<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 October 1, 2000
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 November 10, 2000, the Registrant had 22,136,889 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.
===============================================================================
<PAGE>
DONNA KARAN INTERNATIONAL INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Item 1. Financial Statements
Statements of Income --
Three months and Nine months ended October 1, 2000 and October 3, 1999................... 3
Balance Sheets--
October 1, 2000 and January 2, 2000...................................................... 4
Statements of Cash Flows--
Nine months ended October 1, 2000 and October 3, 1999.................................... 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......................................................... 17
</TABLE>
2
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
OCTOBER 1, OCTOBER 3, OCTOBER 1, OCTOBER 3,
2000 1999 2000 1999
-------------- ------------ ------------ --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NET REVENUES........................................ $ 203,741 $ 202,511 $ 497,024 $ 485,264
Cost of sales....................................... 131,093 130,013 336,073 331,929
------------ ---------- ---------- ------------
GROSS PROFIT........................................ 72,648 72,498 160,951 153,335
Selling, general and administrative expenses........ 47,922 48,568 141,863 137,539
Restructuring credit................................ -- -- (200) --
------------ ---------- ---------- ------------
OPERATING INCOME.................................... 24,726 23,930 19,288 15,796
Interest expense, net............................... 1,032 1,209 1,785 3,088
------------ ---------- ---------- ------------
INCOME BEFORE INCOME TAXES.......................... 23,694 22,721 17,503 12,708
Income tax expense.................................. 9,714 9,770 7,176 5,464
------------ ---------- ---------- ------------
NET INCOME.......................................... $ 13,980 $ 12,951 $ 10,327 $ 7,244
============ ========== ========== ============
Net income per common share:
Basic.......................................... $ 0.65 $ 0.60 $ 0.48 0.34
============ ========== ========== ============
Diluted........................................ $ 0.63 $ 0.60 $ 0.47 0.33
============ ========== ========== ============
Weighted average common shares outstanding:
Basic.......................................... 21,605,700 21,599,300 21,604,100 21,599,300
============ ========== ========== ============
Diluted........................................ 22,170,700 21,728,100 22,036,200 21,702,400
============ ========== ========== ============
</TABLE>
See Notes to Financial Statements
3
<PAGE>
DONNA KARAN INTERNATIONAL INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 1, JANUARY 2,
2000 2000
--------------- ---------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents...................................... $ 6,792 $ 15,038
Accounts receivable, net of allowances of $33,277 at
October 1, 2000 and $27,193 at January 2, 2000.............. 112,331 86,314
Inventories.................................................... 73,272 82,792
Deferred income taxes.......................................... 26,233 26,408
Prepaid expenses and other current assets...................... 21,556 17,567
--------------- ---------------
TOTAL CURRENT ASSETS........................................ 240,184 228,119
Property and equipment, net......................................... 39,432 41,512
Deferred income taxes............................................... 17,528 19,543
Deposits and other noncurrent assets................................ 16,617 15,117
--------------- ---------------
$ 313,761 $ 304,291
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................... $ 62,859 $ 57,923
Accrued expenses and other current liabilities................. 60,263 71,339
Borrowing under revolving line of credit....................... 9,460 --
--------------- ---------------
TOTAL CURRENT LIABILITIES................................... 132,582 129,262
--------------- ---------------
Subordinated notes payable......................................... 8,209 8,209
Deferred income.................................................... 29,764 34,051
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 35,000,000 shares
Authorized, issued and outstanding 22,136,889 and
21,600,264, respectively.................................... 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..................................... 188,446 188,471
Retained deficit............................................... (43,384) (53,711)
Accumulated other comprehensive loss........................... (1,130) (991)
--------------- ---------------
144,148 133,985
Less: Treasury stock, at cost (16,270 and 17,770 shares)...... (384) (419)
Unearned compensation................................... (558) (797)
=============== ===============
TOTAL STOCKHOLDERS' EQUITY................................. 143,206 132,769
--------------- ---------------
$ 313,761 $ 304,291
=============== ===============
</TABLE>
See Notes to Financial Statements
4
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------------------
OCTOBER 1, OCTOBER 3,
2000 1999
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 10,327 $ 7,244
Adjustments to reconcile net income to net cash used for
operating activities:
Depreciation and amortization........................... 10,043 13,085
Provision for bad debts................................. (119) 1,697
Amortization of deferred income......................... (10,458) (11,786)
Deferred income taxes................................... 2,190 3,863
Other, net.............................................. 249 357
Changes in operating assets and liabilities:
