<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
ANNUAL REPORT ON FORM 10-K/A
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 29, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11805
DONNA KARAN INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-3882426
(State or other jurisdiction (I.R.S. Employer
of Incorporation or organization) Identification
Number)
550 SEVENTH AVENUE 10018
NEW YORK, NEW YORK (Zip Code)
(Address of principal executive
office)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 789-1500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<S> <C>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------------------------------------------- --------------------------------------------------------
Common Stock New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 period 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes _X_ No ____
The aggregate market value of Registrant's Common Stock held by
nonaffiliates as of March 18, 1997 was $118,948,929 based on 10,813,539 such
shares outstanding on such date and the closing sales price for the Common Stock
on such date of $11.00 as reported on the New York Stock Exchange.
As of March 18, 1997, the Registrant had 21,468,034 shares of Common Stock
outstanding.*
* Does not include 18 shares of Class A Common Stock, par value $.01 per
share, and two shares of Class B Common Stock, par value $.01 per share,
outstanding as of such date.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Item III of the Company's Annual Report on Form 10-K for the year ended
December 29, 1996 is hereby amended and, as so amended, is restated below in
its entirety.
Item III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to executive officers and Directors of the
Company which is called for by this Item 10 is incorporated herein by reference
to the information set forth under the heading "Directors and Executive
Officers of the Registrant" in Item 1 of this report.
The Board of Directors currently consists of three classes of Directors,
as nearly equal in number as possible. The Company's By-laws state that the
number of Directors of the Company shall be nine. The total number of current
Directors is seven, consisting of two Class I Directors, two Class II
Directors, and three Class II Directors. There is one vacancy in each of
Class I and Class II. The Directors in Classes I, II, and III are serving terms
expiring at the Company's annual meeting of stockholders in 1997, 1998, and
1999, respectively.
The current Class I Directors are Stephen L. Ruzow and Dewey K. Shay, the
current Class II Directors are Stephan Weiss and M. William Benedetto, and the
current Class III Directors are Donna Karan, Andrea Jung, and Ann McLaughlin.
CERTAIN VOTING ARRANGEMENTS
Pursuant to a stockholders agreement, Ms. Karan, Mr. Weiss, trusts for the
benefit of Ms. Karan and the children of Ms. Karan and Mr. Weiss (the "KW
Trusts"), and Gabrielle Studio, Inc. ("Gabrielle Studio"), a corporation
wholly-owned by Ms. Karan, Mr. Weiss, and the KW Trusts (collectively, the
"Karan/Weiss Group"), are entitled to designate one member to the Board of
Directors of the Company (in addition to Ms. Karan and Mr. Weiss) as long as
the combined ownership of the shares of Common Stock held by members of the
Karan/Weiss Group is not less than 20% of the then outstanding Common Stock.
Additionally, pursuant to the stockholders agreement, Mr. Tomio Taki, Mr.
Frank R. Mori, Takihyo Inc. and certain affiliates of Messrs. Taki and Mori
(collectively, the "Takihyo Group") are entitled to designate (a) two members
of the Board of Directors until such time after the Company's initial public
offering as the Takihyo Group sells any shares of Common Stock owned by it
(other than shares distributed to stockholders of Takihyo Inc.) and (b)
thereafter, one member of the Board of Directors as long as the Takihyo Group
owns not less than 10% of the then outstanding Common Stock, except that if
either Mr. Taki or Mr. Mori is otherwise able to serve, and is serving, as the
one designee of the Takihyo Group, then such person shall be entitled to
continue to serve as a director as long as the Takihyo Group continues to own
not less than 5% of the then outstanding Common Stock. The stockholders
agreement provides that neither Mr. Mori, Mr. Taki, nor any other affiliate of
the Takihyo Group may serve as a director as long as the Takihyo Group has an
ownership interest in, or either of such person is an officer or director of,
Anne Klein & Company or any other competitor of the Company. Pursuant to the
stockholders agreement, the Karan/Weiss Group, on the one hand, and the
Takihyo Group, on the other hand, have agreed to vote the shares of Common
Stock owned by them for each other's designees (and, in the case of the
Takihyo Group, for Ms. Karan and Mr. Weiss) as directors. The designees to the
Board of Directors of the Karan/ Weiss Group and of the Takihyo Group (other
than Messrs. Taki or Mori) must be reasonably satisfactory to the Company's
Board of Directors. The Takihyo Group recently designated two nominees for the
Board of Directors, and requested that Ms. Karan, Mr. Weiss, and the Company
waive the provisions of the stockholders agreement so that Mr. Mori could
become a director of the Company. The Board, Ms. Karan, and Mr. Weiss did not
grant such a waiver. The Board also determined that the other Takihyo nominee
was not reasonably satisfactory to it. The Company has requested that the
Takihyo Group suggest other nominees to be considered by the Board.
Additionally, Donna Karan and Stephan Weiss, each of whom holds nine shares of
Class A Common Stock, and Tomio Taki and Frank R. Mori, each of whom holds one
share of Class B Common Stock, have agreed in writing that, if the holders of
Class A Common Stock or Class B Common Stock are entitled to vote separately
as a class with respect to a matter, they will vote their respective shares of
Class A and Class B Common Stock as nearly as possible in the same manner as
the holders of a majority of the shares of Common Stock vote their shares with
respect to such matter.
