<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
DONNA KARAN INTERNATIONAL INC.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
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<PAGE>
[LOGO]
April 14, 1999
Dear Fellow Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders,
which will be held in the Haft Auditorium of the Fashion Institute of
Technology, located at 27th Street and Seventh Avenue, New York, New York, on
Wednesday, May 26, 1999, at 10:00 a.m. (local time). Your Board of Directors and
management look forward to greeting personally those stockholders able to
attend.
The enclosed notice and proxy statement contain details concerning the
business to come before the meeting. You will note that the Board of Directors
recommends a vote FOR the election of two directors to serve until the 2002
Annual Meeting of Stockholders and FOR the ratification of auditors. Please sign
and return your proxy card in the enclosed envelope at your earliest convenience
to assure that your shares will be represented and voted at the meeting even if
you cannot attend.
On behalf of the Board of Directors, thank you for your cooperation and
continued support.
Sincerely,
<TABLE>
<S> <C>
[/S/ DONNA KARAN]
[/S/ JOHN D. IDOL]
Donna Karan John D. Idol
Chairman of the Board and Chief Executive Officer
Chief Designer
</TABLE>
<PAGE>
[LOGO]
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
------------------------
The Annual Meeting of Stockholders of DONNA KARAN INTERNATIONAL INC. (the
"Company") will be held in the Haft Auditorium at the Fashion Institute of
Technology, 227 West 27th Street, New York, New York 10001 on Wednesday, May 26,
1999, at 10:00 a.m. (local time), for the following purposes:
1. to elect two Class III directors to hold office for a three-year term;
2. to ratify the appointment of Ernst & Young LLP as the independent auditors
of the Company for the 1999 fiscal year; and
3. to transact any such other business as may properly come before the meeting
and at any adjournment thereof.
Holders of record of the Company's common stock as of the close of business
on March 31, 1999 are entitled to notice of and to vote at the Annual Meeting of
Stockholders and any adjournments or postponements thereof.
By order of the Board of Directors
[/S/ LYNN E. USDAN]
Lynn E. Usdan
SECRETARY
April 14, 1999
YOUR VOTE IS IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING OF
STOCKHOLDERS IN PERSON, PLEASE COMPLETE, SIGN, AND DATE THE ENCLOSED
PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ADDRESSED,
STAMPED ENVELOPE.
<PAGE>
DONNA KARAN INTERNATIONAL INC.
550 SEVENTH AVENUE
NEW YORK, NEW YORK 10018
------------------------
PROXY STATEMENT
------------------------
This Proxy Statement is furnished to the stockholders of Donna Karan
International Inc., a Delaware corporation (the "Company"), in connection with
the solicitation of proxies by the Board of Directors for use at the annual
meeting of stockholders of the Company (the "Annual Meeting") to be held in the
Haft Auditorium at the Fashion Institute of Technology, 227 West 27(th) Street,
New York, New York on May 26, 1999, and at any adjournment or postponements
thereof. A copy of the notice of meeting accompanies this Proxy Statement. The
approximate date on which this Proxy Statement and form of proxy are first being
sent or given to stockholders is April 14, 1999.
Only stockholders of record at the close of business on March 31, 1999, the
record date for the Annual Meeting, are entitled to notice of and to vote at the
meeting. On the record date, the Company had outstanding 21,599,264 shares of
common stock, par value $.01 per share (the "common stock"), 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. These are the only securities of the Company
entitled to vote at the Annual Meeting. Each share of common stock and Class A
common stock is entitled to one vote on each matter properly brought before the
Annual Meeting and each share of Class B common stock is entitled to nine votes
on each matter properly brought before the Annual Meeting. The rights of holders
of the common stock, Class A common stock, and Class B common stock are
identical in all other respects.
Stockholders who execute proxies may revoke them by giving written notice to
the Secretary of the Company at any time before these proxies are voted.
Attendance at the Annual Meeting will not have the effect of revoking a proxy
unless the stockholder so attending shall, in writing, so notify the Secretary
of the Annual Meeting at any time prior to the voting of the proxy.
The presence, in person or by proxy, of the holders of at least a majority
of the shares of common stock outstanding on the record date is necessary to
have a quorum for the Annual Meeting. Abstentions and broker "non-votes" are
counted as present for purposes of determining a quorum. A broker "non-vote"
occurs when a nominee holding shares of common stock for a beneficial owner does
not vote on a particular proposal because the nominee does not have
discretionary voting power with respect to that item and has not received
instructions from the beneficial owner.
All proxies received pursuant to this solicitation will be voted except as
to matters where authority to vote is specifically withheld and, where a choice
is specified as to the proposal, they will be voted in accordance with such
specification. If no instructions are given, the persons named in the proxy
solicited by the Board of Directors of the Company intend to vote FOR the
election of the nominees listed herein as Class III directors of the Company and
FOR the ratification of the appointment of Ernst & Young LLP as independent
auditors of the Company for the 1999 fiscal year. With regard to the election of
directors, votes cast may be withheld from each nominee; votes that are withheld
will be excluded entirely from the vote and will have no effect. Abstentions may
be specified on all proposals except the election of directors and will have the
same effect as a vote against a proposal. Broker "non-votes" have no effect on
the outcome of the election of directors or the ratification of appointment of
auditors.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The only persons known by the Company to be the beneficial owners of more
than five percent of the outstanding shares of common stock, as of February 1,
1999, are indicated below:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENTAGE
BENEFICIAL OWNER OWNERSHIP OF CLASS
- - ----------------------------------------------------------------------------- ---------------------- -----------
<S> <C> <C>
Donna Karan.................................................................. 5,242,928(1) 24.3%
Stephan Weiss................................................................ 5,242,928(1) 24.3%
Tomio Taki................................................................... 4,245,174(2) 19.7%
Frank Mori................................................................... 4,059,448(2) 18.8%
Takihyo Inc.................................................................. 3,183,881(2) 14.7%
H.R.H. Prince Alwaleed Bin Talal Bin Abdulaziz Al Saud....................... 1,501,350(3) 7.0%
</TABLE>
- - ------------------------
(1) The shares attributed to Ms. Karan include shares held of record by Mr.
Weiss (her husband), a trust for the benefit of the children of Ms. Karan
and Mr. Weiss (the "KW Trust"), and Gabrielle Studio, Inc., a corporation
wholly-owned by Ms. Karan, Mr. Weiss, and the KW Trust ("Gabrielle Studio").
The shares attributed to Mr. Weiss include shares held of record by Ms.
Karan, the KW Trust, and Gabrielle Studio. All of such shares are subject to
the stockholders agreement described herein. See "ELECTION OF
DIRECTORS--Certain Voting Arrangements." Ms. Karan has sole voting and
investment power with respect to the shares held of record by her, and Mr.
Weiss has sole voting and investment power with respect to the shares held
of record by him and the KW Trust. Ms. Karan and Mr. Weiss have shared
voting and investment power with respect to shares held of record by
Gabrielle Studio. Ms. Karan and Mr. Weiss each disclaim beneficial ownership
of the shares held of record by the other, the KW Trust, and Gabrielle
Studio. The total does not include the nine shares of Class A common stock
held by each of Ms. Karan and Mr. Weiss, which are subject to the voting
agreement described herein. The business address of Ms. Karan and Mr. Weiss
is 550 Seventh Avenue, New York, New York 10018.
(2) The shares attributed to Messrs. Taki and Mori include shares held of record
by Takihyo Inc. Each of Messrs. Taki and Mori has a pecuniary interest in
only a portion of such shares, and each disclaims beneficial ownership
except to the extent of such interest. All of such shares are subject to the
stockholders agreement described herein. See "ELECTION OF DIRECTORS--Certain
Voting Arrangements." Each of Messrs. Taki and Mori has sole voting and
investment power with respect to the shares held of record by him and share
voting and investment power with respect to the shares held of record by
Takihyo Inc. The total does not include the one share of Class B common
stock held by each of Messrs. Taki and Mori, which are subject to the voting
agreement described herein. The business address of Messrs. Taki and Mori
and Takihyo Inc. is 11 West 42nd Street, New York, New York 10036.
(3) According to a Schedule 13D filed on September 29, 1997 by His Royal
Highness Prince Alwaleed Bin Talal Bin Abdulaziz Al Saud ("HRH"), HRH is a
citizen of the Kingdom of Saudi Arabia and has sole voting power and
investment power with respect to the shares held of record by him. The
business address of HRH is P.O. Box 8653, Riyadh, 11492, Kingdom of Saudi
Arabia.
