<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 June 28, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11805
------------------------------------------------------
DONNA KARAN INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3882426
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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)
----------------------------------------------------
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 / /
At August 11, 1998, the Registrant had 21,599,334 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.
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<PAGE>
DONNA KARAN INTERNATIONAL INC.
INDEX
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Statements of Operations -
Three Months and Six Months Ended June 28, 1998 and
June 29, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 3
Balance Sheets -
June 28, 1998 and December 28, 1997 . . . . . . . . . . . . . 4
Statements of Cash Flows -
Six Months Ended June 28, 1998 and June 29, 1997. . . . . . . 5
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . 9
0
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 14
-2-
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues. . . . . . . . . . . . . . . . . . . $124,854 $111,045 $306,007 $269,821
Cost of sales . . . . . . . . . . . . . . . . . . 100,153 88,434 238,775 202,172
-------- -------- -------- --------
Gross profit. . . . . . . . . . . . . . . . . . . 24,701 22,611 67,232 67,649
Selling, general and administrative expenses. . . 36,138 47,788 73,870 92,344
Restructuring charges . . . . . . . . . . . . . . - 1,571 - 1,571
-------- -------- -------- --------
Operating loss. . . . . . . . . . . . . . . . . . (11,437) (26,748) (6,638) (26,266)
Other income (expense):
Equity in earnings (loss) of affiliate. . . . . - (23) (65) 709
Gain on sale of affiliate . . . . . . . . . . . - - 88 -
Interest expense, net . . . . . . . . . . . . . (263) (419) (1,252) (139)
-------- -------- -------- --------
Loss before income taxes. . . . . . . . . . . . . (11,700) (27,190) (7,867) (25,696)
Income tax benefit. . . . . . . . . . . . . . . . (5,382) (12,508) (3,619) (11,820)
-------- -------- -------- --------
Net loss. . . . . . . . . . . . . . . . . . . . . $ (6,318) $(14,682) $ (4,248) $(13,876)
======== ======== ======== ========
Net loss per common share (Note 1):
Basic . . . . . . . . . . . . . . . . . . . . . $ (.29) $ (.68) $ (.20) $ (.64)
======== ======== ======== ========
Diluted . . . . . . . . . . . . . . . . . . . . $ (.29) $ (.68) $ (.20) $ (.64)
======== ======== ======== ========
</TABLE>
See Notes to Financial Statements
-3-
<PAGE>
DONNA KARAN INTERNATIONAL INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 28, DECEMBER 28,
1998 1997
----------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 12,791 $ 4,537
Accounts receivable, net of allowances of $41,879 at
June 28, 1998 and $52,035 at December 28, 1997. . . . . 56,937 68,138
Inventories . . . . . . . . . . . . . . . . . . . . . . . 88,210 112,366
Deferred income taxes . . . . . . . . . . . . . . . . . . 27,157 33,474
Prepaid expenses and other current assets . . . . . . . . 14,608 12,248
-------- --------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . 199,703 230,763
Property and equipment, net . . . . . . . . . . . . . . . . 31,148 31,005
Deferred income taxes . . . . . . . . . . . . . . . . . . . 19,361 7,278
Deposits and other noncurrent assets. . . . . . . . . . . . 15,552 18,442
-------- --------
$265,764 $287,488
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable. . . . . . . . . . . . . . . . . . . . . $ 42,670 $ 61,013
Accrued expenses and other current liabilities. . . . . . 53,609 60,711
Current portion of capital lease obligations. . . . . . . - 36
Note payable to principal stockholder . . . . . . . . . . - 6,700
Borrowing under revolving line of credit. . . . . . . . . - 22,314
-------- --------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . 96,279 150,774
-------- --------
Deferred income . . . . . . . . . . . . . . . . . . . . . . 51,537 14,250
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 35,000,000 shares
authorized, 21,618,034 shares issued and outstanding. . 216 216
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. . . . . . . . . . . . . . . . 188,491 188,491
Retained deficit. . . . . . . . . . . . . . . . . . . . . (68,123) (63,875)
Cumulative translation adjustment . . . . . . . . . . . . (882) (455)
-------- --------
119,702 124,377
Less: Treasury stock, at cost (20,200 shares) . . . . . . (479) (479)
Unearned compensation . . . . . . . . . . . . . . . (1,275) (1,434)
-------- --------
Total stockholders' equity. . . . . . . . . . . . . . . 117,948 122,464
-------- --------
$265,764 $287,488
======== ========
</TABLE>
See Notes to Financial Statements
-4-
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
JUNE 28, JUNE 29,
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,248) $(13,876)
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 6,683 5,866
Provision for bad debts . . . . . . . . . . . . . . . . . . 759 411
Gain on sale of affiliate . . . . . . . . . . . . . . . . . (88) -
Provision for restricted stock compensation . . . . . . . . 159 -
Amortization of deferred income . . . . . . . . . . . . . . (3,221) -
Equity in earnings (loss) of affiliate. . . . . . . . . . . 65 (709)
Deferred income taxes . . . . . . . . . . . . . . . . . . . (5,766) (1,321)
Changes in operating assets and liabilities:
Decrease in accounts receivable . . . . . . . . . . . . . . 10,442 28,117
Decrease (increase) in inventories. . . . . . . . . . . . . 24,156 (26,016)
Increase in prepaid expenses and other current assets . . . (2,537) (9,244)
Increase in deposits and other noncurrent assets. . . . . . (451) (2,611)
Decrease in accounts payable, accrued expenses, and
other current liabilities. . . . . . . . . . . . . . . . . (26,752) (36,753)
Increase in deferred income . . . . . . . . . . . . . . . . 41,007 -
-------- --------
Net cash provided by (used for) operating activities. . . 40,208 (56,136)
-------- --------
INVESTING ACTIVITIES
Proceeds from sale of affiliate . . . . . . . . . . . . . . . . 646 -
Purchase of property and equipment. . . . . . . . . . . . . . . (3,550) (7,529)
-------- --------
Net cash (used for) investing activities. . . . . . . . . (2,904) (7,529)
-------- --------
FINANCING ACTIVITIES
Net (repayment) proceeds of revolving credit facility . . . . . (22,314) 26,547
Payments under capital lease. . . . . . . . . . . . . . . . . . (36) (138)
Repayment of note payable to principal stockholder. . . . . . . (6,700) -
-------- --------
Net cash (used for) provided by financing activities. . . (29,050) 26,409
-------- --------
Net increase (decrease) in cash and cash equivalents. . . . . . 8,254 (37,256)
Cash and cash equivalents at beginning of period. . . . . . . . 4,537 40,550
-------- --------
Cash and cash equivalents at end of period. . . . . . . . . . . $ 12,791 $ 3,294
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,112 $ 389
======== ========
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . $ 5,134 $ 9,035
======== ========
</TABLE>
See Notes to Financial Statements
-5-
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
results of operations of Donna Karan International Inc. and its subsidiaries
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation. The equity method of
accounting was used for Donna Karan Japan, K.K., a Japanese stock company
("DKJ"), which was 70% owned by a nonaffiliated entity. In March 1998, the
Company and such nonaffiliated party sold all of their outstanding shares in
DKJ. As a result of this transaction, the Company will no longer recognize
equity in earnings (loss) of affiliate. See Note 7 to the Company's Annual
Report on Form 10-K for the year ended December 28, 1997.
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. On a quarterly basis, the Company's operations may vary as a result
of, among other things, production and shipping schedules, the introduction of
new products, and variations in the timing of certain holidays from year to
year. The results of operations for any interim period are not necessarily
indicative of the results of operations to be expected for a full year. For
further information, refer to the consolidated financial statements and
accompanying footnotes included in the Company's Annual Report on Form 10-K for
the year ended December 28, 1997.
NET LOSS PER COMMON SHARE
For the three and six months ended June 28, 1998, in accordance with the
requirements of Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share," net loss per common share amounts ("basic EPS") were
computed by dividing net loss by the weighted average number of common shares
outstanding and excluded any potential dilution. Net loss per common share
amounts -- assuming dilution ("diluted EPS") were computed by reflecting
potential dilution from the exercise of stock options. SFAS No. 128 requires the
presentation of both basic EPS and diluted EPS on the face of the income
statement. Earnings per share amounts for the same prior-year periods have been
restated to conform with the provisions of SFAS No. 128.
A reconciliation between net loss and shares used to compute basic and
diluted EPS computations for net loss is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss, as reported . . . . . . . . . . . . $(6,318) $(14,682) $(4,248) $(13,876)
Effect of dilutive securities:
Stock options . . . . . . . . . . . . . . . . - - - -
------- -------- ------- --------
Net loss, assuming full dilution. . . . . . . $(6,318) $(14,682) $(4,248) $(13,876)
======= ======== ======= ========
Weighted average common shares, basic . . . . 21,598 21,448 21,598 21,448
Effect of dilutive securities:
Stock options . . . . . . . . . . . . . . . . 86 - 58 -
------- -------- ------- --------
Weighted average common shares, assuming
full dilution . . . . . . . . . . . . . . . . 21,684 21,448 21,656 21,448
======= ======== ======= ========
</TABLE>
-6-
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 28, DECEMBER 28,
1998 1997
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw material........ $ 5,662 $ 10,306
Work in process..... 10,089 11,316
Finished goods...... 72,459 90,744
------- --------
$88,210 $112,366
======= ========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed
primarily on the straight-line basis over the estimated useful lives of the
assets ranging from 5 to 7 years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the expected useful lives or the lease
term, which in certain instances include the anticipated renewal period.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 28, DECEMBER 28,
1998 1997
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Machinery, equipment and fixtures........... $ 22,358 $ 20,314
Property and equipment under capital leases. - 1,207
Leasehold improvements...................... 43,399 40,688
-------- --------
65,757 62,209
Less accumulated depreciation............... (34,609) (31,204)
-------- --------
$ 31,148 $ 31,005
======== ========
</TABLE>
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
JUNE 28, DECEMBER 28,
1998 1997
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Accrued expenses........................... $22,351 $22,417
Accrued compensation....................... 10,780 10,947
Accrued restructuring and other charges.... 9,721 23,927
Accrued royalties.......................... 5,044 823
Unearned revenues.......................... 4,469 -
Accrued income taxes....................... - 109
Accrued taxes other than income taxes...... 941 1,895
Other...................................... 303 593
------- -------
$53,609 $60,711
======= =======
</TABLE>
-7-
<PAGE>
PROVISION FOR INCOME TAXES
The provision for income taxes represents federal, foreign, state and local
income taxes. The effective income tax rate was approximately 46% for the three
and six months ended June 28, 1998 and June 29, 1997. This rate reflects the
effect of state and local taxes, tax rates in certain foreign jurisdictions and
certain nondeductible expenses.
