<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 2, 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 August 11, 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
Item 1. Financial Statements PAGE
----
Statements of Operations--
Three months and Six months ended July 2, 2000 and July 4, 1999. 3
Balance Sheets--
July 2, 2000 and January 2, 2000................................ 4
Statements of Cash Flows--
Six months ended July 2, 2000 and July 4, 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 4. Submission of Matters to a Vote of Security Holders............... 17
Item 6. Exhibits and Reports on Form 8-K.................................. 17
2
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NET REVENUES ................................. $ 120,513 $ 122,033 $ 293,283 $ 282,753
Cost of sales ................................ 88,189 88,395 204,980 201,916
------------ ------------ ------------ ------------
GROSS PROFIT ................................. 32,324 33,638 88,303 80,837
Selling, general and administrative expenses . 44,175 46,495 93,941 88,971
Restructuring credit ......................... (200) -- (200) --
------------ ------------ ------------ ------------
OPERATING LOSS ............................... (11,651) (12,857) (5,438) (8,134)
Interest expense, net ........................ 182 950 753 1,879
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES ..................... (11,833) (13,807) (6,191) (10,013)
Income tax benefit ........................... (4,851) (5,937) (2,538) (4,306)
------------ ------------ ------------ ------------
NET LOSS ..................................... $ (6,982) $ (7,870) $ (3,653) $ (5,707)
============ ============ ============ ============
Net loss per common share:
Basic ................................... $ (0.32) $ (0.36) $ (0.17) $ (0.26)
============ ============ ============ ============
Diluted ................................. $ (0.32) $ (0.36) $ (0.17) $ (0.26)
============ ============ ============ ============
Weighted average common shares outstanding:
Basic ................................... 21,603,400 21,599,300 21,601,900 21,599,300
============ ============ ============ ============
Diluted ................................. 22,135,000 21,599,300 21,941,700 21,599,300
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
3
<PAGE>
DONNA KARAN INTERNATIONAL INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 2, JANUARY 2,
2000 2000
--------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................... $ 14,740 $ 15,038
Accounts receivable, net of allowances of $31,416 at
July 2, 2000 and $27,193 at January 2, 2000 .......... 69,718 86,314
Inventories ............................................. 76,200 82,792
Deferred income taxes ................................... 26,480 26,408
Prepaid expenses and other current assets ............... 20,064 17,567
--------- ---------
TOTAL CURRENT ASSETS ................................. 207,202 228,119
Property and equipment, net .................................. 40,226 41,512
Deferred income taxes ........................................ 20,362 19,543
Deposits and other noncurrent assets ......................... 15,851 15,117
--------- ---------
$ 283,641 $ 304,291
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ........................................ $ 58,479 $ 57,923
Accrued expenses and other current liabilities .......... 55,127 71,339
--------- ---------
TOTAL CURRENT LIABILITIES ............................ 113,606 129,262
--------- ---------
Subordinated notes payable ................................... 8,209 8,209
Deferred income .............................................. 32,667 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 ........................................ (57,364) (53,711)
Accumulated other comprehensive loss .................... (1,118) (991)
--------- ---------
130,180 133,985
Less: Treasury stock, at cost (16,270 and 17,770 shares) (384) (419)
Unearned compensation ............................ (637) (797)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY .......................... 129,159 132,769
--------- ---------
$ 283,641 $ 304,291
========= =========
</TABLE>
See Notes to Financial Statements
4
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JULY 2, JULY 4,
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss .................................................... $ (3,653) $ (5,707)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization ........................... 6,681 7,795
Provision for bad debts ................................. (196) 293
Amortization of deferred income ......................... (7,636) (4,671)
Deferred income taxes ................................... (891) (4,477)
Other, net .............................................. 170 263
Changes in operating assets and liabilities:
Decrease in accounts receivable ......................... 16,792 12,316
Decrease in inventories ................................. 6,592 3,401
(Increase) decrease in prepaid expenses and other
current assets ....................................... (2,498) 1,030
Increase in deposits and other noncurrent assets ........ (3,612) (3,710)
Decrease in accounts payable, accrued expenses, and
other current liabilities ............................ (8,145) (13,804)
(Decrease) increase in deferred income .................. (1,384) 1,500
-------- --------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES . 2,220 (5,771)
-------- --------
INVESTING ACTIVITIES
Purchase of free-standing retail stores ................. -- (9,200)
Purchase of property and equipment, net ................. (2,518) (6,705)
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES ............... (2,518) (15,905)
-------- --------
FINANCING ACTIVITIES
Net proceeds of revolving credit facility ............... -- 25,468
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............ -- 25,468
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .... (298) 3,792
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........ 15,038 7,448
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............. $ 14,740 $ 11,240
======== ========
</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.
