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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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ANNUAL REPORT ON FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED JANUARY 2, 2000
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-11805
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DONNA KARAN INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 13-3882426
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
550 SEVENTH AVENUE 10018
NEW YORK, NEW YORK (zip code)
(Address of principal executive office)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (212) 789-1500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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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 period 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of Registrant's Common Stock held by
nonaffiliates as of March 29, 2000 was $89,661,008 based on 11,954,801 such
shares outstanding on such date and the closing sales price for the Common Stock
on such date of $7.50 as reported on the New York Stock Exchange. As of
March 29, 2000, the Registrant had 21,989,949 shares of Common Stock
outstanding.*
PART III incorporates information by reference from the Registrant's
definitive Proxy Statement for its 2000 Annual Meeting of Shareholders to be
filed with the Commission within 120 days of January 2, 2000.
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* Does not include 18 shares of Class A Common Stock, par value $.01 per share,
and two shares of Class B Common Stock, par value $.01 per share, outstanding
as of such date.
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ITEM 1. BUSINESS
OVERVIEW
Donna Karan International Inc. 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-REGISTERED TRADEMARK-, DKNY-REGISTERED TRADEMARK-, DKNY JEANS-TM- and DKNY
ACTIVE-TM- brand names. The Company also selectively has granted licenses for
the manufacture and distribution of certain other products under its brand
names, including beauty and beauty-related products, jeanswear, activewear,
hosiery, intimate apparel, eyewear, and children's apparel.
The Company's goal is to build and maintain a balanced company through the
right combination of wholesale, licensing, and retail operations. The Company's
four major brands are:
- DONNA KARAN NEW YORK-REGISTERED TRADEMARK-, which addresses the lifestyle
needs of the luxury goods customer.
- DKNY-REGISTERED TRADEMARK-, which addresses the spirit and energy of New
York, and includes a wide range of merchandise from evening to work to
weekend.
- DKNY JEANS-TM-, which addresses the jeans market, primarily targeted to a
younger, more casual consumer.
- DKNY ACTIVE-TM-, which addresses the apparel and lifestyle needs of
consumers with an active lifestyle.
The Company's principal trademarks, "DONNA KARAN," "DONNA KARAN NEW YORK,"
"DKNY," and variations thereof are licensed to the Company pursuant to a license
agreement with Gabrielle Studio, Inc., a corporation wholly-owned by Ms. Donna
Karan, her husband, Mr. Stephan Weiss, and certain affiliated trusts. See
"Trademarks" below in this section for the terms on which the trademarks are
licensed to the Company. Brand names italicized throughout this document reflect
registered and unregistered trademarks used by and licensed to the Company.
The Company operates in three segments: wholesale, licensing, and retail.
During fiscal 1999, approximately 69.9% of the Company's net revenues were
derived from sales within the United States and approximately 30.1% were derived
from sales outside the United States. See Note 16 to notes to financial
statements included elsewhere herein for financial information relating to the
Company's business and geographic segments.
As used in this report, references to the "Company" mean the predecessors to
Donna Karan International Inc. as of the dates and periods prior to the
consummation of the Company's initial public offering in July 1996 and,
thereafter, collectively, Donna Karan International Inc. and its subsidiaries.
The principal executive offices of the Company are located at 550 Seventh
Avenue, New York, New York 10018. Its telephone number is (212) 789-1500.
WHOLESALE
The Company's wholesale segment consists of womenswear, menswear, and
accessories products offered under the DONNA KARAN NEW YORK, DKNY, DKNY JEANS,
and DKNY ACTIVE brands. The Company's total wholesale net revenues for fiscal
1999 were $496.3 million. Included in wholesale net revenues are sales of
apparel and accessory products by the Company to department stores, specialty
stores, boutiques and the Company's free-standing International Retail Stores
(as defined below in "Licensing"). To increase wholesale sell-through at retail,
the Company continues to improve in-store presentations through expansion and/or
renovation of in-store shops ("shop-in-shop") and continues to rollout a
merchandise coordinator program to enhance the retail presentation standards and
train in-store selling specialists.
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The approximate suggested retail price ranges for the wholesale products
sold by the Company set forth below are indicative of their approximate
individual item price ranges:
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DRESSES
SKIRTS AND SHIRTS AND (OTHER THAN
JACKETS PANTS BODYSUITS SWEATERS EVENING WEAR)
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WOMENSWEAR:
DONNA KARAN NEW YORK
Collection (black label)........... $990-1,800 $395-725 $395-595 $320-800 $580-1,650
Signature (gold label)............. 720-995 230-595 145-350 295-430 235-770
DKNY................................. 220-595 65-295 45-225 80-225 130-395
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SUITS SPORTSCOATS TROUSERS
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MENSWEAR:
DONNA KARAN NEW YORK
Collection (black label)............................... $1,395-1,995 $850-1,350 $250-275
Signature (gold label)................................. 795-995 550-750 175-195
DKNY..................................................... -- 200-295 80-150
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SMALL LEATHER
HANDBAGS GOODS SHOES
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ACCESSORIES:
DONNA KARAN NEW YORK........................................ -- -- $225-595
DKNY........................................................ $60-350 $25-140 110-295
DKNY JEANS/ACTIVE........................................... 55-95 20-60 25-200
</TABLE>
WOMENSWEAR
The Company designs, sources, markets, and distributes womenswear under the
DONNA KARAN NEW YORK, DKNY, DKNY JEANS, and DKNY ACTIVE brands. The original
DONNA KARAN NEW YORK collection for women was based upon Ms. Karan's concept of
"seven easy pieces," a collection of bodysuits and tights, dresses, skirts,
blouses, jackets, pants, and accessories that when layered in combinations
achieved a varied, but consistent, high fashion look. In general, there are four
annual seasonal presentations for each DONNA KARAN NEW YORK and DKNY collection:
Fall, Resort, Spring, and Summer. The Spring and Fall collections typically are
presented at major fashion shows, which generate extensive press coverage in the
domestic and international fashion press as well as in the general media.
In the fourth quarter of 1999, the Company combined the DONNA KARAN NEW YORK
and DKNY women's business into one operating division.
DONNA KARAN NEW YORK COLLECTIONS. The DONNA KARAN NEW YORK brand consists
of two collections: DONNA KARAN NEW YORK and DONNA KARAN SIGNATURE.
The DONNA KARAN NEW YORK collection ("black label") is the foundation of the
Donna Karan brands. This exclusive apparel collection is a modern system of
dressing which embodies the ultimate in luxury, sensuality, comfort, and
creative expression using the finest quality fabrics, workmanship, and
technological innovation. This collection is designed for sophisticated,
international, affluent women and is distributed exclusively in key markets to a
limited number of doors. (A "door" is a single retail outlet.) For the Fall 1998
season, the Company reintroduced into the DONNA KARAN NEW YORK collection an
"Essentials" program, which includes timeless versions of the Company's most
successful styles and newly designed classic signature styles.
