<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 July 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 August 13, 1999, the Registrant had 21,600,264 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>
PAGE
<S> <C>
Item 1. Financial Statements
Statements of Operations -
Three Months and Six Months Ended July 4, 1999 and June 28, 1998....................... 3
Balance Sheets -
July 4, 1999 and January 3, 1999....................................................... 4
Statements of Cash Flows -
Six Months Ended July 4, 1999 and June 28, 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 4.
Submission of Matters to a Vote of Security Holders.......................................... 19
Item 6. Exhibits and Reports on Form 8-K............................................................. 19
</TABLE>
2
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------- ---------------------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NET REVENUES ............................... $ 122,033 $ 124,854 $ 282,753 $ 306,007
Cost of sales .............................. 88,395 100,153 201,916 238,775
------------ ------------ ------------ ------------
GROSS PROFIT ............................... 33,638 24,701 80,837 67,232
Selling, general and administrative expenses 46,495 36,138 88,971 73,870
------------ ------------ ------------ ------------
OPERATING LOSS ............................. (12,857) (11,437) (8,134) (6,638)
Other income (expense):
Other, net ............................ -- -- -- 23
Interest expense, net ................. (950) (263) (1,879) (1,252)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES ................... (13,807) (11,700) (10,013) (7,867)
Income tax benefit ......................... (5,937) (5,382) (4,306) (3,619)
------------ ------------ ------------ ------------
NET LOSS ................................... $ (7,870) $ (6,318) $ (5,707) $ (4,248)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per common share:
Basic ................................. $ (0.36) $ (0.29) $ (0.26) $ (0.20)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted ............................... $ (0.36) $ (0.29) $ (0.26) $ (0.20)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average common shares outstanding:
Basic ................................. 21,599,300 21,597,800 21,599,300 21,597,800
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted ............................... 21,599,300 21,587,800 21,599,300 21,597,800
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See Notes to Financial Statements
3
<PAGE>
DONNA KARAN INTERNATIONAL INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 4, JANUARY 3,
1999 1999
--------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................ $ 11,240 $ 7,448
Accounts receivable, net of allowances of $25,811 at
July 4, 1999 and $29,872 at January 3, 1999 ........... 58,368 70,977
Inventories .............................................. 90,210 89,825
Deferred income taxes .................................... 24,063 24,688
Prepaid expenses and other current assets ................ 17,831 18,860
--------- ---------
TOTAL CURRENT ASSETS .................................. 201,712 211,798
Property and equipment, net ................................... 45,225 33,675
Deferred income taxes ......................................... 22,155 17,052
Deposits and other noncurrent assets .......................... 15,951 16,204
--------- ---------
$ 285,043 $ 278,729
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ......................................... $ 48,550 $ 59,266
Accrued expenses and other current liabilities ........... 47,874 60,864
Borrowing under revolving line of credit ................. 25,468 --
--------- ---------
TOTAL CURRENT LIABILITIES ............................. 121,892 120,130
--------- ---------
Subordinated notes payable .................................... 8,209 --
Deferred income ............................................... 37,995 36,495
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 35,000,000 shares
authorized, 21,618,034 shares issued and 21,600,764
shares outstanding at July 4, 1999 and 21,599,264
shares outstanding 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 ............................... 188,467 188,479
Retained deficit ......................................... (69,454) (63,747)
Accumulated other comprehensive (loss) ................... (918) (1,206)
--------- ---------
118,311 123,742
Less: Treasury stock, at cost (17,270 and 18,770 shares) (408) (443)
Unearned compensation ............................. (956) (1,195)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ........................... 116,947 122,104
--------- ---------
$ 285,043 $ 278,729
--------- ---------
--------- ---------
</TABLE>
See Notes to Financial Statements
4
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
JULY 4, JUNE 28,
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ............................................................ $ (5,707) $ (4,248)
Adjustments to reconcile net loss to net cash (used for)
provided by operating activities:
Depreciation and amortization .................................. 7,795 6,683
Provision for bad debts ........................................ 293 759
Amortization of deferred income ................................ (4,671) (3,221)
