<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 1999
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11805
--------------------------------------
DONNA KARAN INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3882426
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
550 Seventh Avenue, New York, New York 10018
(Address of principal executive offices)
(Zip Code)
(212) 789-1500
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO /_/
At May 18, 1999, the Registrant had 21,599,264 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
<TABLE>
<CAPTION>
Item 1. Financial Statements
PAGE
<S> <C>
Statements of Income --
Three months ended April 4, 1999 and March 29, 1998............................................................................. 3
Balance Sheets--
April 4, 1999 and January 3, 1999............................................................................................ 4
Statements of Cash Flows--
Three months ended April 4, 1999 and March 29, 1998 ......................................................................... 5
Notes to Financial Statements................................................................................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................................................................11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ...............................................................................16
</TABLE>
2
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
APRIL 4, MARCH 29,
1999 1998
----------------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
NET REVENUES......................................... $ 160,720 $ 181,153
Cost of sales........................................ 113,521 138,622
----------------- ---------------
GROSS PROFIT......................................... 47,199 42,531
Selling, general and administrative expenses......... 42,476 37,732
----------------- ---------------
OPERATING INCOME .................................... 4,723 4,799
Other income (expense):
Other, net....................................... - 23
Interest expense, net............................ (929) (989)
----------------- ---------------
INCOME BEFORE INCOME TAXES........................... 3,794 3,833
Provision for income taxes........................... 1,631 1,763
----------------- ---------------
NET INCOME .......................................... $ 2,163 $ 2,070
----------------- ---------------
----------------- ---------------
Net income per common share:
Basic........................................... $ 0.10 $ 0.10
----------------- ---------------
----------------- ---------------
Diluted......................................... $ 0.10 $ 0.10
----------------- ---------------
----------------- ---------------
Weighted average common shares outstanding:
Basic........................................... 21,599,200 21,597,800
----------------- ---------------
----------------- ---------------
Diluted......................................... 21,615,700 21,627,500
----------------- ---------------
----------------- ---------------
</TABLE>
See Notes to Financial Statements
3
<PAGE>
DONNA KARAN INTERNATIONAL INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1999 1999
------------------ -----------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents............................ $ 8,005 $ 7,448
Accounts receivable, net of allowances of $30,614 at
April 4, 1999 and $29,872 at January 3, 1999..... 89,030 70,977
Inventories.......................................... 75,138 89,825
Deferred income taxes................................ 24,717 24,688
Prepaid expenses and other current assets............ 18,768 18,860
------------------ -----------------
TOTAL CURRENT ASSETS............................. 215,658 211,798
Property and equipment, net.............................. 44,031 33,675
Deferred income taxes.................................... 15,870 17,052
Deposits and other noncurrent assets..................... 14,964 16,204
------------------ -----------------
$ 290,523 $ 278,729
------------------ -----------------
------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..................................... $ 39,479 $ 59,266
Accrued expenses and other current liabilities....... 49,969 60,864
Borrowing under revolving line of credit............. 31,731 -
------------------ -----------------
TOTAL CURRENT LIABILITIES......................... 121,179 120,130
------------------ -----------------
Subordinated notes payable .............................. 8,209 -
Deferred income.......................................... 36,995 36,495
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 35,000,000 shares
authorized, shares issued 21,618,034 at
April 4, 1999 and 21,618,034 at January 3, 1999..... 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............................ 188,479 188,479
Retained deficit...................................... (61,584) (63,747)
Accumulated other comprehensive (loss)................ (1,492) (1,206)
------------------ -----------------
125,619 123,742
Less: Treasury stock, at cost (18,770 shares)......... (443) (443)
Unearned compensation........................... (1,036) (1,195)
------------------ -----------------
TOTAL STOCKHOLDERS' EQUITY........................ 124,140 122,104
------------------ -----------------
$ 290,523 $ 278,729
------------------ -----------------
------------------ -----------------
</TABLE>
See Notes to Financial Statements
4
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
APRIL 4, MARCH 29,
1999 1998
----------------- -----------------
(IN THOUSANDS)
OPERATING ACTIVITIES
<S> <C> <C>
Net income.................................................. $ 2,163 $ 2,070
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization........................... 3,779 3,589
Provision for bad debts................................. 145 386
Gain on sale of affiliate............................... - (88)
Provision for restricted stock compensation............. 159 80
Amortization of deferred income......................... (3,243) (360)
Equity in earnings (loss) of affiliate.................. - 65
Deferred income taxes................................... 1,154 (7,079)