The DONNA KARAN SIGNATURE collection ("gold label") is a complete lifestyle
collection designed to address the specific needs of the modern, professional
woman. Based on the spirit of the Donna Karan
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design vision, the DONNA KARAN SIGNATURE collection was created to deliver a
balanced mix of fashion expression, sportswear function, and classification
items. While still a designer collection, the DONNA KARAN SIGNATURE collection
is priced and merchandised for wider distribution than the DONNA KARAN NEW YORK
collection.
DKNY COLLECTION. DKNY represents the energy and spirit of New York. The DKNY
product line is designed to appeal to a broader customer base and has wider
distribution than the DONNA KARAN NEW YORK and DONNA KARAN SIGNATURE
collections.
The DKNY collection addresses a broad range of lifestyle needs from work to
weekend to eveningwear. The collection includes jackets, skirts, blouses,
bodysuits, dresses, pants, knits, sweaters, and outerwear.
MENSWEAR
The Company designs, sources, markets, and distributes menswear under the
DONNA KARAN NEW YORK, DKNY, DKNY JEANS, and DKNY ACTIVE brands. Generally, there
are four annual seasonal presentations for each DONNA KARAN NEW YORK and DKNY
collection: Fall, Resort, Spring, and Summer. In recognition of the DONNA KARAN
NEW YORK collection, Ms. Karan received the Council of Fashion Designers of
America's Menswear Designer of the Year Award for 1992.
DONNA KARAN NEW YORK COLLECTIONS. THE DONNA KARAN NEW YORK brand consists of
two collections of men's apparel: DONNA KARAN NEW YORK ("black label") and DONNA
KARAN SIGNATURE ("gold label").
The DONNA KARAN NEW YORK collection is designed to deliver the same
simplified system of dressing for men that originally was created for women.
This collection expresses the ultimate in style, comfort, function,
technological innovation, and quality using the finest fabrication and
workmanship. It is comprised of a balanced mix of tailored clothing, dress
furnishings, and luxury sportswear and classification items. Like the DONNA
KARAN NEW YORK women's collection, the menswear collection has limited
distribution through premier retailers and the Company's free-standing
International Retail Stores.
The DONNA KARAN SIGNATURE collection is a lifestyle collection created
specifically for the modern professional man and captures the design vision of
Donna Karan through a mix of tailored clothing and dress furnishings. Targeting
a broader audience and more widely distributed, this collection is priced below
the DONNA KARAN NEW YORK black label collection but maintains a similar
dedication to quality and design, while using lower cost fabrications and more
commercial production techniques.
DKNY COLLECTION. The DKNY menswear collection is positioned as a modern
lifestyle collection. The collection includes dress and casual sportswear. Other
products in the collection, including suitings and dress furnishings, are being
manufactured and sold by licensees. The DKNY menswear collection is designed to
appeal to a broader customer base than the DONNA KARAN NEW YORK collections for
men and is more widely distributed than those collections.
The Company relaunched the DKNY men's sportswear collection for the Spring
1999 season to offer a more competitively priced and broadly distributed product
range. Additionally, the Company plans to increase the number of fixtured
shop-in-shops which carry the DKNY men's collection.
ACCESSORIES
The Company sells accessory products under the DONNA KARAN NEW YORK, DKNY,
DKNY JEANS, and DKNY ACTIVE brands. These lifestyle collections are designed to
complement their respective apparel collections, as well as exist as stand-alone
collections.
DONNA KARAN NEW YORK COLLECTIONS. The DONNA KARAN NEW YORK collection of
accessories is a limited designer collection of luxury footwear for women and
men. These collections are sold to the Company's
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free-standing International Retail Stores and to a limited number of better
department and specialty stores.
For the Fall 2000 season, the Company plans to re-introduce the DONNA KARAN
NEW YORK accessories collection for women, which is expected to be a designer,
luxury-brand, collection of handbags, small leather goods, and belts. This
collection is expected to be sold to the Company's free-standing International
Retail Stores and to a limited number of better department and specialty stores.
DKNY, DKNY JEANS, AND DKNY ACTIVE COLLECTIONS. The DKNY accessories
collection includes bags, small leather goods, and footwear for men and women,
including a balance of fashion, function, and value items. The women's
accessories and shoe collections are widely distributed through department and
specialty stores, while the men's collections have a more limited range of
distribution. For the Fall 1999 season, the Company launched a DKNY children's
shoe collection. Also for the Fall 1999 season, the Company launched a new
comfort shoe line under the DKNY brand, with a price range of $69 to $110. For
the Spring 2000 season, the Company expanded its offerings under the DKNY shoe
collection to include DKNY ESSENTIALS (fashion basics), with a price range of
$110 to $145.
The DKNY JEANS footwear collection for women is designed to be a fashion
basics line targeted to a younger, fashion-oriented customer. Under the DKNY
ACTIVE label, the Company offers an extensive athleisure and performance
athletic footwear collection for men, women, and children. This collection is
sold through department stores and specialty athletic stores.
INTERNATIONAL DKNY JEANS AND DKNY ACTIVE COLLECTIONS
Starting with the Spring 2000 season, the Company began to expand its DKNY
JEANS and DKNY ACTIVE business for men and women in the European and Middle
Eastern markets. The DKNY JEANS collection is positioned as a modern lifestyle
collection targeted to a younger, more casual consumer in the international
jeans market and the DKNY ACTIVE collection is positioned to target the apparel
and lifestyle needs of international consumers with an active lifestyle. These
collections are sold through international department stores, specialty stores,
and the Company's free-standing International Retail Stores.
WHOLESALE CUSTOMERS, SALES, AND SUPPORT
The Company distributes its wholesale products through better department and
specialty stores and boutiques, and through the free-standing International
Retail Stores operated under the DONNA KARAN NEW YORK, DKNY, and DKNY JEANS
brand names. The Company's better department and large specialty store customers
include Bloomingdale's, Macy's, Saks Fifth Avenue, Neiman Marcus, Nordstrom, and
Dillards. The Company also sells products, including excess and out-of-season
merchandise, through secondary distribution channels, including the Company's
outlet stores.
Certain of the Company's customers, including some under common ownership
with each other, have accounted for significant portions of the Company's
revenues; however, no customer accounted for more than 10% of the Company's
revenue for fiscal 1999. The Company's 10 largest wholesale customers accounted
for approximately 45% of the Company's revenues during 1999.
Retailers carrying the Company's collections stock and display the
merchandise generally in accordance with the Company's standards, which may
include creating shop-in-shops, or providing special signs, display cases, and
display racks, depending on the collection. The Company and its licensees are
expanding the shop-in-shop program for the Company's products. Under this
program, participating retailers set aside dedicated floor space to provide for
a broad assortment of Company products in a combination of wall case and
free-standing fixtures. The Company believes that shop-in-shops enhance brand
recognition and encourage a store to carry a representative cross-section of the
Company's product line for each season. The Company has focused its efforts and
its licensees' efforts on increasing the number and size of shop-in-shops or
renovating existing shop-in-shops, where appropriate. The size of the
shop-in-shops
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typically range from 600 to 2,000 square feet for womenswear, 400 to 750 square
feet for menswear, and 100 to 300 square feet for accessories. The continued
expansion of the Company's shop-in-shop and fixturing program is dependent on
market conditions, including continued demand for the Company's and its
licensees' products.