PROPOSAL ONE
ELECTION OF DIRECTORS
The Board of Directors currently consists of three classes of directors, as
nearly equal in number as possible. Directors hold office for staggered terms of
three years (or less if they are filling a vacancy) and until their successors
are elected and qualified, or until their earlier resignation or removal. One of
the three classes, comprising approximately one-third of the directors, is
elected each year to succeed the directors whose terms are expiring. The Company
currently has six directors, consisting of two Class I
2
<PAGE>
Directors, two Class II Directors, and two Class III Directors. There is one
vacancy in each of Class I, Class II, and Class III. The terms of the two
current Class III Directors expire at the Annual Meeting. The directors in
Classes I and II are serving terms expiring at the Company's annual meeting of
stockholders in 2000 and 2001, respectively.
The Board of Directors has designated Donna Karan and Ann McLaughlin as the
two nominees for reelection as Class III directors for a term expiring at the
annual meeting of stockholders in 2002.
Each nominee has consented to being named as a nominee in this Proxy
Statement and to serve if elected. If either nominee should become unavailable
for any reason, which management does not anticipate, the proxy will be voted
for any substitute nominee or nominees who may be selected by the management
prior to or at the Annual Meeting, or, if no substitute is selected by
management prior to or at the Annual Meeting, for a motion to reduce the
membership of the Board to the number of nominees available. In no event will
any proxies be voted for a greater number of persons than the number of nominees
named below. Directors will be elected by a plurality of the votes cast. The
information concerning the nominees and each director continuing in office and
their security holdings has been furnished by them to the Company.
THE BOARD RECOMMENDS A VOTE FOR EACH NOMINEE AS A DIRECTOR TO HOLD OFFICE
UNTIL THE 2002 ANNUAL MEETING. PROXIES RECEIVED BY THE COMPANY WILL BE SO VOTED
UNLESS STOCKHOLDERS SPECIFY IN THEIR PROXY A CONTRARY CHOICE.
NOMINEES FOR ELECTION AS DIRECTORS:
CLASS III NOMINEES FOR DIRECTORS WHOSE TERMS EXPIRE IN 2002
DONNA KARAN, 50, founded the Company along with Stephan Weiss, Tomio Taki,
Frank Mori, and Takihyo Inc. in 1984 and has served as Chief Designer of the
Company from the date of its formation and Chief Executive Officer from the date
of the Company's formation until August 1997. Ms. Karan has served on the Board
of Directors of the Company since April 1996, and has served as Chairman of the
Board since July 1996. Immediately prior to the formation of the Company, Ms.
Karan was the head designer at Anne Klein & Company. Ms. Karan is a member of
the Board of Directors of the Council of Fashion Designers of America ("CFDA"),
the Design Industries Foundation for AIDS, and the Martha Graham Center of
Contemporary Dance. Ms. Karan also serves as a member of the Board of Governors
of the Parsons School of Design, a division of The New School. Ms. Karan was
honored as the CFDA's Designer of the Year in 1985 and 1990, as its Menswear
Designer of the Year in 1992, and as its Womenswear Designer of the Year in
1996. Ms. Karan is the wife of Mr. Stephan Weiss, Vice Chairman of the Company.
ANN MCLAUGHLIN, 57, has served as a director of the Company since January
1997. Ms. McLaughlin has been Chairman of The Aspen Institute, an international
non-profit, educational and public policy organization dedicated to serving
leaders throughout the world, since August 1996 and served as Vice Chairman of
this institute since August 1993. From May 1990 to September 1995, Ms.
McLaughlin served as President of the Federal City Council, Washington, D.C., a
non-profit, non-partisan organization. From 1987 to 1989, Ms. McLaughlin was the
United States Secretary of Labor. She also served as Chairman of the President's
Commission on Aviation Security and Terrorism from 1989 to 1990 and as Under
Secretary of the Department of the Interior from 1984 to 1987. Ms. McLaughlin is
a director of AMR Corporation and its subsidiary, American Airlines Inc., Fannie
Mae, General Motors Corporation, Host Marriott Corporation, Kellogg Company,
Nordstrom, Union Camp Corporation, Vulcan Materials Company, and Harman
International Industries, Inc.
3
<PAGE>
DIRECTORS WHOSE TERMS OF OFFICE CONTINUE:
CLASS I DIRECTORS WHOSE TERMS EXPIRE IN 2000
JOHN D. IDOL, 40, joined the Company in July 1997 and has served as Chief
Executive Officer and a director of the Company since August 1997. Prior to
joining the Company, Mr. Idol was employed by Polo Ralph Lauren Corporation, a
publicly-traded apparel company, from 1984 through July 1997, most recently as
Group President, Product Licensing, including Home Collection operations.
JOHN EYLER, 51, has served as a director of the Company since April 1999.
Mr. Eyler has been Chairman and Chief Executive Officer of F.A.O. Schwarz, an
upscale retailer of toys, since June 1992. From 1989 to 1992, he was the Chief
Executive Officer of the retail subsidiary of Hartmarx Corporation, a men's
clothing manufacturer, and from 1983 to 1989 was Chairman/Chief Executive
Officer of MainStreet, a retail division of Federated Department Stores. Mr.
Eyler also is a director of Filene's Basement, Inc.
CLASS II DIRECTORS WHOSE TERMS EXPIRE IN 2001
STEPHAN WEISS, 60, has served on the Board of Directors since April 15, 1996
and as Vice Chairman since July 1996. From 1985 to 1992, Mr. Weiss served as the
Operating Principal of the Company and from 1993 through 1995 as the Co-Chief
Executive Officer of the Company. During that time, Mr. Weiss served the Company
in various capacities, including having direct supervisory responsibility at
various times for the legal department, licensing, new business ventures, and
developing the Creative Services Department. Since July 1997, Mr. Weiss has
served the Company in an advisory capacity. Mr. Weiss is the husband of Ms.
Karan.
M. WILLIAM BENEDETTO, 57, a founder and principal of Benedetto, Gartland &
Co. Inc., a New York-based private placement and investment-banking firm, has
served as a director of the Company since July 1996. Before founding this firm
in 1988, Mr. Benedetto was a senior executive in the investment banking
industry.
4
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The table below sets forth the beneficial ownership of the common stock as
of February 1, 1999 (i) by each current director, (ii) by each of the executive
officers named in the "Summary Compensation Table," and (iii) by all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP
OF COMMON STOCK AS PERCENTAGE
NAME POSITION OF FEBRUARY 1, 1999 OF CLASS
- - ------------------------------------ --------------------------------------- -------------------- -----------
<S> <C> <C> <C>
Donna Karan......................... Chairman of the Board and Chief 5,242,928(1) 24.3%
Designer
Stephan Weiss....................... Vice Chairman of the Board 5,242,928(1) 24.3%
John D. Idol........................ Chief Executive Officer and Director 200,000(2) *
M. William Benedetto................ Director 10,500(3) *
John Eyler.......................... Director -- *
Ann McLaughlin...................... Director 10,000(4) *
Lee Goldenberg...................... Corporate Executive Vice President, 13,600(5) *
Worldwide Operations
Joseph B. Parsons................... Corporate Executive Vice President, 21,000(5) *
Chief Financial and Administrative
Officer
David L. Bressman................... Former Corporate Senior Vice President, 11,500(5) *
General Counsel, and Secretary
All directors and executive officers
of the Company as a group (10
persons).......................... 5,512,637(6) 25.5%
</TABLE>
- - ------------------------
* Less than one percent (1%).
(1) The shares attributed to Ms. Karan include shares held of record by Mr.
Weiss, the KW Trust, and Gabrielle Studio. The shares attributed to Mr.
Weiss include shares held of record by Ms. Karan, the KW Trust, and
Gabrielle Studio. All of such shares are subject to the stockholders
agreement described herein. See "Certain Voting Arrangements" below. Ms.
Karan has sole voting and investment power with respect to the shares held
of record by her and Mr. Weiss has sole voting and investment power with
respect to the shares held of record by him and the KW Trust. Ms. Karan and
Mr. Weiss have shared voting and investment power with respect to shares
held of record by Gabrielle Studio. Ms. Karan and Mr. Weiss each disclaim
beneficial ownership of the shares held of record by the other, the KW
Trust, and Gabrielle Studio. Does not include the nine shares of Class A
common stock held by each of Ms. Karan and Mr. Weiss, which are subject to
the voting agreement described herein.