COMPREHENSIVE LOSS
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which requires
companies to report certain changes in equity during the period in which they
are recognized (e.g., foreign currency translation adjustments, minimum pension
liability adjustments, and unrealized gains and losses on certain investments in
debt and equity securities), as comprehensive income. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses), including net income, in the
financial statements. Comprehensive loss consists of net loss, as reported by
the Company, plus foreign currency translation adjustments and totaled $6.5
million and $4.7 million and $14.6 million and $13.9 million for the three and
six months ended June 28, 1998 and June 29, 1997, respectively.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses reported in those financial statements. Actual results could
differ from those based upon such estimates and assumptions.
NOTE 2 -- RESTRUCTURING 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 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.
NOTE 3 -- PRO-FORMA FINANCIAL INFORMATION
In connection with the Company's licensing of its beauty business in fiscal
1997, the following table presents pro-forma condensed financial information of
the Company for the three and six months ended June 29, 1997, to reflect results
of operations as if the Company had exited the beauty business as of January 1,
1997.
<TABLE>
<CAPTION>
JUNE 29, 1997
------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------------- ---------------------------------------
AS PRO AS PRO
REPORTED BEAUTY FORMA REPORTED BEAUTY FORMA
--------- -------- --------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales........... $111,045 $ 6,373 $104,672 $269,821 $12,452 $257,369
Operating loss...... (26,748) (5,428) (21,320) (26,266) (8,634) (17,632)
Net loss............ (14,682) (2,930) (11,752) (13,876) (4,662) (9,214)
</TABLE>
-8-
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND 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 and DKNY 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, DKNY, DKNY JEANS and DKNY ACTIVE brand
names, including beauty and beauty-related products, DKNY jeanswear and
activewear products, DKNY Men's tailored clothing, hosiery, intimate apparel,
eyewear and children's apparel.
In March 1998, the Company and a nonaffiliated party sold all of their
outstanding shares in Donna Karan Japan ("DKJ") to a subsidiary of Onward
Kashiyama Co. Ltd., a Japanese public company. As a result of this transaction,
the Company will no longer recognize equity in earnings (loss) of affiliate.
The Company also granted DKJ a 16-year exclusive license to import, manufacture,
license and/or distribute DONNA KARAN NEW YORK and DKNY products in Japan, with
certain exceptions. The Company expects that over an approximately three-year
period, DKJ will transition from importing and reselling substantially all of
its products to manufacturing and selling a majority of products under its
licensing agreement. As a result, in the future, the Company expects to
recognize decreasing revenues from its wholesale business and increasing
revenues from its licensing activities, in its Japanese business.
RESULTS OF OPERATIONS
The following discussion provides information and analysis of the Company's
results of operations for the three and six months ended June 28, 1998 and June
29, 1997. The Company utilizes a 52- or 53-week fiscal year ending on the
Sunday nearest December 31. The Company's business is comprised of wholesale,
licensing and retail activities.
The following table sets forth certain condensed statement of operations
data.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------ -------------------------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
---------------- ----------------- ----------------- -----------------
(IN MILLIONS)
-------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............................ $124.9 100.0% $111.0 100.0% $306.0 100.0% $269.8 100.0%
Gross profit............................ 24.7 19.8 22.6 20.4 67.2 22.0 67.6 25.1
Selling, general and administrative
expenses.............................. 36.1 28.9 47.8 43.1 73.9 24.1 92.3 34.2
Operating loss.......................... (11.4) (9.1) (26.7) (24.1) (6.6) (2.1) (26.3) (9.7)
Equity in earnings (loss) of affiliate.. - - - - - - 0.7 0.3
Net loss................................ (6.3) (5.0) (14.7) (13.2) (4.2) (1.4) (13.9) (5.2)
</TABLE>
NET REVENUES for the three and six months ended June 28, 1998 increased
$13.9 million, or 12.5%, and $36.2 million, or 13.4%, respectively, as compared
to net revenues of $111.0 million and $269.8 million in the same prior-year
periods. Excluding certain sales of merchandise to Liz Claiborne Inc. ("LCI")
relating to the DKNY JEANS license in fiscal 1998 and revenues in fiscal 1997
related to the Company's beauty business, revenues would have increased $14.2
million, or 13.5%, and $21.9 million, or 8.5%, as compared to the same
prior-year periods. For the three months ended June 28, 1998, net revenues
increased due to a $1.8 million, or 82.5%, increase in licensing revenues, a
$6.3 million, or 39.4%, increase in retail sales and a $6.0 million, or 7.0%,
increase in wholesale revenues. For the six months ended June 28, 1998, the
increase was primarily attributable to a $3.8 million, or 85.5%, increase in
licensing revenues, a $9.8 million, or 34.4%, increase in retail sales and a
$7.8 million, or 3.5%, increase in wholesale revenues.
-9-
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The increase in licensing revenues for the three and six months ended June
28, 1998 was primarily attributable to royalties received from LCI, associated
with the Company's grant to LCI of an exclusive long-term right to the DKNY
JEANS and DKNY ACTIVE trademarks for apparel products marketed, distributed and
sold in the Western Hemisphere. The increase in retail sales primarily related
to an increase in the number of outlet stores and a slight increase in
comparable store sales gains for the three and six months ended June 28, 1998,
as compared to the same prior-year periods. Exclusive of the Company's beauty
business and certain sales of merchandise to LCI relating to the DKNY JEANS
license, wholesale revenues increased for the three months ended June 28, 1998
primarily due to an increase in sales from DONNA KARAN NEW YORK and DKNY
collections for women and DONNA KARAN NEW YORK collections for men, partially
offset by lower sales of DKNY collections for men as a result of licensing the
DKNY JEANS menswear business to LCI. Exclusive of the Company's beauty business
and certain sales of merchandise to LCI relating to the DKNY JEANS license,
wholesale revenues increased for the six months ended June 28, 1998 primarily
due to increased sales from DONNA KARAN NEW YORK collections for women and men,
and an increase in footwear sales, partially offset by lower sales of DKNY
collections for women as a result of a planned reduction in doors, and lower
sales of DKNY collections for men as a result of licensing the DKNY JEANS
menswear business to LCI. Wholesale revenues for the three and six months ended
June 28, 1998 continued to be impacted by a depressed Asian retail environment,
and the Company currently anticipates that this will be a difficult market for
the foreseeable future. Additionally, the Company anticipates a difficult
retail environment in the specialty athletic footwear channels for the
foreseeable future.
GROSS PROFIT as a percentage of sales for the three months and six months
ended June 28, 1998 were 19.8% and 22.0%, respectively, as compared to 20.4% and
25.1% for the same prior-year periods. Excluding the impact of DKNY JEANS sales
to LCI in fiscal 1998 and the effect of beauty business sales in fiscal 1997,
gross profit margins for the three and six months ended June 28, 1998 were 20.7%
and 24.1%, respectively, as compared to 18.8% and 24.0% for the same prior-year
periods. The increase reflects the impact of greater licensing revenues,
partially offset by lower margins in the wholesale division, primarily due to
product mix, and the retail division, primarily due to the continued liquidation
of prior season's merchandise.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased to 28.9% and 24.1%
of net revenues for the three and six months ended June 28, 1998, respectively,
as compared to 43.1% and 34.2% of net revenues in the same prior-year periods.
Excluding the DKNY JEANS sales in fiscal 1998, selling, general and
administrative expenses were 30.3% and 26.5% of net revenues for the three and
six months ended June 28, 1998, respectively. Selling, general and
administrative expenses, exclusive of restructuring and other nonrecurring
charges for the three and six months ended June 29, 1997 would have been 39.8%
and 32.9% of net revenues, respectively. See Note 2, "Restructuring and Other
Charges", in the Notes to Financial Statements. The decrease in selling,
general and administrative expenses was primarily attributable to lower selling,
advertising, and marketing expenses, primarily as a result of the Company's
strategic initiatives, including the licensing of the beauty and DKNY JEANS
businesses.
OPERATING LOSS decreased 57%, or $15.3 million to $11.4 million, and 75%,
or $19.7 million to $6.6 million for the three and six months ended June 28,
1998, respectively, as compared to the same prior-year periods. Operating losses
as a percent of net revenues improved to 9.1% and 2.1% in the current periods as
compared to the corresponding prior-year periods, excluding restructuring and
other nonrecurring charges. In fiscal 1997, exclusive of restructuring and
other nonrecurring charges, operating loss as a percent of net revenues would
have been 19.4% and 7.8%, respectively.