2
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation earned for services rendered in all capacities for the 1996 and
1995 fiscal years by the Chief Executive Officer and the four most highly
compensated executive officers of the Company for the fiscal year ended
December 29, 1996 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
---------------------------------------- AWARDS
SALARY/ -------------
CONSULTING OTHER ANNUAL SECURITIES OTHER
FEES BONUS COMPENSATION UNDERLYING COMPENSATION(2)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) OPTIONS(#) $
- -------------------------------------- --------- -------------- --------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Donna Karan........................... 1996 1,746,154 --(3) -- -- --
Chairman of the Board, Chief 1995 2,734,330 -- -- -- --
Executive Officer, and
Chief Designer
Stephan Weiss......................... 1996 1,246,154 --(3) -- -- --
Vice Chairman 1995 1,583,333 -- -- -- --
Stephen L. Ruzow...................... 1996 814,423 500,000 50,138 250,000 5,004,500(4)
President and Chief Operating 1995 744,230 750,000 58,485 -- 4,620
Officer
Louis Praino.......................... 1996 407,692 180,951 20,263 40,000 4,500
Executive Vice President-- Worldwide 1995 357,307 150,000 23,603 -- 2,214
Production
Joseph B. Parsons..................... 1996 291,538 150,000 24,361 30,000 104,500(4)
Executive Vice President and Chief 1995 160,000 40,000 12,510 -- 2,970
Financial Officer
</TABLE>
- ------------------------
(1) Represents the dollar value of annual compensation not properly categorized
as salary or bonus awarded to, earned by, or paid to the persons listed for
services rendered to the Company during each of 1996 and 1995. Includes an
annual automobile allowance for Messrs. Ruzow, Praino, and Parsons of
$18,000, $14,000, and $13,000, respectively, for 1996, and $18,000,
$14,400, and $6,000, respectively, for 1995. Also includes an annual wear
test allowance for Messrs. Ruzow, Praino, and Parsons of $32,138, $8,863,
and $11,561, respectively, for 1996, and $40,485, $9,203, and $6,510,
respectively, for 1995.
(2) Represents matching contributions under the Company's 401(k) Plan, which
contributions vest over a five-year period.
(3) Ms. Karan and Mr. Weiss waived the 1996 bonus to which they were entitled
under their respective employment agreements.
(4) Includes a one-time payment of $5,000,000 under Mr. Ruzow's employment
agreement and a one-time bonus of $100,000 for Mr. Parsons, in each case,
in connection with the consummation of the Company's initial public
offering.
3
<PAGE>
STOCK OPTIONS
The following table sets forth information with respect to options granted
to the Named Executive Officers of the Company during the fiscal year ended
December 29, 1996. No stock appreciation rights were granted to the Named
Executive Officers during the fiscal year ended December 29, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OF BASE OPTION TERM (2)
OPTIONS EMPLOYEES IN PRICE ----------------------
NAME GRANTED FISCAL YEAR ($/SH) EXPIRATION 5%($) 10%($)
- ----------------------------------------------- ----------- ------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Donna Karan.................................... -- -- -- -- -- --
Stephan Weiss.................................. -- -- -- -- -- --
Stephen L. Ruzow............................... 250,000(1) 17.25% 24.00 6/27/06 3,772,500 9,562,500
Louis Praino................................... 40,000(1) 2.76% 24.00 6/27/06 603,600 1,530,000
Joseph B. Parsons.............................. 30,000(1) 2.07% 24.00 6/27/06 452,700 1,147,500
</TABLE>
- ------------------------
(1) The options are exercisable in four equal annual installments. The
installments will become exercisable on June 27, 1997, June 27, 1998, June
27, 1999, and June 27, 2000.
(2) In accordance with rules promulgated by the Securities and Exchange
Commission, the potential realizable value of these grants (on a pre-tax
basis) assumes that the Common Stock gains 5% or 10% in value per year,
compounded over the 10-year life of the options. These are assumed rates of
appreciation and are not intended to forecast future appreciation of the
Company's Common Stock.
The following table sets forth information with respect to options held as
of December 29, 1996 by the Named Executive Officers of the Company. No options
were exercised by the Named Executive Officers of the Company during the fiscal
year ended December 29, 1996, and as of such date no options were in-the-money.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
OPTIONS
AT FISCAL YEAR-END(#)
------------------------------
<S> <C> <C>
NAME EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------ --------------- -------------
Donna Karan....................................................... -- --
Stephan Weiss..................................................... -- --
Stephen L. Ruzow.................................................. -- 250,000
Louis Praino...................................................... -- 40,000
Joseph B. Parsons................................................. -- 30,000
</TABLE>
4
<PAGE>
EMPLOYMENT ARRANGEMENTS
EMPLOYMENT AGREEMENT WITH MS. KARAN
On July 3, 1996, the Company entered into an agreement with Ms. Karan for
her employment as Chairman of the Board of Directors, Chief Executive Officer,
and Chief Designer. The agreement has an initial three-year term which is
automatically renewable for successive three-year terms, unless otherwise
terminated. The employment agreement provides for an annual base salary of
$500,000, as adjusted annually for the Consumer Price Index, and an annual bonus
of up to 100% of base salary based on the adjusted pre-tax profits of the
Company. Ms. Karan waived her bonus for 1996.