Changes in operating assets and liabilities:
Increase in accounts receivable......................... (18,198) (21,219)
Decrease in inventories................................. 18,473 23,860
Decrease in prepaid expenses and other current assets... 93 168
(Increase) decrease in deposits and other noncurrent
assets................................................ (725) 1,577
Decrease in accounts payable, accrued expenses, and
other current liabilities............................. (22,781) (22,902)
Increase in deferred income............................. 500 44,563
----------------- ------------------
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES (18,481) 24,710
----------------- ------------------
INVESTING ACTIVITIES
Purchase of free-standing retail stores ................ (9,200) -
Proceeds from sale of affiliate......................... - 646
Purchase of property and equipment...................... (3,493) (458)
----------------- ------------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (12,693) 188
----------------- ------------------
FINANCING ACTIVITIES
Net proceeds (repayment) of revolving credit facility... 31,731 (20,512)
Payments under capital lease............................ - (36)
Repayments of note payable to principal stockholder..... - (6,700)
----------------- ------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES. 31,731 (27,248)
----------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 557 (2,350)
CASH AND CASH EQUIVALENT AT BEGINNING OF PERIOD......... 7,448 4,537
----------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............. $ 8,005 $ 2,187
----------------- ------------------
----------------- ------------------
</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"). The equity method of accounting was used for
Donna Karan Japan, K.K., a Japanese stock company ("DKJ"), since the date the
Company sold 70% of its interest in OKJ to a nonaffiliated party and until
March 1998, when the Company and such nonaffiliated party sold all of their
remaining outstanding shares to a subsidiary of Onward Kashiyama Co. Ltd., a
Japanese public company. All significant intercompany balances and
transactions have been eliminated in consolidation.
Certain amounts in the consolidated financial statements of the prior
period have been reclassified to conform to the current period presentation for
comparative purposes.
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 January 3, 1999.
NET INCOME PER COMMON SHARE
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 contingently issuable shares
(which satisfy certain conditions) 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 statements of income. Income per share amounts for the same prior-year
periods have been restated to conform with the provisions of SFAS No. 128.
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations for net income is as follows:
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
APRIL 4, MARCH 29,
1999 1998
----------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
NUMERATOR:
Net income attributable to common stock............ $ 2,163 $ 2,070
------------- -------------
DENOMINATOR:
Weighted average common shares outstanding--
Basic......................................... 21,599,200 21,597,800
Effect of dilutive securities: stock options....... 16,500 29,700
------------- -------------
Weighted average common shares outstanding--
Diluted....................................... 21,615,700 21,627,500
------------- -------------
------------- -------------
Basic EPS.......................................... $ 0.10 $ 0.10
------------- -------------
------------- -------------
Diluted EPS........................................ $ 0.10 $ 0.10
------------- -------------
------------- -------------
</TABLE>
6
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
INVENTORIES
Inventory only includes those items considered saleable or usable in
future periods and is stated at the lower of cost or market, with cost being
determined on the first-in, first-out method.
Inventories consist of the following:
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1999 1999
---------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................. $ 5,707 $ 6,588
Work in process........................................... 3,488 4,654
Finished goods............................................ 65,943 78,583
---------------- ---------------
$ 75,138 $ 89,825
---------------- ---------------
---------------- ---------------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
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>
APRIL 4, JANUARY 3,
1999 1999
--------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Machinery, equipment, and fixtures........................ $ 26,043 $ 25,443
Leasehold improvements.................................... 56,493 44,924
--------------- -------------------
82,536 70,367
Less accumulated depreciation............................. (38,505) (36,692)
--------------- -------------------
$ 44,031 $ 33,675
--------------- -------------------
--------------- -------------------
</TABLE>
<PAGE>
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1999 1999
---------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Accrued operating expenses................................. $ 18,027 $ 16,826
Accrued compensation....................................... 7,859 13,143
Accrued restructuring and other charges.................... 2,099 8,087
Unearned revenues.......................................... 11,622 14,865
Accrued royalties.......................................... 6,822 5,795
Accrued taxes other than income taxes...................... 2,680 1,517
Other...................................................... 860 631
---------------- ----------------
$ 49,969 60,864
---------------- ----------------
---------------- ----------------
</TABLE>
7
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
RESTRUCTURING AND OTHER CHARGES
For the three months ended April 4, 1999, the Company utilized
approximately $6.0 million of its remaining reserves previously established in
connection with its restructuring plan. The Company anticipates utilizing the
remaining balance of its reserves during fiscal 1999.