(2) Includes 150,000 shares subject to a restricted stock award and 50,000
shares which may be acquired upon the exercise of options which are
presently exercisable or which will become exercisable within 60 days of
February 1, 1999.
(3) Includes 1,000 shares jointly owned with Mr. Benedetto's wife, 500 shares
subject to a restricted stock award, and 8,000 shares which may be acquired
upon the exercise of options which are presently exercisable or which will
become exercisable within 60 days of February 1, 1999. Does not include
3,464 stock units held in stock accounts under the Company's Director's
Deferred Compensation Plan, the value of which depends directly upon the
market price of the common stock.
(4) Includes 500 shares subject to a restricted stock award and 7,500 shares
which may be acquired upon the exercise of options which are presently
exercisable or which will become exercisable within 60 days of February 1,
1999. Does not include 1,419 stock units held in stock accounts under the
Company's Director's Deferred Compensation Plan, the value of which depends
directly upon the market price of the common stock.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
5
<PAGE>
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)
(5) Includes the following number of shares which may be acquired upon the
exercise of options which are presently exercisable or which will become
exercisable within 60 days of February 1, 1999; Mr. Goldenberg--13,500
shares; Mr. Parsons--21,000 shares; Mr. Bressman--10,500 shares; and all
executive officers as a group--97,709 shares.
(6) Includes or excludes (as the case may be) the shares described in footnotes
2, 3, 4, and 5 above.
CERTAIN VOTING ARRANGEMENTS
Pursuant to a stockholders agreement, Ms. Karan, Mr. Weiss, the KW Trust,
and Gabrielle Studio, a corporation wholly-owned by Ms. Karan, Mr. Weiss, and
the KW Trust (collectively, the "Karan/Weiss Group"), are entitled to designate
one member to the Board of Directors of the Company (in addition to Ms. Karan
and Mr. Weiss) as long as the combined ownership of the shares of common stock
held by members of the Karan/Weiss Group is not less than 20% of the then
outstanding common stock. Additionally, pursuant to such stockholders agreement,
Mr. Tomio Taki, Mr. Frank R. Mori, Takihyo Inc., and certain affiliates of
Messrs. Taki and Mori (collectively, the "Takihyo Group") are entitled to
designate (a) two members of the Board of Directors until such time as the
Takihyo Group sells any shares of common stock owned by it (other than shares
distributed to stockholders of Takihyo Inc.) and (b) thereafter, one member of
the Board of Directors as long as the Takihyo Group owns not less than 10% of
the then outstanding common stock, except that if either Mr. Taki or Mr. Mori is
otherwise able to serve, and is serving, as the one designee of the Takihyo
Group, then such person shall be entitled to continue to serve as a director as
long as the Takihyo Group continues to own not less than 5% of the then
outstanding common stock. The stockholders agreement provides that neither Mr.
Mori, Mr. Taki, nor any other affiliate of the Takihyo Group may serve as a
director as long as the Takihyo Group has an ownership interest in, or either of
such person is an officer or director of, Anne Klein & Company or any other
competitor of the Company. Pursuant to the stockholders agreement, the
Karan/Weiss Group, on the one hand, and the Takihyo Group, on the other hand,
have agreed to vote the shares of common stock owned by them for each other's
designees (and, in the case of the Takihyo Group, for Ms. Karan and Mr. Weiss)
as directors. The designee to the Board of Directors of the Karan/Weiss Group
and the designees of the Takihyo Group (other than Messrs. Taki or Mori) must be
reasonably satisfactory to the Company's Board of Directors. Additionally, Ms.
Karan and Mr. Weiss, each of whom holds nine shares of Class A common stock, and
Messrs. Taki and Mori, each of whom holds one share of Class B common stock,
have agreed in writing that, if the holders of Class A common stock or Class B
common stock are entitled to vote separately as a class with respect to a
matter, they will vote their respective shares of Class A and Class B common
stock as nearly as possible in the same manner as the holders of a majority of
the shares of common stock vote their shares with respect to such matter.
DIRECTOR COMPENSATION
Directors who are employees of the Company receive no compensation, as such,
for service as members of the Board of Directors or its committees.
Each director who is not an employee or officer of the Company or a
subsidiary thereof and who is
not an officer, director, or employee of certain affiliates of the Company
("Eligible Directors") receives an annual retainer of $25,000 and $1,000 for
each Board and Committee meeting attended. The chairman of each Committee
receives an additional retainer fee of $2,500 per annum.
Each Eligible Director is eligible to receive options under the Company's
1996 Non-Employee Directors Stock Option Plan (the "Directors' Plan"). The
Directors' Plan provides that, on the date of initial election or appointment to
the Board, each Eligible Director is granted a non-qualified option to purchase
7,500 shares of common stock. Thereafter, other than with respect to the year in
which an Eligible Director receives an initial grant of options, as of the first
day of the month following the annual meeting of stockholders, each Eligible
Director is entitled to receive a non-qualified option to purchase
6
<PAGE>
1,000 shares of common stock. The options have an exercise price equal to the
fair market value of the common stock on the date of grant, vest on the first
anniversary of the date of grant, and have a 10-year term. In addition, options
granted and not previously exercisable will become vested and fully exercisable
immediately upon a change in control of the Company (as defined in the
Directors' Plan). Neither Ms. Karan nor Mr. Weiss (nor Messrs. Mori or Taki, if
either of them is serving as a director) is eligible to receive options under
the Directors' Plan. The Directors' Plan authorizes the issuance of up to
100,000 shares of common stock, subject to adjustments in certain circumstances.
Each Eligible Director also will receive a grant of a restricted stock award
under the Company's 1998 Non-Employee Director Restricted Stock Plan. Each
Eligible Director will receive an award of 500 shares of common stock as of the
first day of the month following the annual meeting of stockholders, which award
will vest on the first anniversary of the date of grant. In addition, the
restricted stock award will become fully vested upon a change in control of the
Company (as defined in the plan).
Eligible Directors also will be eligible to participate in a Voluntary
Deferred Compensation Plan for Non-Employee Directors of the Company (the
"Deferred Compensation Plan"). Pursuant to the Deferred Compensation Plan, an
Eligible Director, upon his or her election, may defer payment of his or her
cash retainer and meeting fees for five years or until he or she ceases to be a
director. The deferred amounts, at the election of the director, during the
deferral period either (i) are credited with interest at prescribed rates or
(ii) are converted to the equivalent of that number of shares of the Company's
common stock (based on the market price at the time of the deferral) that could
be purchased with the deferred amounts. All payments under the Deferred
Compensation Plan are in the form of cash. The Deferred Compensation Plan
provides that lump-sum payments of all deferred compensation will be made as
soon as administratively feasible following the date that (i) the participating
director ceases to be a member of the Board of Directors or (ii) the Deferred
Compensation Plan is terminated.
BOARD COMMITTEES AND MEMBERSHIP
The Company has an Audit Committee of the Board of Directors, consisting
entirely of outside directors, the current members of which are Mr. Benedetto
and Ms. McLaughlin. The Audit Committee held seven meetings in 1998. The Audit
Committee recommends annually to the Board of Directors the appointment of the
independent auditors of the Company, and reviews with the independent auditors
the scope and results of the Company's audits, the Company's internal accounting
controls, and the professional services furnished by the independent auditors to
the Company.
The Company also has a Compensation Committee of the Board of Directors
consisting of Mr. Benedetto and Ms. McLaughlin. The Compensation Committee
reviews and approves annual salaries and bonuses for all executive officers and
key members of the Company's design teams and management staff, and reviews and
approves the terms and conditions of all employee benefit plans or changes
thereto. The Compensation Committee has created an Incentive Compensation
Subcommittee to address all issues before the Compensation Committee that
require decisions by directors who qualify as outside directors under Section
162(m) of the Internal Revenue Code of 1986, as amended, and as non-employee
directors under Section 16(b) of the Securities Exchange Act of 1934, as
amended. The Incentive Compensation Subcommittee reviews and approves grants of
stock options and stock awards pursuant to the Company's 1996 Stock Incentive
Plan. Currently, the members of the Incentive Compensation Subcommittee are
identical to the Compensation Committee. In 1998, the Compensation Committee met
one time and the Incentive Compensation Subcommittee met two times and also took
action by unanimous written consent.