The Company's sales and marketing departments consist primarily of
individuals located in the Company's New York headquarters. The Company has
begun to utilize regional sales representatives or agents and/or distributors,
both domestically and internationally, for several of its product categories to
expand its channels of distribution.
LICENSING
In late 1997, the Company began to expand its licensing activities by
forming strategic alliances with companies to develop, manufacture, market, and
sell products under the DONNA KARAN NEW YORK, DKNY, DKNY JEANS, and DKNY ACTIVE
brands. In fiscal 1998, the Company entered into its first regional license
whereby, in certain cases, the licensee also produces and sources products
independently and together with the Company and its product licensees. The
Company's licensing strategy consists of the following elements: leveraging the
Company's brands by entering into licenses for related product categories,
increasing awareness for the Company's brands, entering new distribution
channels, increasing floor space in existing distribution channels, increasing
the advertising and overall promotion of the Company's brands, and generating an
increased stream of royalty revenues that provides a balance to the Company's
wholesale and retail business. The Company's licensing revenues for fiscal 1999
were $30.1 million, exclusive of a one-time credit of $5.0 million as a result
of satisfying certain conditions in one of the Company's licenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
PRODUCT LICENSES
Product licensees are granted the exclusive and, in certain cases,
non-exclusive right to manufacture and sell at wholesale and, in limited
circumstances, through retail stores specified products under the DONNA KARAN
NEW YORK, DKNY, DKNY JEANS, and/or DKNY ACTIVE brand names. In consideration for
such licenses, licensees pay royalties to the Company based upon a percentage of
net sales of licensed products (as defined), subject, generally, to payment of a
minimum royalty. Additionally, the Company typically obtains a commitment from
the licensee for a minimum level of advertising and marketing based upon a
percentage of net sales of licensed products, with additional funds allocated to
the launch of new products. License agreements generally have three- to six-year
initial terms, with renewal options if certain minimum sales thresholds are met.
To ensure that products sold by its licensees meet the Company's design and
quality standards, the Company takes an active role in the design, quality
control, packaging, advertising, marketing, merchandising, and distribution of
each licensed product and such items are also subject to the Company's prior
approval.
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As of March 1, 2000, the Company had license agreements with the following
licensees providing for the manufacture and distribution of the categories of
products listed below under the trademarks specified as of such date:
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LICENSEE LICENSED MARK PRODUCTS
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Estee Lauder Inc. DONNA KARAN NEW YORK Men's and women's beauty and
DKNY beauty-related products
LC Libra, LLC, a subsidiary DKNY JEANS Men's and women's jeanswear
of Liz Claiborne, Inc. DKNY ACTIVE and active lifestyle products
(Western Hemisphere)
LC Libra, LLC, a subsidiary * Women's careerwear and
of Liz Claiborne, Inc. sportswear
Hanes Hosiery, a division of DONNA KARAN NEW YORK Women's pantyhose, legwear,
Sara Lee Corp. DKNY and socks
Wacoal America, Inc. DONNA KARAN NEW YORK Women's intimate apparel
DKNY
Esprit de Corp./Oxford DKNY Girls, boys, infants, and
Industries Inc.** DKNY KIDS toddler apparel
(United States & Canada)
Peerless Delaware, Inc. DKNY Men's tailored clothing
Phillips-Van Heusen Corp. DKNY Men's dress shirts
(North America)
Mallory & Church DKNY Men's neckwear and hosiery
(United States & Canada)
Fairbrooke Fashion Corp. DONNA KARAN SIGNATURE Women's coats
DKNY
Mantero Seta, SPA (Europe) DONNA KARAN SIGNATURE Men's ties
DKNY Women's scarves and men's
ties
Cipriani Accessories Inc. & DKNY Women's and men's belts
The Max Leather Group, Inc. DKNY JEANS Men's small leather goods
DKNY ACTIVE
CSB Home Fashions, Inc. DONNA KARAN NEW YORK Bed and bath products
DKNY
CWF Children Worldwide DKNY Girls, boys, infants and
Fashion S.A. DKNY JEANS toddler apparel
(Europe & Middle East) DKNY ACTIVE
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* This line will bear a new label, as of yet to be determined and which is
expected to be under the DKNY trademark.
** Effective with the Fall 2000 season, Oxford Industries Inc. was granted the
license for children's apparel in the United States and Canada.
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LICENSEE LICENSED MARK PRODUCTS
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Fossil, Inc. DONNA KARAN NEW YORK Men's, women's, and
DKNY children's watches
DKNY ACTIVE
DKNY JEANS
Haggar Clothing Co. DKNY Men's finished bottom pants
and shorts
Marchon Eyewear DONNA KARAN NEW YORK Men's and women's sun and
DONNA KARAN SIGNATURE ophthalmic eyewear and
DKNY eyewear accessories
DKNY ACTIVE
Swank, Inc. DKNY Women's fashion jewelry
Swimwear Anywhere, Inc. DKNY Women's swimwear and
DKNY ACTIVE swimwear-related apparel
Echo Lake Industries, Ltd. DONNA KARAN NEW YORK Men's hosiery
Cavalco Confezioni S.A. DONNA KARAN SIGNATURE Men's dress shirts
(Europe) DKNY
Global Amici, Inc. DONNA KARAN NEW YORK Decorative accessories
DKNY
Butterick Company, Inc. DONNA KARAN NEW YORK Paper patterns and knitting
(Vogue Patterns) DKNY patterns
</TABLE>
The Company entered into strategic licensing alliances for its beauty and
beauty-related products, jeans and activewear lines, and a new better career
sportswear line, which are described below.
BEAUTY AND BEAUTY-RELATED PRODUCTS. In November 1997, the Company granted
to Estee Lauder Inc. ("ELI") the exclusive, long-term, worldwide license rights
to the DONNA KARAN NEW YORK and DKNY trademarks for the manufacture, marketing,
distribution, and sale of beauty and beauty-related products, including
fragrances, cosmetics, skincare products, and beauty-related accessories. In the
Fall of 1999, a women's DKNY fragrance was launched in limited distribution,
with a broader launch in Spring 2000. The men's DKNY fragrance is expected to
launch in Fall 2000.
DKNY JEANS, DKNY ACTIVE, AND "BETTER CAREER" PRODUCTS. In December 1997,
the Company and a subsidiary of Liz Claiborne Inc. ("LCI") entered into a
strategic licensing alliance for new lines of men's and women's jeanswear and
active clothing. LCI was granted the exclusive, long-term license rights to the
DKNY JEANS and DKNY ACTIVE trademarks for apparel products and the exclusive
right to market, distribute, and sell the DKNY JEANS and DKNY ACTIVE apparel
collections in the Western Hemisphere. The DKNY JEANS lines launched for the
Spring 1998 season, the DKNY ACTIVE lines launched for the Spring 1999 season,
and the DKNY JEANS juniors line launched for the Spring 2000 season. This
licensing alliance marked the Company's expansion from the designer and bridge
markets into the women's better casual sportswear market.