Increase in accounts receivable......................... (25,898) (27,058)
Decrease in inventories................................. 9,520 10,116
(Increase) decrease in prepaid expenses and other
current assets.................................. (3,989) 2,690
Increase in deposits and other noncurrent assets........ (5,637) (5,323)
Increase in accounts payable, accrued expenses, and
Other current liabilities............................... 4,178 2,206
Decrease in deferred income............................. (4,287) (9,358)
----------------- ------------------
NET CASH USED FOR OPERATING ACTIVITIES............... (13,881) (12,267)
----------------- ------------------
INVESTING ACTIVITIES
Purchase of free-standing retail stores ................ -- (9,200)
Purchase of property and equipment, net................. (3,825) (11,233)
----------------- ------------------
NET CASH USED FOR INVESTING ACTIVITIES............... (3,825) (20,433)
----------------- ------------------
FINANCING ACTIVITIES
Net proceeds of revolving credit facility............... 9,460 29,325
----------------- ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES............ 9,460 29,325
----------------- ------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS............... (8,246) (3,375)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........ 15,038 7,448
----------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............. $ 6,792 $ 4,073
================= ==================
</TABLE>
See Notes to Financial Statements
5
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
results of operations of Donna Karan International Inc. and its subsidiaries
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
The 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 accounting principles generally accepted in the United States 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, the timing of opening and closing company
owned retail stores, 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 2, 2000.
NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement will be adopted effective January 1, 2001, but is not expected to
materially impact the Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements." The
effective date has been deferred pending additional interpretive guidance. Based
on current interpretations, no material impact on the Company's financial
statement is anticipated.
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 issued 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 vesting of restricted stock and 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 operations.
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- -------------------------------
OCTOBER 1, OCTOBER 3, OCTOBER 1, OCTOBER 3,
2000 1999 2000 1999
--------------- --------------- ------------ --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NUMERATOR:
Net income attributable to common stock............. $ 13,980 $ 12,951 $ 10,327 $ 7,244
=============== =============== ============= ==============
DENOMINATOR:
Weighted average common shares outstanding -
Basic........................................... 21,605,700 21,599,300 21,604,100 21,599,300
Effect of dilutive securities: stock options and
restricted stock............................... 565,000 128,800 432,100 103,100
--------------- --------------- ------------- --------------
Weighted average common shares outstanding -
Diluted........................................ 22,170,700 21,728,100 22,036,200 21,702,400
=============== =============== ============= ==============
Basic EPS......................................... $ 0.65 $ 0.60 $ 0.48 $ 0.34
=============== =============== ============= ==============
Diluted EPS....................................... $ 0.63 $ 0.60 $ 0.47 $ 0.33
=============== =============== ============= ==============
</TABLE>
6
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
INVENTORIES
Inventory includes only 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>
OCTOBER 1, JANUARY 2,
2000 2000
---------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials......................... $ 3,162 $ 2,947
Work in process....................... 4,092 2,730
Finished goods........................ 66,018 77,115
---------------- --------------
$ 73,272 $ 82,792
================ ==============
</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>
OCTOBER 1, JANUARY 2,
2000 2000
---------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Machinery, equipment, and fixtures......... 36,632 $ 28,281
Leasehold improvements..................... 57,250 61,776
---------------- -------------------
93,882 90,057
Less accumulated depreciation.............. (54,450) (48,545)
---------------- -------------------
39,432 $ 41,512
================ ===================
</TABLE>
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
OCTOBER 1, JANUARY 2,
2000 2000
---------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Accrued operating expenses.................... 17,322 17,326
Unearned revenues............................. 9,181 14,852
Accrued royalties............................. 13,276 10,559
Accrued compensation.......................... 9,082 14,061
Accrued income taxes.......................... 7,371 6,469
Accrued restructuring and other charges....... 1,301 5,370
Accrued taxes other than income taxes......... 2,251 1,722
Other......................................... 479 980
---------------- ----------------
$ 60,263 $ 71,339
================ ================
</TABLE>
7
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
RESTRUCTURING AND OTHER CHARGES
For the nine months ended October 1, 2000, the Company utilized
approximately $2.2 million of reserves previously established in connection with
its fiscal 1999 restructuring plan. The Company anticipates utilizing the
remaining balance of its reserves during fiscal 2000.
