<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11805
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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
incorporation or organization) Identification No.)
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 May 12, 1998, the Registrant had 21,597,834 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
Item 1. Financial Statements
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Statements of Income for the three months ended
March 29, 1998 and March 30, 1997, respectively................... 3
Balance Sheets as of March 29, 1998 and December 28, 1997........... 4
Statements of Cash Flows for the three months ended
March 29, 1998 and March 30, 1997, respectively................... 5
Notes to Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 14
Item 6. Exhibits and Reports on Form 8-K.............................. 14
</TABLE>
2
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
March 29,1998 March 30, 1997
------------- --------------
(In thousands, except per
share data)
<S> <C> <C>
Net revenues........................................... $ 181,153 $ 158,776
Cost of sales.......................................... 138,622 113,738
----------- ----------
Gross profit........................................... 42,531 45,038
Selling, general and administrative expenses........... 37,732 44,556
----------- ----------
Operating income....................................... 4,799 482
Other income (expense):
Equity in earnings (loss) of affiliate............... (65) 732
Gain on sale of affiliate............................ 88 --
Interest income (expense), net....................... (989) 280
----------- ----------
Income before income taxes............................. 3,833 1,494
Provision for income taxes............................. 1,763 688
---------- ----------
Net income............................................. $ 2,070 $ 806
----------- ----------
----------- ----------
Net income per common share (Note 1):
Basic.................................................. $ .10 $ .04
----------- ----------
----------- ----------
Diluted................................................ $ .10 $ .04
----------- ----------
----------- ----------
</TABLE>
See notes to financial statements.
3
<PAGE>
DONNA KARAN INTERNATIONAL INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
------------- ----------------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 2,187 $ 4,537
Accounts receivable, net of allowances of $49,736 at
March 29, 1998 and $52,035 at December 28, 1997.............. 88,971 68,138
Inventories.................................................... 88,506 112,366
Deferred income taxes.......................................... 28,080 33,474
Prepaid expenses and other current assets...................... 11,903 12,248
----------- ----------
Total current assets......................................... 219,647 230,763
Property and equipment, net...................................... 29,447 31,005
Deferred income taxes............................................ 19,751 7,278
Deposits and other noncurrent assets............................. 15,226 18,442
----------- ----------
$ 284,071 $ 287,488
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 42,378 $ 61,013
Accrued expenses and other current liabilities................. 64,545 60,711
Current portion of capital lease obligations................... -- 36
Note payable to principal stockholder.......................... -- 6,700
Borrowing under revolving line of credit....................... 1,802 22,314
----------- ----------
Total current liabilities.................................... 108,725 150,774
Deferred income.................................................. 51,003 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............................................... (61,804) (63,875)
Cumulative translation adjustment.............................. (726) (455)
----------- ----------
126,177 124,377
Less: Treasury stock, at cost (20,200 shares).................. (479) (479)
Unearned compensation.......................................... (1,355) (1,434)
----------- ----------
Total stockholders' equity..................................... 124,343 122,464
----------- ----------
$ 284,071 $ 287,488
----------- ----------
----------- ----------
</TABLE>
See notes to financial statements.