PROVISION FOR INCOME TAXES
The provision for income taxes represents federal, foreign, state and local
income taxes. The effective income tax rate was 43.0% and 46.0% for the three
months ended April 4, 1999 and March 29, 1998, respectively. This rate reflects
the effect of state and local taxes, tax rates in certain foreign jurisdictions,
and certain nondeductible expenses.
STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
APRIL 4, MARCH 29,
1999 1998
------------- -------------
CASH PAID FOR: (IN THOUSANDS)
<S> <C> <C>
Interest paid ....................................... $ 822 $ 745
------------- -------------
------------- -------------
Income taxes paid.................................... $ 121 $ 2,882
------------- -------------
------------- -------------
NON-CASH ACTIVITIES:
Issuance of subordinated notes payable in
connection with the purchase of free-standing
retail stores ....................................... $ 8,209 $ -
------------- -------------
------------- -------------
</TABLE>
COMPREHENSIVE INCOME
Comprehensive income, as reported by the Company, is comprised of net
income and other comprehensive income, which contains gains or losses from
foreign currency translation adjustments. Accumulated other comprehensive
income is reflected in the accompanying consolidated balance sheets.
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 -- ACQUISITIONS
In January 1999, the Company acquired the assets of three free-standing
retail stores in the United Kingdom which were previously owned and operated by
affiliates of Club 21 PTE Ltd. ("Club 21"), a Singapore-based company,
affiliated with Ong Beng Seng, for approximately $17.4 million. The aggregate
purchase price was financed with working capital and the issuance of
subordinated notes payable (the "Notes") to an affiliate of Club 21, which
mature in January 2002.
The acquisition was accounted for as a purchase, with any excess of the
remaining purchase price over the estimated fair value of the assets acquired,
being recorded as goodwill. Subject to certain post-closing adjustments to the
purchase price, in accordance with the terms of the asset purchase agreement,
the principal amount of the Notes may be adjusted in the future.
8
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 -- COMPREHENSIVE INCOME
Comprehensive income and its components, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
APRIL 4, MARCH 29,
1999 1998
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Net income .................................. $ 2,163 $ 2,070
------------- ------------
Other comprehensive (loss):
Foreign currency translations .......... (286) (271)
------------- ------------
Other comprehensive (loss) ............. (286) (271)
------------- ------------
Comprehensive income ........................ $ 1,877 $ 1,799
------------- ------------
------------- ------------
</TABLE>
Accumulated other comprehensive (loss) is as follows:
<TABLE>
<CAPTION>
FOREIGN
CURRENCY
TRANSLATION
-----------------
(IN THOUSANDS)
<S> <C>
Beginning balance.............................. $ (1,206)
Current-period change.......................... (286)
-----------------
Ending balance.................................. $ (1,492)
-----------------
-----------------
</TABLE>
<PAGE>
NOTE 4 -- SEGMENT INFORMATION
Information related to the Company's reportable business segments is as
follows:
<TABLE>
<CAPTION>
WHOLESALE LICENSING RETAIL TOTAL
------------ ------------ ----------- -----------
(IN THOUSANDS)
THREE MONTHS ENDED
APRIL 4, 1999
- -------------------------
<S> <C> <C> <C> <C>
Net revenues from external
customers......................... $ 130,422 $ 6,845 $ 23,453 $ 160,720
Intersegment revenues............. 17,376 - - 17,376
Segment operating profit (loss)... 4,679 2,636 (2,592) 4,723
Segment assets.................... 233,517 2,672 54,334 290,523
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 29, 1998
- -------------------------
<S> <C> <C> <C> <C>
Net revenues from external
customers........................ $ 160,902 $ 4,303 $ 15,948 $ 181,153
Intersegment revenues ............. 10,479 - - 10,479
Segment operating profit (loss).... 6,426 1,485 (3,112) 4,799
Segment assets..................... 248,106 1,690 34,275 284,071
</TABLE>
9
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SEGMENT INFORMATION - (CONTINUED)
Information related to the Company's geographic segments is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
APRIL 4, MARCH 29,
1999 1998
----------------- ----------------
(IN THOUSANDS)
Net revenues:
<S> <C> <C>
United States........................... $ 101,421 $ 120,057
Japan................................... 7,795 17,360
Other................................... 51,504 43,736
----------------- ----------------
$ 160,720 $ 181,153
----------------- ----------------
----------------- ----------------
</TABLE>
NOTE 5 -- SUBSEQUENT EVENT
On May 18, 1999, Loehmann's Inc. ("Loehmann's"), a customer of the
Company, commenced bankruptcy proceedings under Chapter 11 of the United
States Bankruptcy Code. To date, amounts outstanding owed to the Company for
merchandise sold to Loehmann's totaled approximately $2.0 million. At this
time, the Company is not able to determine what amounts, if any, may be
collectible from Loehmann's.