During the initial three-year term of the employment agreement, Ms. Karan
may terminate her employment as Chief Executive Officer without reason, and
after such initial three-year term, Ms. Karan may terminate her employment as
Chairman of the Board of Directors, Chief Executive Officer, and Chief Designer
without reason, in each case with at least four months' notice. The employment
agreement also may be terminated at any time without notice by Ms. Karan for
"good reason" if: (i) Ms. Karan (without her prior written consent) is no longer
Chairman of the Board, the sole Chief Executive Officer, and the sole Chief
Designer; (ii) Ms. Karan is assigned duties and responsibilities inconsistent
with the employment agreement (without her prior written consent); (iii) the
Company fails to pay Ms. Karan all amounts required under the employment
agreement; (iv) there is a material breach of the employment agreement by the
Company; (v) there is a change in control of the Company, including as a result
of certain changes in ownership of voting securities, an acquisition by a third
party of 30% of the voting securities of the Company, mergers, sales of assets,
and certain changes in the composition of the Board of Directors; (vi) there are
any fundamental changes to the business or operations of the Company which are
material (without her prior written consent); or (vii) a physician of recognized
skill confirms to the Board of Directors in writing that Ms. Karan's continued
employment with the Company would have a material adverse impact on her health
or have an adverse effect on her ability to perform her duties to the Company.
The employment agreement may be terminated by the Company only for "cause."
If Ms. Karan terminates her employment with the Company for "good reason" or
upon termination as a result of Ms. Karan's death or disability, the Company
will pay to Ms. Karan (or her estate), a lump sum cash payment equal to the sum
of her current base salary and incentive bonus from the prior year for the
greater of one year and the remaining term of the employment agreement.
The employment agreement provides that for a period of one year following
the termination of Ms. Karan's agreement, Ms. Karan will not participate or
engage in, either directly or indirectly, any business activity that is directly
competitive with the Company's then current principal product lines and price
points and could reasonably be expected to have a material adverse effect on the
Company. The employment agreement further provides that Ms. Karan will have no
obligation to mitigate the Company's financial obligations in the event of her
termination.
During the term of the employment agreement, Ms. Karan is obligated to
devote substantially all her business time and attention to the Company and,
except with regard to Gabrielle Studio, may not have an interest in or perform a
service that is in direct competition with the Company's principal product lines
and price points, which activity could reasonably be expected to have a material
adverse effect on the Company. Subject to the foregoing and provided there is no
interference with Ms. Karan's primary obligations to the Company, Ms. Karan may
engage in certain activities for her own personal benefit, such as personal
endorsements and appearances; motion pictures; television; writing; speaking and
teaching engagements; photography; the fine arts; designing for stage, film, and
other media; architectural, industrial, and interior design (exclusive of home
furnishings) and sales of limited edition products based on such designs; and
consulting services in connection with the foregoing.
5
<PAGE>
EMPLOYMENT AGREEMENT WITH MR. WEISS
On July 3, 1996, the Company entered into an agreement with Mr. Weiss for
his employment as Vice Chairman of the Board of Directors. The agreement has an
initial one-year term which is automatically renewable for successive one-year
terms, unless otherwise terminated. The employment agreement provides for an
annual base salary of $500,000, as adjusted for the Consumer Price Index, and an
annual bonus of up to 100% of base salary based on the adjusted pre-tax profits
of the Company. Mr. Weiss waived his bonus for 1996. Under the employment
agreement, Mr. Weiss currently has principal executive responsibility for the
operations of the Beauty Division. While Mr. Weiss' office is not a full-time
position, he spends a substantial amount of time as Vice Chairman. Mr. Weiss'
employment agreement is in other material respects relating to termination and
non-competition similar to the employment agreement of Ms. Karan described
above.
EMPLOYMENT AGREEMENT WITH MR. RUZOW
Mr. Ruzow entered into an employment agreement, dated as of December 12,
1995, providing for his employment as President and Chief Operating Officer of
the Company until December 31, 2000. Pursuant to his employment agreement, Mr.
Ruzow will be entitled to receive an annual base salary of $850,000, $900,000,
$950,000 and $1,000,000 in 1997, 1998, 1999, and 2000, respectively. Mr. Ruzow
also is entitled to a maximum cash bonus each year of up to 100% of his then
current base salary which is based on specified performance criteria, with a
minimun cash bonus in years 1996 through 1999, of 25% of his then current base
salary. In addition, Mr. Ruzow is entitled to participate in the Company's
benefit plans, and the Company has agreed to maintain a term life insurance
policy on the life of Mr. Ruzow in the amount of $5,000,000, payable to Mr.
Ruzow's beneficiaries. Upon the consummation of the Company's initial public
offering, Mr. Ruzow received a one-time payment of $5,000,000 in accordance with
the terms of his employment agreement. Additionally, as provided by his
employment agreement, he was granted options to purchase up to 250,000 shares of
Common Stock pursuant to the Company's 1996 Stock Incentive Plan, at an exercise
price of $24.00, the market value of the Common Stock on the date of the grant.