4
<PAGE>
DONNA KARAN INTERNATIONAL INC
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 29, March 30,
1998 1997
-------------- ---------------
(In thousands)
<S> <C> <C>
Operating Activities
Net income..................................................... $ 2,070 $ 806
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization................................ 3,589 2,570
Provision for bad debts...................................... 386 192
Gain on sale of affiliate.................................... (88) --
Provision for restricted stock compensation.................. 80 --
Amortization of deferred income.............................. (360) --
Equity in earnings (loss) of affiliate....................... 65 (732)
Deferred income taxes........................................ (7,079) 5,037
Changes in operating assets and liabilities:
Increase in accounts receivable.............................. (21,219) (18,569)
Decrease (increase) in inventories........................... 23,860 (1,274)
Decrease (increase) in prepaid expenses and other
current assets............................................. 168 (3,313)
Decrease in deposits and other noncurrent assets............. 1,577 1,758
Decrease in accounts payable, accrued expenses
and other current liabilities.............................. (22,902) (34,063)
Increase in deferred income.................................. 44,563 --
---------- -------
Net cash provided by (used for) operating activities....... 24,710 (47,588)
---------- -------
Investing Activities
Proceeds from sale of affiliate................................ 646 --
Purchase of property and equipment............................. (458) (4,551)
---------- -------
Net cash provided by (used for) investing activities........ 188 (4,551)
---------- -------
Financing Activities
Net (repayment) proceeds of revolving credit facility.......... (20,512) 11,880
Payments under capital lease................................... (36) (68)
Repayment of note payable to principal stockholder............. (6,700) --
---------- -------
Net cash (used for) provided by financing activities........ (27,248) 11,812
---------- -------
Net decrease in cash and cash equivalents...................... (2,350) (40,327)
Cash and cash equivalents at beginning of period............... 4,537 40,550
---------- -------
Cash and cash equivalents at end of period..................... $ 2,187 $ 223
---------- -------
---------- -------
Supplemental cash flow information
Interest paid.................................................. $ 745 $ 65
---------- -------
---------- -------
Income taxes paid.............................................. $ 2,882 $ 8,831
---------- -------
---------- -------
</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 is used for Donna Karan Japan, K.K., a Japanese stock company
("DKJ"), which was 70% owned by a nonaffiliated entity.
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 Income Per Common Share
For the period ended March 29, 1998, in accordance with the requirements of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," net income per common share amounts ("basic EPS") were computed by
dividing net income by the weighted average number of common shares outstanding
and excluded any potential dilution. Net income 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 income and shares used to compute basic and
diluted EPS computations for net income is as follows:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
March 29, March 30,
1998 1997
--------------- ---------------
(In thousands)
<S> <C> <C>
Net income, as reported................................... $ 2,070 $ 806
Effect of dilutive securities:
Stock options........................................... -- --
--------- ---------
Net income, assuming full dilution........................ $ 2,070 $ 806
--------- ---------
--------- ---------
Weighted average common shares, basic..................... 21,598 21,468
Effect of dilutive securities:
Stock options........................................... 30 --
--------- ---------
Weighted average common shares, assuming full dilution.... 21,628 21,468
--------- ---------
--------- ---------
</TABLE>
6
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
-------------- --------------
(In thousands)
<S> <C> <C>
Raw materials................................. $ 3,057 $ 10,306
Work in process............................... 9,000 11,316
Finished goods................................ 76,449 90,744
---------- -----------
$ 88,506 $ 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>
March 29, December 28,
1998 1997
-------------- ----------------
(In thousands)
<S> <C> <C>
Machinery, equipment and fixtures................... $ 22,327 $ 20,314
Property and equipment under capital leases......... -- 1,207
Leasehold improvements.............................. 40,340 40,688
---------- -----------
62,667 62,209
Less accumulated depreciation....................... (33,220) (31,204)
---------- -----------
$ 29,447 $ 31,005
---------- -----------
---------- -----------
</TABLE>
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
------------- ------------
(In thousands)
<S> <C> <C>
Accrued operating expenses........................... $ 21,210 $ 22,417
Accrued compensation................................. 11,757 10,947
Accrued restructuring and other charges.............. 11,191 23,927
Unearned revenues.................................... 7,810 --
Accrued income taxes................................. 5,858 109
Accrued royalties.................................... 5,408 823
Accrued taxes other than income taxes................ 602 1,895
Other................................................ 709 593
------------ ----------
$ 64,545 $ 60,711
------------ ----------
------------ ----------
</TABLE>
7
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
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
months ended March 29, 1998 and March 30, 1997. This rate reflects the effect of
state and local taxes, tax rates in certain foreign jurisdictions and certain
nondeductible expenses.
