30-
<PAGE>
24. D&O INSURANCE. The Company agrees to use its best efforts to
obtain a directors and officers liability insurance policy covering the
Executive in an amount that is no less than the policy currently in effect for
senior executives or, if no such policy exists, a sufficient amount to provide
such indemnification, and to maintain such policy during the Employment Period
(and for so long thereafter as is practicable in the circumstances, taking into
account the availability of such insurance).
-31-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above written.
DONNA KARAN INTERNATIONAL INC.
By:
-----------------------------------
Name: Donna Karan
Title: Chief Executive Officer
THE DONNA KARAN COMPANY
By: DONNA KARAN INTERNATIONAL INC.,
GENERAL PARTNER
By:
-----------------------------------
Name: Donna Karan
Title: Chief Executive Officer
EXECUTIVE
--------------------------------------
John D. Idol
-32-
<PAGE>
Exhibit 99.2
INCENTIVE BONUS AWARD
for
John D. Idol
------------------------------- -------------------------
Net Income Before Income Taxes
and Amount of Bonus
Extraordinary Items (IBT) (% of IBT)
(in millions)
------------------------------- -------------------------
Over Up To
-------------- --------------- -------------------------
$30.0 $75.0 2.0%
-------------- --------------- -------------------------
75.0 100.0 1.5%
-------------- --------------- -------------------------
100.0 1.0%
-------------- --------------- -------------------------
(1) Subject to the provisions of this Award, the Chief Executive
Officer shall be entitled to receive the Bonus amount for any fiscal year to the
extent of IBT in such fiscal year.
(2) The amount shall be cumulative. For example, if IBT is $90
million, the bonus is two percent (2%) of $45 million plus one and a half
percent (1.5%) of the $15 million above $75 million.
(3) In determining IBT, calculations will be based on GAAP as of the
date hereof (ignoring changes therein hereafter). Extraordinary items shall be
as defined in the Employment Contract referred to below.
(4) There shall be no partial payments if minimum targets are not
achieved.
(5) The bonus will commence for the 1998 fiscal year.
(6) The maximum amount of Incentive Bonus payable for any fiscal year
to the Chief Executive Officer shall be $2,000,000 (prorated for any partial
years).
(7) The Award shall be administered by the Incentive Compensation
Sub-Committee of the Board (the "Committee").
-1-
<PAGE>
(8) The Award shall be payable for any fiscal year only if the bonus
criteria for such fiscal year has been achieved, as calculated by the Company
auditor and certified in writing by the Committee, subject to exceptions or pro
rata determination in certain limited cases as provided in the Employment
Agreement of even date hereto between the Company, the Awardee and The Donna
Karan Company.
(9) This Award shall be subject to stockholder approval at such time
or times as required under Code Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code").
(10) The Award is intended to comply with the exemption for
performance based compensation under Code Section 162(m) and any required
provision required therefore shall be deemed part of the Award and the
provisions of the Award shall be interpreted and construed in accordance
therewith. References herein to Code Section 162(m) shall include the Treasury
regulations thereunder.
(11) This Award shall be deemed to include the applicable provisions
of the Employment Contract of even date herewith among the Company, The Donna
Karan Company and Executive referring to the Incentive Bonus, including but not
limited to Section 3(c) thereof.
Acknowledged:
DONNA KARAN INTERNATIONAL INC.
By:
---------------------------------------
Donna Karan
Chief Executive Officer
THE DONNA KARAN COMPANY
By: DONNA KARAN INTERNATIONAL INC.,
GENERAL PARTNER
By:
-----------------------------------------
Donna Karan
Chief Executive Officer
EXECUTIVE
-------------------------------------------
John D. Idol
-2-
<PAGE>
PERFORMANCE BONUS AWARD
for
John D. Idol
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Goals Award
- ------------ ---------------------------------------------------------------------------------------
(1)
Income Before (3)
Income Taxes Minimum (4)
and Licensing Licensing (5)
Extraordinary (2) Revenues Revenue Bonus
Fiscal Year Items ("IBT") IBT Growth* ("MLR") Growth* Amount
- ------------ ---------------- ---------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
- ------------ ---------------- ---------------- ------------- ---------------- --------------
1998 $10,000,000 10% increase $7,000,000 10% increase $750,000
- ------------ ---------------- on prior year ------------- on prior year --------------
1999 11,500,000 actual IBT 8,000,000 actual Licensing $750,000
- ------------ ---------------- ------------- Revenue --------------
2000 13,250,000 9,250,000 $750,000
- ------------ ---------------- ------------- --------------
2001 15,250,000 10,500,000 $750,000
- ------------ ---------------- ------------- --------------
Thereafter 10% per 10% per $750,000
fiscal year fiscal year per year
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Subject to the provisions of this Award, the Chief Executive
Officer shall be entitled to receive the Bonus amount set forth in column (5)
for any fiscal year if any of the targets in columns (1) through (4) are
attained for such fiscal year.