INTEREST EXPENSE, NET was $0.3 million and $1.3 million for the three and
six months ended June 28, 1998, respectively, as compared to $0.4 million and
$0.1 million for the same prior-year periods. The increase in interest expense
for the six months ended June 28, 1998 was primarily due to higher average
borrowings during fiscal 1998 as compared to fiscal 1997, when the Company was
in an investing position due to proceeds received from its initial public
offering (the "Offering").
INCOME TAX BENEFIT represents federal, foreign, state and local income
taxes. The effective income tax rate for the three and six months ended June
28, 1998 and June 29, 1997 was 46.0%. This rate reflects the effects of state
and local taxes, tax rates in certain foreign jurisdictions and certain
nondeductible expenses.
NET LOSS for the three and six months ended June 28, 1998 was $6.3 million
and $4.2 million, respectively, as compared to $14.7 million and $13.9 million
for the same prior-year periods. Exclusive of restructuring charges and other
nonrecurring charges in 1997, net loss for the three and six months ended June
28, 1998 decreased 47.3% and 62.2%, respectively, as compared to the same
prior-year periods.
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<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds have historically been, and are
expected to continue to be, cash flow from operations and borrowings under its
Credit Facility (as herein defined). 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. At June 28, 1998, the Company had cash and
cash equivalents of $12.8 million as compared to $4.5 million at December 28,
1997.
The Company has supplemented its cash flow from operations and bank lines
of credit with proceeds from the Offering and its license and strategic
alliances. In January 1998, the Company received from LCI $30.0 million related
to the granting of license rights for the marketing, distribution and sale of
DKNY JEANS and ACTIVEWEAR products in the Western Hemisphere. In March 1998,
the Company received $15.2 million related to a 16-year exclusive license to
import, manufacture, license and/or distribute DONNA KARAN NEW YORK and DKNY
products in Japan, with certain exceptions.
The Company has a $150.0 million, three-year revolving credit facility (the
"Credit Facility"). The Credit Facility is used for working capital
requirements and general corporate purposes. At June 28, 1998, there were no
amounts outstanding under the Credit Facility.
Net cash provided by operating activities increased to $40.2 million for
the six months ended June 28, 1998 as compared to net cash used for operating
activities of $56.1 million in the same prior-year period. This increase
primarily reflects the Company's deferred revenues associated with the Company's
recent licensing agreements, lower inventory levels and lesser decreases in
accounts payable, accrued expenses and other current liabilities, partially
offset by an increase in deferred income taxes and a lesser decrease in accounts
receivable. Net cash used for investing activities decreased $4.6 million for
the six months ended June 28, 1998 as compared to the prior year, primarily due
to decreased purchases of property and equipment. Financing activities reflect
borrowings under the Credit Facility and the repayment of a note payable to a
principal stockholder. Net cash used by financing activities increased $55.5
million for the six months ended June 28, 1998 as compared to the prior year,
primarily due to the repayment of amounts outstanding under the Credit Facility
and the repayment of a note payable to a principal stockholder.
The Company uses derivative financial instruments for the purpose of
managing its exposure to adverse fluctuations in foreign currency exchange
rates. The Company addresses its risks through a program of risk management,
the principal objective of which is to minimize the risks and/or costs
associated with its operating activities. The Company does not utilize
derivative financial instruments for trading or other speculative purposes. The
Company conducts business in many foreign currencies. As a result, it is
subject to foreign currency exchange rate risk due to the effects that foreign
exchange rate movements of these currencies, principally the Italian lire,
Spanish peseta, Dutch guilder and Hong Kong dollar, have on the Company's costs
and cash flows.
The Company enters into forward exchange contracts to hedge purchases,
receivables and payables denominated in foreign currencies for periods
consistent with its identified exposures. Gains and losses related to
qualifying hedges of these exposures are deferred and recognized in operating
income when the underlying hedged transaction occurs. The Company from time to
time also enters into purchased foreign currency options to hedge anticipated
transactions where there is a high probability that anticipated exposures will
materialize. Any gains realized on such options that qualify as hedges are
deferred and recognized in operating income when the underlying hedged
transaction occurs. Premiums on foreign currency options are amortized over the
period being hedged. Foreign currency transactions that do not qualify as
hedges are marked-to-market on a current basis with gains and losses recognized
through income and reflected in operating expenses. In addition, any previously
deferred gains and losses on hedges that are terminated prior to the transaction
date are recognized in current income when the hedge is terminated. The
contracts have varying maturities with none exceeding 18 months.
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<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As a matter of policy, the Company enters into contracts with parties which
are major international banks and financial institutions that have at least an
"A" (or equivalent) credit rating. The Company's exposure to credit loss in the
event of nonperformance by any of the counterparts is limited to only the
recognized, but not realized gains attributable to the contracts. Management
believes risk of loss is remote and in any event would be immaterial. Costs
associated with entering into such contracts have not been material to the
Company's financial results. At June 28, 1998, the Company had contracts to
exchange foreign currencies in the form of forward exchange contracts in the
amount of $31.8 million.
Capital expenditures, primarily for leasehold improvements, equipment,
machinery, computers, office furniture, and outlet and retail stores, were
approximately $3.6 million and $7.5 million for the six months ended June 28,
1998 and June 29, 1997, respectively. As of August 11, 1998, the Company had
committed to additional capital expenditures during fiscal 1998 of approximately
$1.3 million. The Company anticipates that it will incur additional capital
expenditures in fiscal 1998 relating to its retail business initiatives and
other matters.
The Company anticipates that it will be able to satisfy its ongoing cash
requirements for the foreseeable future, primarily with cash flow from
operations, supplemented by borrowings under the Credit Facility and, from time
to time, amounts received in connection with strategic transactions, including
licensing arrangements.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established standards for
derivative instruments and hedging activities, which among other things requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for all financial statements issued for all interim
periods beginning after June 15, 1999. The Company believes the impact of the
adoption of this statement will not have a material effect on the Company's
results of operations or financial position.
SEASONALITY OF BUSINESS
The Company's business varies with general seasonal trends that are
characteristic of the apparel industry, 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 revolving credit facility,
historically, have been lower on or about its fiscal year end. On a quarterly
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. The Company historically has experienced lower net
revenues and operating income (or higher operating losses) in the second quarter
than in other quarters due to: (i) lower demand among retail customers typical
of the apparel industry; and (ii) certain expenses that are constant throughout
the year being relatively higher as a percentage of net revenues. As the
Company's business continues to evolve, the Company's operating performance may
not reflect the typical seasonality of the apparel industry.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases, and annual
reports to stockholders and in other written or oral statements made by the
Company's representatives, the words and phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimates," "projects,"
"believes," "plans," or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements include, without
limitation, the Company's expectations regarding sales, earnings or other future
financial performance and liquidity, and general statements about future
operations and operating results. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations include, without limitation:
(i) the failure of certain key members of the Company's design teams or
management, including Ms. Karan, to continue to be active in the business of the
Company; (ii) the possibility of a termination of the Company's license with
Gabrielle Studio, Inc., a bankruptcy of Gabrielle Studio or transfer of the
stock of Gabrielle Studio; (iii) the timing and expense associated with, and
effects of, cost-cutting measures and the strategic initiatives being
implemented by the Company; (iv) risks associated with the receipt, pricing and
timing of customer orders;
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<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(v) general competitive factors and the overall financial condition of the
apparel industry, the retail industry, and the general economy; (vi) timing of
and costs associated with new store openings; (vii) a change in retailer or
consumer acceptance of the Company's products; (viii) 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, the timing of launching new products
and collections and opening of new doors, fashion trends, and the timing, terms,
consummation or success of any joint ventures, licenses, or other dispositions
of product lines; (ix) consolidations and restructurings in the retail industry
causing a decrease in the number of stores that sell the Company's products, or
an increase in the ownership concentration within the retail industry; (x)
social, political and economic risks to the Company's foreign retail operations
and customers, including changes in foreign investment and trade policies and
regulations of the host countries and of the United States; (xi) the inability
of the Company's licensees to obtain capital, manage their labor relations, or
maintain operational or financial control over their businesses; (xii) changes
in the laws, regulations and policies, including changes in accounting
standards, that affect, or will affect, the Company in the United States and
abroad; (xiii) foreign currency fluctuations affecting the Company's results of
operations and value of its foreign assets, the relative prices at which the
Company and foreign competitors sell their products in the same market and the
Company's operating and manufacturing costs outside of the United States; (xiv)
shipment delays, depletion of inventory and increased production costs resulting
from disruption at any of the Company's facilities or other causes; (xv) changes
in product mix to ones which are less profitable; and (xvi) the ability of the
Company and third parties, including customers or suppliers, to adequately
address Year 2000 issues. The Company assumes no responsibility to publicly
update or revise forward-looking statements made herein or elsewhere.
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<PAGE>
DONNA KARAN INTERNATIONAL INC.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of the Stockholders of the Company was held on June 11,
1998.
(b) The following directors were elected at the Annual Meeting of Stockholders:
Stephan Weiss and M. William Benedetto, as Class II Directors for a
three-year term expiring at the 2001 Annual Meeting.
(c) (i) Each person elected as a director received the number of votes
indicated beside his name:
Name Votes For Votes Withheld
---- ---------- --------------
Stephan Weiss 18,993,865 135,430
M. William Benedetto 19,003,744 125,551
(ii) 19,058,155 votes were cast for and 40,227 votes were cast against
the ratification of the selection of Ernst & Young LLP as auditors
for the Company. Abstentions totaled 30,913.