Deferred income taxes .......................................... (4,477) (5,766)
Other - net .................................................... 263 136
Changes in operating assets and liabilities:
Decrease in accounts receivable ................................ 12,316 10,442
Decrease in inventories ........................................ 3,401 24,156
Decrease (increase) in prepaid expenses and other current assets 1,030 (2,537)
Increase in deposits and other noncurrent assets ............... (3,710) (451)
Decrease in accounts payable, accrued expenses, and
other current liabilities ..................................... (13,804) (26,752)
Increase in deferred income .................................... 1,500 41,007
-------- --------
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES ........ (5,771) 40,208
-------- --------
INVESTING ACTIVITIES
Purchase of free-standing retail stores ............................. (9,200) --
Proceeds from sale of affiliate ..................................... -- 646
Purchase of property and equipment .................................. (6,705) (3,550)
-------- --------
NET CASH (USED FOR) INVESTING ACTIVITIES .................... (15,905) (2,904)
-------- --------
FINANCING ACTIVITIES
Net proceeds (repayment) of revolving credit facility ............... 25,468 (22,314)
Payments under capital lease ........................................ -- (36)
Repayment of note payable to principal stockholder .................. -- (6,700)
-------- --------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ........ 25,468 (29,050)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 3,792 8,254
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 7,448 4,537
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 11,240 $ 12,791
-------- --------
-------- --------
</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 DKJ 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 LOSS PER COMMON SHARE
In accordance with the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share," net loss per common share
amounts ("basic EPS") were computed by dividing net loss by the weighted average
number of common shares outstanding and contingently issuable shares (which
satisfy certain conditions) and excluded any potential dilution. Net loss per
common share amounts assuming dilution ("diluted EPS") were computed by
reflecting potential dilution from the exercise of stock options. The exercise
of stock options was not included in the computation of diluted EPS, since such
inclusion would have been antidilutive. SFAS No. 128 requires the presentation
of both basic EPS and diluted EPS on the face of the statements of operations.
Loss 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 loss is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -------------------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1999 1998 1999 1998
---------- ---------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NUMERATOR:
Net loss attributable to common stock ....... $ (7,870) $ (6,318) $ (5,707) $ (4,248)
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
DENOMINATOR:
Weighted average common shares outstanding --
Basic .................................. 21,599,300 21,597,800 21,599,300 21,597,800
Effect of dilutive securities: stock options -- -- -- --
---------- ---------- ---------- ------------
Weighted average common shares outstanding --
Diluted ................................ 21,599,300 21,597,800 21,599,300 21,597,800
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
Basis EPS ................................... $ (0.36) $ (0.29) $ (0.26) $ (0.20)
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
Diluted EPS ................................. $ (0.36) $ (0.29) $ (0.26) $ (0.20)
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
</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>
JULY 4, JANUARY 3,
1999 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw material ....................... $ 3,845 $ 6,588
Work in process .................... 4,736 4,654
Finished goods ..................... 81,629 78,583
------- -------
$90,210 $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>
JULY 4, JANUARY 3,
1999 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Machinery, equipment and fixtures ........ $ 27,107 $ 25,443
Leasehold improvements ................... 58,641 44,924
-------- --------
85,748 70,367
Less accumulated depreciation ............ (40,523) (36,692)
-------- --------
$ 45,225 $ 33,675
-------- --------
-------- --------
</TABLE>
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
JULY 4, JANUARY 3,
1999 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued expenses ............................. $15,704 $16,826
Accrued compensation ......................... 6,881 13,143
Accrued restructuring and other charges ...... 1,980 8,087
Unearned revenues ............................ 11,144 14,865
Accrued royalties ............................ 6,842 5,795
Accrued taxes other than income taxes ........ 3,612 1,517
Other ........................................ 1,711 631
------- -------
$47,874 $60,864
------- -------
------- -------
</TABLE>
7
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
RESTRUCTURING AND OTHER CHARGES
For the six months ended July 4, 1999, the Company utilized
approximately $6.1 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.