The employment agreement with Mr. Ruzow requires six months' notice of
intent to terminate by Mr. Ruzow and three months' notice of intent to terminate
by the Company in the event Mr. Ruzow is terminated "without cause" (as defined
therein) (or a shorter period of time if terminated for "cause" (as defined
therein)). Mr. Ruzow has also agreed not to compete with the business of the
Company for a period of one year following termination of his employment with
the Company. If Mr. Ruzow is terminated by the Company "without cause," his
employment terminates because he is disabled, or he terminates the agreement for
"good reason" (as defined therein), Mr. Ruzow will be entitled to a severance
payment in the amount of $1,000,000.
EMPLOYMENT AGREEMENT WITH MR. SHAY
The Company and Dewey Shay, Senior Executive Vice President and Chief
Administrative Officer of the Company, are parties to a three-year employment
agreement, dated December 2, 1996, which provides for the payment to Mr. Shay
of an annual base salary of $400,000 in fiscal 1996 and 1997 and $450,000 and
$500,000 in fiscal 1998 and 1999, respectively. In addition, the agreement
provides for the payment to Mr. Shay of a minimum cash bonus of $200,000
annually and a maximum cash bonus of $700,000 for fiscal 1997, $750,000 in
fiscal 1998, and $800,000 in fiscal 1999. The bonus amount in excess of the
minimum amount shall be based on the performance criteria established in
accordance with the Company's then existing incentive compensation plan.
The agreement further provides that, immediately after the 1997 Annual Meeting
(assuming approval by the stockholders of an amendment of the 1996 Stock
Incentive Plan), the Company will recommend to the Incentive Compensation
Subcommittee that it grant Mr. Shay an option to purchase 600,000 shares of
Common Stock of the Company at the market value of the Common Stock on the
date of grant. The agreement further provides that if the Company terminates
Mr. Shay's employment "without cause," Mr. Shay terminates his employment for
"good reason" (each as defined in the agreement), or
6
<PAGE>
Mr. Shay terminates his employment after a change of management or for failure
to receive the stock option described above, Mr. Shay will be entitled to a
substantial severance payment and any stock options held by Mr. Shay that would
be exercisable by him within 12 months after his termination immediately vest
and become exercisable. The agreement also provides that Mr. Shay will be
elected to the Board of Directors of the Company.
EMPLOYMENT AGREEMENT WITH MR. PARSONS
The Company and Joseph B. Parsons, Executive Vice President and Chief
Financial Officer of the Company, are parties to an employment agreement dated
October 15, 1996, under which Mr. Parsons receives an annual base salary of
$300,000, subject to increase at the discretion of the Company. Mr. Parsons also
is entitled to a target bonus equal to 50% of his base salary, with a guaranteed
bonus of $140,000 for fiscal 1996. The agreement further provides that in the
event of Mr. Parsons' disability, his termination by the Company "without
reason," or his termination of the agreement for "good reason" (each as defined
in the agreement), the Company will pay him or his estate an amount equal to his
then current annual salary plus the bonus he earned during the prior fiscal
year. The agreement is generally terminable by either party upon two months'
notice.
DIRECTOR COMPENSATION
Directors who are employees of the Company receive no compensation, as such,
for service as members of the Board of Directors or its committees.
Any director who is not an active employee or officer of the Company or a
subsidiary thereof and who is not an officer, director, or employee of certain
affiliates of the Company ("Eligible Directors") receives an annual retainer of
$25,000, an annual wear test allowance of $10,000, and stock options pursuant
to the Company's 1996 Non-Employee Director Stock Option Plan (the "Directors'
Plan"). Eligible Directors also are paid $1,000 per meeting attended and are
reimbursed for expenses incurred in connection with attendance at such meetings.
Under the Directors' Plan, Eligible Directors are eligible to receive
options under the Directors' Plan in accordance with the terms thereof. On the
date of election or appointment, each Eligible Director is granted a
non-qualified option to purchase 7,500 shares of Common Stock. These initial
options vest one year after the date of grant, assuming the Eligible Director
remains a director. Each year, other than with respect to the year in which an
Eligible Director receives an initial grant of options, as of the first day of
the month following the annual meeting of stockholders, each Eligible Director
will receive a non-qualified option to purchase 500 shares of Common Stock. Upon
exercise of an option, the purchase price paid by an Eligible Director will be
100% of the fair market value of such share at the time of the grant of the
option, or the par value of the share, whichever is greater.
The options to purchase shares of Common Stock described above will be
exercisable on or after the first anniversary of the date of grant. In addition,
options granted and not previously exercisable will become vested and fully
exercisable immediately upon a change in control (as defined in the Directors'
Plan). Each option will expire on the tenth anniversary of the date of grant.
Subject to the number of shares authorized for issuance under the Directors'
Plan and the term of the Directors' Plan, the Directors' Plan will continue in
effect without limit unless and until the Board of Directors determines
otherwise. Neither Ms. Karan nor Mr Weiss (nor Messrs. Mori or Taki, if either
of them is serving as a director) is eligible to receive options under the
Directors' Plan. The Directors' Plan authorizes the issuance of up to 100,000
shares of Common Stock, subject to adjustments in certain circumstances. No
options may be granted after June 19, 2006.