The Company and LCI expanded their relationship in December 1999 by
completing a strategic licensing alliance for a new line of women's career and
casual sportswear targeted for the better market segment. LCI has been granted
the exclusive right to market, distribute, and sell such new collection in the
United States and Canada. This line will launch for the Spring 2001 season under
a new label and will include item-oriented pieces such as jackets, dresses,
shirts, sweaters, skirts, and pants. This line is
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expected to be positioned as a modern accessibly-priced collection in the urban
style of the Company's DKNY brand.
REGIONAL LICENSES
Starting in fiscal 1998 and continuing into 1999, the Company began to enter
into regional licenses for a given geographic area. Depending upon the
territory, regional licensees may be granted the right to import, manufacture,
and/or distribute, and, in limited instances, license specified products under
one or more brand names in the specified geographic region. These regional
licenses also generally are granted retail development rights in the region. The
economic arrangements of these regional licenses generally are similar to those
of the Company's product licenses. The Company seeks to preserve the integrity
of its brands by monitoring and approving the design and quality of the products
sold in the region. The license agreements provide that the regional licensees
also will collaborate with the Company's product licensees in order to offer a
broad range of the Company's products of consistent style and quality.
The first of these regional license arrangements began in March 1998 with
the grant to Donna Karan Japan K.K., a Japanese corporation ("Donna Karan
Japan"), of a 16-year exclusive license to import, manufacture, license, and/or
distribute DONNA KARAN NEW YORK and DKNY products in Japan, with certain
exceptions. In addition, Donna Karan Japan was granted the exclusive right to
develop and operate a total of 12 DONNA KARAN NEW YORK and DKNY retail boutiques
in Japan over the term of the agreement. The Company receives a royalty on net
sales of licensed products and a servicing fee on net sales of Donna Karan
products imported by Donna Karan Japan.
In February 2000, the Company entered into a new strategic licensing
alliance with HPL-21 Holdings PTE Ltd. ("HPL-21"), an affiliate of Hotel
Properties Ltd. and a corporation owned by the Ong family, which also has a
substantial interest in Hotel Properties Ltd. Under this agreement, HPL-21 was
granted exclusive retail rights for the DONNA KARAN NEW YORK, DKNY, DKNY JEANS,
and DKNY ACTIVE apparel products in eight countries in the Far East, together
with certain product distribution rights in these countries. This new agreement
replaces the Company's existing retail development agreement with HPL-21 and its
existing boutique arrangements with a related company owned by the Ong family,
and will convert the majority of the Company's existing wholesale business with
such entities into a regional royalty-based licensing business. As of
January 2, 2000, there were 15 full-price free-standing boutiques operating in
this region.
As of January 2, 2000, the Company also had entered into regional licenses
for Australia and New Zealand and South Korea.
RETAILING
The Company is pursuing a strategy to expand its channels of distribution by
opening full-price, free-standing retail stores, while continuing to license to
others the right to open free-standing stores internationally.
In fiscal 1999, the Company's net revenues from its retail operations were
$130.4 million, which represented the Company's outlet store and full-price
retail operations. With respect to free-standing International Retail stores,
products manufactured by the Company and sold to the free-standing International
Retail stores are included in the Company's wholesale net revenues and royalties
derived from sales by the Company's licensees of their licensed products to the
free-standing International Retail stores are included in the Company's
licensing revenues.
COMPANY-OWNED FULL-PRICE STORES
The Company plans to open full-price, free-standing retail stores in upscale
regional malls and major street locations generally in the largest urban markets
in the United States and in limited international
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locations. In fiscal 1999, the Company opened its worldwide flagship DKNY
full-price, free-standing store in New York City. In January 1999, the Company
acquired two DKNY and one DONNA KARAN NEW YORK free-standing retail stores in
the United Kingdom from an affiliate of Hotel Properties Ltd., which previously
had operated these stores. See Note 11 in the notes to financial statements
included elsewhere herein. In addition, in fiscal 1999 the Company opened DKNY
full-price, free-standing stores in Cherry Creek, Colorado; Boston,
Massachusetts; King of Prussia, Pennsylvania; Mission Viejo, California; and
Huntington, New York. At the end of fiscal 1999, the Company operated 13
full-price, free-standing retail stores, two of which are under the DONNA KARAN
NEW YORK name and 11 of which are under the DKNY name. Of these 13 stores, 10
are located in the United States and 3 are located in the United Kingdom. In
fiscal 2000, the Company expects to open four or five additional full-price,
free-standing retail stores.
COMPANY-OWNED OUTLET STORES
As of January 2, 2000, the Company operated 51 outlet stores in the United
States and three outlet stores in the United Kingdom, which included one store
subsequently closed by the Company as part of its previously announced
restructuring. In fiscal 1999, the Company continued a remerchandising program
through which certain core products will be produced specifically for the outlet
stores. This program is designed to enable the Company to better balance the
merchandise flow in the outlet stores in an effort to maintain consistent sales
results and improve operating margins. The Company currently anticipates that it
will have approximately 55 outlet stores (net of anticipated outlet store
closings) in operation by the end of 2000.
LICENSED FULL-PRICE AND OUTLET STORES
INTERNATIONAL. The Company has entered into license arrangements and
strategic alliances for the opening by third parties of full-price,
free-standing retail stores in a number of international markets under the DONNA
KARAN NEW YORK, DKNY, DONNA KARAN, and DKNY JEANS marks (the "International
Retail Stores"). The free-standing International Retail Stores operated under
these names generally carry the corresponding product lines exclusively. There
are provisions in certain of the agreements for these International Retail
Stores granting certain product and/or boutique exclusivity within a defined
geographical area. These licenses are granted on a royalty-free basis but
require certain minimum purchases of Company product. Additionally, in
connection with its regional licenses, the Company also has granted such
licensees the right to open and operate full-price, free-standing retail stores
and, in some cases, outlet stores in their respective territory. As of
January 2, 2000, there were 79 free-standing International Retail Stores owned
by third parties unaffiliated with the Company (including stores operated by
regional licensees). The Company anticipates that approximately 90 free-standing
International Retail Stores will be in operation by the end of fiscal 2000.
DOMESTIC. The Company has granted to LCI the non-exclusive right to open
retail stores and the exclusive right to open outlet stores under the DKNY JEANS
mark in the Western Hemisphere during the term of the Company's product license
with LCI. As of the end of fiscal 1999, two full-price retail stores and eight
outlet stores under the DKNY JEANS mark had opened.
In October 1998, the Company granted an affiliate of Ms. Donna Karan, the
Chairman and Chief Designer of the Company, the right to open and operate a
DONNA KARAN NEW YORK flagship full-price, free-standing retail store on Madison
Avenue in New York City, which store is anticipated to open in 2001. See
Note 10 in the notes to financial statements included elsewhere herein.
DESIGN
The Company was founded upon the marketing and design talents of Ms. Donna
Karan. The Company believes that its future success will depend in substantial
part on its ability to continue to originate and define fashion trends, as well
as to anticipate and react to changing consumer demands in a timely manner.