The Company does not have a nominating committee. In 1998, the Board of
Directors held nine meetings and committees of the Board held a total of ten
meetings. During 1998, all of the current directors attended at least 75% of the
aggregate of all meetings of the Board of Directors and the committees of the
Board of Directors on which such director served.
7
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation earned for services rendered in all capacities for the 1998, 1997,
and 1996 fiscal years by the Chief Executive Officer and the four most highly
compensated executive officers of the Company (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION ----------------------------
--------------------------------------- RESTRICTED
SALARY/ OTHER ANNUAL STOCK SECURITIES
NAME AND PRINCIPAL FISCAL CONSULTING BONUS COMPENSATION AWARDS UNDERLYING
POSITION YEAR FEES($) ($) ($)(1) ($) OPTIONS (#)
- - ----------------------------------------- ----------- ----------- --------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
DONNA KARAN (2).......................... 1998 500,000 -- -- -- --
Chairman of the Board and 1997 490,384 -- -- -- --
Chief Designer 1996 1,746,154 --(3) -- -- --
JOHN D. IDOL (2)......................... 1998 900,000 750,000 -- -- 100,000
Chief Executive Officer 1997 362,971 535,000 -- 1,565,625(4) 400,000
LEE GOLDENBERG........................... 1998 350,000 175,000 -- -- --
Corporate Executive 1997 312,321 -- -- -- 18,000
Vice President, 1996 306,046 47,033 -- -- 15,000
Worldwide Operations
JOSEPH B. PARSONS........................ 1998 315,000 207,500 64,707 -- --
Corporate Executive Vice President, 1997 308,531 -- -- -- 18,000
Chief Financial and Administrative 1996 291,538 150,000 -- -- 30,000
Officer
DAVID L. BRESSMAN (8).................... 1998 302,500 105,000 -- -- --
Former Corporate Senior Vice President, 1997 247,169 -- -- -- 9,000
General Counsel, and Secretary 1996 235,400 117,700 -- -- 15,000
<CAPTION>
OTHER
NAME AND PRINCIPAL COMPENSATION
POSITION ($)(5)
- - ----------------------------------------- -------------
<S> <C>
DONNA KARAN (2).......................... --
Chairman of the Board and --
Chief Designer --
JOHN D. IDOL (2)......................... 4,228
Chief Executive Officer --
LEE GOLDENBERG........................... 30,920(6)
Corporate Executive 4,714
Vice President, 4,500
Worldwide Operations
JOSEPH B. PARSONS........................ 30,372(6)
Corporate Executive Vice President, 4,750
Chief Financial and Administrative 104,500(7)
Officer
DAVID L. BRESSMAN (8).................... 24,250(6)
Former Corporate Senior Vice President, 4,000
General Counsel, and Secretary 29,136(7)
</TABLE>
- - ------------------------------
(1) Except as indicated, the aggregate amount of perquisites and other personal
benefits awarded to, earned by, or paid to each Named Executive Officer was
less than either $50,000 or 10% of the total of annual salary and bonus for
that executive officer during each of these years. Includes for Mr. Parsons
a one-time payment of $48,032 for reimbursement of relocation expenses and
an annual automobile allowance of $14,400.
(2) Mr. Idol became Chief Executive Officer of the Company on August 11, 1997,
at which time Ms. Karan resigned as Chief Executive Officer.
(3) Ms. Karan waived the 1996 bonus to which she was entitled under her
employment agreement.
(4) Reflects the dollar value (without consideration of the restrictions) of a
restricted stock award of 150,000 shares granted to Mr. Idol pursuant to his
employment agreement. These shares vest on the fifth anniversary of the date
of grant or earlier in 20% increments if the common stock trades at
specified price levels. Based on the closing price of the common stock at
the end of fiscal 1998, the market value of such shares (without
consideration of the restrictions) was $1,143,750.
(5) Unless otherwise noted, represents matching contributions under the
Company's 401(k) Plan, which contributions vest over a five-year period.
(6) Includes contributions under the Company's deferred compensation plan, which
contributions vest after the fifth anniversary of participation in the plan,
in the following amounts: $26,125 for Mr. Goldenberg; $26,250 for Mr.
Parsons; and $20,250 for Mr. Bressman.
(7) Includes a one-time bonus of $100,000 for Mr. Parsons and a one-time bonus
of $25,000 for Mr. Bressman in connection with the consummation of the
Company's initial public offering and $4,500 for Mr. Parsons and $4,136 for
Mr. Bressman for matching contributions under the Company's 401(k) Plan.
(8) Mr. Bressman resigned from the Company effective in April 1999.
8
<PAGE>
EMPLOYMENT ARRANGEMENTS
EMPLOYMENT AGREEMENT WITH MS. KARAN
The Company's employment agreement with Ms. Karan provides for her
employment as Chairman of the Board and Chief Designer and has an initial
three-year term through December 31, 1999. The agreement is automatically
renewable for successive three-year terms, unless otherwise terminated. The
employment agreement provides for an annual base salary of $500,000, as adjusted
annually for increases in the Consumer Price Index, and an annual bonus of up to
100% of base salary based on the adjusted pre-tax profits of the Company.
Ms. Karan may terminate her employment without reason, at any time after the
initial three-year term with at least four months' notice. The employment
agreement also may be terminated at any time by written notice by Ms. Karan for
"good reason" if: (i) Ms. Karan (without her prior written consent) is no longer
Chairman of the Board and the sole Chief Designer; (ii) Ms. Karan is assigned
duties and responsibilities inconsistent with the employment agreement (without
her prior written consent); (iii) the Company fails to pay Ms. Karan all amounts
required under the employment agreement; (iv) there is a material breach of the
employment agreement by the Company; (v) there is a change in control of the
Company, including as a result of certain changes in ownership of voting
securities, an acquisition by a third party of 30% of the voting securities of
the Company, mergers, sales of assets, and certain changes in the composition of
the Board of Directors; (vi) there are any fundamental changes to the business
or operations of the Company that are material (without her prior written
consent); or (vii) a physician of recognized skill confirms to the Board of
Directors in writing that Ms. Karan's continued employment with the Company
would have a material adverse impact on her health or have an adverse effect on
her ability to perform her duties to the Company. The employment agreement may
be terminated by the Company only for "cause."
If Ms. Karan terminates her employment with the Company for "good reason" or
upon termination as a result of Ms. Karan's death or disability, the Company
will pay to Ms. Karan (or her estate), a lump sum cash payment equal to the sum
of her current base salary and incentive bonus from the prior year for the
greater of one year and the remaining term of the employment agreement. The
employment agreement provides that for a period of one year following the
termination of Ms. Karan's agreement, Ms. Karan will not participate or engage
in, either directly or indirectly, any business activity that is directly
competitive with the Company's then current principal product lines and price
points and could reasonably be expected to have a material adverse effect on the
Company. The employment agreement further provides that Ms. Karan will have no
obligation to mitigate the Company's financial obligations in the event of her
termination.
During the term of the employment agreement, Ms. Karan is obligated to
devote substantially all her business time and attention to the Company and,
except with regard to Gabrielle Studio, may not have an interest in or perform a
service that is in direct competition with the Company's principal product lines
and price points, which activity could reasonably be expected to have a material
adverse effect on the Company. Subject to the foregoing and provided there is no
interference with Ms. Karan's primary obligations to the Company, Ms. Karan may
engage in certain activities for her own personal benefit, such as personal
endorsements and appearances; motion pictures; television; writing; speaking and
teaching engagements; photography; the fine arts; designing for stage, film, and
other media; architectural, industrial, and interior design (exclusive of home
furnishings) and sales of limited edition products based on such designs; and
consulting services in connection with the foregoing.
EMPLOYMENT AGREEMENT WITH MR. WEISS
The Company's employment agreement with Mr. Weiss provides for his
employment as Vice Chairman of the Board of Directors. The agreement is
automatically renewable for successive one-year terms, unless otherwise
terminated. In 1997, Mr. Weiss' agreement was amended to provide for the
elimination of
9
<PAGE>
the duties and responsibilities of Mr. Weiss set forth in his employment
agreement and his compensation therefor, for so long as Mr. Idol serves as Chief
Executive Officer of the Company. Mr. Weiss' employment agreement is in other
material respects relating to termination and non-competition similar to the
employment agreement of Ms. Karan described above.