If an Eligible Director terminates his or her service on the Board of
Directors for any reason, including disability, death, resignation, or
failure to stand for re-election, any exercisable option which has not
expired may be exercised with respect to the number of shares of Common Stock
which were exercisable on the date the Eligible Director terminated his or
her service with the Company at any time during the earlier of (i) the
one-year period following such date or (ii) the remaining term of the option.
Any unexpired but unexercisable option shall terminate and become null and
void as of the date the Eligible Director terminates his or her service with
the Company.
In 1996, pursuant to the Directors' Plan, Mr. Benedetto and Ms. Jung each
received an option to purchase 7,500 shares of Common Stock at an exercise price
of $21.125 per share and $20.50 per share, respectively, the market value of the
Common Stock on the date of the grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Company's initial public offering, the Company's principals
and senior management were directly involved in setting compensation for the
Company's executives. Following the initial public offering, all decisions
regarding compensation of executive officers were made by the Board of
Directors of the Company. In 1997 the Board of Directors of the Company
formed a Compensation Committee which currently is comprised of Mr.
Benedetto, Ms. Jung, and Ms. McLaughlin. Ms. Karan serves as an ex-officio
member of such committee. Ms. Karan is the Chairman of the Board, Chief
Executive Officer, and Chief Designer of the Company. Ms. Jung and Ms.
McLaughlin serve as the members of the Incentive Compensation Subcommittee
of the Compensation Committee.
The Company has an agreement with Benedetto, Gartland & Greene Inc. ("BGG")
which provides that BGG will serve as financial advisor to the Company until
December 31, 1997 for an annual fee of $350,000, plus reimbursement of expenses.
Additionally, BGG acted as the Company's financial advisor in connection with
its initial public offering. In fiscal 1996, the Company paid an aggregate of
$523,000 to BGG for such services. Mr. Benedetto, a director of the
Company, is a founder and principal of BGG. The Company believes that the
agreement with BGG is on terms at least as favorable as would
have been available from other parties.
Also see "Certain Relationships and Related Transactions" for information
with respect to certain members of the Board of Directors.
7
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The only persons known by the Company to be the beneficial owners
of more than five percent of the outstanding shares of Common Stock, as of
February 15, 1997, are indicated below:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENTAGE
BENEFICIAL OWNER OWNERSHIP OF CLASS
- ------------------------------------------------------------------------------- -------------------- -------------
<S> <C> <C>
Donna Karan.................................................................... 5,242,937(1) 24.4%
Stephan Weiss.................................................................. 5,242,937(1) 24.4%
Frank Mori..................................................................... 4,059,448(2) 18.9%
Tomio Taki..................................................................... 4,245,174(2) 19.8%
Takihyo Inc.................................................................... 3,183,881(2) 14.8%
The Capital Group Companies, Inc............................................... 1,262,500(3) 5.9%
</TABLE>
- ------------------------
(1) The shares attributed to Ms. Karan include shares held of record by Mr.
Weiss, the KW Trusts, and Gabrielle Studio. The shares attributed to
Mr. Weiss include shares held of record by Ms. Karan, the KW Trusts,
and Gabrielle Studio. All of such shares are subject to the stockholders
agreement described herein. See Item 10. "DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT--Certain Voting Arrangements."
Ms. Karan has sole voting and investment power with respect to the shares
held of record by her and Mr. Weiss has sole voting and investment power
with respect to the shares held of record by him and the KW Trusts.
Ms. Karan and Mr. Weiss have shared voting and investment power with
respect to shares held of record by Gabrielle Studio. Ms. Karan and
Mr. Weiss each disclaim beneficial ownership of the shares held of record by
the other, the KW Trusts, and Gabrielle Studio. The total does not include
the nine shares of Class A Common Stock held by each of Ms. Karan and
Mr. Weiss, which are subject to the voting agreement described herein.
The business address of Ms. Karan and Mr. Weiss is 550 Seventh Avenue,
New York, New York 10018.
(2) The shares attributed to Messrs. Taki and Mori include shares held of record
by Takihyo Inc. Each of Messrs. Taki and Mori has a pecuniary interest in
only a portion of such shares, and each disclaims beneficial ownership
except to the extent of such interest. All of such shares are subject to
the stockholders agreement described herein. See Item 10. "DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT--Certain Voting Arrangements."
Mr. Mori and Mr. Taki each has sole voting and investment power with
respect to the shares held of record by him and share voting and investment
power with respect to the shares held of record by Takihyo Inc. The
total does not include the one share of Class B Common Stock held by
each of Mr. Taki and Mr. Mori, which are subject to the voting agreement
described herein. The business address of Messrs. Taki and Mori and
Takihyo Inc. is 11 West 42nd Street, New York, New York 10036.
(3) According to a Schedule 13G for the year ended December 29, 1996 filed by
The Capital Group Companies, Inc. ("CGC"), CGC is the parent holding company
of a group of investment management companies that hold investment power,
and, in some cases, voting power over the Common Stock held by it. Under
Rule 13d-3 of the Securities Exchange Act of 1934, CGC may be deemed to
beneficially own such shares of Common Stock. Of the shares of Common Stock
beneficially owned by CGC, Capital Guardian Trust Company, a wholly-owned
subsidiary of CGC, is the beneficial owner of 1,240,100 shares of Common
Stock as a result of its serving as the investment manager of various
institutional accounts. The remaining shares are beneficially owned by other
subsidiaries of CGC. The address of CGC is 333 South Hope Street, Los
Angeles, California 90071.