INCOME TAX BENEFIT
The income tax benefit represents federal, foreign, state and local
income taxes. The effective income tax rate was 43.0% and 46.0% for the three
and six months ended July 4, 1999 and June 28, 1998, respectively. These rates
reflect 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>
JULY 4, JUNE 28,
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
CASH PAID FOR:
Interest paid ............................... $1,484 $1,112
------ ------
------ ------
Income taxes paid ........................... $ 249 $5,134
------ ------
------ ------
NON-CASH ACTIVITIES:
Issuance of subordinated notes payable in
connection with the purchase of free-standing
retail stores ................................. $8,209 $ --
------ ------
------ ------
</TABLE>
COMPREHENSIVE LOSS
Comprehensive loss, as reported by the Company, is comprised of net loss
and other comprehensive loss, which contains gains or losses from foreign
currency translation adjustments. Accumulated other comprehensive loss 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.
8
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
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.
NOTE 3 -- COMPREHENSIVE LOSS
Comprehensive loss and its components, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- ------------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1999 1998 1999 1998
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss ........................ $(7,870) $(6,318) $(5,707) $(4,248)
------- ------- ------- -------
Other comprehensive loss:
Foreign currency translations 574 (156) 288 (427)
------- ------- ------- -------
Other comprehensive loss .... 574 (156) 288 (427)
------- ------- ------- -------
Comprehensive loss .............. $(7,296) $(6,474) $(5,419) $(4,675)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Accumulated other comprehensive loss is as follows:
<TABLE>
<CAPTION>
FOREIGN CURRENCY TRANSLATION
-------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1999 1998 1999 1998
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance ............... $(1,492) $ (726) $(1,206) $ (455)
Current-period change ........... 574 (156) 288 (427)
------- ------- ------- -------
Ending balance .................. $ (918) $ (882) $ (918) $ (882)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
9
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SEGMENT INFORMATION
Information related to the Company's reportable business
segments is as follows:
<TABLE>
<CAPTION>
WHOLESALE LICENSING RETAIL TOTAL
--------- --------- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
THREE MONTHS ENDED
JULY 4, 1999
Net revenues from external
customers ..................... $85,384 $ 5,811 $30,838 $122,033
Intersegment revenues ........... 13,754 -- -- 13,754
Segment operating profit (loss) . (12,951) 2,032 (1,938) (12,857)
THREE MONTHS ENDED
JUNE 28, 1998
Net revenues from external
customers ..................... $98,422 $ 4,037 $22,395 $124,854
Intersegment revenues ........... 8,949 -- -- 8,949
Segment operating profit (loss) . (7,364) 886 (4,959) (11,437)
SIX MONTHS ENDED
JULY 4, 1999
Net revenues from external
customers ..................... $215,805 $12,656 $54,292 $282,753
Intersegment revenues ........... 31,132 -- -- 31,132
Segment operating profit (loss) . (8,273) 4,668 (4,529) (8,134)
Segment assets .................. 218,029 2,575 64,439 285,043
SIX MONTHS ENDED
JUNE 28, 1998
Net revenues from external
customers ..................... $259,324 $ 8,340 $38,343 $306,007
Intersegment revenues ........... 19,428 -- -- 19,428
Segment operating profit (loss) . (939) 2,371 (8,070) (6,638)
Segment assets .................. 234,122 1,338 30,304 265,764
</TABLE>
Information related to the Company's geographic segments is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues:
United States .............. $92,793 $86,156 $194,214 $206,213
Japan ...................... 6,066 12,369 13,861 29,729
Other ...................... 23,174 26,329 74,678 70,065
-------- -------- -------- --------
$122,033 $124,854 $282,753 $306,007
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
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 continue 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 and six months
ended July 4, 1999 and June 28, 1998.