EMPLOYMENT AGREEMENT WITH MR. IDOL
Mr. Idol's employment agreement with the Company provides for his employment
as Chief Executive Officer of the Company until June 30, 2002. The agreement
also provides for an automatic renewal for an indefinite term unless and until
either party gives the other party 12 months' notice of termination. Pursuant to
the employment agreement, Mr. Idol will be entitled to receive an annual base
salary of $900,000 for the 1998 and 1999 fiscal years; $950,000 for the 2000 and
2001 fiscal years; $475,000 for the period from the beginning of the 2002 fiscal
year through June 30, 2002 if the employment agreement is not renewed and
$950,000 for each fiscal year thereafter. Mr. Idol is also entitled to receive,
commencing with the 1998 fiscal year, a performance bonus (the "Performance
Bonus Award") of up to $750,000 per year based on certain performance criteria
and an incentive bonus (the "Incentive Bonus Award") of up to $2 million per
year based on the Company attaining certain performance goals.
The Performance Bonus Award is payable during each fiscal year during the
term of his employment agreement if: (i) the Company's net income before taxes
or extraordinary items ("Pre-Tax Income") increases by 10% or more over the
actual Pre-Tax Income for the prior fiscal year, or (ii) the Company licensing
revenues increase by 10% or more over the actual licensing revenues for the
prior fiscal year. Even if the foregoing performance targets are not attained,
Mr. Idol will be entitled to receive the Performance Bonus Award upon the
attainment of the following additional performance targets for: (i) the 1998
fiscal year, if Pre-Tax Income is at least $10 million or licensing revenues are
at least $7 million; (ii) the 1999 fiscal year, if Pre-Tax Income is at least
$11.5 million or licensing revenues are at least $8 million; (iii) the 2000
fiscal year, if Pre-Tax Income is at least $13.25 million or licensing revenues
are at least $9.25 million; and/or (iv) the 2001 fiscal year, if Pre-Tax Income
is at least $15.25 million or licensing revenues are at least $10.25 million.
The additional performance targets for the 2002 fiscal year and years thereafter
during the term of Mr. Idol's employment agreement also will be based on Pre-Tax
Income and licensing revenues (as described in the prior sentence) with such
targets increasing by 10% per year.
In addition, any amounts attained in excess of any performance target set
forth for any fiscal year under the Performance Bonus Award may be applied to
the applicable performance target for the next succeeding fiscal year or years.
Moreover, if a performance target is not attained in a particular fiscal year,
the attainment of such performance target in a subsequent fiscal year on a
cumulative basis will result in the performance bonus being deemed earned for
such prior and current fiscal years. There will be no partial payments if
performance targets are not attained.
The maximum performance bonus payable under the Performance Bonus Award for
any fiscal year to Mr. Idol is $750,000 (prorated for partial years) plus any
amount not earned in prior years with regard to the award, provided that, in all
cases, the maximum amount payable for any fiscal year will not exceed $3
million.
Mr. Idol will be eligible to earn an Incentive Bonus Award calculated as a
percentage of Pre-Tax Income in excess of $30 million. For Pre-Tax Income of (i)
$30 million to $75 million, the Incentive Bonus Award will be 2% of Pre-Tax
Income; and (ii) $75 million to $100 million, the Incentive Bonus Award will be
$1.5 million plus 1.5% of Pre-Tax Income in excess of $75 million. For Pre-Tax
Income in excess of $100 million, the Incentive Bonus Award will be $1.875
million plus 1.0% of Pre-Tax Income in excess of $100 million. In no event will
the Incentive Bonus Award for any fiscal year exceed $2 million. There will be
no partial payments if the minimum performance targets are not met.
10
<PAGE>
Each of the Performance Bonus Award and the Incentive Bonus Award was
approved by the Company's stockholders and is intended to comply with the
requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended.
In addition, Mr. Idol is entitled to receive deferred compensation of
$750,000 upon the earliest to occur of the third anniversary of the agreement,
termination of his employment, or a change in control of the Company (as
defined). Pursuant to this employment agreement upon commencement of Mr. Idol's
employment, he was granted options to purchase 400,000 shares of common stock
under the Company's 1996 Stock Incentive Plan. Pursuant to his agreement, Mr.
Idol received options to purchase 100,000 shares of common stock in each of
August 1998 and March 1999 and is entitled to receive options to purchase
100,000 shares of common stock on or about April 1, 2000 and 2001, provided that
the Company has recorded income before income taxes and extraordinary items in
the prior fiscal year. Of these options, 200,000 options granted on the date of
the commencement of Mr. Idol's employment vest five years from the date of
grant, have an exercise price equal to the fair market value on the date of
grant, and are subject to accelerated vesting in one-third increments based on
the Company's attainment of certain net income thresholds. The remainder of the
options vest at the rate of 25% per year commencing on the first anniversary of
the date of grant and have an exercise price equal to the fair market value of
the common stock on the date of grant.
Pursuant to this employment agreement, the Company also granted Mr. Idol
150,000 shares of restricted common stock, which shares vest on the fifth
anniversary of date of grant or earlier in 20% increments if the common stock
trades at price levels ranging between $16 and $24 per share. Mr. Idol is
entitled to participate in the Company's benefit plans and the Company has
agreed to maintain a term life insurance policy on the life of Mr. Idol in the
amount of $5 million payable to his beneficiaries.
The employment agreement with Mr. Idol requires 60 days' notice of intent to
terminate by Mr. Idol and three months' written notice of intent to terminate by
the Company if Mr. Idol is terminated "without cause" (as defined) (or for a
shorter period of time if terminated for "cause" (as defined)). Mr. Idol has
also agreed not to compete with the business of the Company for a period of
one-year following termination of his employment with the Company for any reason
other than "good reason" (as defined). If Mr. Idol is terminated by the Company
"without cause" or he terminates his employment for "good reason" prior to June
30, 2002, Mr. Idol will be entitled to receive the sum of 2.99 times his base
salary plus two times his total bonus compensation (including his performance
bonus and incentive bonus) for the immediately prior fiscal year plus accrued
obligations (as defined) payable 30 days after the date of termination and all
then unvested restricted stock and stock options will be fully vested.
If Mr. Idol is terminated "without cause" or he terminates his employment
for "good reason" during the 12-month period following a "change in control" of
the Company (as defined), Mr. Idol will be entitled to receive (i) the sum of
three times his base salary plus three times his total bonus compensation
(including his performance bonus and incentive bonus) for the immediately prior
fiscal year, (ii) continued health, disability, and life insurance at the level
then in effect for 18 months, and (iii) full vesting of all then unvested
restricted shares of common stock and stock options. Notwithstanding the
foregoing, if such payments and benefits are subject to an excise tax under the
Code as "golden parachute payments," then such payments and benefits will be
reduced to eliminate such excise tax if, and only if, Mr. Idol would be in a
better after-tax position as a result of such reduction.
EMPLOYMENT AGREEMENT WITH MR. PARSONS
The Company and Joseph B. Parsons, Corporate Executive Vice President, Chief
Financial and Administrative Officer of the Company, are parties to an
employment agreement, under which Mr. Parsons receives an annual base salary of
$300,000, subject to increase at the discretion of the Company. Pursuant to his
agreement, Mr. Parsons also is entitled to a target bonus equal to 50% of his
base salary. The agreement further provides that in the event of Mr. Parsons'
disability, his termination by
11
<PAGE>
the Company "without reason," or his termination of the agreement for "good
reason" (each as defined in the agreement), the Company will pay him or his
estate an amount equal to his then current annual salary plus the bonus he
earned during the prior fiscal year. The agreement is generally terminable by
either party upon two months' notice.
EMPLOYMENT AGREEMENT WITH MR. GOLDENBERG
The Company and Lee Goldenberg, Corporate Executive Vice President,
Worldwide Operations, are parties to an employment agreement, under which Mr.
Goldenberg receives an annual base salary of $350,000, subject to increase at
the discretion of the Company. This agreement has an initial term through
December 31, 2000 and is automatically renewable for successive one-year terms,
unless otherwise terminated. Pursuant to this agreement, Mr. Goldenberg is
entitled to a target bonus of between 50% and 100% of his base salary,
determined in accordance with the Company's Executive Incentive Plan (or
successor plan thereto). Additionally, Mr. Goldenberg is entitled to participate
in the Company's annual stock option program for executives and is entitled to a
contribution by the Company of 5% of his base salary and bonus under the
Company's deferred compensation program for executives. Commencing for fiscal
1999, Mr. Goldenberg may elect to defer between 10% and 100% of bonus to which
he is entitled. Mr. Goldenberg may terminate the employment agreement upon 60
days' written notice to the Company. If the Company terminates the employment
agreement without "cause," Mr. Goldenberg will be entitled to his base salary
for a one-year period provided that he complies with certain confidentiality and
non-solicitation covenants during such period.