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 2, 2000.
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 issuance 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 for net loss is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ----------------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
------------ -------------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NUMERATOR:
Net loss attributable to common stock .......... $ (6,982) $ (7,870) $ (3,653) $ (5,707)
============ ============== ============ ============
DENOMINATOR:
Weighted average common shares outstanding -
Basic ....................................... 21,603,400 21,599,300 21,601,900 21,599,300
Effect of dilutive securities: stock options and
restricted stock ........................... 531,600 -- 339,800 --
------------ -------------- ------------ ------------
Weighted average common shares outstanding -
Diluted ..................................... 22,135,000 21,599,300 21,941,700 21,599,300
============ ============== ============ ============
Basic EPS ...................................... $ (0.32) $ (0.36) $ (0.17) $ (0.26)
============ ============== ============ ============
Diluted EPS .................................... $ (0.32) $ (0.36) $ (0.17) $ (0.26)
============ ============== ============ ============
</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>
JULY 2, JANUARY 2,
2000 2000
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials .......................... $ 249 $ 2,947
Work in process ........................ 6,087 2,730
Finished goods ......................... 69,864 77,115
------- -------
$76,200 $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>
JULY 2, JANUARY 2,
2000 2000
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Machinery, equipment, and fixtures ............. $ 27,939 $ 28,281
Leasehold improvements ......................... 64,636 61,776
-------- --------
92,575 90,057
Less accumulated depreciation .................. (52,349) (48,545)
-------- --------
$ 40,226 $ 41,512
======== ========
</TABLE>
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
JULY 2, JANUARY 2,
2000 2000
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued operating expenses ......................... $18,442 $17,326
Unearned revenues .................................. 9,100 14,852
Accrued royalties .................................. 9,916 10,559
Accrued compensation ............................... 11,790 14,061
Accrued income taxes ............................... 1,014 6,469
Accrued restructuring and other charges ............ 1,651 5,370
Accrued taxes other than income taxes .............. 2,201 1,722
Other .............................................. 1,013 980
------- -------
$55,127 $71,339
======= =======
</TABLE>
7
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
RESTRUCTURING AND OTHER CHARGES
For the six months ended July 2, 2000, the Company utilized approximately
$1.8 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 UTILIZED BALANCE AT
JANUARY 2, ----------------- NOT JULY 2,
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 1,410 -- -- 533
Other .................................... 1,227 162 -- -- 1,065
------ ------ ------ ------ ------
$4,462 $1,773 $ 37 $1,001 $1,651
====== ====== ====== ====== ======
</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 six
months ended July 2, 2000 and July 4, 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>
SIX MONTHS ENDED
--------------------
JULY 2, JULY 4,
2000 1999
--------- ------
(IN THOUSANDS)
<S> <C> <C>
CASH PAID FOR:
Interest .................................. $ 626 $1,484
========= ======
Income taxes .............................. $ 5,288 $ 249
========= ======
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 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.
8
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- COMPREHENSIVE LOSS
Comprehensive loss and its components, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss ......................... $(6,982) $(7,870) $(3,653) $(5,707)
------- ------- ------- -------
Other comprehensive loss:
Foreign currency translations 1 574 (127) 288
------- ------- ------- -------
Other comprehensive loss .... 1 574 (127) 288
------- ------- ------- -------
Comprehensive loss ............... $(6,981) $(7,296) $(3,780) $(5,419)
======= ======= ======= =======
</TABLE>
Accumulated other comprehensive loss is as follows:
<TABLE>
<CAPTION>
FOREIGN CURRENCY TRANSLATION
----------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance ................ $(1,119) $(1,492) $ (991) $(1,206)
Current-period change ............ 1 574 (127) 288
------- ------- ------- -------
Ending balance ................... $(1,118) $ (918) $(1,118) $ (918)
======= ======= ======= =======
</TABLE>
NOTE 3 -- SEGMENT INFORMATION
Information related to the Company's geographic segments are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues:
United States ................. $ 89,095 $ 92,793 $194,381 $194,214
Japan ......................... 3,755 6,066 9,005 13,861
Other ......................... 27,663 23,174 89,897 74,678
-------- -------- -------- --------
$120,513 $122,033 $293,283 $282,753
======== ======== ======== ========
</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
JULY 2, 2000
------------------
Net revenues from external
customers .................... $ 80,795 $ 9,254 $30,464 $120,513
Intersegment revenues .......... 11,985 -- -- 11,985
Segment operating profit (loss). (12,922) 3,787 (2,516) (11,651)
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)
SIX MONTHS ENDED
JULY 2, 2000
----------------
Net revenues from external
customers .................... $216,119 $19,668 $57,496 $293,283
Intersegment revenues .......... 28,874 -- -- 28,874
Segment operating profit (loss). (7,114) 8,296 (6,620) (5,438)
Segment assets ................. 227,394 4,920 51,327 283,641
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
</TABLE>
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 six months
ended July 2, 2000 and July 4, 1999.