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--SALE OF INTEREST IN AFFILIATE
In March 1998, the Company and a nonaffiliated party sold all of their
outstanding shares in DKJ to a subsidiary of Onward Kashiyama Co. Ltd., a
Japanese public company ("OKC"). In consideration of the sale of its interest in
DKJ, the Company received approximately $646,000 and recognized a gain, net of
transaction costs, of approximately $88,000.
NOTE 3--LICENSING AGREEMENTS
DKNY JEANS
In January 1998, the Company and Liz Claiborne Inc. ("LCI") consummated a
transaction whereby the Company granted to LCI exclusive, long-term rights to
the DKNY Jeans and DKNY Active trademarks for apparel products and to market,
distribute and sell both collections in the Western Hemisphere. Under the
agreement, LCI is obligated to pay the Company a royalty equal to a percentage
of net sales of the DKNY Jeans and Active products. The initial term of the
license agreement is for 15 years through December 31, 2012, with an option to
renew for an additional 15-year period if certain sales thresholds are met,
which would continue the license through December 31, 2027. Upon consummation of
the transaction, the Company received from LCI $30.0 million which will be
amortized in accordance with the term of the agreement. Aggregate minimum
royalties for the initial 15-year term are $152.0 million.
DONNA KARAN JAPAN
In March 1998, the Company 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. Additionally, DKJ was granted the
exclusive right to develop and operate a total of 12 Donna Karan New York and
DKNY retail boutiques in Japan over the term of the agreement. Upon consummation
of the transaction, the Company received $15.2 million and will receive, on an
ongoing basis, a royalty on net sales of licensed products and a servicing fee
on net sales of Donna Karan products imported by DKJ.
8
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4--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 months ended March 30, 1997, to reflect results of
operations as if the Company had exited the beauty business as of January 1,
1997.
<TABLE>
<CAPTION>
March 30, 1997
---------------------------------
As Pro
Reported Beauty Forma
---------- --------- ----------
(In thousands)
<S> <C> <C> <C>
Net sales........................... $ 158,776 $ 6,079 $ 152,697
Operating income (loss)............. 482 (3,206) 3,688
Net income (loss)................... 806 (1,732) 2,538
</TABLE>
9
<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 and DKNY brand names, including beauty
and beauty-related products, DKNY jeanswear and activewear products, 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 ("OKC"). 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
COMPARISON OF THE THREE MONTHS ENDED MARCH 29, 1998
TO THE THREE MONTHS ENDED MARCH 30, 1997
The following discussion provides information and analysis of the Company's
results of operations for the three months ended March 29, 1998 and March 30,
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 income data.
<TABLE>
<CAPTION>
For the three months ended
---------------------------------------------------------
March 29, 1998 March 30, 1997
------------------------------- ---------------------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Net revenues................................................... $ 181.2 100.0% $ 158.8 100.0%
Gross profit................................................... 42.5 23.5 45.0 28.4
Selling, general and administrative expenses................... 37.7 20.8 44.5 28.1
Operating income............................................... 4.8 2.6 0.5 0.3
Equity in earnings of affiliate................................ -- -- 0.7 0.5
Net income..................................................... 2.1 1.1 0.8 0.5
</TABLE>
Net revenues for the three months ended March 29, 1998 increased $22.4
million or 18.0% as compared to net revenues of $158.8 million in the prior
year. 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 $7.4
million or 4.8%. The increase was primarily attributable to a $2.0 million or
88.4% increase in licensing revenues, a $3.5 million or 28.0% increase in retail
sales and a $1.9 million or 1.3% increase in wholesale sales.
The increase in licensing revenues was primarily attributable to royalties
received from LCI associated with the Company granting to LCI 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 stores as
compared to the same prior-year period. Wholesale net revenues increased due to
an increase in footwear sales as compared to the same prior-year period, an
increase in sales from the Donna Karan New York collections for women, partially
offset by decreased sales in the DKNY collections for women as a result of a
planned reduction in doors, lower sales in the Company's menswear business as a
result of licensing the DKNY Jeans menswear business to LCI and the continued
impact of a depressed Asian retail environment.