10
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Donna Karan International Inc. (together with its subsidiaries, the
"Company") is one of the world's leading international fashion design houses.
The Company designs, contracts for the manufacture of, markets, retails, and
distributes collections of men's and women's clothing, sportswear,
accessories, and shoes under the DONNA KARAN NEW YORK and DKNY brand names.
The Company also selectively has granted licenses for the manufacture and
distribution of certain other products under the DONNA KARAN NEW YORK, DKNY,
DKNY JEANS and DKNY ACTIVE brand names, including beauty and beauty-related
products, jeanswear, activewear, 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, K.K. ("DKJ") to a subsidiary of
Onward Kashiyama Co. Ltd., a Japanese public company. As a result of this
transaction, the Company will no longer recognize equity in earnings (loss)
of affiliate. The Company also granted DKJ a 16-year exclusive license to
import, manufacture, license, and/or distribute DONNA KARAN NEW YORK and DKNY
products in Japan, with certain exceptions. The Company expects that over an
approximately three-year period, from March 1998, DKJ will transition from
importing and reselling substantially all of its products to manufacturing
and selling a majority of products under this licensing agreement. As a
result, with respect to its Japanese business, the Company expects to
recognize decreasing revenues from its wholesale business and increasing
revenues from its licensing activities.
RESULTS OF OPERATIONS
The Company's business is comprised of wholesale, licensing, and retail
activities. The Company utilizes a 52- or 53-week fiscal year ending on the
Sunday nearest December 31. The following discussion provides information and
analysis of the Company's results of operations for the three months ended April
4, 1999 and March 29, 1998.
The following tables set forth certain segment data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
APRIL 4, MARCH 29,
1999 1998
------------ --------------
(IN MILLIONS)
Net revenues from external customers:
By segments:
<S> <C> <C>
Wholesale ......................... $ 130.4 $ 160.9
Licensing ......................... 6.8 4.3
Retail ............................ 23.5 15.9
------------ --------------
$ 160.7 $ 181.1
------------ --------------
------------ --------------
By geographic area:
United States ..................... $ 101.4 $ 120.0
Japan ............................. 7.8 17.4
Other ............................. 51.5 43.7
------------ --------------
$ 160.7 $ 181.1
------------ --------------
------------ --------------
Segment operating profit (loss):
Wholesale ......................... $ 4.7 $ 6.4
Licensing ......................... 2.6 1.5
Retail ............................ (2.6) (3.1)
------------ --------------
------------ --------------
$ 4.7 $ 4.8
------------ --------------
------------ --------------
</TABLE>
11
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain condensed statement of income data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------
APRIL 4, MARCH 29,
1999 1998
----------------- ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenues ......................... $ 160.7 100.0% $ 181.2 100.0%
Gross profit ......................... 47.2 29.4 42.5 23.5
Selling, general and administrative
expenses ......................... 42.5 26.4 37.7 20.8
Operating income ..................... 4.7 2.9 4.8 2.6
Net income ........................... 2.2 1.4 2.1 1.2
</TABLE>
NET REVENUES
Net revenues for the three months ended April 4, 1999 decreased $20.5
million, or 11.3%, to $160.7 million as compared to net revenues of $181.2
million in the corresponding prior-year period. Excluding certain sales of
merchandise to Liz Claiborne Inc. ("LCI") relating to the DKNY JEANS license in
fiscal 1998, net revenues increased $0.6 million, or 0.4%, for the three months
ended April 4, 1999 as compared to the corresponding prior-year period.