(iii) 18,766,563 votes were cast for and 318,076 votes were cast against
the proposal to approve the performance bonus award to the Chief
Executive Officer of the Company. Abstentions totaled 44,656.
(iv) 18,588,101 votes were cast for and 519,782 votes were cast against
the proposal to approve the incentive bonus award to the Chief
Executive Officer of the Company. Abstentions totaled 51,412.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
10.1 - 1998 Non-Employee Director Restricted Stock Plan.
10.2 - Amendment to 1996 Non-Employee Director Stock Option Plan.
10.3 - Voluntary Deferred Compensation Plan for Non-Employee
Directors.
27.1 - Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the
three months ended June 28, 1998.
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<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: August 12, 1998 By: /s/ John D. Idol
------------------------------
John D. Idol
Chief Executive Officer
Date: August 12, 1998 By: /s/ Joseph B. Parsons
------------------------------
Joseph B. Parsons
Executive Vice President and
Chief Financial Officer
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<PAGE>
EXHIBIT 10.1
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DONNA KARAN INTERNATIONAL INC.
1998 NON-EMPLOYEE DIRECTOR RESTRICTED STOCK PLAN
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Table of Contents
<TABLE>
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Page
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I. Purposes of the Plan...................................................1
II. Definitions............................................................1
III. Effective Date.........................................................3
IV. Administration.........................................................3
A. Duties of the Committee.........................................3
B. Advisors........................................................4
C. Determinations..................................................4
V. Shares; Adjustment Upon Certain Events.................................4
A. Shares to be Delivered; Fractional Shares.......................4
B. Adjustments; Recapitalization, etc..............................4
VI. Restricted Stock.......................................................5
A. Restricted Stock................................................5
B. Awards and Certificates.........................................5
VII. Acceleration Events....................................................6
VIII. Termination of Directorship............................................6
A. General.........................................................6
B. Forfeiture......................................................7
IX. Nontransferability of Awards...........................................7
X. Termination, Amendment and Modification................................7
XI. General Provisions.....................................................8
A. Right to Terminate Directorship.................................8
B. Trusts, etc.....................................................8
C. Notices.........................................................8
D. Severability of Provisions......................................8
E. Payment to Minors, Etc..........................................8
F. Headings and Captions...........................................9
G. Controlling Law.................................................9
H. Costs...........................................................9
I. Section 16(b) of the Exchange Act...............................9
</TABLE>
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<TABLE>
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Page
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XII. Issuance of Stock Certificates;
Legends; Payment of Expenses....................................9
A. Stock Certificates..............................................9
B. Legends.........................................................9
XIII. Listing of Shares and Related Matters.................................10
XIV. Withholding of Taxes..................................................10
</TABLE>
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Donna Karan International Inc.
1998 Non-Employee Director Restricted Stock Plan
I. Purposes of the Plan
The purposes of this 1998 Non-Employee Director Restricted
Stock Plan (the "Plan") are to enable Donna Karan International Inc. (the
"Company") to attract, retain and motivate the directors who are important to
the success and growth of the business of the Company and to create a long-term
mutuality of interest between such individuals and the stockholders of the
Company by granting the directors Restricted Stock (as defined herein).
II. Definitions
In addition to the terms defined elsewhere herein, for
purposes of this Plan, the following terms will have the following meanings when
used herein with initial capital letters:
A. "Award" means any Restricted Stock granted pursuant to the
Plan.
B. "Board" means the Board of Directors of the Company.
C. "Cause" means with respect to an Eligible Director's
Termination of Directorship, an act or failure to act that constitutes
"cause" for removal of a director under applicable Delaware law.
D. "Change In Control" means any of the following:
(a) the acquisition by any "person" (as such term is
used in Section 13(d) or 14(d) of the Exchange Act) other than a person
who is a stockholder of the Company on the effective date of the
registration statement filed under the Securities Act relating to the
first public offering of securities of the Company (an "Initial
Stockholder") of 30% or more of the voting power of securities of
Company or the acquisition by an Initial Stockholder other than an
affiliate of Gabrielle Studio, Inc. (and excluding any such acquisition
resulting from a purchase, sale or transfer of Takihyo Inc. stock by
and between any of the current stockholders of Takihyo Inc.) of an
additional 5% of the voting power of securities of the Company over and
above that owned immediately after the closing date of the initial
public offering of the Company's Common Stock; excluding, however, the
following: (x) any acquisition by the Company or a Related Person or an
affiliate of any of the foregoing, or (y) any acquisition by an
employee benefit plan (or related trust) sponsored or maintained by the
Company or a Related Person; or
(b) any merger or sale of substantially all of the
assets of the Company under circumstances where the holders of 20% or
more of the equity securities of the
<PAGE>
surviving entity of such transaction were not holders of the Common
Stock of the Company immediately prior to the consummation of such
transaction; or
(c) any change in the composition of the Board of
Directors of the Company not approved by (i) a majority of the Board
prior to such change and (ii) by not less than two directors of the
Company who were directors prior to the time any person who was not an
Initial Stockholder acquired 30% or more of the voting power of
securities of the Company.
E. "Code" means the Internal Revenue Code of 1986, as amended
and all rules and regulations promulgated thereunder.
F. "Committee" means the Board or a committee appointed by the
Board from time to time to administer the Plan, consisting of two or more
members of the Board, each of whom shall be a non-employee director as defined
in Rule 16b-3 promulgated under Section 16(b) of the Exchange Act. If for any
reason the appointed Committee does not meet the requirements of Rule 16b-3
promulgated under Section 16(b) of the Exchange Act, such noncompliance shall
not affect the validity of the Awards, grants, interpretations or other actions
of the Committee.
G. "Common Stock" means the common stock of the Company, par
value $0.01 per share, any common stock into which the common stock may be
converted and any Common Stock resulting from any reclassification of the Common
Stock.
H. "Company" means Donna Karan International Inc., a Delaware
corporation, and any successor thereto.
I. "Effective Date" has the meaning set forth in Article III.
J. "Eligible Director" means a director of the Company who is
not an active employee of the Company or Related Person and who is not an
officer, director or employee of (i) any entity which, directly or indirectly,
beneficially owns or controls 5% or more of the combined voting power of the
then outstanding voting securities of the Company (or any Related Person)
entitled to vote generally in the election of directors or (ii) any entity
controlling, controlled by or under common control (within the meaning of Rule
405 of the Securities Act) with any such entity.
K. "Exchange Act" means the Securities Exchange Act of 1934,
as amended, and all rules and regulations promulgated thereunder.
L. "Fair Market Value" of a share of Common Stock means, for
purposes of this Plan, unless otherwise required by any applicable provision of
the Code or any regulations issued thereunder, as of any date, the last sales
prices reported for the Common Stock on the applicable date, (i) as reported by
the principal national securities exchange in the United States on which it is
then traded, or (ii) if not traded on any such national securities exchange, as
quoted on an automated quotation system sponsored by the Nasdaq Stock Market,
Inc., or if the sale of the Common Stock
2
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shall not have been reported or quoted on such date, on the first day prior
thereto on which the Common Stock was reported or quoted.
M. "Participant" means an Eligible Director who is granted an
Award under the Plan, which Award has not expired.
N. "Related Person" means, other than the Company (a) any
corporation that is defined as a subsidiary corporation in Section 424(f) of the
Code; (b) any corporation or trade or business (including, without limitation, a
partnership or limited liability company) which is controlled 50% or more by the
Company or one of its subsidiaries (whether by ownership of stock, assets or an
equivalent ownership interest); (c) any corporation that is defined as a parent
corporation in Section 424(e) of the Code; or (d) any corporation or trade or
business (including, without limitation, a partnership or limited liability
company) which controls 50% or more of the Company (whether by ownership of
stock, assets or an equivalent ownership interest).
O. "Restricted Stock" means shares of Common Stock or the
right to receive shares of Common Stock, as the case may be, granted to an
Eligible Director of the Company pursuant to Article VI.
P. "Restricted Stock Agreement" means an agreement evidencing
the grant of an Award.
Q. "Securities Act" means the Securities Act of 1933, as
amended, and all rules and regulations promulgated thereunder.
R. "Share" means a share of Common Stock.
S. "Termination of Directorship" with respect to an individual
means that individual is no longer acting as a director (whether a
non-employee director or employee director) of the Company.
III. Effective Date
The Plan shall become effective on May 1, 1998 (the "Effective
Date").
IV. Administration
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A. Duties of the Committee. The Plan shall be administered and
interpreted by the Committee. The Committee shall have full authority to
interpret the Plan and to decide any questions and settle all controversies and
disputes that may arise in connection with the Plan; to establish, amend and
rescind rules for carrying out the Plan; to administer the Plan, subject to its
provisions; to prescribe the form or forms of instruments evidencing Awards and
any other instruments required under the Plan and to change such forms from time
to time; and to make all other determinations and to take all such steps in
connection with the Plan and the Awards as the Committee, in its sole
discretion, deems necessary or desirable.
B. Advisors. The Committee may employ such legal counsel,
consultants and agents as it may deem desirable for the administration of the
Plan, and may rely upon any advice or opinion received from any such counsel or
consultant and any computation received from any such consultant or agent.
Expenses incurred by the Committee in the engagement of such counsel, consultant
or agent shall be paid by the Company.
C. Determinations. Each determination, interpretation or other
action made or taken pursuant to the provisions of this Plan by the Committee
shall be final, conclusive and binding for all purposes and upon all persons,
including, without limitation, the Participants, the Company, directors,
officers and other employees of the Company, and the respective heirs,
executors, administrators, personal representatives and other successors in
interest of each of the foregoing.