Ms. Karan, who has been designing high fashion apparel for over 25 years,
ultimately is responsible for the Company's creative inspiration, marketing, and
overall fashion direction. In addition to Ms. Karan, as of January 2, 2000, the
Company employed a design staff of approximately 75 people, some of whom have
assumed substantial design responsibilities under Ms. Karan's supervision.
9
<PAGE>
ADVERTISING, PUBLIC RELATIONS, AND MARKETING
All worldwide advertising, public relations, and marketing programs are
managed on a centralized basis through the Company's Creative Services and
Public Relations and Marketing Departments to promote a consistent global image
for the Company and its products.
The Company supports the marketing of its products with extensive image
advertising designed to appeal to a specific target group of customers. The
Company advertises principally in print and outdoor advertising media, but also
makes extensive use of video for point-of-sale displays, as well as mailers,
magalogs, catalogues, newsletters, and consumer awareness programs. For example,
the Company markets its DONNA KARAN NEW YORK brand name and image through its
WOMAN TO WOMAN bi-annual newsletter, which is a dialogue between the Company's
Chief Designer and consumers.
The Company's Public Relations and Marketing Department is responsible for
the worldwide coordination and communication for each of the Company's brands
with the industry and general press and media and offers up-to-date information
on the Company's products and activities. A variety of public relations and
marketing activities is managed on a centralized basis in order to ensure
consistency of message and presentation. In general, each of the Spring and Fall
womenswear collections is introduced at major fashion shows in New York, which
generates extensive worldwide media coverage. The Spring and Fall menswear
collections typically are introduced in Milan and New York at presentations
organized for international and domestic fashion press and retailers. The
Company and its licensees further strengthen consumer awareness with
sponsorships and special events.
SOURCING, PRODUCT DEVELOPMENT, AND QUALITY CONTROL
The Company sources products through its established relationships with
leading contractors. The Company works with fabric mills in the United States,
Europe, and the Far East to develop woven and knitted fabrics that enhance the
comfort, design, and look of its products. The Company employs fabric
specialists in the United States and Hong Kong who perform this function.
The lead times for the various stages of the Company's operations from
sourcing to delivery of finished goods differ for each of the Company's
divisions and for the various selling seasons. Fabric purchases for a
substantial portion of the Company's apparel products take place generally four
to five months prior to the corresponding selling season, although the Company
may begin to acquire fabric for certain products up to a year in advance of the
corresponding selling season. Apparel production (cut, manufacture, and trim)
generally begins approximately 90 to 120 days prior to delivery of finished
goods to customers.
The Company does not own any production facilities and engages both domestic
and foreign independent contractors for the production of its products. Total
contractors used by the Company during the year for apparel products, including
the production of samples, were approximately 300 worldwide. During 1999,
approximately 64% of direct purchases of raw materials, labor, and finished
goods were produced in Hong Kong, Taiwan, South Korea, and other Asian
countries; approximately 15% were produced in the United States and its
territories; approximately 19% were produced in Europe; and approximately 2%
were produced in other locations. None of the contractors engaged by the Company
accounted for more than 10% of the Company's total production during 1999. The
Company has had long-term relationships with many of its contractors. The
production and sourcing staff in New York oversees all aspects of fabric
acquisition, apparel manufacturing, quality control, and production, as well as
researching and developing new sources of supply. The Company operates product
sourcing and quality control offices in Hong Kong. Finished goods production,
quality control, and delivery for products sourced through South Korea are
monitored through an exclusive buying agent in the territory. Additionally,
fabric and finished goods production, quality control, and delivery for
materials and products sourced through Italy are monitored through exclusive
agents in Italy.
10
<PAGE>
The Company uses a variety of raw materials, principally consisting of woven
and knitted fabrics and yarns. During 1999, approximately 14% of the Company's
raw materials were purchased by the Company directly from suppliers and sent to
contractors to be cut and sewn or assembled. Contractors purchased the rest of
the raw materials used in the Company's products from mills or yarn suppliers
designated by the Company. In certain cases, the Company must commit to purchase
fabric from a mill before it will begin production. If the Company overestimates
the demand for a particular fabric or yarn, it frequently can utilize the excess
in garments made for subsequent seasons or made into past seasons' silhouettes
for distribution through secondary distribution channels.
The Company monitors the quality of its fabrics prior to the production of
garments and inspects prototypes of products before production runs are
commenced. The Company also performs random in-line quality control checks
during and after production before the garments leave the contractor. Final
random inspections occur when the garments are received in the Company's
distribution centers.
WAREHOUSE AND DISTRIBUTION CENTERS
To facilitate the distribution of its apparel products, the Company utilizes
distribution centers at six sites. Two of the distribution centers are operated
by the Company and four are operated by independent contractors. Distribution of
the Company's apparel and accessory products in the United States primarily is
conducted in Carlstadt, New Jersey facilities operated by the Company. The
Company operates a distribution center in Hong Kong, which services the Pacific
Rim, other than Japan. Additionally, the Company utilizes a third party
warehouse operator in The Netherlands that services the entire European market.
The Company also utilizes third party operators in California and Florida for
distribution of certain of its products and a warehouse operator in Montreal
that services the Canadian market.
COMPETITION
Competition is strong in the segments of the fashion industry in which the
Company operates. The Company competes with numerous designers, manufacturers,
and retailers, domestic and foreign, many of which are significantly larger and
have substantially greater resources than the Company. Further, with sufficient
financial backing, talented designers can become competitors within several
years of establishing a new label. The Company competes primarily on the basis
of fashion, quality, and service. The Company's business depends on its ability
to shape and stimulate consumer tastes and demands by producing innovative,
attractive, and exciting fashion products, as well as on its ability to remain
competitive in the areas of quality and price.
BACKLOG
The Company generally receives wholesale orders for its products
approximately three to five months prior to the time the products are delivered
to stores. All such orders are subject to cancellation for late delivery. At
March 14, 2000, backlog was $288.2 million, as compared to $252.7 million at
March 24, 1999. The Company's backlog depends upon a number of factors,
including the timing of the market weeks for its collections, during which a
significant percentage of the Company's orders is received, the timing of
shipments and the planned reorder business which is not ordered in advance. As a
consequence, a comparison of backlog from period to period is not necessarily
meaningful and may not be indicative of eventual shipments.
TRADEMARKS
The principal trademarks used by the Company to distinguish its brands are
DONNA KARAN NEW YORK, DKNY, DKNY JEANS and DKNY ACTIVE. Under these brands, the
Company uses many variations of these trademarks. Upon consummation of the
Company's initial public offering, Gabrielle Studio, Inc. ("Gabrielle Studio"),
a corporation owned by Ms. Donna Karan, her husband, Mr. Stephan Weiss, and
11
<PAGE>
certain affiliated trusts, granted to the Company an exclusive worldwide license
(the "Gabrielle License") in perpetuity to use and sublicense the right to use
the licensed marks including the principal trademarks of the Company, and to use
and sublicense the right to use the name and likeness of Ms. Karan, in
connection with the sale of all products and store services, other than certain
products and specified services for which Gabrielle Studio retained the right to
use or license such trademarks. Gabrielle Studio has licensed such specified
products and services to Ms. Karan. The Gabrielle License provides, however,
that at such time as Ms. Karan is no longer the Chairman of the Board of
Directors and Chief Designer of the Company, the licensed marks may only be used
by the Company in the market segments in which such licensed marks previously
were used.