The following tables set forth certain segment data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1999 1998 1999 1998
------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenues from external customers:
By segments:
Wholesale .......... $ 85.4 $ 98.5 $ 215.8 $ 259.4
Licensing .......... 5.8 4.0 12.7 8.3
Retail ............. 30.8 22.4 54.3 38.3
------- ------- ------- -------
$ 122.0 $ 124.9 $ 282.8 $ 306.0
------- ------- ------- -------
------- ------- ------- -------
By geographic area:
United States ...... $ 92.8 $ 86.2 $ 194.2 $ 206.2
Japan .............. 6.1 12.3 13.9 29.7
Other .............. 23.1 26.4 74.7 70.1
------- ------- ------- -------
$ 122.0 $ 124.9 $ 282.8 $ 306.0
------- ------- ------- -------
------- ------- ------- -------
Segment operating profit (loss):
Wholesale .......... $ (13.0) $ (7.3) $ (8.3) $ (0.9)
Licensing .......... 2.0 0.9 4.7 2.4
Retail ............. (1.9) (5.0) (4.5) (8.1)
------- ------- ------- -------
$ (12.9) $ (11.4) $ (8.1) $ (6.6)
------- ------- ------- -------
------- ------- ------- -------
</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 operations
data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------- -------------------------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1999 1998 1999 1998
------------------- ------------------ ----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues ...................... $ 122.0 100.0% $ 124.9 100.0% $ 282.8 100.0% $ 306.0 100.0%
Gross profit ...................... 33.6 27.6 24.7 19.8 80.8 28.6 67.2 22.0
Selling, general and administrative
expenses ..................... 46.5 38.1 36.1 28.9 89.0 31.5 73.9 24.1
Operating loss .................... (12.9) (10.5) (11.4) (9.1) (8.1) (2.9) (6.6) (2.1)
Net loss .......................... (7.9) (6.4) (6.3) (5.0) (5.7) (2.0) (4.2) (1.4)
</TABLE>
SECOND QUARTER FISCAL 1999 COMPARED WITH SECOND QUARTER FISCAL 1998
NET REVENUES
Net revenues for the three months ended July 4, 1999 decreased $2.8
million, or 2.3%, to $122.0 million as compared to net revenues of $124.9
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 $2.9 million, or 2.4%, for the three months
ended July 4, 1999 as compared to the corresponding prior-year period.
Wholesale revenues for the three months ended July 4, 1999, decreased
$13.0 million, or 13.2%, to $85.4 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 $7.3 million, or 7.9%. The decline was primarily attributable
to: a decrease in sales from the womenswear businesses, primarily due to the
transition of DKJ from substantially an import business to essentially a
licensing business; elimination of sales from the DKNY KIDS business which was
licensed in 1998; partially offset by an increase in sales from the menswear
businesses.
Licensing revenues for the three months ended July 4, 1999 increased
$1.8 million, or 43.9%, to $5.8 million as compared to $4.0 million in the
corresponding prior-year period. The increase was primarily due to royalties
from: (i) LCI associated with the DKNY JEANS and ACTIVE license; (ii) the
license with DKJ associated with the DONNA KARAN NEW YORK and DKNY products
manufactured and sold in Japan, and (iii) the DKNY intimate apparel license;
as well as growth in sales of certain other new and existing licensed
products.
Retail revenues for the three months ended July 4, 1999 increased $8.4
million, or 37.7%, to $30.8 million as compared to $22.4 million in the
corresponding prior-year period. The increase was primarily attributable to: the
recent opening and acquisition of full-price free-standing retail stores; a 7.1%
increase in comparable store sales; and an increase in the number of outlet
stores.
GEOGRAPHIC
Net revenues for the United States for the three months ended July 4, 1999
increased $6.6 million, or 7.7%, to $92.8 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 increased $12.3 million, or 15.3%. The increase was primarily
attributable to increased wholesale and retail revenues.
Net revenues for Japan for the three months ended July 4, 1999, decreased
$6.3 million, or 51.0%, 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.
12
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net revenues for other geographic areas for the three months ended July 4,
1999 decreased $3.2 million, or 12.0%, as compared to the corresponding
prior-year period.