8
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The table below sets forth the beneficial ownership of the Common Stock as
of February 15, 1997 (i) by each director, (ii) by each of the executive
officers named in the "Summary Compensation Table," and (iii) by all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP
OF COMMON STOCK AS
OF FEBRUARY PERCENTAGE
NAME POSITION 15,1997(1) OF CLASS
- ---------------------------------------- ----------------------------------- -------------------- -------------
<S> <C> <C> <C>
Donna Karan............................. Chairman of the Board, Chief 5,242,937(2) 24.4%
Executive Officer, and Chief
Designer
Stephan Weiss........................... Vice Chairman and Director 5,242,937(2) 24.4%
M. William Benedetto.................... Director 1,000 *
Andrea Jung............................. Director 8,000(3) *
Ann McLaughlin.......................... Director -- --
Stephen L. Ruzow........................ President, Chief Operating Officer, -- --
and Director
Dewey K. Shay........................... Senior Executive Vice President, -- --
Chief Administrative Officer, and
Director
Joseph B. Parsons....................... Executive Vice President and Chief 100 *
Financial Officer
Louis Praino............................ Executive Vice President-- 200 *
Worldwide Production
All directors and executive officers of
the Company as a group (12
persons).............................. 5,255,837(2)(3) 24.5%
</TABLE>
- ------------------------
* Less than one percent (1%).
(1) Excludes shares underlying options granted or to be granted to the directors
and executive officers, because none of such options is exercisable within
60 days of February 15, 1997. See "Item 11. EXECUTIVE COMPENSATION--
Employment Arrangements;" "Stock Options;" and "Director Compensation."
(2) The shares attributed to Ms. Karan include shares held of record by Mr.
Weiss, the KW Trusts, and Gabrielle Studio. The shares attributed to Mr.
Weiss include shares held of record by Ms. Karan, the KW Trusts, and
Gabrielle Studio. All of such shares are subject to the stockholders
agreement described herein. See "Item 10. Directors and Executive Officers
of the Registrant--Certain Voting Arrangements" above. Ms.
Karan has sole voting and investment power with respect to the shares held
of record by her and Mr. Weiss has sole voting and investment power with
respect to the shares held of record by him and the KW Trusts. Ms. Karan and
Mr. Weiss have shared voting and investment power with respect to shares
held of record by Gabrielle Studio. Ms. Karan and Mr. Weiss each disclaim
beneficial ownership of the shares held of record by the other, the KW
Trusts, and Gabrielle Studio. Does not include the nine shares of Class A
Common Stock held by each of Ms. Karan and Mr. Weiss, which are
subject to the voting agreement described herein.
(3) Represents shares held by Ms. Jung's husband, as to which shares she
disclaims beneficial ownership.
9
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
REORGANIZATION
Beginning in 1984, Ms. Karan, Mr. Weiss, Mr. Taki, Mr. Mori, and Takihyo
Inc. formed various partnerships and corporations (the "DK Companies") to engage
in various aspects of the Company's business, each of which was ultimately owned
one-half by Ms. Karan, Mr. Weiss, and the KW Trusts and one-half by members of
the Takihyo Group. The Company was formed on April 10, 1996 to acquire and
continue the various businesses conducted by the DK Companies. Prior to the
Company's initial public offering, the Company conducted no business and held no
assets or liabilities. Simultaneously with the consummation of the Company's
initial public offering, Ms. Karan, Mr. Weiss, and the KW Trusts contributed to
the Company all the outstanding shares of the various corporations which hold
their interests in the DK Companies, except for their shares in Gabrielle
Studio, and Gabrielle Studio, contributed to the Company its partnership
interest in Donna Karan Studio, one of the DK Companies. Messrs. Taki and Mori
and Mr. Mori's children contributed to the Company all the outstanding shares of
the various corporations which held their interests in the DK Companies and
Takihyo Inc. contributed its partnership interests representing the balance of
the Takihyo Group's interest in the DK Companies. In connection with this
reorganization, Ms. Karan, Mr. Weiss, the KW Trusts, and Gabrielle Studio
received an aggregate of 5,306,467 shares of Common Stock and certain members of
the Takihyo Group received an aggregate of 5,306,467 shares of Common Stock.
In addition, in connection with this reorganization, the Company agreed to
indemnify the Karan/ Weiss Group and the Takihyo Group for certain obligations
arising prior to or as a result of the reorganization.
LICENSE AGREEMENT FOR PRINCIPAL TRADEMARKS
In connection with the Company's initial public offering and reorganization
in July 1996, Gabrielle Studio, a corporation wholly-owned by Ms. Karan, Mr.
Weiss, and the KW Trusts, entered into a license agreement (the "License
Agreement") with the Company. The License Agreement provided for the grant of an
exclusive license throughout the world to use, and to sublicense the right to
use, the trademarks "DONNA KARAN," "DONNA KARAN NEW YORK," "DKNY," "DK," and all
variations thereof (collectively, the "Licensed Marks") and to use and to
sublicense the right to use the name, signature, and likeness of Ms. Karan (the
"Name") in connection with the design, manufacture, distribution, sale (both at
retail and at wholesale), advertising, marketing, and promotion of products of
any kind, nature, or description except for certain products and other matters,
such as food products, restaurants, toys, and games and in connection with the
provision of certain store services, all of which Gabrielle Studio has
licensed to Ms. Karan.