(2) Additionally, any amounts attained in excess of the target(s) set
forth for any given fiscal year may be applied to the target(s) for the next
succeeding fiscal year or years. For example, if IBT for fiscal 1998 is
$22,000,000, then $12,000,000 will be applied toward the fiscal 1999 target and
such target will be deemed achieved if IBT for such year is equal to or greater
than ($500,000), with any unused 1998 and 1999 IBT carried forward for
application in fiscal year 2000 .
(3) Further, if a target is not attained in a particular fiscal year
ending during the Employment Period, attainment of such target in a subsequent
fiscal year on a cumulative basis shall result in the Bonus Amount being deemed
earned for such prior and current fiscal years. For example, if MLR in fiscal
1998 is $6,000,000, no Bonus Amount is deemed earned in fiscal 1998. However,
if MLR in fiscal 1999 is $9,000,000 then the Bonus Amount for fiscal 1999 will
be deemed earned and the excess $1,000,000 over the target for fiscal 1999 will
be applied to fiscal 1998 and, hence, that too will be deemed earned (with
payment of the Bonus
-1-
<PAGE>
Amount for both fiscal years to be received at the time of payment of the Bonus
Amount for fiscal 1999).
(4) IBT Growth and Licensing Revenue Growth targets shall be based on
actual IBT or Licensing Revenues, as the case may be, of the prior fiscal year.
For example, if actual IBT or Licensing Revenues, as the case may be, for fiscal
1998 is $6,000,000, and actual IBT or Licensing Revenues, as the case may be,
for fiscal 1999 is $6,600,000, the Bonus Amount for fiscal 1999 will be deemed
earned.
(5) In determining IBT, IBT Growth, MLR or Licensing Revenue Growth,
calculations will be based on GAAP as of the date hereof (ignoring changes
therein hereafter). Extraordinary items shall be as defined in the Employment
Contract referred to below.
(6) There shall be no partial payments if targets are not achieved.
(7) The bonus will commence for the 1998 fiscal year.
(8) The maximum amount of Performance Bonus payable for any fiscal
year to the Chief Executive Officer shall be $750,000 (prorated for any partial
years) plus any amount not earned in prior years with regard to the award,
provided that the maximum amount payable for any fiscal year to the Executive
shall be $3,000,000.
(9) The Award shall be administered by the Incentive Compensation
Sub-Committee of the Board (the "Committee").
(10) The Award shall be payable for any fiscal year only if the bonus
criteria for such fiscal year has been achieved, as calculated by the Company
auditor and certified in writing by the Committee, subject to exceptions or pro
rata determination in certain limited cases as provided in the Employment
Agreement of even date hereto between the Company, the Awardee and The Donna
Karan Company.
(11) This Award shall be subject to stockholder approval at such time
or times as required under Code Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code").
(12) The Award is intended to comply with the exemption for
performance based compensation under Code Section 162(m). References herein to
Code Section 162(m) shall include the Treasury regulations thereunder and any
required provision required therefore shall be deemed part of the Award and the
provisions of the Award shall be interpreted and construed in accordance
therewith.
-2-
<PAGE>
(13) This Award shall be deemed to include the applicable provisions
of the Employment Contract of even date herewith among the Company, The Donna
Karan Company and Executive referring to the Incentive Bonus, including but not
limited to Section 3(c) thereof.
Acknowledged:
DONNA KARAN INTERNATIONAL INC.
By:
----------------------------------
Donna Karan
Chief Executive Officer
THE DONNA KARAN COMPANY
By: DONNA KARAN INTERNATIONAL INC.,
GENERAL PARTNER
By:
-------------------------------------
Donna Karan
Chief Executive Officer
EXECUTIVE
--------------------------------------
John D. Idol
-3-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> SEP-28-1997
<CASH> 3,057
<SECURITIES> 0
<RECEIVABLES> 148,924
<ALLOWANCES> (43,976)
<INVENTORY> 116,745
<CURRENT-ASSETS> 274,154
<PP&E> 68,950
<DEPRECIATION> (34,071)
<TOTAL-ASSETS> 335,074
<CURRENT-LIABILITIES> 84,081
<BONDS> 0
0
0
<COMMON> 216
<OTHER-SE> 190,683
<TOTAL-LIABILITY-AND-EQUITY> 335,074
<SALES> 484,691
<TOTAL-REVENUES> 484,691
<CGS> 360,241
<TOTAL-COSTS> 360,241
<OTHER-EXPENSES> 148,324
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,470)
<INCOME-PRETAX> (23,986)
<INCOME-TAX> (11,034)
<INCOME-CONTINUING> (12,952)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,952)
<EPS-PRIMARY> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