The balance of the fiscal 1999 restructuring and other charges are as
follows:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
JANUARY 2, UTILIZED NOT OCTOBER 1,
2000 CASH NONCASH UTILIZED 2000
---------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C>
Exit costs (including inventory markdowns) $ 1,292 201 $ 37 $ 1,001 $ 53
Employee termination and severance costs.. 1,943 1,787 - - 156
Other..................................... 1,227 135 - - 1,092
------------ --------- ---------- ---------- -----------
$ 4,462 $ 2,123 $ 37 $ 1,001 $ 1,301
============ ========= ========== =========== ===========
</TABLE>
In June 2000, the Company determined that certain amounts related to the
fiscal 1999 accrual were no longer required and credited into income
approximately $1.0 million. The credit includes $0.8 million related to cost of
sales and $0.2 million related to selling, general and administrative expenses.
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective income tax rate was 41.0% and 43.0% for the nine
months ended October 1, 2000 and October 3, 1999, 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>
NINE MONTHS ENDED
----------------------------
OCTOBER 1, OCTOBER 3,
2000 1999
------------- -------------
CASH PAID FOR: (IN THOUSANDS)
<S> <C> <C>
Interest............................................. $ 1,534 $ 2,449
=========== ============
Income taxes......................................... $ 5,458 $ 435
=========== ============
NON-CASH ACTIVITIES:
Issuance of subordinated notes payable in
connection with the purchase of free-standing
retail stores ..................................... $ - $ 8,209
=========== ============
</TABLE>
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
8
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- COMPREHENSIVE INCOME
Comprehensive income and its components, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 1, OCTOBER 3, OCTOBER 1, OCTOBER 3,
2000 1999 2000 1999
----------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income...................................... $ 13,980 $ 12,951 $ 10,327 $ 7,244
----------- --------- ---------- ----------
Other comprehensive (loss) income:
Foreign currency translations............. (12) (146) (139) 142
----------- --------- ---------- ----------
Other comprehensive (loss) income..... (12) (146) (139) 142
----------- --------- ---------- ----------
Comprehensive income........................ $ 13,968 $ 12,805 $ 10,188 $ 7,386
=========== ========= ========== ==========
</TABLE>
Accumulated other comprehensive loss is as follows:
<TABLE>
<CAPTION>
FOREIGN CURRENCY TRANSLATION
-----------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- ----------------------------
OCTOBER 1, OCTOBER 3, OCTOBER 1, OCTOBER 3,
2000 1999 2000 1999
----------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance ......................... $ (1,118) $ (918) $ (991) $ (1,206)
Current-period change ..................... (12) (146) (139) 142
------------ -------- --------- --------
Ending balance............................. $ (1,130) $ (1,064) $ (1,130) $ (1,064)
============ ======== ========= ========
</TABLE>
NOTE 3 -- SEGMENT INFORMATION
Information related to the Company's geographic segments are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 1, OCTOBER 3, OCTOBER 1, OCTOBER 3,
2000 1999 2000 1999
----------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues:
United States.................................. $ 125,383 $ 140,864 $ 319,764 $ 335,078
Japan.......................................... 6,996 7,413 16,001 21,274
Other.......................................... 71,362 54,234 161,259 128,912
============ ============ ============= =============
$ 203,741 $ 202,511 $ 497,024 $ 485,264
============ ============ ============= =============
</TABLE>
9
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
Information related to the Company's reportable business segments are as
follows:
<TABLE>
<CAPTION>
WHOLESALE LICENSING RETAIL TOTAL
------------ ------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
THREE MONTHS ENDED
OCTOBER 1, 2000
-------------------------
Net revenues from external customers......... $ 158,395 $ 12,765 $ 32,581 $ 203,741
Intersegment revenues........................ 23,600 - - 23,600
Segment operating profit (loss).............. 19,596 6,142 (1,012) 24,726
THREE MONTHS ENDED
OCTOBER 3, 1999
-------------------------
Net revenues from external
customers.................................. $ 153,371 $ 13,662(a) $ 35,478 $ 202,511
Intersegment revenues ....................... 27,295 - - 27,295
Segment operating profit (loss).............. 15,959 8,708(a) (737) 23,930
NINE MONTHS ENDED
OCTOBER 1, 2000
-------------------------
Net revenues from external
customers.................................. $ 374,514 $ 32,433 $ 90,077 $ 497,024
Intersegment revenues........................ 52,474 - - 52,474
Segment operating profit (loss).............. 12,482 14,438 (7,632) 19,288
Segment assets............................... 247,813 7,301 58,647 313,761
NINE MONTHS ENDED
OCTOBER 3, 1999
-------------------------
Net revenues from external
customers.................................... $ 369,173 $ 26,318(a) $ 89,773 $ 485,264
Intersegment revenues ....................... 58,427 - - 58,427
Segment operating profit (loss).............. 7,686 13,376(a) (5,266) 15,796
Segment assets............................... 223,243 5,757 70,980 299,980
</TABLE>
(a) includes a $5 million, one-time recognition of deferred revenue
related to the Estee Lauder beauty license.