GROSS PROFIT
Gross profit as a percentage of net revenues for the three months ended
July 4, 1999 was 27.6%, as compared to 19.8%, for the corresponding prior-year
period. Exclusive of DKNY JEANS sales to LCI, gross profit margin for the three
months ended June 28, 1998 was 20.7%. The increase, exclusive of the effect of
DKNY JEANS sales to LCI, primarily reflected the change in the revenue mix to
higher margin licensing business and full-price retail stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to 38.1% of net
revenues for the three months ended July 4, 1999, as compared to 28.9% in the
corresponding prior-year period. Exclusive of a provision recorded for $1.7
million resulting from the bankruptcy of Loehmann's Inc. ("Loehmann's"), a
customer of the Company, selling, general and administrative expenses were 36.7%
of net revenues for the three months ended July 4, 1999. Exclusive of the effect
of the DKNY JEANS sales to LCI, selling, general and administrative expenses
were 30.3% of net revenues for the three months ended June 28, 1998. The
increase was primarily a result of the growth of the Company's full-price
free-standing retail stores.
OPERATING LOSS
Operating loss for the three months ended July 4, 1999 increased $1.4
million, or 12.4%, to $12.9 million as compared to $11.4 million in the
corresponding prior-year period. Increased operating losses in the wholesale
segment were partially offset by decreased operating losses in the retail
segment and increased operating profits in the licensing 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, and the
recording of a provision related to the Loehmann's bankruptcy.
INTEREST EXPENSE, NET
Interest expense, net was $0.9 million for the three months ended July 4,
1999 as compared to $0.3 million for the corresponding prior-year period. The
increase was primarily attributable to higher average borrowings during fiscal
1999 as compared to fiscal 1998.
INCOME TAX BENEFIT
The income tax benefit represents federal, foreign, state and local income
taxes. The effective income tax rates for the three months ended July 4, 1999
and June 28, 1998 were 43% and 46%, respectively. These rates reflect the
effects of state and local taxes, tax rates in certain foreign jurisdictions,
and certain nondeductible expenses.
NET LOSS
Net loss for the three months ended July 4, 1999 was $7.9 million as
compared to $6.3 million for the corresponding prior-year period. Exclusive of
the effect of a provision recorded for the bankruptcy of Loehmann's, net loss
for the three months ended July 4, 1999 was $6.9 million.
SIX MONTHS FISCAL 1999 COMPARED TO SIX MONTHS FISCAL 1998
NET REVENUES
Net revenues for the six months ended July 4, 1999 decreased $23.3
million, or 7.6%, to $282.8 million as compared to net revenues of $306.0
million in the corresponding prior-year period. Excluding certain sales of
merchandise to LCI relating to the DKNY JEANS license in fiscal 1998, net
revenues increased $3.5 million, or 1.2%, for the six months ended July 4, 1999
as compared to the corresponding prior-year period. The increase was
attributable to increased retail and licensing revenues partially offset by
lower wholesale revenues.
Wholesale revenues for the six months ended July 4, 1999, decreased $43.5
million, or 16.8%, to $215.8 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 $16.8 million, or 7.2%. The decline was primarily attributable to: a
decrease in sales from the womenswear businesses, primarily due to the
transition of DKJ from substantially an import business to essentially a
licensing business; elimination of sales from the DKNY KIDS business which was
licensed in 1998; and slightly lower sales in the
13
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
menswear businesses; all of which was partially offset by increases in revenues
from the accessories business due to an increase in footwear sales.
Licensing revenues for the six months ended July 4, 1999 increased $4.4
million, or 53.0%, to $12.7 million as compared to $8.3 million in the
corresponding prior-year period. The increase was primarily due to royalties
from: (i) LCI associated with the DKNY JEANS and ACTIVE license; (ii) the
license with DKJ associated with the DONNA KARAN NEW YORK and DKNY products
manufactured and sold in Japan, and (iii) the DKNY intimate apparel license;
as well as growth in sales of certain other new and existing licensed
products.
Retail revenues for the six months ended July 4, 1999 increased $16.0
million, or 41.8%, to $54.3 million as compared to $38.3 million in the
corresponding prior-year period. The increase was primarily attributable to: the
recent opening and acquisition of full-price free-standing retail stores; a 6%
increase in comparable store sales; and an increase in the number of outlet
stores.