The License Agreement continues in perpetuity unless earlier terminated as
provided therein. The License Agreement provides that it may be terminated by
Gabrielle Studio upon the failure of the Company to pay any amount due within 60
days of receipt of notice of such failure, or if the Company violates the
quality control provisions of the License Agreement and fails to initiate and
thereafter pursue appropriate corrective action within 60 days after a final
unappealable determination by an arbitration tribunal or court of competent
jurisdiction that such violation has occurred. The License Agreement may be
terminated by Gabrielle Studio upon the occurrence of, among other events, a
change in control of the Company, which includes certain changes in the
ownership of voting securities, an acquisition by a third party of 30% of the
voting securities of the Company, mergers, sales of assets, and changes in the
composition of the Board of Directors. All costs in connection with the transfer
of record ownership of the Licensed Marks to Gabrielle Studio are being paid by
the Company.
The License Agreement imposes certain obligations on the Company with
respect to the use of sales materials, protection of the Licensed Marks,
indemnification of Gabrielle Studio, the maintenance of public liability
insurance, and quality control of products bearing the Licensed Marks or the
Name. The
10
<PAGE>
License Agreement also limits the use of the Licensed Marks in certain
circumstances and in general prohibits any transfer or assignment of the rights
thereunder.
The License Agreement provides that the Company will pay to Gabrielle Studio
an annual royalty equal to 1.75% of the first $250 million of net sales (as
defined in the License Agreement, which includes products and store services)
for such year, plus 2.5% of the next $500 million of net sales for such year,
plus 3% of the next $750 million of net sales for such year, plus 3.5% of all
net sales for such year in excess of $1.5 billion. For purposes of computing the
annual royalty, "net sales" includes sales by the Company, its affiliates, its
subsidiaries, and its sublicensees of products bearing any of the Licensed Marks
or the Name. If the royalty paid with respect to any year is less than an amount
equal to the greater of (a) $3.0 million as adjusted for inflation during the
term of the License Agreement plus 25% of the average annual sales royalty
payable to Gabrielle Studio for the prior three years as adjusted for inflation
or (b) one-third of the average annual sales royalty payable to Gabrielle
Studio, over the prior three years as adjusted for inflation, Gabrielle Studio
may terminate the License Agreement unless the Company pays to Gabrielle Studio
the amount of such deficiency within 60 days of demand therefor. During fiscal
1996, the Company made a one-time payment of $4.6 million to Gabrielle Studio in
connection with the License Agreement and paid royalties of $9.3 million to
Gabrielle Studio for net sales, after the License Agreement became effective in
July 1996.
LICENSE AGREEMENT FOR PERFUME BOTTLES
Mr. Stephan Weiss is the owner of the designs and utility patents relating
to the bottles in which the Company's beauty division products are packaged. In
connection with the initial public offering, Mr. Weiss granted to the Company an
exclusive, royalty-free worldwide license in perpetuity for the use of the
utility patents for the bottles developed by Mr. Weiss. Such license does not
provide for the sublicense to independent third parties. Additionally, the
license agreement may be terminated by the licensor for material breaches of the
agreement which remain uncured for a period of 180 days after notice. In fiscal
1996, Mr. Weiss received $393,000 in connection with the execution of the
license, representing his out-of-pocket costs incurred in the development of the
bottles and the issuance of the patents thereon. Such expenses were comprised
substantially of outside legal fees incurred in connection with the registration
and maintenance of such patents around the world.
RELEASE OF SECURITY INTEREST
Prior to the initial public offering, the Company's principal trademarks
were owned by Ms. Karan who licensed them to Gabrielle Studio which then
sublicensed them to Donna Karan Studio, a subsidiary of the Company. In
connection with the Company's initial public offering, the lenders under the
Company's credit facility agreed to release their liens on the license agreement
between Gabrielle Studio and the Company and the license agreement between Ms.
Karan and Gabrielle Studio and on the ownership interests in Donna Karan
Studio. The release of such liens may be considered a benefit to Ms. Karan, Mr.
Weiss, and the KW Trusts.
REGISTRATION RIGHTS AGREEMENT
Simultaneously with the closing of the Company's initial public offering,
the Company, members of the Takihyo Group, Ms. Karan, Mr. Weiss, the KW Trusts,
and Gabrielle Studio entered into a Registration Rights Agreement. The
Registration Rights Agreement granted to members of the Takihyo Group the right
to demand on an aggregate of two occasions (one of which shall not be earlier
than 12 months after the effective date of the registration statement pertaining
to any other offering of the Company's securities under the Securities Act of
1933) that the Company, at its expense, register all or a portion of the shares
which they own, subject to a minimum demand of 5% of the then outstanding shares
of Common Stock. Upon receipt of a demand from a member of the Takihyo Group for
the registration of the Company's shares, the Company (or its designee) shall
have the option of purchasing the shares at the average of their
11
<PAGE>
closing market prices for the 10 trading days before and the 10 trading days
after the demand. The Registration Rights Agreement also granted to the
Karan/Weiss Group the right to request on one occasion (which cannot be earlier
than June 27, 1997) that the Company, at its expense, register all or a portion
of the shares which the members of the Karan/Weiss Group own. In addition, the
Takihyo Group and, in certain circumstances the Karan/Weiss Group, have the
right to join ("piggyback") in any registration statement filed by the Company
with respect to an offering of any of its securities by it or on behalf of any
of its securityholders.