10
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. 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, DKNY, DKNY JEANS and DKNY ACTIVE 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.
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 nine months
ended October 1, 2000 and October 3, 1999.
The following tables set forth certain segment data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- ----------------------------
OCTOBER 1, OCTOBER 3, OCTOBER 1, OCTOBER 3,
2000 1999 2000 1999
---------- ---------- ---------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenues from external customers:
By segments:
Wholesale ....... $ 158.4 $ 153.4 $ 374.5 $ 369.2
Licensing ....... 12.7 13.7(a) 32.4 26.3(a)
Retail .......... 32.6 35.4 90.1 89.8
-------- -------- -------- --------
$ 203.7 $ 202.5 $ 497.0 $ 485.3
======== ======== ======== ========
By geographic area:
United States ... $ 125.4 $ 140.9 $ 319.8 $ 335.1
Japan ........... 7.0 7.4 16.0 21.3
Other ........... 71.3 54.2 161.2 128.9
-------- -------- -------- --------
$ 203.7 $ 202.5 $ 497.0 $ 485.3
======== ======== ======== ========
Segment operating profit (loss):
Wholesale ....... $ 19.6 $ 16.0 $ 12.5 $ 7.7
Licensing ....... 6.1 8.7(a) 14.4 13.4(a)
Retail .......... (1.0) (0.8) (7.6) (5.3)
-------- -------- -------- --------
$ 24.7 $ 23.9 $ 19.3 $ 15.8
======== ======== ======== ========
</TABLE>
(a) includes a $5 million one-time recognition of deferred revenue related to
the Estee Lauder beauty license.
11
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables set forth certain condensed statement of income
data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------- -----------------------------------------
OCTOBER 1, OCTOBER 3, OCTOBER 1, OCTOBER 3,
2000 1999 2000 1999
------------------- ------------------- ------------------- -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues ...................... $ 203.7 100.0% $ 202.5 100.0% $ 497.0 100.0% $ 485.3 100.0%
======== ======== ======== ========
Gross profit ...................... 72.7 35.7 72.5 35.8 161.0 32.4 153.3 31.6
Selling, general and administrative
Expenses ...................... 48.0 23.5 48.6 24.0 141.9 28.5 137.5 28.3
Operating income .................. 24.7 12.1 23.9 11.8 19.3 3.9 15.8 3.3
Net income ........................ 14.0 6.9 13.0 6.4 10.3 2.1 7.2 1.5
</TABLE>
THIRD QUARTER FISCAL 2000 COMPARED WITH THIRD QUARTER FISCAL 1999
NET REVENUES
Net revenues for the three months ended October 1, 2000 increased $1.2
million, or 0.6%, to $203.7 million as compared to net revenues of $202.5
million in the corresponding prior-year period. Excluding the one-time
recognition of deferred revenue in fiscal 1999 related to the Estee Lauder Inc.
("ELI") beauty license, net revenues increased $6.2 million, or 3.2%.
Wholesale revenues for the three months ended October 1, 2000 increased
$5.0 million, or 3.3%, to $158.4 million as compared to $153.4 million in the
corresponding prior-year period. Exclusive of sales to Japan, wholesale revenues
increased $5.8 million, or 3.9%. The increase was attributable to an increase in
sales from the International DKNY JEANS and menswear businesses, substantially
offset by decreases in the women's and accessories businesses.