GEOGRAPHIC
Net revenues for the United States for the six months ended July 4, 1999
decreased $12.0 million, or 5.8%, to $194.2 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 increased $19.0 million, or 10.8%. The increase was
attributable to increased retail and licensing revenues partially offset by
lower wholesale revenues.
Net revenues for Japan for the six months ended July 4, 1999, decreased
$15.9 million, or 53.4%, 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 six months ended July 4,
1999 increased $4.6 million, or 6.6%, as compared to the corresponding
prior-year period. The increase was primarily attributable to the acquisition of
three free-standing retail stores in the United Kingdom.
GROSS PROFIT
Gross profit as a percentage of net revenues for the six months ended July
4, 1999 was 28.6%, as compared to 22.0%, for the corresponding prior-year
period. Exclusive of DKNY JEANS sales to LCI, gross profit margin for the six
months ended June 28, 1998 was 24.1%. The increase, exclusive of the effect of
DKNY JEANS sales to LCI, primarily reflected the change in the revenue mix to
higher margin licensing business and full-price retail stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to 31.5% of net
revenues for the six months ended July 4, 1999, as compared to 24.1% in the
corresponding prior-year period. Exclusive of a provision recorded for $1.7
million resulting from the bankruptcy of Loehmann's, selling, general and
administrative expenses were 30.9% of net revenues for the six months ended July
4, 1999. Exclusive of the effect of the DKNY JEANS sales to LCI, selling,
general and administrative expenses were 26.4% of net revenues for the six
months ended June 28, 1998. The increase was primarily a result of the growth of
the Company's full-price free-standing retail stores.
OPERATING LOSS
Operating loss for the six months ended July 4, 1999 increased $1.5
million, or 22.5%, to $8.1 million as compared to $6.6 million in the
corresponding prior-year period. Increased operating losses in the wholesale
segment were partially offset by decreased operating losses in the retail
segment and increased operating profit in the licensing 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, and the
recording of a provision related to the Loehmann's bankruptcy.
14
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEREST EXPENSE, NET
Interest expense, net was $1.9 million for the six months ended July 4,
1999 as compared to $1.3 million for the corresponding prior-year period. The
increase was primarily attributable to higher average borrowings during fiscal
1999 as compared to fiscal 1998.
INCOME TAX BENEFIT
The income tax benefit represents federal, foreign, state and local income
taxes. The effective income tax rates for the six months ended July 4, 1999 and
June 28, 1998 were 43% and 46%, respectively. These rates reflect the effects of
state and local taxes, tax rates in certain foreign jurisdictions, and certain
nondeductible expenses.
NET LOSS
Net loss for the six months ended July 4, 1999 was $5.7 million, as
compared to $4.2 million for the corresponding prior-year period. Exclusive of
the effect of a provision recorded for the bankruptcy of Loehmann's, net loss
for the six months ended July 4, 1998 was $4.7 million.
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 and renovation of existing 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 July 4,
1999, the Company had cash and cash equivalents of $11.2 million, as compared to
$12.8 million at June 28, 1998.
The Company has a $150.0 million, three-year revolving credit facility
(the "Facility") through January 2001. The Facility is used for working capital
requirements and general corporate purposes. At July 4, 1999, the Company had
$25.5 million outstanding under the Facility, as compared to no amounts
outstanding at June 28, 1998.