STOCK OPTIONS
The following tables set forth information with respect to options granted
to the Named Executive Officers of the Company during the fiscal year ended
January 3, 1999. No stock appreciation rights were granted to the Named
Executive Officers during the fiscal year ended January 3, 1999.
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (2)
---------------------------------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- - ------------------------------------------------ ----------- ------------- ----------- ----------- --------- ----------
Donna Karan..................................... -- -- -- -- -- --
John D. Idol.................................... 100,000 38.4% 13.69 8/1/08 860,838 2,181,457
Lee Goldenberg.................................. -- -- -- -- -- --
Joseph B. Parsons............................... -- -- -- -- -- --
David L. Bressman............................... -- -- -- -- -- --
</TABLE>
- - ------------------------
(1) The options granted in fiscal 1998 were granted pursuant to the executive
officer's employment agreement and were granted under the Company's 1996
Stock Incentive Plan. Under this plan, the exercise price may not be less
than 100% of the fair market value of the common stock on the date the
option is granted. All unexercisable stock options granted under the plan
become exercisable upon a change in control of the Company. The plan allows
shares of common stock to be used to satisfy any resulting Federal, state,
and local tax liabilities. Following termination of employment, option
holders
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
12
<PAGE>
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)
have one year to exercise the portion of the stock option exercisable upon
the date of termination of employment. This option vests in equal
installments over a four-year period.
(2) In accordance with rules promulgated by the Securities and Exchange
Commission, the potential realizable value of these grants (on a pre-tax
basis) assumes that the common stock gains 5% or 10% in value per year,
compounded over the 10-year life of the options. These are assumed rates of
appreciation and are not intended to forecast future appreciation of the
Company's common stock.
AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND FISCAL 1998 OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(2)
-------------------------- --------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ---------------------------------------------------------- ----------- ------------- ----------- -------------
Donna Karan............................................... -- -- -- --
John D. Idol.............................................. 50,000 450,000 -- --
Lee Goldenberg............................................ 13,500 19,500 -- --
Joseph B. Parsons......................................... 21,000 27,000 -- --
David L. Bressman......................................... 10,500 13,500 -- --
</TABLE>
- - ------------------------
(1) No options were exercised in fiscal 1998.
(2) The value of in-the-money options assumes the closing sales price of the
common stock underlying the options as of January 3, 1999 ($7.625).
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors and the Incentive Compensation
Subcommittee thereof. The Compensation Committee, consisting entirely of
non-employee directors, reviews annual salaries and bonuses for all executive
officers and key members of the Company's design teams and management staff, and
reviews and approves the terms and conditions of all employee benefit plans or
changes thereto. The Incentive Compensation Subcommittee reviews and approves
grants of stock options and restricted stock awards pursuant to the Company's
1996 Stock Incentive Plan.
In 1997, the Company retained an executive compensation consultant to
conduct a survey on compensation practices of the Company and of other companies
in the industry and to make recommendations with respect to annual and long-term
incentives. Based in part on this survey and in connection with the Company's
establishment of its new strategic plan, the Compensation Committee approved a
new executive compensation program for executives for fiscal 1998. This program,
consisting of annual and long-term incentives, is designed to motivate the Named
Executive Officers and other key employees of the Company to achieve and exceed
the Company's annual financial and strategic goals.
COMPENSATION COMMITTEE PHILOSOPHY
The general philosophy of the Compensation Committee is to link overall
executive compensation with the performance of the Company and the individual
executive. The focus is on both annual and long-term incentives. By providing a
combination of incentives to the key employees of the Company, upon whose
efforts and commitment the success and growth of the Company depends, the
Compensation Committee not only rewards those efforts, but also provides a means
by which those employees can share in the growth.
13
<PAGE>
The Company's compensation and benefit programs are designed to promote
desired financial and operational results and thereby create value for the
stockholders, by attracting, motivating and assisting in the retention of key
employees with outstanding ability. The programs also are designed to align the
interests of management with the interests of stockholders of the Company. In
addition, compensation programs are designed to promote teamwork and
resourcefulness on the part of key employees whose performance and
responsibilities directly affect Company profits. In particular, compensation of
a key employee generally is linked to the area in which such employee can have
the greatest impact, whether on a divisional or corporate basis.
ANNUAL COMPENSATION
Base Salary. The Named Executive Officers of the Company who have entered
into employment agreements are compensated in accordance with those agreements,
which were approved by the Board of Directors or the Compensation Committee.
Base salary is reviewed annually. Increases in base salary are determined
primarily by individual performance rather than Company performance and are
based on subjective evaluations of key qualitative factors that include personal
accomplishments, strategic impact, and contributions to the Company. It is the
Company's practice to offer to management and key employees a competitive salary
so as to attract and retain a group of talented executives.
Ms. Karan's compensation is set by the terms of her employment agreement
with the Company, which agreement was approved prior to the Company's initial
public offering by the then Board of Directors of the Company. The terms of this
agreement are discussed in detail above in the summary of her employment
agreement.
Annual Bonus. Pursuant to her employment agreement, no bonus was paid to Ms.
Karan for fiscal 1998 because the Company did not achieve the minimum level of
adjusted pre-tax profits required under the agreement.
Eligible management and key employees, including the Named Executive
Officers (other than Ms. Karan and Mr. Idol), were eligible to participate in
the Company's Executive Incentive Plan, (the "EIP"), pursuant to which annual
bonuses are paid if certain specified objectives are met. Under the 1998 Bonus
Program of the EIP, each participant was eligible to receive a bonus equal to a
designated percentage of such participant's base salary (which varied depending
upon the participant's position with the Company), if pre-established pre-tax
net income targets of the Company and specified budget targets of the
participant's division were met. The program provides that no payments will be
made in any fiscal year in which the Company is not profitable, regardless of
divisional performance. In fiscal 1998, the bonus award to the Named Executive
Officers pursuant to the EIP was based 50% on the attainment of the pre-tax
income targets of the Company and 50% on the attainment of specified divisional
budget targets. The program provides that the maximum bonus payable to the Named
Executive Officers, as a percentage of base salary, was 100% for the Corporate
Executive Vice Presidents and 70% for the Corporate Senior Vice President.
For fiscal 1998, bonuses paid to the Named Executive Officers under the EIP
reflected the attainment of divisional targets. Although the Company achieved
one of its corporate goals of returning to profitability in 1998, the level of
achievement was below targeted levels. Accordingly, no bonuses were paid for
attainment of the Company's pre-tax net income goals. In fiscal 1998,
approximately 55 employees participated in the EIP.
In addition to the bonus under the EIP, the Committee awarded a
discretionary bonus to Mr. Parsons as a result of his extraordinary efforts in
1998 in achieving a number of the Company's strategic initiatives.
LONG-TERM INCENTIVES
Stock Options and Restricted Stock. The Company adopted the 1996 Stock
Incentive Plan (the "Stock Plan") for the benefit of certain key employees and
consultants of the Company (other than Ms. Karan and Mr. Weiss who are not
entitled to participate in such plan). The purpose of the Stock Plan is to
create
14
<PAGE>
a long-term mutuality of interests between such persons and the stockholders of
the Company and to attract and retain executives and other key employees who are
important to the success and growth of the Company. Stock options have value for
an employee only if the price of the Company's stock increases above its fair
market value on the grant date and the employee remains in the Company's employ
for the period required for the stock option to be exercisable.
Under the terms of her employment agreement, Ms. Karan is not entitled to
participate in the Stock Plan, but she is entitled to participate in any other
option plan approved by stockholders. Pursuant to her employment agreement,
under any such future plan, she will be entitled to benefits which are at least
equal to or greater than the benefits received by any other employee of the
Company.