Licensing revenues for the three months ended October 1, 2000 decreased
$1.0 million, or 6.6%, to $12.7 million as compared to $13.7 million in the
corresponding prior-year period. Exclusive of the one-time recognition of
deferred revenue in fiscal 1999 related to the ELI beauty license, licensing
revenues increased $4.0 million, or 47.4%. The increase was primarily due to
royalties from the Company's: DKNY JEANS and ACTIVE license; regional Japanese
license; and growth in sales of certain other new and existing licensed
products.
Retail revenues for the three months ended October 1, 2000 decreased $2.8
million, or 8.2%, to $32.6 million as compared to $35.4 million in the
corresponding prior-year period. The decrease was primarily attributable to a
16.6% overall decrease in outlet store sales, including a decrease in the number
of outlet stores. Comparable store sales decreased 10.2% in 2000 compared to
the corresponding prior-year period.
GEOGRAPHIC
Net revenues for the United States for the three months ended October 1,
2000 decreased $15.5 million, or 11.0%, to $125.4 million as compared to $140.9
million in the corresponding prior-year period. Exclusive of the one-time
recognition of deferred revenue in fiscal 1999, related to the ELI beauty
license, net revenues decreased $10.5 million, or 7.7%. The decrease, exclusive
of the deferred revenues, was primarily attributable to decreased wholesale
revenues.
Net revenues for Japan for the three months ended October 1, 2000
decreased $0.4 million, or 5.6%, to $7.0 million as compared to $7.4 million in
the corresponding prior-year period. The decrease was primarily attributable to
the planned decrease in wholesale revenues from Japan, as a result of the
Company's regional licensing agreement. The Company anticipates further
decreases in wholesale revenues in Japan, while at the same time receiving
increased royalties, as the Company's Japanese licensee transitions its business
exclusively from importing and reselling products to primarily manufacturing and
selling products.
12
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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
October 1, 2000 increased $17.1 million, or 31.6%, to $71.3 million as compared
to $54.2 million in the corresponding prior-year period. The increase is
primarily attributable to increased wholesale and licensing revenues and the
Company's retail stores in the United Kingdom.
GROSS PROFIT
Gross profit as a percentage of net revenues for the three months ended
October 1, 2000 was 35.7%, as compared to 35.8% in the corresponding prior-year
period. Exclusive of the one-time recognition of deferred revenue in fiscal 1999
related to the ELI beauty license, gross profit margin was 34.2% in the
corresponding prior-year period. The increase, exclusive of the deferred
revenue, primarily reflects 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 decreased to 23.5% of net
revenues for the three months ended October 1, 2000, as compared to 24.0% in the
corresponding prior-year period. Exclusive of the one-time recognition of
deferred revenue related to the ELI beauty license, selling general and
administrative expenses were 24.6% of net revenues for the corresponding
prior-year period.
OPERATING INCOME
Operating income for the three months ended October 1, 2000 increased
$0.8 million, or 3.3%, to $24.7 million as compared to $23.9 million in the
corresponding prior-year period. Exclusive of the one-time recognition of
deferred revenue related to the ELI beauty license, operating income increased
$5.8 million, or 30.6%. The increase, exclusive of the deferred revenue, is
primarily attributable to increased operating profit in the wholesale and
licensing segments.
INTEREST EXPENSE, NET
Interest expense, net was $1.0 million for the three months ended October
1, 2000 as compared to $1.2 million for the corresponding prior-year period. The
decrease was primarily attributable to a decrease in average borrowings during
the three months ended October 1, 2000, as compared to the corresponding
prior-year period.
INCOME TAX EXPENSE
The provision for income taxes represents Federal, foreign, state and
local income taxes. The effective income tax rate for the three months ended
October 1, 2000 and October 3, 1999 was 41.0% and 43.0%, 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 October 1, 2000 increased $1.0
million, or 7.9%, to $14.0 million, as compared to $13.0 million in the
corresponding prior-year period. Exclusive of the one-time recognition of
deferred revenue related to the ELI beauty license, net income increased $3.9
million, or 38.4%.
NINE MONTHS FISCAL 2000 COMPARED TO NINE MONTHS FISCAL 1999
NET REVENUES
Net revenues for the nine months ended October 1, 2000 increased $11.7
million, or 2.4%, to $497.0 million as compared to net revenues of $485.3
million in the corresponding prior-year period. Excluding the one-time
recognition of deferred revenue in fiscal 1999, related to the ELI beauty
license, net revenues increased $16.7 million, or 3.5%.