The Gabrielle License may be terminated by Gabrielle Studio upon the failure
of the Company to pay any amount due within 60 days of receipt of notice of such
failure, or if the Company violates the quality control provisions of the
Gabrielle License and fails to initiate and thereafter pursue appropriate
corrective action within 60 days after a final unappealable determination by an
arbitration tribunal or court of competent jurisdiction that such violation has
occurred. The Gabrielle License also may be terminated by Gabrielle Studio upon
the occurrence of, among other events, a "change of control" of the Company,
including certain changes in ownership of voting securities, an acquisition by a
third party of 30% of the voting securities of the Company, mergers, sales of
assets, and certain changes in the composition of the Board of Directors.
Gabrielle Studio and its shareholders have agreed that Gabrielle Studio will
not engage in any activities other than those related to the Gabrielle License
and its license agreement with Ms. Karan. However, there is no restriction on
the transferability of shares of Gabrielle Studio. See Note 10 in the notes to
financial statements included elsewhere herein and "Certain Relationships and
Related Transactions--License Agreement for Principal Trademarks" included in
the 2000 Proxy Statement for a more complete description of the terms of this
license and the royalties payable thereunder.
The principal trademarks used by the Company are the subject of
registrations and pending applications throughout the world filed by the Company
or its licensees on behalf of Gabrielle Studio, for use on a variety of items of
apparel, apparel-related products, and beauty products, as well as in connection
with retail services, and the Company continues to expand its worldwide usage
and registration of related trademarks. The Company regards the license to use
the trademarks and its other proprietary rights in and to the trademarks as
valuable assets in the marketing of its products, and on a worldwide basis,
actively seeks to protect them against infringement. The Company also has an
enforcement program to seek to control the sale of counterfeit products in the
United States and in major markets abroad.
EMPLOYEES
As of January 2, 2000, the Company had approximately 2,250 employees,
including 1,970 in the United States and 280 in foreign countries. Approximately
1,050 employees are engaged in the Company's wholesale, licensing, and corporate
operations and 1,200 employees in the Company's retail operations (most of whom
are part-time employees). Approximately 230 of the Company's United States
production, design, and distribution employees are members of three locals of
the Union of Needletrades, Industrial & Textile Employees, which operates under
a collective bargaining agreement. The Company considers its relations with its
employees to be satisfactory.
GOVERNMENT REGULATIONS
The Company and its products are subject to regulation by the Federal Trade
Commission in the United States. Such regulations relate principally to the
labeling of the Company's products. The Company believes that it is in
substantial compliance with such regulations, as well as applicable federal,
state, local, and foreign rules and regulations governing the discharge of
materials hazardous to the environment. There are no significant capital
expenditures for environmental control matters either estimated in the
12
<PAGE>
current year or expected in the near future. The Company's licensed products and
licensees also are subject to additional legislation. The Company's license
agreements require that its licensees operate in compliance with all applicable
laws and regulations.
The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and a number of foreign
countries. These agreements, which have been negotiated bilaterally either under
the framework established by the Arrangement Regarding International Trade in
Textiles, known as the Multifiber Agreement, or other applicable statutes,
impose quotas on the amounts and types of merchandise which may be imported into
the United States from these countries. These agreements also allow the
signatories to adjust the quantity of imports for categories of merchandise
that, under the terms of the agreements, are not currently subject to specific
limits. The Company's imported products are also subject to United States
customs duties. In addition, each of the countries in which the Company's
products are sold have laws and regulations regarding import restrictions,
quotas, and duties. The United States and other countries in which the Company's
products are manufactured or sold may, from time to time, impose new quotas,
duties, tariffs or other restrictions, or adversely adjust present prevailing
rates, which could adversely affect the Company's operations.
FORWARD-LOOKING STATEMENTS AND BUSINESS CONSIDERATIONS
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" and 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
13
<PAGE>
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; (xx) the
violation of labor or other laws by the Company, any independent manufacturer,
or any licensee; or (xxi) risks associated with the ability of the Company and
third parties, including customers and suppliers, to timely and adequately
remedy any Year 2000 issues. 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.
ITEM 2. PROPERTIES
Certain information concerning the Company's principal facilities, all of
which are leased, is set forth below:
<TABLE>
<CAPTION>
APPROXIMATE AREA
LOCATION USE IN SQUARE FEET
- -------- --------------------------------------------- ----------------
<S> <C> <C>
550 Seventh Avenue................... Principal executive and administrative 70,000
New York, New York offices; design facilities, sales offices,
and showrooms
West 40th Street..................... DKNY'S executive and administrative offices, 170,000*
New York, New York including its design facilities, sales
offices, production offices, and showrooms
Carlstadt, New Jersey................ Distribution and warehouse facility; 385,000
administrative offices
Kowloon, Hong Kong................... Distribution and warehouse facility; 55,000
production control, sourcing, and quality
control
</TABLE>
- ------------------------
* Excludes approximately 46,000 square feet of space occupied by certain of the
Company's licensees under occupancy agreements with the Company.
The leases for the above facilities expire between 2000 and 2009. The
Company anticipates that it will be able to extend those leases which expire in
the near future on terms satisfactory to the Company or, if necessary, locate
substitute facilities on acceptable terms.
As of January 2, 2000, the Company operated 13 full-price retail stores and
54 retail outlet stores (one of which was subsequently closed) in leased
premises, with an aggregate approximate square footage of 342,000. The leases
for these stores expire between 2000 and 2020. The Company expects to renew, for
the applicable option renewal period, those leases, which expire in 2000.
The Company believes that its existing facilities are well maintained and in
good operating condition and are adequate for their intended use and the
Company's present level of operations.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in routine legal matters and
litigation incidental to its business. Although the outcome of any such matters
and litigation cannot be determined with certainty, management is of the opinion
that the final outcome of these matters and litigation should not have a
material effect on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names of the executive officers of the Company and their ages and
positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Donna Karan........... 51 Chairman of the Board and Chief Designer
Stephan Weiss......... 61 Vice Chairman and Director
John D. Idol.......... 41 Chief Executive Officer and Director
Lee Goldenberg........ 49 Corporate Executive Vice President--Worldwide Operations
Joseph B. Parsons..... 46 Corporate Executive Vice President, Chief Financial and Administrative
Officer, and Treasurer
Lynn E. Usdan......... 40 Corporate Senior Vice President, General Counsel, and Secretary
</TABLE>
DONNA KARAN founded the Company along with Stephan Weiss, Tomio Taki, Frank
R. Mori, and Takihyo Inc. in 1984 and has served as Chief Designer of the
Company from the date of its formation and Chief Executive Officer from the date
of the Company's formation until August 1997. Ms. Karan has served on the Board
of Directors of the Company since April 1996, and has served as Chairman of the
Board since July 1996. Immediately prior to the formation of the Company in
1984, Ms. Karan was the head designer at Anne Klein & Company. Ms. Karan is a
member of the Board of Directors of the Council of Fashion Designers of America
("CFDA"), the Design Industries Foundation for AIDS, and the Martha Graham
Center of Contemporary Dance. Ms. Karan also serves as a member of the Board of
Governors of the Parsons School of Design, a division of The New School.