For fiscal 1998, stock options were granted to the Named Executive Officers
based upon a program established at the end of 1997. Pursuant to the option
program, each participant will be eligible to receive an option grant in a
specified amount. One-half of the grant will be made if divisional targets are
achieved and the other half is made regardless of divisional performance. For
fiscal 1998, grants were made in March 1999 to the Named Executive Officers
based on the achievement of divisional goals. The options granted have a 10-year
term, vest over a three-year period commencing on the first anniversary of the
date of grant, and have an exercise price equal to the fair market value of the
common stock on the date of grant.
Deferred Compensation Plan. The Company has adopted a deferred compensation
plan covering eligible management and key employees, including the Named
Executive Officers (other than Ms. Karan and Mr. Idol). In accordance with this
plan, the Company credits a contribution to each participant's plan account
equal to 5% of his or her annual cash compensation, including bonus, provided
the Company has been profitable for such year. Amounts credited to a
participant's account, together with amounts earned thereon, fully vest five
years after participation in the plan. Based on the Company's results for fiscal
1998, each of the Named Executive Officer's plan account was credited under this
plan.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Mr. Idol has an employment agreement with the Company which was approved by
the Compensation Committee and the Incentive Compensation Subcommittee. See
"Employment Arrangements" above for a summary of the terms of this agreement and
the bonus plans in effect during the term of his agreement.
For fiscal 1998, Mr. Idol was eligible to receive the Performance Bonus
Award and the Incentive Bonus Award based on the attainment of objective
criteria described in these plans (as described in more detail in the summary of
his employment agreement). For fiscal 1998, the bonus paid to Mr. Idol reflects
the attainment of goals established under the Performance Bonus Award.
For fiscal 1998, in accordance with the terms of his employment agreement,
Mr. Idol was granted in August 1998 and March 1999 stock options to purchase an
aggregate of 200,000 shares of common stock under the Stock Plan, with an
exercise price equal to the fair market value of the common stock on the date of
grant.
POLICY WITH RESPECT TO QUALIFYING COMPENSATION DEDUCTIBILITY
The Company's policy with respect to the deductibility limit of Section
162(m) of the Internal Revenue Code of 1986, as amended, generally is to
preserve the federal income tax deductibility of compensation paid when it is
appropriate and is in the best interest of the Company and its stockholders.
However, the Company reserves the right to authorize the payment of
non-deductible compensation if it deems that it is appropriate.
MEMBERS OF THE COMPENSATION COMMITTEE
M. WILLIAM BENEDETTO, CHAIRMAN
ANN MCLAUGHLIN
15
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LICENSE AGREEMENT FOR PRINCIPAL TRADEMARKS
Gabrielle Studio, a corporation wholly-owned by Ms. Karan, Mr. Weiss, and
the KW Trust, entered into a license agreement (the "License Agreement") with
the Company. The License Agreement provides for the grant of an exclusive
license throughout the world to use, and to sublicense the right to use, the
trademarks "Donna Karan," "Donna Karan New York," "DKNY," "DK," and all
variations thereof (collectively, the "Licensed Marks") and to use and to
sublicense the right to use the name, signature, and likeness of Ms. Karan (the
"Name") in connection with the design, manufacture, distribution, sale (both at
retail and at wholesale), advertising, marketing, and promotion of products of
any kind, nature, or description except for certain products and other matters,
such as food products, restaurants, toys, and games and in connection with the
provision of certain store services, all of which Gabrielle Studio has licensed
to Ms. Karan.
The License Agreement continues in perpetuity unless earlier terminated as
provided therein. The License Agreement provides that it may be terminated by
Gabrielle Studio upon the failure of the Company to pay any amount due within 60
days of receipt of notice of such failure, or if the Company violates the
quality control provisions of the License Agreement and fails to initiate and
thereafter pursue appropriate corrective action within 60 days after a final
unappealable determination by an arbitration tribunal or court of competent
jurisdiction that such violation has occurred. The License Agreement may be
terminated by Gabrielle Studio upon the occurrence of, among other events, a
change in control of the Company, which includes certain changes in the
ownership of voting securities, an acquisition by a third party of 30% of the
voting securities of the Company, mergers, sales of assets, and changes in the
composition of the Board of Directors. The Company is paying all costs in
connection with the transfer of record ownership of the Licensed Marks to
Gabrielle Studio.
The License Agreement imposes certain obligations on the Company with
respect to the use of sales materials, protection of the Licensed Marks,
indemnification of Gabrielle Studio, the maintenance of public liability
insurance, and quality control of products bearing the Licensed Marks or the
Name. The License Agreement also limits the use of the Licensed Marks in certain
circumstances and in general prohibits any transfer or assignment of the rights
thereunder.
The License Agreement provides that the Company will pay to Gabrielle Studio
an annual royalty equal to 1.75% of the first $250 million of net sales (as
defined in the License Agreement, which includes products and store services)
for such year, plus 2.5% of the next $500 million of net sales for such year,
plus 3% of the next $750 million of net sales for such year, plus 3.5% of all
net sales for such year in excess of $1.5 billion. For purposes of computing the
annual royalty, "net sales" includes sales by the Company, its affiliates, its
subsidiaries, and its sublicensees of products bearing any of the Licensed Marks
or the Name. During fiscal 1998, the Company incurred royalty expense of $19.5
million to Gabrielle Studio pursuant to the License Agreement.
REGISTRATION RIGHTS AGREEMENT
In connection with the Company's initial public offering, the Company,
members of the Takihyo Group, Ms. Karan, Mr. Weiss, the KW Trust, and Gabrielle
Studio entered into a registration rights agreement, pursuant to which the
Company granted to members of the Takihyo Group and the Karan/ Weiss Group
certain demand and "piggyback" registration rights. In connection therewith, the
Company has agreed to pay certain expenses related to the registration of
securities under the registration rights agreement.
BOUTIQUE AGREEMENT
On October 29, 1998, the Company and Urban Zen LLC ("Urban Zen"), an entity
of which Ms. Donna Karan is the sole member, entered into a boutique license
agreement granting Urban Zen the right to open and operate a DONNA KARAN NEW
YORK flagship-store in New York City. The boutique
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agreement has an initial five-year term, with two renewal periods at Urban Zen's
option assuming certain conditions are met. The agreement further provides that
the Company will provide Urban Zen with certain management services in
connection with the operation of the store, in exchange for an annual fee equal
to the greater of 3% of sales and $150,000, and that Urban Zen will be entitled
to offer for sale certain non-Company products. In all other material respects,
the boutique license agreement is similar to the Company's other boutique
agreements for DONNA KARAN NEW YORK stores, including provisions for the sale of
Donna Karan merchandise to Urban Zen at wholesale prices, minimum purchase
requirements and minimum advertising requirements. It is expected that Ms. Karan
will devote a portion of her time to the Collection Store, which is scheduled to
open on Madison Avenue in 2000. For fiscal year 1998, no fees were incurred by
Urban Zen under the boutique agreement.
Additionally, in connection with lease for this store, the Company has
agreed to permit Gabrielle Studio to guarantee Urban Zen's obligations under the
lease.
OTHER AGREEMENTS AND TRANSACTIONS
For a discussion of the voting arrangement between the members of the
Karan/Weiss Group and members of the Takihyo Group, see "ELECTION OF
DIRECTOR--Certain Voting Arrangements."
In November 1997, the Company borrowed $6.7 million from Ms. Karan, which
amount, together with interest thereon at the rate of 8% per annum, was repaid
in February 1998.
In addition, in connection with the reorganization of the Company in
connection with its initial public offering the Company agreed to indemnify the
Karan/Weiss Group and the Takihyo Group for certain obligations arising prior to
or as a result of the reorganization.
LITIGATION
In 1997, the Company and certain directors and officers of the Company (the
"DK Defendants") were named as defendants in four separate purported class
actions filed in the United States District Court for the Eastern District of
New York. Each of the actions sought unspecified damages and purported to be a
class action on behalf of all purchasers of common stock during certain
specified periods between June 1996 and May 1997. In September 1997, these
actions were consolidated by court order. The complaints alleged violations of
the Securities Exchange Act of 1934 and the Securities Act of 1933 and the rules
thereunder as well as New York common. On August 14, 1998, the Court granted the
motion to dismiss filed by the Company and the underwriter defendants, and
dismissed the action in all respects. The Court offered plaintiffs the
opportunity to file a motion seeking leave to file an amended complaint.
Plaintiffs did not file such a motion and the Court entered judgment dismissing
the action. On October 9, 1998, plaintiffs filed a notice of appeal, and on
December 10, 1998, the United States Court of Appeals so ordered the parties'
stipulation dismissing the appeal, thereby concluding this matter.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is comprised of Mr. Benedetto and Ms. McLaughlin.