10
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gross profit as a percentage of sales decreased to 23.5% in 1998 from 28.4%
in 1997. 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 were 26.6%
and 27.5% in fiscal 1998 and 1997, respectively. The reduction in the gross
profit margin was due to lower margins in the wholesale division, primarily due
to a change in mix, and the retail division, primarily due to continued
liquidation of prior season's merchandise.
Selling, general and administrative expenses decreased to 20.8% of net
revenues in the first quarter of 1998 as compared to 28.1% of net revenues in
the same prior-year period. The decrease in selling, general and administrative
expenses was primarily attributable to lower advertising, marketing and
administrative expenses, primarily as a result of the Company's strategic
initiatives, including the licensing of the beauty and DKNY Jeans businesses.
Operating income increased to $4.8 million in the first quarter of 1998 from
$0.5 million in the prior year. Operating margins were 2.6% in the current
period as compared to 0.3% in the corresponding prior-year period.
Interest income (expense), net was $1.0 million for the three months ended
March 29, 1998 as compared to $0.3 million net interest income in the same
prior-year period. The increase in interest expense 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 ("Offering").
Provision for income taxes represents federal, foreign, state and local
income taxes. The effective income tax rate for the three months ended March 29,
1998 and March 30, 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 income for the three months ended March 29, 1998 was $2.1 million as
compared to $0.8 million for the same prior-year period.
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 March 29, 1998, the Company had cash and
cash equivalents of $2.2 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.
Net cash provided by operating activities increased to $24.7 million for
the three months ended March 29, 1998 from net cash used for operating
activities of $47.6 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. Net
cash provided by investing activities increased $4.7 million for the three
months ended March 29, 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 repayment of a note payable
to a principal stockholder. Net cash used by financing activities increased
$39.1 million for the three months ended March 29, 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.
11
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 financial and global 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 which 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 which 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 12 months.
As a matter of policy, the Company enters into contracts with parties who
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 counterparties 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 March 29, 1998, the Company had contracts to
exchange foreign currencies in the form of forward exchange contracts in the
amount of $20.3 million.
Capital expenditures, primarily for leasehold improvements, equipment,
machinery, computers, office furniture, and outlet and retail stores, were
approximately $0.5 million and $4.6 million for the three months ended March 29,
1998 and March 30, 1997, respectively. As of May 13, 1998, the Company had
committed to additional capital expenditures during fiscal 1998 of approximately
$0.8 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.
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 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.
12
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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; (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 update
forward looking statements made herein or elsewhere.
13
<PAGE>
DONNA KARAN INTERNATIONAL INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in various legal proceedings incident to the
ordinary course of its business. Based upon the available information to date,
the Company believes that the outcome of all pending legal proceedings in the
aggregate will not have a material adverse effect on the results of operations
or financial condition of the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits 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 March 29, 1998.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DONNA KARAN INTERNATIONAL INC.
(Registrant)
Date: May 13, 1998 By: /s/ John D. Idol
-----------------------
John D. Idol
Chief Executive Officer
Date: May 13, 1998 By: /s/ Joseph B. Parsons
-----------------------
Joseph B. Parsons
Executive Vice President and
Chief Financial Officer
15
<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>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> MAR-29-1998
<CASH> 2,187
<SECURITIES> 0
<RECEIVABLES> 138,707
<ALLOWANCES> 49,736
<INVENTORY> 88,506
<CURRENT-ASSETS> 219,647
<PP&E> 62,677
<DEPRECIATION> 33,220
<TOTAL-ASSETS> 284,071
<CURRENT-LIABILITIES> 108,725
<BONDS> 0
0
0
<COMMON> 216
<OTHER-SE> 124,127
<TOTAL-LIABILITY-AND-EQUITY> 284,071
<SALES> 181,153
<TOTAL-REVENUES> 181,153
<CGS> 138,622
<TOTAL-COSTS> 138,622
<OTHER-EXPENSES> 37,732
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 989
<INCOME-PRETAX> 3,833
<INCOME-TAX> 1,763
<INCOME-CONTINUING> 2,070
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<NET-INCOME> 2,070
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