The following tables set forth certain segment data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -----------------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
-------------- --------------- ----------- ----------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenues from external customers:
By segments:
Wholesale ............ $ 80.7 $ 85.4 $ 216.1 $ 215.8
Licensing ............ 9.3 5.8 19.7 12.7
Retail ............... 30.5 30.8 57.5 54.3
-------- -------- -------- --------
$ 120.5 $ 122.0 $ 293.3 $ 282.8
======== ======== ======== ========
By geographic area:
United States ........ $ 89.1 $ 92.8 $ 194.4 $ 194.2
Japan ................ 3.8 6.1 9.0 13.9
Other ................ 27.6 23.1 89.9 74.7
-------- -------- -------- --------
$ 120.5 $ 122.0 $ 293.3 $ 282.8
======== ======== ======== ========
Segment operating profit (loss):
Wholesale ............ $ (12.9) $ (13.0) $ (7.1) $ (8.3)
Licensing ............ 3.8 2.0 8.3 4.7
Retail ............... (2.5) (1.9) (6.6) (4.5)
-------- -------- -------- --------
$ (11.6) $ (12.9) $ (5.4) $ (8.1)
======== ======== ======== ========
</TABLE>
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 SIX MONTHS ENDED
-------------------------------------- --------------------------------------
JULY 2, JULY 4, JULY 2, JULY 4,
2000 1999 2000 1999
------------------ ------------------ ------------------ ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues ...................... $ 120.5 100.0% $ 122.0 100.0% $ 293.3 100.0% $ 282.8 100.0%
======== ======== ======== ========
Gross profit ...................... 32.3 26.8 33.6 27.6 88.3 30.1 80.8 28.6
Selling, general and administrative
expenses ...................... 44.2 36.7 46.5 38.1 93.9 32.0 89.0 31.5
Operating loss .................... (11.6) (9.7) (12.9) (10.5) (5.4) (1.8) (8.1) (2.9)
Net loss .......................... (7.0) (5.8) (7.9) (6.4) (3.7) (1.3) (5.7) (2.0)
</TABLE>
SECOND QUARTER FISCAL 2000 COMPARED WITH SECOND QUARTER FISCAL 1999
NET REVENUES
Net revenues for the three months ended July 2, 2000 decreased $1.5
million, or 1.2%, to $120.5 million as compared to net revenues of $122.0
million in the corresponding prior-year period.
Wholesale revenues for the three months ended July 2, 2000 decreased $4.7
million, or 5.4%, to $80.7 million as compared to $85.4 million in the
corresponding prior-year period. Exclusive of sales to Japan, wholesale revenues
decreased $2.0 million, or 2.5%. The decrease was attributable to a decrease in
sales from the women's and accessories businesses, partially offset by an
increase in sales from the International DKNY JEANS and menswear businesses.
Licensing revenues for the three months ended July 2, 2000 increased $3.5
million, or 59.2%, to $9.3 million as compared to $5.8 million in the
corresponding prior-year period. The increase was primarily due to royalties
from the Company's regional Japanese license and growth in sales of certain
other new and existing licensed products.
Retail revenues for the three months ended July 2, 2000 decreased $0.3
million, or 1.2%, to $30.5 million as compared to $30.8 million in the
corresponding prior-year period. The decrease was primarily attributable to a
16.5% overall decrease in outlet store sales, a 11.3% decrease in total comp
store sales and a decrease in the number of outlet stores, partially offset by a
52.0% overall increase in full-price retail stores.
GEOGRAPHIC
Net revenues for the United States for the three months ended July 2, 2000
decreased $3.7 million, or 4.0%, to $89.1 million as compared to $92.8 million
in the corresponding prior-year period. The decrease was primarily attributable
to decreased wholesale revenues.