Wholesale revenues for the three months ended April 4, 1999, decreased
$30.5 million, or 18.9%, to $130.4 million as compared to the corresponding
prior-year period. Exclusive of certain sales of merchandise to LCI (relating to
the DKNY JEANS license) in the corresponding prior-year period, wholesale
revenues decreased $9.5 million, or 6.8%. The decline was primarily attributable
to a decrease in sales from the women's business, elimination of sales in the
DKNY KIDS business which was licensed in 1998, and lower sales in the menswear
businesses.
Licensing revenues for the three months ended April 4, 1999 increased $2.5
million, or 59.1%, to $6.8 million as compared to $4.3 million in the
corresponding prior-year period. The increase was primarily due to royalties
from LCI associated with the DKNY JEANS and ACTIVE license, as well as growth in
sales of certain other new and existing licensed products.
Retail revenues for the three months ended April 4, 1999 increased $7.5
million, or 47.1%, to $23.5 million as compared to $15.9 million in the
corresponding prior-year period. The increase was primarily attributable to: an
increase in the number of outlet stores; the recent opening and acquisition of
full-price free-standing retail stores; and a slight increase in comparable
store sales.
GEOGRAPHIC
Net revenues for the United States for the three months ended April 4,
1999 decreased $18.6 million, or 15.5%, to $101.4 million as compared to the
corresponding prior-year period. Exclusive of certain sales of merchandise to
LCI (relating to the DKNY JEANS license) and the DKNY KIDS business in fiscal
1998, net revenues decreased $1.0 million, or 1.3%.
Net revenues for Japan for the three months ended April 4, 1999,
decreased $9.6 million, or 55.1%, as compared to the corresponding prior-year
period. The decrease was primarily attributable to the planned decrease in
wholesale revenues to Japan, as a result of the Company's licensing agreement
with DKJ. The Company anticipates further decreases in wholesale revenues in
Japan, while at the same time receiving increased royalties, as DKJ
transitions its business exclusively from importing and reselling products to
primarily manufacturing and selling products.
Net revenues for other geographic areas for the three months ended
April 4, 1999 increased $7.8 million, or 17.8%, as compared to the
corresponding prior-year period. The increase was attributable to increased
wholesale revenues and the acquisition of three free-standing retail stores
in the United Kingdom.
12
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GROSS PROFIT
Gross profit as a percentage of net revenues for the
three months ended April 4, 1999 was 29.4%, as compared to 23.5%, for the
corresponding prior-year period. Exclusive of DKNY JEANS sales to LCI, gross
profit margin for the three months ended March 29, 1998 was 26.6%. The
increase, exclusive of the effect of DKNY JEANS sales to LCI, primarily
reflected the change in the revenue mix to higher margin full-price retail
stores and licensing businesses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to 26.4% of net
revenues for the three months ended April 4, 1999, as compared to 20.8% in the
corresponding prior-year period. Exclusive of the effect of the DKNY JEANS sales
to LCI, selling, general and administrative expenses were 23.6% of net revenues
for the three months ended March 29,1998. The increase was primarily a result of
the growth of the Company's full-price free-standing retail stores.
OPERATING INCOME
Operating income for the three months ended April 4, 1999 was
comparable to the corresponding prior-year period. Increased operating profit
in the licensing segment and decreased operating losses in the retail segment
were offset by decreases in operating profit in the wholesale segment. The
decline in the wholesale segment was primarily attributable to lower revenues
in the current period, as compared to the corresponding prior-year period.
INTEREST EXPENSE, NET
Interest expense, net was $0.9 million for the three months ended
April 4, 1999 and was comparable to that of the corresponding prior-year
period.
PROVISION FOR INCOME TAXES
The provision for income taxes represents federal, foreign, state
and local income taxes. The effective income tax rates for the three months
ended April 4, 1999 and March 29, 1998 were 43.0% and 46.0%, respectively.
These rates reflect the effects of state and local taxes, tax rates in
certain foreign jurisdictions, and certain nondeductible expenses.
NET INCOME
Net income for the three months ended April 4, 1999 was $2.2 million, as
compared to $2.1 million for the corresponding 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 revolving credit facility. The Company's principal need for funds is to
finance working capital (principally inventory and receivables), capital
expenditures (including the construction of new shop-in-shops, outlet and
full-price free-standing retail stores), and investments in the start up of
new collections and the extension of existing collections. At April 4, 1999,
the Company had cash and cash equivalents of $8.0 million, as compared to
$2.2 million at March 29, 1998.