V. Shares; Adjustment Upon Certain Events
A. Shares to be Delivered; Fractional Shares. Shares to be
issued under the Plan shall be made available only from issued Shares reacquired
by the Company and held in treasury. No fractional Shares will be issued or
transferred in connection with the vesting of Restricted Stock. With respect to
any remaining fractional Share, no payment will be paid to the Participant and
such remaining fractional Share shall be cancelled.
B. Adjustments; Recapitalization, etc.
1. The existence of the Plan and the Restricted Stock
granted hereunder shall not affect in any way the right or power of the Board or
the stockholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of bonds, debentures, preferred or prior preference stocks ahead of or affecting
Common Stock, the dissolution or liquidation of the Company or any sale or
transfer of all or part of its assets or business, or any other corporate act or
proceeding. The Committee may make or provide for such adjustments in the number
of Shares covered by outstanding Awards granted hereunder to recognize the
effect that otherwise would result from any stock dividend, stock split,
combination of shares, recapitalization or other change in the capital structure
of the Company, merger, consolidation, spin-off, reorganization, partial or
complete liquidation, issuance of rights or warrants to purchase securities or
any other corporate transaction or event having an effect similar to any of the
foregoing.
4
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2. Except as hereinbefore expressly provided, the
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, for cash, property, labor or
services, upon direct sale, upon the exercise of rights or warrants to subscribe
therefor or upon conversion of shares or other securities, and in any case
whether or not for fair value, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number and class of shares and/or
other securities or property subject to Awards theretofore granted or the
purchase price (as hereinafter defined).
VI. Restricted Stock
Restricted Stock granted pursuant to this Article VI shall be
evidenced by a Restricted Stock Agreement in such form as the Committee shall
from time to time approve and the terms and conditions of such grants shall be
set forth therein.
A. Restricted Stock. Without further action by the Board or
the Committee (except as provided in Article X) of the Company, each year, as of
the first day of the month following the annual meeting of the stockholders of
the Company, each Eligible Director shall be automatically granted 500 shares of
Restricted Stock, subject to the terms of the Plan, provided that no such Award
shall be granted if on the date of grant the Company has liquidated, dissolved
or merged or consolidated with another entity in such a manner that it is not
the surviving entity (unless the Plan has been assumed by such surviving entity
with regard to future grants).
B. Awards and Certificates. An Eligible Director shall not
have any rights with respect to a future award of Restricted Stock, unless and
until such Eligible Director has delivered a fully executed copy of the
Restricted Stock Agreement to the Company and has otherwise com plied with the
applicable terms and conditions of such Restricted Stock Agreement. Further,
such Restricted Stock shall be subject to the following conditions:
1. Purchase Price. The purchase price for Restricted
Stock shall be their par value or, to the extent permitted by applicable law,
zero.
2. Acceptance. Awards of Restricted Stock must be
accepted within a period of sixty (60) days after the grant date, by executing a
Restricted Stock Agreement and by paying the purchase price, if any.
3. Vesting. Shares of Restricted Stock granted to a
Participant shall be fully vested as of the one (1) year anniversary of the date
the Award is granted (the "Restriction Period").
4. Certificates. Upon a grant of Restricted Stock, the
Committee may, in its sole discretion, decide to either have the Company or
other agent appointed by the Committee hold the share certificates representing
such Restricted Stock in escrow or issue share certificates to
5
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the Participant, unless the Committee elects to use another system, such as book
entries by the transfer agent, as evidencing ownership of a grant of Restricted
Stock. If a certificate is issued, such certificate shall be registered in the
name of such Participant, and shall bear an appropriate legend referring to the
terms, conditions, and restrictions applicable to such Restricted Stock,
substantially in the following form.
"The anticipation, alienation, attachment sale, transfer, assignment,
pledge, encumbrance or charge of the shares of Common Stock represented
hereby are subject to the terms and conditions (including forfeiture)
of the Donna Karan International Inc. (the "Company") 1998 Non-Employee
Director Restricted Stock Plan and the Restricted Stock Agreement
entered into between the registered owner and the Company dated
_______________. Copies of such Plan and Restricted Stock Agreement are
on file at the principal office of the Company."
If a stock certificate is held in custody by the Company, the Committee may
require, as it determines in its sole discretion, to have the Participant
deliver a duly signed stock power, endorsed in blank, relating to the Restricted
Stock.
5. Ownership. Except to the extent otherwise set forth
in the Restricted Stock Agreement, the Participant shall possess all incidents
of ownership of such Shares, subject to this Article VI, including the right to
receive dividends with respect to such Shares, the right to vote such Shares,
and, subject to and conditioned upon the full vesting of Restricted Stock, the
right to tender such Shares. Any stock dividend that is issued on Restricted
Stock or if Restricted Stock is split or any other shares, securities, moneys or
property representing a dividend is issued on Restricted Stock (other than
regular cash dividends) or represents a distribution or return of capital upon
or in respect of Restricted Stock or any part thereof, or results from a
split-up, reclassification or other like changes of Restricted Stock, or
otherwise is issued in exchange therefor, and any warrants, rights or options
issued in respect of Restricted Stock shall be subject to the same restrictions,
including that of this Article VI, as Restricted Stock with regard to which they
are issued and shall herein be encompassed within the term "Restricted Stock."
VII. Acceleration Events
Unless otherwise provided in the applicable Restricted Stock
Agreement, the restrictions to which Restricted Stock granted prior to the
Change In Control are subject shall lapse as if the applicable Restriction
Period had ended upon such Change In Control.
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VIII. Termination of Directorship
A. General. If a Participant incurs a Termination of
Directorship for any reason including, without limitation, death, disability,
resignation, failure to stand for reelection or for Cause during the relevant
Restriction Period, all rights to all Restricted Stock shall be forfeited
immediately.
B. Forfeiture. A Participant shall be entitled to no
compensation upon the forfeiture of rights to Restricted Stock, other than
repayment of par value paid for such Restricted Stock, if any.
IX. Nontransferability of Awards
No Award shall be transferable by the Participant otherwise
than by will or under applicable laws of descent and distribution, and during
the lifetime of the Participant may be exercised only by the Participant or his
or her guardian or legal representative. In addition, except as provided above,
no Award shall be assigned, negotiated, pledged or hypothecated in any way
(whether by operation of law or otherwise), and no Award shall be subject to
execution, attachment or similar process. Upon any attempt to transfer, assign,
negotiate, pledge or hypothecate any Award, or in the event of any levy upon any
Award by reason of any execution, attachment or similar process contrary to the
provisions hereof, such Award shall immediately terminate and become null and
void.
X. Termination, Amendment and Modification
The Plan shall terminate at the close of business on the tenth
anniversary of the Effective Date (the "Termination Date"), unless terminated
sooner as hereinafter provided, and no Award shall be granted under the Plan on
or after that date. The termination of the Plan shall not terminate any
outstanding Awards that by their terms continue beyond the Termination Date. At
any time prior to the Termination Date, the Committee or Board may amend or
terminate the Plan or suspend the Plan in whole or in part.
The Committee or Board may at any time, and from time to time,
amend in whole or in part, any or all of the provisions of the Plan (including
any amendment deemed necessary to ensure that the Company complies with any
regulatory requirements referred to in Article XII), or suspend or terminate it
entirely, retroactively or otherwise; provided, however, that, unless otherwise
required by law or specifically provided herein, the rights of a Participant
with respect to Awards granted prior to such amendment, suspension or
termination, may not be materially impaired without the consent of such
Participant.
The Committee or the Board may amend the terms of any Award
granted, prospectively or retroactively, but, subject to Article VII above or as
otherwise provided herein, no such amendment or other action by the Committee or
the Board shall materially impair the rights
7
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of any Participant without the Participant's consent. Notwithstanding the
foregoing and solely to the extent required by Section 16(b) of the Exchange
Act, neither the Board nor the Committee may make any determination or
interpretation or take any other action which would cause any member of the
Committee to cease to be a non-employee director for purposes of Section 16(b)
of the Exchange Act.
XI. General Provisions
A. Right to Terminate Directorship. Neither the adoption of
the Plan nor the grant of Restricted Stock hereunder shall impose any obligation
on the Company to retain any Participant as a director nor shall it impose any
obligation on the part of any Participant to remain as a director of the
Company.
B. Trusts, etc. Nothing contained in the Plan and no action
taken pursuant to the Plan shall create or be construed to create a trust of any
kind, or a fiduciary relationship, between the Company and any Participant or
the executor, administrator or other personal representative or designated
beneficiary of such Participant, or any other persons. If and to the extent that
any Participant or such Participant's executor, administrator or other personal
representative, as the case may be, acquires a right to receive any payment from
the Company pursuant to the Plan, such right shall be no greater than the right
of an unsecured general creditor of the Company.
C. Notices. Any notice to the Company required by or in
respect of this Plan will be addressed to Donna Karan International Inc. at 550
Seventh Avenue, New York, New York 10018, Attention: General Counsel (or such
other place of business as shall become Donna Karan International Inc. principal
executive offices from time to time). Each Participant shall be responsible for
furnishing the Committee with the current and proper address for the mailing to
such Participant of notices and the delivery to such Participant of agreements,
Shares and payments. Any such notice to the Participant will, if the Company has
received notice that the Participant is then deceased, be given to the
Participant's personal representative if such representative has previously
informed the Company of his status and address (and has provided such reasonable
substantiating information as the Company may request) by written notice under
this Article XII. Any notice required by or in respect of this Plan will be
deemed to have been duly given when delivered in person or when dispatched by
telecopy or one business day after having been dispatched by a nationally
recognized overnight courier service or three business days after having been
mailed by United States registered or certified mail, return receipt requested,
postage prepaid. The Company assumes no responsibility or obligation to deliver
any item mailed to such address that is returned as undeliverable to the
addressee and any further mailings will be suspended until the Participant
furnishes the proper address.