Net revenues for Japan for the three months ended July 2, 2000 decreased
$2.3 million, or 38.1%, to $3.8 million as compared to $6.1 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 three months ended July
2, 2000 increased $4.5 million, or 19.4%, to $27.6 million as compared to $23.1
million in the corresponding prior-year period. The increase is primarily
attributable to increased wholesale and licensing revenues.
12
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GROSS PROFIT
Gross profit as a percentage of net revenues for the three months ended
July 2, 2000 was 26.8%, as compared to 27.6% in 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, as a
credit to cost of sales. Exclusive of the restructuring credit, gross profit as
a percentage of net revenues for the three months ended July 2, 2000 was 26.2%.
The decrease in gross profit was attributable to greater sales dilution and
higher than anticipated inventory shrinkage.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to 36.7% of net
revenues for the three months ended July 2, 2000, as compared to 38.1% in the
corresponding prior-year period. Exclusive of a provision recorded in fiscal
1999 for $1.7 million resulting from the bankruptcy of Loehmann's Inc.
("Loehmann's"), selling general and administrative expenses were 36.7% of net
revenues for the corresponding prior-year period.
OPERATING LOSS
Operating loss for the three months ended July 2, 2000 decreased $1.3
million, or 9.4%, to $11.6 million as compared to $12.9 million in the
corresponding prior-year period. The decrease is attributable to increased
operating profit in the licensing segment and a slight decrease in the operating
loss in the wholesale segment, partially offset by increased operating losses in
the retail segment.
INTEREST EXPENSE, NET
Interest expense, net was $0.2 million for the three months ended July 2,
2000 as compared to $1.0 million for the corresponding prior-year period. The
decrease was primarily attributable to a decrease in average borrowings during
the three months ended July 2, 2000, as compared to the corresponding prior-year
period.
INCOME TAX BENEFIT
The provision for income taxes represents Federal, foreign, state and
local income taxes. The effective income tax rate for the three months ended
July 2, 2000 and July 4, 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 LOSS
Net loss for the three months ended July 2, 2000 decreased $0.9 million,
or 11.3%, to $7.0 million, as compared to $7.9 million in the corresponding
prior-year period.
SIX MONTHS FISCAL 2000 COMPARED TO SIX MONTHS FISCAL 1999
NET REVENUES
Net revenues for the six months ended July 2, 2000 increased $10.5
million, or 3.7%, to $293.3 million as compared to net revenues of $282.8
million in the corresponding prior-year period.
Wholesale revenues for the six months ended July 2, 2000, increased $0.3
million, or 0.1%, to $216.1 million as compared to $215.8 million in the
corresponding prior-year period. The increase was attributable to an increase in
sales from International DKNY JEANS and the menswear and accessories businesses,
somewhat offset by a decrease in sales from the women's business.
Licensing revenues for the six months ended July 2, 2000 increased $7.0
million, or 55.4%, to $19.7 million as compared to $12.7 million in the
corresponding prior-year period. 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.
13
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail revenues for the six months ended July 2, 2000 increased $3.2
million, or 5.9%, to $57.5 million as compared to $54.3 million in the
corresponding prior-year period. The increase was primarily attributable to a
70.8% increase in full-price retail store sales primarily due to an increase in
the number of full-price free-standing retail stores, somewhat offset by a 8.7%
decrease in total comp store sales, a 13.2% decrease in outlet store sales and a
decrease in the number of outlet stores.
GEOGRAPHIC
Net revenues for the United States for the six months ended July 2, 2000
increased $0.2 million, or 0.9%, to $194.4 million as compared to $194.2 million
in the corresponding prior-year period. The increase was primarily attributable
to increased licensing and retail revenues.
Net revenues for Japan for the six months ended July 2, 2000 decreased
$4.9 million, or 35.0%, to $9.0 million as compared to $13.9 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 six months ended July 2,
2000 increased $15.2 million, or 20.4%, to $89.9 million as compared to $74.7
million in the corresponding prior-year period. The increase is attributable to
increased wholesale and licensing revenues and the Company's 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 2, 2000 was 30.1%, as compared to 28.6% 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 six months ended July 2, 2000 was 29.8%. The increase 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 32.0% of net
revenues for the six months ended July 2, 2000, as compared to 31.5% in the
corresponding prior-year period. Exclusive of a provision recorded for $1.7
million in fiscal 1999 resulting from the bankruptcy of Loehmann's, selling,
general and administrative expenses were 30.9% of net revenues in the
corresponding prior-year period. The increase is primarily a result of the
growth of the Company's full-price free-standing retail stores and certain other
initiatives.