Ms. Karan serves as an ex-officio member of such committee. Ms. Karan is the
Chairman of the Board and Chief Designer. Also see "Certain Relationships and
Related Transactions" above, for information with respect to certain members of
the Board of Directors.
17
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on $100
invested on June 28, 1996 through January 3, 1999 (assuming reinvestment of
dividends), with the cumulative total return for the same period on the same
amount invested in the Standard & Poor's 500 Stock Index ("S&P 500") and the
Standard & Poor's Textile/Apparel Index ("S&P Textile Index"). Trading of the
Company's common stock commenced on June 28, 1996, on a when issued basis.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE COMPANY S&P 500 S&P TEXTILE-APPAREL
<S> <C> <C> <C>
Jun-96 100 100 100
Dec-96 58.85 112.11 117.43
Dec-97 53.64 149.51 126.64
Dec-98 31.77 192.24 109.59
</TABLE>
PROPOSAL TWO
RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITORS
The Board of Directors, upon recommendation of the Audit Committee, has
appointed Ernst & Young LLP, independent auditors, to audit the books and
records of the Company for the 1999 fiscal year.
One or more representatives of Ernst & Young LLP will be present at the
Annual Meeting, will be given an opportunity to make a statement if he or she
desires to do so, and will be available to respond to appropriate questions.
Ratification of the appointment of the independent auditors requires the
affirmative vote of a majority of the votes cast by the holders of the common
stock.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE THEIR SHARES
FOR RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE INDEPENDENT
AUDITORS FOR THE COMPANY FOR THE 1999 FISCAL YEAR. PROXIES RECEIVED BY THE
COMPANY WILL BE SO VOTED UNLESS STOCKHOLDERS SPECIFY IN THEIR PROXY A CONTRARY
CHOICE.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than ten-percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership of such securities with the Securities and
Exchange Commission and the New York Stock Exchange. Officers, directors and
greater than ten-percent beneficial owners are required by applicable
regulations to furnish the Company with copies of all Section 16(a) forms they
file. Based solely upon a review of the copies of the forms furnished to the
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<PAGE>
Company, or written representations from certain reporting persons that no Forms
5 were required, the Company believes that all filing requirements applicable to
its executive officers and directors were complied with during the 1998 fiscal
year.
DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS AND NOMINATIONS
Any stockholder proposal intended for inclusion in the proxy statement and
form of proxy relating to the Company's 2000 annual meeting of stockholders must
be received by the Company not later than December 14, 1999, pursuant to the
proxy solicitation regulations of the Securities and Exchange Commission.
Pursuant to such rules, if a stockholder notifies the Company after March 1,
2000 of an intent to present a proposal at the Company's 2000 annual meeting of
stockholders, the Company will have the right to exercise its discretionary
voting authority with respect to such proposal, if presented at the meeting,
without including information regarding such proposal in its proxy materials. In
addition, the Company's Restated Certificate of Incorporation requires that
nominations for director may be made by or at the direction of the Board of
Directors (or any duly authorized committee thereof) or by any stockholder of
record entitled to vote for the election of directors who has delivered timely
notice in writing to the Secretary of the Company. To be timely, a stockholder's
notice must be delivered to or mailed and received within the time periods
specified in Rule 14a-8(a)(3) (or any successor rule) of the Securities Exchange
Act of 1934, as amended.
The Company's By-laws further provide that no business may be brought before
an annual meeting except as specified in the Company's notice of meeting or as
otherwise brought before the meeting by or at the direction of the Board or by a
stockholder entitled to vote at such meeting who has given timely written notice
within the time limits noted above for a nomination for the election of a
director. Nothing herein shall be deemed to require the Company to include in
its proxy statement and form of proxy for such meeting any stockholder proposal
which does not meet the requirements of the Securities and Exchange Commission
in effect at the time.
A copy of the full text of the Company's Restated Certificate of
Incorporation and By-laws may be obtained upon written request to the Secretary
of the Company at the address provided above.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors does not know
of any other matters to be presented for action by the stockholders at the
Annual Meeting. If, however, any other matters not now known are properly
brought before the meeting, the persons named in the accompanying proxy will
vote such proxy in accordance with the determination of a majority of the Board
of Directors.
COST OF SOLICITATION
The cost of soliciting proxies will be borne by the Company. In addition to
the use of the mails, proxies may be solicited personally or by telephone by
directors, officers, and employees of the Company, who will not be specially
compensated for such activities. Such solicitations may be made personally or by
mail, facsimile, telephone, or messenger. The Company also has retained
ChaseMellon Shareholder Services Proxy Solicitation to assist in the
solicitation of proxies, at an estimated cost of $4,500, plus reimbursement of
reasonable out-of-pocket expenses. The Company will request persons, firms, and
companies holding shares in their names or in the name of their nominees, which
are beneficially owned by others, to send proxy materials to and obtain proxies
from such beneficial owners. The Company will reimburse such persons for their
reasonable expenses incurred in that connection.
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<PAGE>
ADDITIONAL INFORMATION
The Company has filed an Annual Report on Form 10-K for the fiscal year
ended January 3, 1999 with the Securities and Exchange Commission. Stockholders
may obtain, without charge, a copy of the Form 10-K (without exhibits) by
writing to the Investor Relations Department at Donna Karan International Inc.,
550 Seventh Avenue, New York, New York 10018. The exhibits to the Form 10-K are
available upon payment of charges which approximate the Company's cost of
reproduction.
By Order of the Board of Directors,
[/S/ LYNN E. USDAN]
Lynn E. Usdan
SECRETARY
April 14, 1999
STOCKHOLDERS ARE REQUESTED TO DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT
IN THE ENCLOSED ADDRESSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES. YOUR PROMPT RESPONSE WILL BE HELPFUL AND YOUR COOPERATION WILL BE
APPRECIATED.
<PAGE>
- - --------------------------------------------------------------------------------
DONNA KARAN INTERNATIONAL INC.
PROXY
The undersigned hereby appoints John D. Idol, Joseph B. Parsons and Lynn
E. Usdan, and each of them, with power of substitution, to represent and to vote
on behalf of the undersigned all of the shares of Donna Karan International
Inc. (the "Company"), which the undersigned is entitled to vote at the Annual
Meeting of Stockholders to be held in the Haft Auditorium at the Fashion
Institute of Technology, 227 West 27th Street, New York, New York 10001 on
Wednesday, May 26, 1999, at 10:00 a.m. (local time), and at any adjournment
or adjournments thereof, hereby revoking all proxies heretofore given with
respect to such stock, upon the following proposals more fully described in
the notice of and proxy statement for the meeting (receipt of which is hereby
acknowledged).
(TO BE SIGNED ON REVERSE SIDE)
- - --------------------------------------------------------------------------------
^ FOLD AND DETACH HERE ^
<PAGE>
- - --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR (1) AND (2).
Please mark
your votes as
in this /X/
example.
FOR all nominees listed
below except as marked WITHHOLD AUTHORITY to vote
to the contrary for all nominees listed below
1. ELECTION OF
DIRECTORS / / / /
Nominees: Donna Karan and Ann McLaughlin
INSTRUCTIONS: To withhold authority to vote for any individual nominee, write
that nominee's name on the space provided below.
- - --------------------------------------------------------------------
FOR AGAINST ABSTAIN
2. PROPOSAL TO APPROVE THE APPOINTMENT OF ERNST & YOUNG LLP
AS THE INDEPENDENT AUDITORS OF THE COMPANY FOR THE 1999 / / / / / /
FISCAL YEAR.
3. In their discretion upon such other matters as may properly come before
the meeting.
I will attend the meeting / /
I will not attend the meeting / /
THIS PROXY IS SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE
VOTED IN THE MANNER DIRECTED HEREIN BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1
AND 2.
Please sign exactly as name appears hereon.
Joint owners should each sign. When signing as
attorney, executor, administrator, trustee, or
guardian, please give full title as such. If
corporation, please sign in full corporate name
by President or other authorized officer. If a
partnership, please sign in partnership name by
authorized person.
PLEASE RETURN PROMPTLY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE.
Signature Signature if held jointly Date
--------------- --------------- -------
- - --------------------------------------------------------------------------------
^ FOLD AND DETACH HERE ^