D. Severability of Provisions. If any provisions of the Plan
shall be held invalid or unenforceable, such invalidity or unenforceability
shall not affect any other provisions of the Plan, and the Plan shall be
construed and enforced as if such provisions had not been included.
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E. Payment to Minors, Etc. Any benefit payable to or for the
benefit of a minor, an incompetent person or other person incapable of receipt
thereof shall be deemed paid when paid to such person's guardian or to the party
providing or reasonably appearing to provide for the care of such person, and
such payment shall fully discharge the Committee, the Company and their
employees, agents and representatives with respect thereto.
F. Headings and Captions. The headings and captions herein are
provided for reference and convenience only. They shall not be considered part
of the Plan and shall not be employed in the construction of the Plan.
G. Controlling Law. The Plan shall be construed and enforced
according to the laws of the State of Delaware, without giving effect to rules
governing the conflicts of laws.
H. Costs. The Company shall bear all expenses included in
administering this Plan, including expenses of issuing Common Stock pursuant to
any Restricted Stock granted hereunder.
I. Section 16(b) of the Exchange Act. All elections and
transactions under the Plan by persons subject to Section 16 of the Exchange Act
involving Shares shall be intended to comply with any applicable condition under
Rule 16b-3 as then in effect. In such event, the Committee may at any time
impose any limitations upon the issuance of Shares or other conditions which, in
the Committee's discretion, are necessary or desirable in order to comply with
Section 16(b) and the rules and regulations thereunder and may establish and
adopt written administrative guidelines, designed to facilitate compliance with
Section 16(b) of the Exchange Act, as it may deem necessary or proper for the
administration and operation of the Plan and the transaction of business
thereunder.
XII. Issuance of Stock Certificates;
Legends; Payment of Expenses
A. Stock Certificates. Upon the lapse of restriction on
Restricted Stock, a certificate or certificates for the Shares as to which such
Restricted Stock has been granted shall be issued by the Company in the name of
the person or persons receiving such Restricted Stock and shall be delivered to
or upon the order of such person or persons.
B. Legends. All certificates for Shares delivered under the
Plan shall be subject to such stock transfer orders and other restrictions as
the Committee may deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Common Stock is then listed or any national securities association
system upon whose system the Common Stock is then quoted, any applicable federal
or state securities law, and any applicable corporate law, and the Committee may
cause a legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
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If the Board or the Committee determines in its sole
discretion, each Participant shall, upon any exercise or conversion of an Award,
execute and deliver to the Company a written statement, in form satisfactory to
the Company, representing and warranting that such Participant is purchasing or
accepting the Shares then acquired for such Participant's own account and not
with a view to the resale or distribution thereof, that any subsequent offer for
sale or sale of any such Shares shall be made either pursuant to (i) a
registration statement on an appropriate form under the Securities Act, which
registration statement shall have become effective and shall be current with
respect to the Shares being offered and sold, or (ii) a specific exemption from
the registration requirements of the Securities Act, and that in claiming such
exemption the Participant will, prior to any offer for sale or sale of such
Shares, obtain a favorable written opinion, satisfactory in form and substance
to the Company, from counsel approved by the Company as to the availability of
such exception.
XIII. Listing of Shares and Related Matters
If the Board determines, in its discretion, that the listing,
registration, or qualification of the Award or the Shares subject to the Award
upon any securities exchange or under any state or federal securities or other
law or regulation, or the exemption from such listing, registration or
qualification requirements, or the consent or approval of any governmental
regulatory body is necessary or desirable as a condition to or in connection
with the vesting of Restricted Stock, no Shares shall be issued upon the lapse
of restrictions on any Restricted Stock unless the listing, registration,
qualification, exemption, consent or approval has been effected or obtained free
of any conditions not acceptable to the Board. The holder of Restricted Stock
will supply the Company with certificates, representations, and information that
the Company requests and shall otherwise cooperate with the Company in obtaining
the listing, registration, qualification, exemption, consent or approval.
Without limiting the foregoing, no Shares shall be issued upon lapse of
restrictions on any Restricted Stock if the Company or the Committee determines
that the issuance of Shares upon vesting does not comply with any applicable
Federal and state securities laws.
XIV. Withholding of Taxes
The Company shall have the right to deduct from any payment to
be made to a Participant, or to otherwise require, prior to the issuance or
delivery of any Shares or the payment of any cash hereunder, payment by the
Participant of, any Federal, state or local taxes required by law to be
withheld.
10
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AMENDMENT NUMBER ONE
TO THE
DONNA KARAN INTERNATIONAL INC.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
WHEREAS, Donna Karan International Inc. (the "Company") maintains the
Donna Karan International Inc. 1996 Non-Employee Director Stock Option Plan (the
"Plan");
WHEREAS, pursuant to Section X of the Plan, the Board of Directors of
the Company (the "Board") has the right to amend the Plan without stockholder
approval if such approval is not required as a condition of compliance with the
requirements of Section 16(b) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"); and
WHEREAS, the Board desires to amend the Plan to increase the number of
shares of common stock of the Company that may be purchased pursuant to the
annual options granted under the Plan and stockholder approval is not required.
NOW, THEREFORE, the Plan is hereby amended effective as of May 1, 1998,
as follows:
1. The reference to "500 Shares" in paragraph A of Section VI of the
Plan is amended to read as "1,000 Shares."
<PAGE>
Exhibit 10.3
- --------------------------------------------------------------------------------
DONNA KARAN INTERNATIONAL INC.
VOLUNTARY DEFERRED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS
Effective July 1, 1998
- --------------------------------------------------------------------------------
<PAGE>
DONNA KARAN INTERNATIONAL INC.
VOLUNTARY DEFERRED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS
<TABLE>
<CAPTION>
Section Page
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<S> <C>
Section 1 PURPOSE.............................................................1
Section 2 DEFINITIONS.........................................................1
Section 3 DEFERRAL OF DIRECTOR FEES...........................................4
Section 4 DEEMED INVESTMENT...................................................5
Section 5 DISTRIBUTION........................................................5
Section 6 RIGHTS OF PARTICIPANTS; NO FUNDING OBLIGATION.......................6
Section 7 NON-TRANSFERABILITY OF RIGHTS UNDER THE PLAN........................6
Section 8 MINORS AND INCOMPETENTS.............................................6
Section 9 WITHHOLDING TAXES...................................................7
Section 10 STOCKHOLDER RIGHTS..................................................7
Section 11 NO RIGHTS OF CONTINUED DIRECTORSHIP OR EMPLOYMENT...................7
Section 12 TERMINATION, AMENDMENT AND MODIFICATION.............................7
Section 13 ADMINISTRATION......................................................8
Section 14 NOTICES.............................................................8
Section 15 SECTION 16(b) OF THE EXCHANGE ACT .................................9
Section 16 SEVERABILITY OF PROVISIONS..........................................9
Section 17 ENTIRE AGREEMENT ...................................................9
Section 18 HEADINGS AND CAPTIONS...............................................9
Section 19 GENDER AND NUMBER...................................................9
</TABLE>
i
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<TABLE>
<CAPTION>
Section Page
<S> <C>
Section 20 CONTROLLING LAW.....................................................9
</TABLE>
ii
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<TABLE>
<CAPTION>
Section Page
<S> <C>
</TABLE>
iii
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DONNA KARAN INTERNATIONAL INC.
VOLUNTARY DEFERRED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS
Section 1 PURPOSE
The purpose of the Donna Karan International Inc. Voluntary Deferred
Compensation Plan for Non-Employee Directors is to enable Donna Karan
International Inc. to attract, retain and motivate the best qualified
directors by enabling them to defer payment of their Director Fees.
Section 2 DEFINITIONS
Unless the context requires otherwise, the following words as used in
the Plan shall have the meanings ascribed to each below:
2.1 "Account" means the total of the Phantom Stock Account and Interest
Account to which a Participant's Deferred Director Fees shall be
credited. A separate Account shall be established with respect to the
Deferred Director Fees for each Plan Year.
2.2 "Active Participant" means a Participant who is currently having
Deferred Director Fees credited to his or her Account hereunder.
2.3 "Administrator" shall mean the Board or a duly authorized committee
thereof or any employee or other person designated under Section 13.3
of the Plan to assist in the administration of the Plan.
2.4 "Beneficiary" shall mean the individual designated by the Participant,
on a form acceptable by the Administrator, to receive benefits payable
under this Plan in the event of the Participant's death. If no
Beneficiary designation is in effect at the time of a Participant's
death, or if no designated beneficiary survives the Participant, or if
such designation conflicts with law, the payment of the amount, if any,
payable under the Plan upon his or her death shall be made to the
Participant's estate. Upon the acceptance by the Administrator of a new
Beneficiary designation, all Beneficiary designations previously filed
shall be canceled. The Administrator shall be entitled to rely on the
last Beneficiary designation filed by the Participant and accepted by
the Administrator prior to his or her death. Notwithstanding the
foregoing, no Beneficiary designation, or change or revocation thereof,
shall be effective unless received and acknowledged by the
Administrator prior to the Participant's death.
2.5 "Board" shall mean the Board of Directors of the Company.
2.6 "Common Stock" shall mean common stock of the Company, par value $.01
per share.
<PAGE>
2.7 "Company" shall mean Donna Karan International Inc. or any successor
corporation by merger, consolidation or transfer of assets
substantially as a whole.