Ms. Karan was honored as the CFDA's Designer of the Year in 1985 and 1990, as
its Menswear Designer of the Year in 1992, and as its Womenswear Designer of the
Year in 1996.
STEPHAN WEISS has served on the Board of Directors of the Company since
April 1996, and as Vice Chairman since July 1996. From 1985 to 1992, Mr. Weiss
served as the Operating Principal of the Company and from 1993 through 1995 as
the Co-Chief Executive Officer. During this time, Mr. Weiss has served the
Company in various capacities, including having direct supervisory
responsibility for the legal department, licensing, new business ventures, and
developing the Creative Services Department.
JOHN D. IDOL joined the Company in July 1997 and has served as Chief
Executive Officer and a director of the Company since August 1997. Prior to
joining the Company, Mr. Idol was employed by Polo Ralph Lauren Corporation, a
publicly traded apparel company, from 1984 through July 1997, most recently as
Group President, Product Licensing and the Home Collection.
LEE GOLDENBERG served as Corporate Executive Vice President--Worldwide
Operations of the Company since November 1995. From April 1993 to
November 1995, Mr. Goldenberg held increasingly responsible positions with the
Company, including Senior Vice President and Chief Information and Logistics
Officer. From 1985 to April 1993, Mr. Goldenberg was employed in various
management positions at Bernard Chaus Inc., most recently as Vice President
Management Information Systems.
15
<PAGE>
JOSEPH B. PARSONS has served as Corporate Executive Vice President and Chief
Financial Officer of the Company since February 1996, as Treasurer of the
Company since June 1996, and as Chief Administrative Officer since
January 1999. From January 1993 to February 1996, Mr. Parsons held increasingly
responsible financial positions with the Company, most recently as Vice
President-Finance.
LYNN E. USDAN has served as Corporate Senior Vice President, General
Counsel, and Secretary of the Company since April 1999. She joined the Company
in January 1996 as Associate General Counsel and was named Vice President in
November 1997. From February 1994 to December 1995, Ms. Usdan was Senior Counsel
at Proskauer Rose LLP, a New York law firm.
Donna Karan and Stephan Weiss are married to each other. There are no other
family relationships among the directors and executive officers.
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock trades on the New York Stock Exchange under the
symbol "DK." The following table reflects the high and low closing sales prices
of the Company's Common Stock, as reported by the New York Stock Exchange, for
each quarter of fiscal 1999 and 1998.
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998
------------------- -------------------
QUARTER HIGH LOW HIGH LOW
- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
First....................................................... $ 8.88 $5.56 $13.81 $10.50
Second...................................................... $11.00 $7.13 $16.75 $12.63
Third....................................................... $ 9.69 $7.19 $16.25 $ 7.25
Fourth...................................................... $ 9.19 $6.13 $ 8.44 $ 5.06
</TABLE>
As of March 29, 2000, the number of holders of record of the Company's
Common Stock was approximately 1,200. As of March 29, 2000, there were two
record owners of each of the Company's Class A Common Stock and Class B Common
Stock.
DIVIDEND INFORMATION
The Company anticipates that all of its earnings in the foreseeable future
will be retained to finance the continued growth and expansion of its business
and has no current intention to pay cash dividends. The Company's future
dividend policy will depend on the Company's earnings, capital requirements,
financial condition, requirements of the financing agreements to which the
Company is party, and other factors considered relevant by the Board of
Directors. The Company's existing credit agreement limits the amount of cash
dividends the Company may pay to its stockholders.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's Financial Statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31,
2000 1999 1997 1996 1995
---------- ---------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues (1).............................. $ 661,837 $ 622,646 $ 638,725 $ 612,840 $ 510,126
---------- ---------- ---------- ---------- ----------
Gross profit (1)(2)(3)........................ 211,151 154,087 121,407 200,776 179,437
Selling, general, and administrative
expenses (2)(3)(4).......................... 193,827 152,089 204,088 187,474 136,906
Restructuring charges (credits),
net (2)(3).................................. 2,645 (267) 8,635 -- --
---------- ---------- ---------- ---------- ----------
Operating income (loss)....................... 14,679 2,265 (91,316) 13,302 42,531
Equity in (loss) earnings of affiliate (5).... -- (65) 1,435 3,089 2,519
Interest expense, net......................... (4,090) (2,050) (2,515) (8,534) (7,650)
Gain on sale of interests in affiliate (5).... -- 88 -- -- 18,673
---------- ---------- ---------- ---------- ----------
Income (loss) before provision for certain
state, local, and foreign income taxes...... 10,589 238 (92,396) 7,857 56,073
Provision (benefit) for income taxes (6)...... 553 110 (11,034) (17,179) 2,398
---------- ---------- ---------- ---------- ----------
Net income (loss)............................. $ 10,036 $ 128 $ (81,362) $ 25,036 $ 53,675
========== ========== ========== ========== ==========
Net income (loss) per common shares (7):
Basic....................................... $ 0.46 $ 0.01 $ (3.78) $ 0.02 $ 0.91
Diluted..................................... $ 0.46 $ 0.01 $ (3.78) $ 0.02 $ 0.91
Weighted average common shares
outstanding (7):
Basic....................................... 21,599,500 21,598,264 21,512,050 18,742,533 16,017,032
Diluted..................................... 21,702,700 21,631,664 21,512,050 18,742,533 16,017,032
BALANCE SHEET DATA:
Working capital............................. $ 98,857 $ 91,668 $ 79,989 $ 146,805 $ 92,635
Total assets................................ 304,291 278,729 287,488 311,695 203,975
Total long-term debt, including current
portion................................... 8,209 -- 36 318 53,538
Stockholders' equity and partners' capital.... 132,769 122,104 122,464 203,791 80,846
</TABLE>
- ------------------------------
(1) Included in the financial statements for the fiscal year ended January 2,
2000 was a one-time recognition of deferred revenue amounting to
$5.0 million, relating to the ELI beauty license consummated in fiscal 1997.
(2) Included in the financial statements for the fiscal year ended January 2,
2000 were restructuring and other non-recurring charges of $11.0 million as
follows: $0.8 million as costs of sales; $6.1 million as selling, general
and administrative expenses; and $4.1 million as restructuring charges. The
restructuring charges are recorded net of $1.4 million of a prior year's
restructuring charges that were determined to be no longer necessary.
(3) Included in the financial statements for the fiscal year ended December 28,
1997 were restructuring charges, other charges, primarily nonrecurring, and
operating losses aggregating $61.5 million as follows: restructuring charges
of $8.6 million; $21.1 million related to the wind-down of the Company's
beauty business (net of a $2.2 million gain in connection with the
consummation of this transaction) of which $11.7 million was recorded as
cost of sales, $10.9 million was recorded as sales returns and $0.7 million
is recorded as selling, general, and administrative expenses; $2.3 million
of operating losses of the beauty business subsequent to the consummation of
this transaction; $12.5 million related to the wind-down of the Company's
DKNY JEANS business as a result of the license of the business classified as
$9.4 million of cost of sales and $3.1 million of selling, general and
administrative expenses; and $17.0 million of other charges related to the
realignment of a retail and distribution arrangement, additional severance
costs, and other costs related to strategic initiatives and cost
containment, which have been classified as $15.4 million of selling, general
and administrative expenses and $1.6 million of cost of sales.