The Company has a $150.0 million, three-year revolving credit facility
(the "Facility"). The Facility is used for working capital requirements and
general corporate purposes. At April 4, 1999, $31.7 million was outstanding
under the Facility, as compared to $1.8 million at March 29, 1998.
Net cash used for operating activities was $18.5 million for the three
months ended April 4, 1999 as compared to net cash provided by operating
activities of $24.7 million in the corresponding prior-year period. This
decrease primarily reflects the Company's recording of deferred revenues
associated with the Company's licensing agreements in the corresponding
prior-year period and a lesser decrease in inventory, partially offset by a
decrease in deferred income taxes and a lesser increase in accounts
receivable. Net cash used for investing activities decreased $12.9 million
for the three months ended April 4, 1999 as compared to the corresponding
prior-year period, primarily due to the Company's acquisition of
free-standing retail stores and increased purchases of property and
equipment. Financing activities reflected
13
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
borrowings under the Facility and the repayment of a note payable to a
principal stockholder. Net cash provided by financing activities was $31.7
million for the three months ended April 4, 1999, as compared to net cash
required by financing activities of $27.2 million in the corresponding
prior-year period. This change was primarily due to greater amounts
outstanding under the Facility in the current period as compared with the
corresponding prior-year period.
As a matter of policy, the Company enters into forward exchange contracts
with parties which are major international banks and financial institutions
that have at least an "A" (or equivalent) credit rating. The Company's
exposure to credit loss in the event of nonperformance by any of the
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 April
4, 1999, the Company had contracts to exchange foreign currencies in the form
of forward exchange contracts in the amount of $101.5 million. There have
been no significant changes in market risk that would have a material effect
on the Company's calculated value-at-risk exposure, as previously disclosed
in the Company's Annual Report on Form 10-K for the fiscal year ended January
3, 1999.
Capital expenditures, primarily for, equipment, machinery, computers,
office furniture, leasehold improvements and outlet and full-price free-standing
retail stores, were approximately $3.5 million and $0.5 million for the three
months ended April 4, 1999 and March 29, 1998, respectively. As of May 18, 1999,
the Company had outstanding commitments for additional capital expenditures
during fiscal 1999 of approximately $8.3 million. The Company anticipates that
it will incur additional capital expenditures in fiscal 1999 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 its Facility and, from time to
time, amounts received in connection with strategic transactions, including
licensing arrangements. Events that may impact this include, but are not limited
to, future events that may have the effect of reducing available cash balances
(such as unexpected operating losses or increased capital or other
expenditures), as well as future circumstances that might reduce or eliminate
the availability of external financing.
YEAR 2000
The efficient operation of the Company's business is dependent in part on
its computer software programs and operating systems (collectively, "Programs
and Systems"). These Programs and Systems are used in several key areas of the
Company's business, including purchasing, inventory management, pricing, sales,
shipping, and financial reporting, as well as in various administrative
functions. The Company is in the process of addressing the Year 2000 issue, and
as a result of this process, the Company has identified three phases of its Year
2000 project: i) inventory, ii) assessment, and iii) remediation and testing.
The Company has completed its inventory and assessment of substantially all
internal computer systems and application software, and plans for establishing
compliance have been developed. These plans include, among other things: which
non-compliant hardware and software will be remediated, upgraded, or replaced,
the timetable and resources (both internal and external) required to achieve
those objectives, and the estimated costs. The Company currently expects to
complete remediation and testing of its internal systems during the summer of
1999.
The Company has identified those items which may require remediation and is
continuing communication with its significant vendors, customers, and financial
institutions about their Year 2000 state of readiness and the extent to which
the failure of any of those systems may otherwise impact the Company's
operations. This communication and evaluation process is ongoing.
The costs of addressing the Year 2000 issue have not been material and
based upon current information, the Company estimates that such costs are
expected to continue to be immaterial. Although the Company is not currently
aware of any material operational issues or costs associated with preparing
its internal systems for the Year 2000, there can be no assurance that there
will not be a delay in, or increased costs associated with, the
implementation of the necessary systems and changes to address the Year 2000
issues. Additionally, while the Company does not currently have the ability
to track internal employee costs specifically related to the Year 2000
project, these costs are not expected to have a material impact on the
Company's results of operations or financial condition.