2.8 "Deferral Agreement" means an agreement entered into between a
Participant and the Company to authorize the Company to reduce the
amount of the Participant's Director Fees and credit the amount of such
reduction to the Plan. A Deferral Agreement shall contain such
provisions, consistent with the provisions of the Plan, as may be
established from time to time by the Company or the Board, including
without limitation,
(a) the dollar amount of Director Fees to be deferred or
the amount to be deferred in whole percentages;
(b) the amount of Deferred Director Fees to be invested
in the Phantom Stock Account and the amount of
Deferred Director Fees to be invested in the Interest
Account (in percentages in increments of five percent
(5%));
(c) the Distribution Date; and
(d) any provisions which may be advisable to comply with
applicable laws, regulations, rulings, or guidelines
of any government authority.
A Deferral Agreement may, to the extent permitted by the Administrator
and by applicable law, be made by paper, telephonic or electronic
means.
2.9 "Deferral Period" shall mean, with regard to the Participant's Deferred
Director Fees for each Plan Year in which a Deferral Agreement is in
effect, the period commencing upon the effective date of a deferral
election and ending on the earlier of the Participant's (a)
Distribution Date, (b) Retirement, or (c) death.
2.10 "Deferred Director Fees" shall mean the amount of Director Fees
deferred by a Participant pursuant to Section 3.
2.11 "Director Fee(s)" shall mean the retainer fee received by the
Participant for service on the Board as a director during the Plan
Year, any fees paid for attendance at Board meetings or meetings of any
Board committee of which the director is a member, and fees paid for
services as chair of any Board committee. Director Fees shall not
include expense reimbursements, amounts realized upon the exercise of a
stock option, restricted stock or any other amounts paid to the
Participant.
2.12 "Distribution Date" means one of the following times to commence the
payment of the amount credited to a Participant's Deferral Account:
(a) as soon as administratively feasible following the
Participant's Retirement or death; or
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(b) the first business day in the January next following
the fifth (5th) year anniversary of the effective
date of the Participant's deferral election.
2.13 "Effective Date" shall mean July 1, 1998.
2.14 "Fair Market Value" shall means, for purposes of this Plan, the last
sales prices reported for the Common Stock on the applicable date, (i)
as reported by the principal national securities exchange in the United
States on which it is then traded, or (ii) if not traded on any such
national securities exchange, as quoted on an automated quotation
system sponsored by the Nasdaq Stock Market, Inc., or if the sale of
the Common Stock shall not have been reported or quoted on such date,
on the first day prior thereto on which the Common Stock was reported
or quoted. If the Common Stock is not readily tradable on a national
securities exchange or any system sponsored by the Nasdaq Stock Market,
Inc., its Fair Market Value shall be such amount as is set by the Board
in good faith.
2.15 "Interest Account" shall mean a hypothetical investment account bearing
interest with respect to any Plan Year during a Deferral Period at the
rate of interest charged or that would be charged to the Company to
borrow money from its principal lender as of January 1 of such Plan
Year.
2.16 "Participant" shall mean a director of the Company who is not an active
employee of the Company or any parent or subsidiary of the Company and
who is not an officer, director or employee of (i) any entity which,
directly or indirectly, beneficially owns or controls 5% or more of the
combined voting power of the then outstanding voting securities of the
Company (or any parent or subsidiary of the Company) entitled to vote
generally in the election of directors or (ii) any entity controlling,
controlled by or under common control (within the meaning of Rule 405
of the Securities Act of 1934, as amended) with any such entity.
2.17 "Phantom Stock Account" shall mean an investment account in which cash
amounts are hypothetically converted into shares of Common Stock. The
value of a Participant's Phantom Stock Account will vary with the
Common Stock's actual market performance. The initial value of the
Common Stock deemed purchased with amounts deferred under the Plan
shall be the Fair Market Value of Common Stock on the date that
Deferred Director Fees are credited to the Phantom Stock Account. All
dividends that would be received on such hypothetical shares of Common
Stock shall be reinvested automatically in the Phantom Stock Account.
In the event of any change in the capital structure or business of the
Company by reason of any stock dividend or extraordinary dividend,
stock split or reverse stock split, recapitalization, reorganization,
merger, consolidation, or exchange of shares, distribution with respect
to its outstanding Common Stock or capital stock other than Common
Stock, reclassification of its capital stock, any sale or transfer of
all or part of the Corporation's assets or business, or any similar
change affecting the Company's capital structure or business and the
Administrator determines that an adjustment is appropriate under this
Plan, then the aggregate number of shares credited to a Participant's
Phantom
3
<PAGE>
Stock Account shall be appropriately adjusted consistent with such
change in such manner as the Administrator may deem necessary to
reflect the change, and any such adjustment determined by the
Administrator in good faith shall be binding and conclusive on the
Company and the Participant and his or her heirs, executors,
administrators, successors and assigns.
2.18 "Plan" shall mean the Donna Karan International Inc. Voluntary Deferred
Compensation Plan For Non-Employee Directors.
2.19 "Plan Year" shall mean the calendar year.
2.20 "Retirement" shall mean a Participant's termination of service as a
director on the Board.
2.21 "Valuation Date" shall mean the day of any Plan Year on which a
Participant's Deferral Period ends.
Section 3 DEFERRAL OF DIRECTOR FEES
3.1 Deferral Election. A Participant may elect to defer all or any
specified portion of the amounts payable to the Participant as Director
Fees by the Company. An election to defer Director Fees hereunder
pursuant to a Deferral Agreement is irrevocable and is valid only for
the Plan Year following the election or in the case of an individual
who first becomes a Participant during a Plan Year, for such Plan Year.
If no new Deferral Agreement is timely made with respect to any
subsequent Plan Year, the Director Fees earned in such Plan Year shall
not be deferred under the Plan. If all or a portion of Director Fees
are not deferred, such fees shall be paid in cash.
3.2 Timing and Manner of Deferral.
Any election to defer payment of all or a portion of a Director Fee
shall be made by the Participant in writing on a Deferral Agreement and provided
to the Administrator on or before the December 31 preceding the Plan Year in
which the Director Fee is earned, and shall apply on a pro rata basis with
respect to the entire amount of Director Fees earned for such Plan Year,
whenever payable. Any such election made by December 31 shall become effective
on the following January 1. Notwithstanding the foregoing,
(a) for the short Plan Year commencing July 1, 1998, a Participant
must elect prior to the beginning of such short Plan Year
(during such period as the Administrator may prescribe, in its
sole discretion) on forms prescribed by, or acceptable to, the
Administrator, to become an Active Participant in the Plan for
such short Plan Year, and
(b) if, after July 1, 1998, an individual first becomes a
Participant during a Plan Year, he or she may elect to become
an Active Participant with respect to such Plan Year
4
<PAGE>
(solely with respect to Director Fees earned after the
Deferral Agreement is executed and delivered to the Company
pursuant to the procedures established by the Administrator)
prior to the end of the thirty (30) day period following the
date he or she becomes a Participant, by making an election,
in writing, on a form prescribed by, or acceptable to, the
Administrator.
3.3 Book Entry of Deferred Director Fees. Deferred Director Fees shall be
credited as a book entry to an Account in the name of the Participant
not later than the date such amount would otherwise be payable to the
Participant.
3.4 Vesting. A Participant's Account shall be fully vested at all times.
3.5 Employee Directors. If a Participant becomes an employee of the Company
but remains a director, he or she may not make any future deferrals
under the Plan and the Participant's Deferral Agreement shall
terminate. Any Director Fees already deferred under the Plan shall
continue to be deferred until the end of such Participant's Deferral
Period.
Section 4 DEEMED INVESTMENT
Upon a Participant's election to defer Director Fees, the Participant
shall designate on the Deferral Agreement the portion of Deferred Director Fees
to be credited to a Phantom Stock Account established in the name of the
Participant and the portion of Deferred Director Fees to be credited to an
Interest Account established in the name of the Participant. Once a Participant
designates the investment on the Deferral Agreement with respect to an election
to defer Director fees, the Participant may not change the investment
designation.
5
<PAGE>
Section 5 DISTRIBUTION
(a) Upon a Participant's election to become an Active
Participant hereunder with respect to a Plan Year, he or she shall make
an election regarding the Distribution Date upon which to commence
receiving the payment of his or her Account. If a Participant does not
make an election with respect to the Distribution Date, the amount
credited to his or her Account shall be paid to him or her in a single
cash lump sum calculated in accordance with Section 5(b) below upon the
first business day of the month coincident with or next following his
or her Retirement (or as administratively feasible thereafter).
Notwithstanding the foregoing, a Participant may make an election or
change his or her existing Distribution Date election, on a form
prescribed by and filed with the Administrator, at any time at least
one (1) year prior to the Distribution Date previously elected, to
receive the amount credited to his or her Account.
(b) Upon the first business day of the month coincident with
or next following the end of the Deferral Period (or as
administratively feasible thereafter), the Participant shall receive a
single cash lump sum distribution equal to:
(i) the value of the balance of Deferred Director Fees
allocated to his or her Phantom Stock Account, based
on the Fair Market Value of Common Stock on the
Valuation Date; plus
(ii) any balance of Deferred Director Fees allocated to
his or her Interest Account, as calculated on the
Valuation Date.
A Participant shall not be entitled to, and the Company shall not be
obligated to pay to such Participant, the whole or any part of the
amounts deferred under the Plan, except as provided in the Plan.