Net cash used for operating activities was $5.8 million for the six months
ended July 4, 1999 as compared to net cash provided by operating activities of
$40.2 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 lesser increase in deferred
income taxes, a greater decrease in accounts receivable and a lesser decrease in
accounts payable, accrued expenses and other current liabilities. Net cash used
for investing activities was $15.9 million for the six months ended July 4, 1999
as compared to $2.9 million in the corresponding prior-year period. The increase
was due to the Company's acquisition of free-standing retail stores and
increased purchases of property and equipment. Financing activities reflected
borrowings under the Facility and the repayment of a note payable to a principal
stockholder. Net cash provided by financing activities was $25.5 million for the
six months ended July 4, 1999, as compared to net cash required by financing
activities of $29.0 million in the corresponding prior-year period. This change
was primarily due to greater amounts outstanding under the Company's 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 July 4, 1999, the Company had
contracts to exchange foreign currencies in the form of forward exchange
contracts in the amount of $99.4 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 $6.7 million and $3.6 million for the six months
ended July 4, 1999 and June 28, 1998, respectively. As of August 17, 1999, the
15
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company had outstanding commitments for additional capital expenditures during
fiscal 1999 of approximately $6.4 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 has made substantial
progress toward completion of its Year 2000 testing, remediation and
implementation of internal system upgrades and will be continuously monitoring
and testing these systems through the end of 1999.
The Company has been communicating, and continues to communicate, with its
significant vendors, customers, transportation carriers, and financial
institutions about the status of 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 process includes the solicitation of written
responses to questionnaires about their plans to address the Year 2000 issue,
however the Company is not able to require remediation actions by such parties,
and as such, may have to revert to manual methods, for avoiding or mitigating
the effects of their lack of Year 2000 readiness.
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.
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.
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 (such as
customers, suppliers, licensees, transportation carriers, governmental agencies,
utility and other general service providers) 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 shipments
16
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. In any event, even
where the Company may develop contingency plans, there can be no assurance
that such plans will address all of the problems that may arise, or that such
plans, even if implemented will be successful. The Company's Year 2000
efforts are ongoing and our overall plan, including the development of our
contingency plans, will continue to evolve and be modified to take into
account new information when it becomes available.
ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." This statement defers the effective date of SFAS No.133
until June 15, 2000. The Company is still determining the effects, of adopting
SFAS No.133, will have on its financial position or the results of its
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 results 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
trademarks which the Company utilizes; (xviii)
17
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
political or economic instability 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.
18
<PAGE>
DONNA KARAN INTERNATIONAL INC.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of the Stockholders of the Company
was held on May 26, 1999.
(b) The following directors were elected at the Annual Meeting of
Stockholders: Donna Karan and Ann McLaughlin, as Class III
Directors for a three-year term expiring at the 2002 Annual
Meeting.
(c) (i) Each person elected as a director received the number of
votes indicated beside her name:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- --------- --------------
<S> <C> <C>
Donna Karan 18,923,366 119,365
Ann McLaughlin 18,951,264 91,467
</TABLE>
(ii) 18,985,507 votes were cast for and 45,545 votes were
cast against the ratification of the selection of Ernst
& Young LLP as auditors for the Company. Abstentions
totaled 11,679.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
27.1 - Financial Data Schedule.
(b) Current Reports on Form 8-K
There were no current reports on Form 8-K filed by the
Company during the three months ended July 4, 1999.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DONNA KARAN INTERNATIONAL INC.
(Registrant)
Date: August 18, 1999 By: /s/ John D. Idol
-----------------------
John D. Idol
Chief Executive Officer
Date: August 18, 1999 By: /s/ Joseph B. Parsons
-----------------------
Joseph B. Parsons
Executive Vice President,
Chief Financial and
Administrative Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DONNA
KARAN INTERNATIONAL INC. FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-END> JUL-04-1999
<CASH> 11,240
<SECURITIES> 0
<RECEIVABLES> 84,179
<ALLOWANCES> 25,811
<INVENTORY> 90,210
<CURRENT-ASSETS> 201,712
<PP&E> 85,748
<DEPRECIATION> 40,523
<TOTAL-ASSETS> 285,043
<CURRENT-LIABILITIES> 121,892
<BONDS> 0
0
0
<COMMON> 216
<OTHER-SE> 116,731
<TOTAL-LIABILITY-AND-EQUITY> 285,043
<SALES> 282,753
<TOTAL-REVENUES> 282,753
<CGS> 201,916
<TOTAL-COSTS> 201,916
<OTHER-EXPENSES> 88,971
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,879
<INCOME-PRETAX> (10,013)
<INCOME-TAX> (4,306)
<INCOME-CONTINUING> (5,707)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,707)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