Wholesale revenues for the nine months ended October 1, 2000, increased
$5.3 million, or 1.4%, to $374.5 million as compared to $369.2 million in the
corresponding prior-year period. Exclusive of sales to Japan, wholesale revenues
increased $11.9 million, or 3.4%. The increase was attributable to an increase
in sales from international DKNY JEANS and the menswear businesses,
substantially offset by a decrease in sales from the women's business.
13
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DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Licensing revenues for the nine months ended October 1, 2000 increased
$6.1 million, or 23.2%, to $32.4 million as compared to $26.3 million in the
corresponding prior-year period. Excluding the one-time recognition of deferred
revenue in fiscal 1999, related to the ELI beauty license, licensing revenues
increased $11.1 million, or 52.1%. The increase was primarily due to royalties
from the Company's: DKNY JEANS and ACTIVE license; regional Japanese license;
and growth in sales of certain other new and existing licensed products.
Retail revenues for the nine months ended October 1, 2000 increased $0.3
million, or 0.3%, to $90.1 million as compared to $89.8 million in the
corresponding prior-year period. The increase was primarily attributable to a
44.0% increase in full-price retail store sales due to an increase in the number
of full-price free-standing retail stores, somewhat offset by an 11.0% decrease
in comparable store sales and a 14.5% decrease in outlet store sales including a
decrease in the number of outlet stores.
GEOGRAPHIC
Net revenues for the United States for the nine months ended October 1,
2000 decreased $15.3 million, or 4.6%, to $319.8 million as compared to $335.1
million in the corresponding prior-year period. Exclusive of the one-time
recognition of deferred revenue in fiscal 1999 related to the ELI beauty
license, net revenues decreased $10.3 million, or 3.1%. The decrease was
primarily attributable to decreased wholesale and retail revenues.
Net revenues for Japan for the nine months ended October 1, 2000 decreased
$5.3 million, or 24.8%, to $16.0 million as compared to $21.3 million in the
corresponding prior-year period. The decrease was primarily attributable to the
planned decrease in wholesale revenues from Japan, as a result of the Company's
regional licensing agreement. The Company anticipates further decreases in
wholesale revenues in Japan, while at the same time receiving increased
royalties, as the Company's Japanese licensee transitions its business
exclusively from importing and reselling products to primarily manufacturing and
selling products.
Net revenues for other geographic areas for the nine months ended October
1, 2000 increased $32.3 million, or 25.1%, to $161.2 million as compared to
$128.9 million in the corresponding prior-year period. The increase is
attributable to increased wholesale and licensing revenues and the Company's
retail stores in the United Kingdom.
GROSS PROFIT
Gross profit as a percentage of net revenues for the nine months ended
October 1, 2000 was 32.4%, as compared to 31.6% for the corresponding prior-year
period. In June 2000, the Company reversed $0.8 million of restructuring
reserves classified in cost of sales, determined no longer to be necessary.
Exclusive of the restructuring credit, gross profit as a percentage of net
revenues for the nine months ended October 1, 2000 was 32.2%. Exclusive of the
one-time recognition of deferred revenue in fiscal 1999, related to the ELI
beauty license, gross profit margin for the corresponding prior-year period was
30.9%. The increase, exclusive of the credit and deferred revenue, primarily
reflects the change in the revenue mix to higher margin licensing business and
an increase in margins in the wholesale and retail businesses, partially offset
by greater sales dilution and higher than anticipated inventory shrinkage.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to 28.5% of net
revenues for the nine months ended October 1, 2000, as compared to 28.3% in the
corresponding prior-year period. Exclusive of the one-time recognition of
deferred revenue related to the ELI beauty license, offset by a provision
recorded as a result of Loehmann's, Inc. ("Loehmann's") bankruptcy in fiscal
1999, selling, general and administrative expenses remained 28.3% of net
revenues in the corresponding prior-year period.
OPERATING INCOME
Operating income for the nine months ended October 1, 2000 increased
$3.5 million, or 22.1%, to $19.3 million as compared to $15.8 million in the
corresponding prior-year period. Exclusive of the one-time recognition of
deferred revenue related to the ELI license and a provision recorded as a result
of the Loehmann's bankruptcy in fiscal 1999, operating income was $12.5 million
in the corresponding prior-year period. The increase, exclusive of the deferred
revenue and provision, is attributable to increased operating profit in the
wholesale and licensing segments, partially offset by increased operating losses
in the retail segment.