5.1 Death. If a Participant dies prior to receiving the total amount of his
or her Accounts, the unpaid portion of his or her Accounts shall be
paid to the Participant's Beneficiary in a single lump sum, upon the
first business day of the month coincident with or next following the
Participant's death (or as administratively feasible thereafter). If
the Administrator is in doubt as to the right of any person to receive
any amount, the Administrator may retain such amount, without liability
for any interest thereon, until the rights thereto are determined, or
the Administrator may pay such amount into any court of appropriate
jurisdiction, and such payment shall be a complete discharge of the
liability of the Plan, the Administrator and the Company therefor.
Section 6 RIGHTS OF PARTICIPANTS; NO FUNDING OBLIGATION
Nothing contained in the Plan and no action taken pursuant to the Plan
shall create or be construed to create a trust of any kind, or a fiduciary
relationship, among the Company, the Administrator and any Participant, the
executor, administrator or other personal representative or designated
beneficiary of such Participant, or any other persons. Funds allocated to a
Phantom Stock
6
<PAGE>
Account or an Interest Account established by the Company in connection with the
Plan shall continue to be a part of the general funds of the Company, and no
individual or entity other than the Company shall have any interest in such
funds until paid to a Participant, his or her executor, administrator or other
personal representative or designated beneficiary. If and to the extent that any
Participant or his or her executor, administrator, or other personal
representative or designated beneficiary, as the case may be, acquires a right
to receive any payment from the Company pursuant to the Plan, such right shall
be no greater than the right of an unsecured general creditor of the Company.
The Company may, in its sole discretion, establish a "rabbi trust" to pay
amounts payable hereunder. If the Company decides to establish any accrued
reserve on its books against the future expense of benefits payable hereunder,
or if the Company establishes a rabbi trust under this Plan, such reserve or
trust shall not under any circumstances be deemed to be an asset of the Plan.
Section 7 NON-TRANSFERABILITY OF RIGHTS UNDER THE PLAN
No amounts payable or other rights under the Plan shall be sold,
transferred, assigned, pledged or otherwise disposed of or encumbered by a
Participant, except as provided herein.
Section 8 MINORS AND INCOMPETENTS
(a) In the event that the Administrator determines that a
Participant is unable to care for his or her affairs because of illness
or accident, then benefits payable hereunder, unless claim has been
made therefor by a duly appointed guardian, committee, or other legal
representative, may be paid in such manner as the Administrator shall
determine, and the application thereof shall be a complete discharge of
all liability for any payments or benefits to which such Participant
was or would have been otherwise entitled under this Plan.
(b) Any payments to a minor from this Plan may be paid by the
Administrator in its sole and absolute discretion (i) directly to such
minor; (ii) to the legal or natural guardian of such minor; or (iii) to
any other person, whether or not appointed guardian of the minor, who
shall have the care and custody of such minor. The receipt by such
individual shall be a complete discharge of all liability under the
Plan therefor.
Section 9 WITHHOLDING TAXES
The Company shall have the right to make such provisions as it deems
necessary or appropriate to satisfy any obligations it may have to withhold
federal, state or local income or other taxes incurred by reason of payments
pursuant to the Plan. In lieu thereof, the Company shall have the right to
withhold the amount of such taxes from any other sums due or to become due from
the Company to the Participant upon such terms and conditions as the
Administrator may prescribe.
Section 10 STOCKHOLDER RIGHTS
No Participant shall not have any rights as a stockholder of the
Company with respect to a Phantom Stock Account, except the right to have deemed
dividends credited to his or her Phantom
7
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Stock Account and adjustment made to the hypothetical shares of Common Stock
under Section 2.17.
Section 11 NO RIGHTS OF CONTINUED DIRECTORSHIP OR EMPLOYMENT
Nothing in the Plan or any booklet or other document describing or
referring to the Plan shall be deemed to impose any obligations on the Company
to retain any Participant as a director or impose any obligation on the part of
any Participant to remain as a director of the Company. The Plan is not an
agreement of employment and it shall not grant a Participant any rights of
employment.
Section 12 TERMINATION, AMENDMENT AND MODIFICATION
12.1 Plan Amendment, Discontinuance or Termination. The Board may from time
to time amend, modify, discontinue or terminate the Plan or any
provision hereof. Notwithstanding anything contained herein, upon
termination of the Plan, all deferred amounts shall be distributed as
soon as practicable following the date of termination to each
Participant as set forth in Section 5, subject to Section 15. Except as
set forth above, no amendment to or discontinuance or termination of
the Plan shall, without the written consent of the Participant,
adversely affect any rights of such Participant with respect to amounts
previously credited to the Participant under the Plan. The Plan shall
continue until terminated by the Board.
12.2 Cessation of Future Deferrals. The Board may direct at any time that
Participants shall no longer be permitted to make future deferrals of
Director Fees under the Plan.
Section 13 ADMINISTRATION
13.1 The Plan shall be administered by the Administrator. All powers and
functions of the Administrator may at any time and from time to time be
exercised by the Board.
13.2 The Board shall have full authority to interpret the Plan; to
establish, amend, and rescind rules for carrying out the Plan; to
administer the Plan; and to make all other determinations and to take
such steps in connection with the Plan as the Board, in its discretion,
deems necessary or desirable for administering the Plan.
13.3 The Board may designate other employees of the Company to assist in the
administration of the Plan and may employ such legal counsel, service
providers, consultants and agents as it may deem desirable for the
administration of the Plan and may rely upon any opinion received from
any such counsel, service provider, or consultant and any computation
received from any such service provider, consultant, or agent. The
Board, the members of the Board and employees of the Company designated
hereunder shall not be liable for any action or determination made in
good faith with respect to the Plan. To the maximum extent permitted by
applicable law and the Company's Certificate of Incorporation and
By-Laws,
8
<PAGE>
the Board, the members of the Board, and employees of the Company
designated hereunder shall be indemnified and held harmless by the
Company against any cost or expense (including counsel fees) or
liability (including any sum paid in settlement of a claim with the
approval of the Company) arising out of any act or omission to act in
connection with the Plan unless arising out of such person's own fraud
or bad faith. Such indemnification shall be in addition to any rights
of indemnification the person may have as a director, officer or
employee or under the Certificate of Incorporation of the Company or
the By-Laws of the Company. Expenses incurred by the Board in the
engagement of any such counsel, service provider, consultant or agent
shall be paid by the Company.
13.4 All costs and expenses involved in administering the Plan as provided
herein, or incident thereto, shall be borne by the Company.
13.5 All determinations by the Board with respect to the administration of
the Plan shall be in the sole discretion of the Board based on the Plan
document and other relevant documents, and all such determinations
shall be final and binding upon all interested parties, including the
Participant, his or her executor, administrator or other personal
representative or designated beneficiary, and the Company.
Section 14 NOTICES
Each Participant shall be responsible for furnishing the Administrator
with the current and proper address for the mailing of notices and the delivery
of agreements and payments to him or her. Any notice required or permitted to be
given shall be deemed given if directed to the person to whom addressed at such
address and mailed by regular United States mail, first-class and prepaid. If
any item mailed to such address is returned as undeliverable to the addressee,
mailing will be suspended until the Participant furnishes the proper address.
Section 15 SECTION 16(b) OF THE EXCHANGE ACT
To the extent applicable, all elections and transactions under this
Plan are intended to comply with any applicable exemptive condition under Rule
16b-3 under Section 16(b) of the Securities Exchange Act of 1934 as then in
effect or any successor provisions (the "Exchange Act"). The Administrator may
establish and adopt written administrative guidelines, designed to facilitate
compliance with Section 16(b) of the Exchange Act, as it may deem necessary or
proper for the administration and operation of this Plan thereunder.
Section 16 SEVERABILITY OF PROVISIONS
If any provision of the Plan shall be held invalid or unenforceable,
such invalidity or unenforceability shall not affect any other provisions
hereof, and the Plan shall be construed and enforced as if such provisions had
not been included.
9
<PAGE>
Section 17 ENTIRE AGREEMENT
This Plan, along with the Participant's elections hereunder,
constitutes the entire agreement between the Company and the Participant
pertaining to the subject matter herein and supersedes any other plan or
agreement, whether written or oral, pertaining to the subject matter herein. No
agreements or representations, other than as set forth herein, have been made by
the Company with respect to the subject matter herein.
Section 18 HEADINGS AND CAPTIONS
The headings and captions herein are provided for reference and
convenience only, shall not be considered part of the Plan, and shall not be
employed in the construction of the Plan.
Section 19 GENDER AND NUMBER
Wherever used in this Plan, the masculine shall be deemed to include
the feminine and the singular shall be deemed to include the plural, unless the
context clearly indicates otherwise.
Section 20 CONTROLLING LAW
This Plan shall be construed and enforced according to the laws of the
State of Delaware (without giving effect to conflict of law rules).
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DONNA
KARAN INTERNATIONAL INC. FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-END> JUN-28-1998
<CASH> 12,791
<SECURITIES> 0
<RECEIVABLES> 98,816
<ALLOWANCES> 41,879
<INVENTORY> 88,210
<CURRENT-ASSETS> 199,703
<PP&E> 65,757
<DEPRECIATION> 34,609
<TOTAL-ASSETS> 265,764
<CURRENT-LIABILITIES> 96,279
<BONDS> 0
0
0
<COMMON> 216
<OTHER-SE> 119,486
<TOTAL-LIABILITY-AND-EQUITY> 265,764
<SALES> 306,007
<TOTAL-REVENUES> 306,007
<CGS> 238,775
<TOTAL-COSTS> 238,775
<OTHER-EXPENSES> 73,870
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,252
<INCOME-PRETAX> (7,867)
<INCOME-TAX> (3,619)
<INCOME-CONTINUING> (4,248)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,248)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