Pursuant to the Registration Rights Agreement, if the Takihyo Group makes a
demand for the registration of any of the Company's shares at any time prior to
June 27, 1997, the Company may not include in such offering any of the Company's
shares or any shares owned by any other securityholder of the Company if, in the
good faith judgment of the managing underwriter of such offering, the inclusion
of such shares would adversely affect the success of such offering or interfere
with the successful marketing of, or require the exclusion of any portion of,
the shares to be registered pursuant to the Takihyo Group's demand. If the
Takihyo Group makes a demand for the registration of its shares on or after such
date, the Company may elect to proceed with an offering of the Company's own
shares. In such event, the demand of the Takihyo Group shall be deemed to be a
request to exercise their "piggyback" rights and they, together with the member
of the Karan/Weiss Group, will be permitted to register and sell such number of
shares (to be apportioned between the Takihyo Group and the Karan/Weiss Group
pursuant to certain agreed-upon allocations) as the underwriter of the Company's
offering determines can be sold without adversely affecting the Company's
offering. If the Company does not so elect, the members of the Karan/ Weiss
Group may elect to include certain of their shares in the Takihyo Group's
offering, subject to certain limitation. If, after June 27, 1997, a member of
the Karan/Weiss Group requests that the Company register shares owned by the
Karan/Weiss Group, the Company may (but is not obligated to) permit the members
of the Karan/Weiss Group to proceed with an offering of certain of their shares,
in which event the members of the Takihyo Group may elect to include certain of
their shares in the offering of the Karan/ Weiss Group, subject to certain
limitations.
OTHER AGREEMENTS AND TRANSACTIONS
For a discussion of the voting arrangement between the members of the
Karan/Weiss Group and members of the Takihyo Group, see "Item 10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT--Certain Voting Arrangements." For a
discussion of the financial advisory agreement between the Company and
BGG, a corporation of which one of the directors is a founder and principal,
see "Item 11. EXECUTIVE COMPENSATION--Compensation Committee Interlocks and
Insider Participation."
DISTRIBUTIONS
Prior to the Company's initial public offering, the interests of the
principals in the DK Companies were held through various partnerships and
corporations (the "Intermediate Entities"). Each of the Intermediate Entities
that is a corporation had been treated for Federal and certain state tax
purposes as an S corporation under the Internal Revenue Code of 1986, as amended
from time to time (the "Code"), and comparable state tax provisions. As a
result, the principals and their affiliates were obligated to pay Federal and
certain state income taxes on their allocable portion of the income of the DK
Companies. The DK Companies made various distributions to the Intermediate
Entities which, in turn, made payments and distributions to the principals of
the Company and their affiliates to pay income taxes on the taxable income of
the DK Companies through the date of the initial public offering. In fiscal
1996, payments and distributions of $25.4 million were made in the aggregate to
Ms. Karan, Mr. Weiss, the KW Trusts, Gabrielle Studio, Mr. Mori, Mr. Taki, and
Takihyo Inc.
On April 16, 1996, the Company and certain of the Intermediate Entities
issued promissory notes in the aggregate principal amount of $57.25 million to
Ms. Karan, Mr. Weiss, and the KW Trusts, and $57.25 million to certain members
of the Takihyo Group. The aggregate principal amount of the notes was an
12
<PAGE>
estimate of the cumulative undistributed taxable income (on which taxes
previously had been paid) of the DK Companies since their inception through the
anticipated closing date of the Company's initial public offering. The notes
bore interest at the rate of 8% per annum. On July 3, 1996, the Company used a
portion of the proceeds of the Company's initial public offering to pay in full
the principal and interest under all of such notes.
LITIGATION
On April 21, 1997, the Company, Donna Karan, Stephan Weiss, and Stephen L.
Ruzow, directors and officers of the Company, and Joseph B. Parsons, an
officer of the Company, were named as defendants in an action filed in the
United States District Court for the Eastern District of New York. The action,
which seeks unspecified damages, purports to be a class action on behalf of
all purchasers of Common Stock during the period from September 30, 1996
through March 5, 1997. The complaint alleges that the Company and the other
defendants violated certain provisions of the Securities Exchange Act of 1934,
as amended, and the rules thereunder by disseminating a press release and
filing with the Securities and Exchange Commission documents allegedly
containing materially false and misleading statements relating to the Jeans
License. The Company and the other defendants have not yet filed their answers
but plan to deny liability and to defend the action vigorously. Based on the
information available to date, management does not believe that the outcome
of this action will have a material adverse effect on the results of
operations and financial condition of the Company.
13
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to the Annual Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.
DONNA KARAN INTERNATIONAL
INC. (Registrant)
Date: April 28, 1997 By: /s/ Stephen L. Ruzow
---------------------------
Stephen L. Ruzow, President
& Chief Operating Officer
Date: April 28, 1997 By: /s/ Joseph B. Parsons
---------------------------
Joseph B. Parsons, Executive
Vice President & Chief
Financial Officer