14
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DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEREST EXPENSE, NET
Interest expense, net was $1.8 million for the nine months ended October
1, 2000 as compared to $3.1 million for the corresponding prior-year period. The
decrease was primarily attributable to a decrease in average borrowings during
the nine months ended October 1, 2000, as compared to the corresponding
prior-year period.
INCOME TAX EXPENSE
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective income tax rate for the nine months ended October 1,
2000 and October 3, 1999 was 41.0% and 43.0%, 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 nine months ended October 1, 2000 increased $3.1
million, or 42.6%, to $10.3 million, as compared to $7.2 million in the
corresponding prior-year period. Exclusive of the one-time recognition of
deferred revenue related to the ELI beauty license and a provision recorded as a
result of the Loehmann's bankruptcy in fiscal 1999, net income increased $5.0
million, or 92.5%.
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 (as herein defined). 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 October 1, 2000,
the Company had cash and cash equivalents of $6.8 million, as compared to $4.1
million at October 3, 1999.
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. In February 2000, the Company amended the Facility
and extended its term to expire on May 1, 2003. At October 1, 2000, $9.5 million
was outstanding under the Facility, as compared to $29.3 million at October 3,
1999.
Net cash used for operating activities was $13.9 million for the nine
months ended October 1, 2000 as compared to $12.3 million in the corresponding
prior-year period. The increase in net cash used for operating activities
primarily reflects an increase in prepaid expenses and other current assets and
a lesser decrease in inventories, partially offset by an increase in accounts
payable, accrued expenses and other current liabilities. Net cash used for
investing activities decreased $16.6 million for the nine months ended October
1, 2000 as compared to the corresponding prior-year period, due to the Company's
acquisition of free-standing retail stores in the corresponding prior-year
period and decreased purchases of property and equipment in the current period.
Financing activities reflect borrowings under the Company's Facility. Net cash
provided by financing activities for the nine months ended October 1, 2000, was
$9.5 million, as compared to $29.3 million in the corresponding prior-year
period. The decrease in net cash provided by financing activities was due to
lesser amounts outstanding under the Company's Facility during 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 who are major international banks and financial institutions that
have at least an "A" (or equivalent) credit rating. The Company's exposure to
credit loss in the event of nonperformance by any of the counterparties is
limited to only the recognized, but not realized, gains attributable to the
contracts. Management believes risk of loss is remote and in any event would be
immaterial. Costs associated with entering into such contracts have not been
material to the Company's financial results. At October 1, 2000, the Company had
contracts to exchange foreign currencies in the form of forward exchange
contracts in the amount of $162.0 million. The Company's measured value-at-risk
from holding such derivative instruments, using a variance co-variance model
with a 95 percent confidence level, assuming normal market conditions at October
1, 2000 was approximately $3.8 million.
15
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DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital expenditures, primarily for leasehold improvements and leasehold
improvements related to outlet and full-price free-standing retail stores,
equipment, machinery, computers and office furniture, were approximately $3.8
million and $11.2 million for the nine months ended October 1, 2000 and October
3, 1999, respectively. As of November 11, 2000, the Company had outstanding
commitments for additional capital expenditures during fiscal 2000 of
approximately $3.2 million. The Company anticipates that it will incur
additional capital expenditures in fiscal 2000 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 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.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 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 new stores; (vii) risks associated with the Company's
increasing royalty revenues as a percent of the Company's total revenues and net
income and risks associated with a lack of operational or financial control over
the Company's licensees; (viii) risks to the Company's existing wholesale
businesses from the Company's licensing of related products; (ix) a change in
retailer or consumer acceptance of the Company's products; (x) 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; (xi) 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; (xii) 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;
(xiii) changes in laws, regulations, and policies, including changes in
accounting standards, that affect, or will affect, the Company in the United
States and abroad; (xiv) 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; (xv) shipment delays, depletion of inventory, and increased
production costs resulting from disruption at any of the Company's facilities or
other causes; (xvi) changes in product mix to ones which are less profitable;
(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 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
16
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DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
violation of labor or other laws by the Company, 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 October 1, 2000.
17
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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: November 15, 2000 By: /s/ John D. Idol
--------------------------------
John D. Idol
Chief Executive Officer
Date: November 15, 2000 By: /s/ Joseph B. Parsons
-----------------------
Joseph B. Parsons
Chief Financial and Operations Officer
18