OPERATING LOSS
Operating loss for the six months ended July 2, 2000 decreased $2.7
million, or 33.1%, to $5.4 million as compared to $8.1 million in the
corresponding prior-year period. The decrease is attributable to increased
operating profit in the licensing segment and a decrease in the operating loss
in the wholesale segment, partially offset by increased operating losses in the
retail segment.
INTEREST EXPENSE, NET
Interest expense, net was $0.8 million for the six months ended July 2,
2000 as compared to $1.9 million for the corresponding prior-year period. The
decrease was primarily attributable to a decrease in average borrowings during
the six months ended July 2, 2000, as compared to the corresponding prior-year
period.
INCOME TAX BENEFIT
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective income tax rate for the six months ended July 2,
2000 and July 4, 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.
14
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET LOSS
Net loss for the six months ended July 2, 2000 decreased $2.0 million,
or 36.0%, to $3.7 million, as compared to $5.7 million in the corresponding
prior-year period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds have historically been, and are
expected to continue to be, cash flow from operations and borrowings under its
revolving credit facility (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 July 2, 2000, the
Company had cash and cash equivalents of $14.7 million, as compared to $11.2
million at July 4, 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 July 2, 2000, no amounts were
outstanding under the Facility, as compared to $25.5 million at July 4, 1999.
Net cash provided by operating activities was $2.2 million for the six
months ended July 2, 2000 as compared to cash required for operating
activities of $5.8 million in the corresponding prior-year period. The
increase in net cash provided by operating activities primarily reflects a
decrease in accounts receivable and inventory, a lesser decrease in accounts
payable, accrued expenses and other current liabilities and the Company's
improved profitability, partially offset by the Company's recording of
deferred revenues associated with the Company's licensing agreements in the
corresponding prior-year period. Net cash used for investing activities
decreased $13.4 million for the six months ended July 2, 2000 as compared to
the corresponding prior-year period, primarily 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.
There was no net cash provided by financing activities for the six months
ended April 2, 2000, as compared to $25.5 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 July 2, 2000, the Company had
contracts to exchange foreign currencies in the form of forward exchange
contracts in the amount of $148.9 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 July 2,
2000 was approximately $3.2 million.
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 $2.5
million and $6.7 million for the six months ended July 2, 2000 and July 4, 1999,
respectively. As of August 11, 2000, the Company had outstanding commitments for
additional capital expenditures during fiscal 2000 of approximately $5.3
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.
15
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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"
include, without limitation, the Company's expectations regarding sales,
earnings, or other future financial performance and liquidity, and general
statements about future operations and operating results. Although the
Company believes that its expectations are based on reasonable assumptions
within the bounds of its knowledge of its business and operations, there can
be no assurance that actual results will not differ materially from its
expectations. Factors that could cause actual results to differ from
expectations include, without limitation: (i) the failure of certain key
members of the Company's design teams or management, including Ms. Karan, to
continue to be active in the business of the Company; (ii) the possibility of
a termination of the Company's license with Gabrielle Studio, Inc., a
bankruptcy of Gabrielle Studio, or transfer of the stock of Gabrielle Studio;
(iii) the timing and expense associated with, and effects of, 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 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.
16
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
25, 2000.
(b) The following directors were elected at the Annual Meeting of
Stockholders: John D. Idol and John Eyler, as Class I Directors for a
three-year term expiring at the 2003 Annual Meeting.
(c) (i) Each person elected as a director received the number of votes
indicated beside his name:
NAME VOTES FOR VOTES WITHHELD
---- --------- --------------
John D. Idol 18,544,191 85,714
John Eyler 18,542,647 87,258
(ii) 18,586,296 votes were cast for and 23,918 votes were cast against
the ratification of the selection of Ernst & Young LLP as
auditors for the Company. Abstentions totaled 19,491.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 - Fifth Amendment, dated as of June 9, 2000, among The Donna
Karan Company, The Donna Karan Company Store, G.P., Donna Karan
Studio, and DK Footwear Partners, the financial institutions
from time to time parties thereto as lenders, the financial
institutions from time to time parties thereto as issuing
banks, Citibank, N.A., as administrative agent, The Chase
Manhattan Bank and Nationsbank, N.A., as co-agents.
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 July 2, 2000.
17
<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 16, 2000 By: /s/ John D. Idol
------------------
John D. Idol
Chief Executive Officer
Date: August 16, 2000 By: /s/ Joseph B. Parsons
----------------------
Joseph B. Parsons
Executive Vice President,
Chief Financial and
Administrative Officer
18