14
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company currently believes that it is difficult to identify its most
reasonably likely worst case Year 2000 scenario. However, a reasonable worst
case scenario would be the result of failures of third parties that would
continue for more than several days in various geographic areas in which the
Company's products are produced and sold. Continuing failures in these areas
which could affect the manufacture or shipment of Company products or limit the
consumers' ability to purchase the Company's products, would most likely have a
material adverse effect on the Company's results of operations. The extent of
such impact cannot be reasonably estimated at this time; however, the Company is
currently evaluating its alternatives with respect to contingency plans, to
limit, to the extent possible, the effect of Year 2000 issues on the Company's
results of operations. Any such plans would necessarily be limited to situations
over which the Company can be reasonably expected to control.
The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's estimates. The
Company currently believes that the Year 2000 issue will not pose significant
operational problems for its computer systems. However, if the required
modifications and conversions are not made, or are not completed on a timely
basis, or the systems from third parties (i.e. suppliers, customers, and
financial institutions) with whom the Company relies on directly, or indirectly,
to be Year 2000 compliant, are not operational, the Year 2000 could have a
material adverse effect on the Company's future results of operations.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are forward-looking statements that
have been made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. 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 including, 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, 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 stores
openings and the Company's economic ability to continue to open stores; (vii) a
change in retailer or consumer acceptance of the Company's products; (viii) the
variability of the Company's result in any period due to the seasonal nature of
the business, the timing and level of the Company's sales, the timing of launch
of 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) consolidation and restructuring 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 operations and customers, including changes in foreign investment and
trade policies and regulations of the host countries and of the United States;
(xi) risks associated with the Company's increasing royalty revenues as a
percent of the Company's total revenues and risks associated with a lack of
operational or financial control over the Company's licensees; (xii) changes in
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 price at which the Company and foreign
competitors sell their products in the same markets, 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; (xvi) the ability of the Company and third
parties, including customers or suppliers, to adequately address Year 2000
issues; (xvii) infringements of the Company's trademarks and other proprietary
rights, imitations or diversions of the Company's products, or inability to
obtain trademark protection outside the United States for one or more of the
Company's marks; (xviii) political or economic instability
15
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
resulting in the disruption of trade from the countries in which the Company's
contractors, suppliers, licensees, or customers are located, the imposition of
additional regulations relating to imports, the imposition of additional duties,
taxes, and other charges on imports, significant fluctuations of the value of
the dollar against foreign currencies, or restriction on transfer of funds;
(xix) the inability of a contractor to deliver the Company's products in a
timely manner thereby causing the Company to miss the delivery date requirements
of its customers, which in turn could result in the cancellation of orders,
refusal to accept deliveries, or a reduction in the selling price; or (xx) the
violation of labor or other laws by any independent manufacturer or any
licensee. The Company undertakes no obligation to publicly update or revise any
forward-looking statements made herein or elsewhere whether as a result of new
information, future events or otherwise.
PART II. OTHER INFORMATION
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 April 4, 1999.
16
<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 19, 1999 By: /S/ JOHN D. IDOL
-----------------------
John D. Idol
Chief Executive Officer
Date: May 19, 1999 By: /S/ JOSEPH B. PARSONS
-----------------------
Joseph B. Parsons
Executive Vice President,
Chief Financial and Administrative
Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DONNA
KARAN INTERNATIONAL INC. FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-END> APR-04-1999
<CASH> 8,005
<SECURITIES> 0
<RECEIVABLES> 119,644
<ALLOWANCES> 30,614
<INVENTORY> 75,138
<CURRENT-ASSETS> 215,658
<PP&E> 82,536
<DEPRECIATION> 38,505
<TOTAL-ASSETS> 290,523
<CURRENT-LIABILITIES> 121,179
<BONDS> 0
0
0
<COMMON> 216
<OTHER-SE> 123,924
<TOTAL-LIABILITY-AND-EQUITY> 290,523
<SALES> 160,720
<TOTAL-REVENUES> 160,720
<CGS> 113,521
<TOTAL-COSTS> 113,521
<OTHER-EXPENSES> 42,476
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 929
<INCOME-PRETAX> 3,794
<INCOME-TAX> 1,631
<INCOME-CONTINUING> 2,163
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<EPS-PRIMARY> 0.10
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