(4) Included in selling, general and administrative expenses for the fiscal year
ended December 29, 1996 were one-time charges for bonuses relating to the
Company's initial public offering (the "Offering") of $5.3 million, the
award of 105,100 shares of common stock to certain employees pursuant to the
Company's 1996 Stock Incentive Plan which amounted to $2.5 million, and
18
<PAGE>
$3.2 million related to the purchase of all sales and marketing plans,
patterns, samples, fabrics and other materials developed by Designer
Holdings, Ltd. in connection with the termination of a license agreement.
(5) On March 31, 1995, the Company sold 70% of its interest in the operations of
Donna Karan Japan to a nonaffiliated party. The Company recognized a gain on
this transaction, net of transaction costs, of $18.7 million. Subsequent to
the sale, the Company accounted for its remaining 30% interest in the
operations of Donna Karan Japan using the equity method of accounting.
Equity in earnings (loss) of affiliate amounted to ($0.1) million,
$1.4 million, $3.1 million and $2.5 million for the quarter ended March 30,
1998 and fiscal 1997, 1996 and 1995, respectively. An agreement with Donna
Karan Japan provided for a management fee payable to the Company based upon
net sales of Donna Karan Japan, which amount was included as an offset
against selling, general and administrative expenses. In March 1998, the
Company and the nonaffiliated party sold all of their outstanding shares in
Donna Karan Japan to a Japanese public company. See Note 6 in the notes to
financial statements elsewhere herein.
(6) The provision for income taxes for the fiscal year ended January 2, 2000 is
net of a $4.0 million reduction in a previously recorded valuation allowance
due to the realization of certain deferred tax assets. The benefit for
income taxes for the fiscal year ended December 28, 1997 was net of a
$24.0 million valuation allowance which was recorded due to the inherent
uncertainties in estimating future taxable income. See Note 14 in the notes
to financial statements elsewhere herein. The provision for income taxes for
the fiscal year ended December 29, 1996 included a $19.0 million tax benefit
which was recorded by the Company concurrent with becoming subject to
Federal and additional state income taxes.
(7) Options outstanding during 1997 were not included in the calculation of
earnings per share because the effect would be antidilutive. Net income
(loss) per common share data for 1995 and 1996 were presented on a pro forma
basis. Pro forma net income (loss) per common share for the year ended
December 31, 1995 was based upon (a) 10,612,934 shares of common stock
outstanding during the period, (b) the number of shares of common stock
(5,298,988) sold by the Company, at an offering price of $24.00 ($21.96 net
of expenses) per share, the proceeds of which would be necessary to pay
approximately $116.0 million of distribution notes previously issued
(including accrued interest thereon), representing cumulative undistributed
taxable income on which taxes previously had been paid, and (c) 105,100
shares of Common Stock which the Company awarded to certain employees
pursuant to the Company's 1996 Stock Incentive Plan. Pro forma net income
(loss) per common share for the year ended December 29, 1996 was based on
the weighted average of the above shares outstanding for the period prior to
the Offering, and 21,468,034 shares for the period subsequent to the
Offering. The net income used in the calculation of pro forma per common
share information excluded the reduction of interest costs of $3.5 million
and $6.2 million in 1996 and 1995, respectively, and the reduction in
amortization of deferred financing costs of $0.8 million and $0.6 million in
1996 and 1995, respectively, and the related tax effect of $1.8 million and
$2.9 million in 1996 and 1995, respectively. Basic and diluted pro forma net
income (loss) per common share are the same since there were no options
outstanding in 1995, and there was no dilutive effect of options in 1996.
Pro forma net income is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
DECEMBER 29, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Pro forma-unaudited
Historical income before income taxes....................... $7,857 $56,073
Pro forma adjustments other than income taxes............... 1,436 23,943
------ -------
Pro forma income before income taxes........................ 6,421 32,130
Pro forma provision for income taxes........................ 3,537 13,705
------ -------
Pro forma net income........................................ $2,884 $18,425
====== =======
</TABLE>
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's business is comprised of wholesale, licensing and retail
activities. The following table is a comparative summary of the Company's
results of operations (adjusted for restructuring and non-recurring charges,
recognition of a one-time credit related to ELI, sales of merchandise to LCI,
and a valuation allowance resulting in a credit and a charge to the provision
(benefit) for income taxes) for the fiscal years ended January 2, 2000 ("fiscal
1999"), January 3, 1999 ("fiscal 1998"), and December 28, 1997 ("fiscal 1997"),
and reflects the basis of presentation described in Note 1 in the notes to
financial statements elsewhere herein. The Company utilizes a 52- or 53-week
fiscal year ending on the Sunday nearest December 31. Fiscal 1999 and fiscal
1997 results include 52 weeks as compared to 53 weeks in fiscal 1998.
<TABLE>
<CAPTION>
ADJUSTED STATEMENTS OF OPERATIONS
-----------------------------------------------------------------
FISCAL 1999 FISCAL 1998 FISCAL 1997
------------------- ------------------- -------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NET REVENUES.............................. $661.8 100.0% $622.6 100.0% $638.7 100.0%
Sales of merchandise to LCI............... -- -- (26.8) -- -- --
One-time credit........................... (5.0) -- -- -- -- --
Restructuring and non-recurring charges... -- -- -- -- 4.0 --
------ ----- ------ ----- ------ -----
NET REVENUES, AS ADJUSTED (A) (B) (C)..... 656.8 100.0% 595.8 100.0% 642.7 100.0%
------ ----- ------ ----- ------ -----
GROSS PROFIT.............................. 211.1 31.9% 154.1 24.7% 121.4 19.0%
One-time credit........................... (5.0) -- -- -- -- --
Restructuring and non-recurring charges... 0.8 -- -- -- 30.1 --
------ ----- ------ ----- ------ -----
GROSS PROFIT, AS ADJUSTED (A) (C)......... 206.9 31.5% 154.1 25.9% 151.5 23.6%
------ ----- ------ ----- ------ -----
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................ 193.8 29.3% 152.1 24.4% 204.1 32.0%
Non-recurring charges..................... (6.1) -- -- -- 22.7 --
------ ----- ------ ----- ------ -----
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES, AS ADJUSTED (A) (C)........... 187.7 28.6% 152.1 25.5% 181.4 28.2%
------ ----- ------ ----- ------ -----
OPERATING INCOME (LOSS)................... 14.7 2.2% 2.3 0.4% (91.3) (14.3%)
One-time credit........................... (5.0) -- -- -- -- --
Restructuring and non-recurring charges... 9.6 -- -- -- 61.5 --
------ ----- ------ ----- ------ -----
OPERATING INCOME, AS ADJUSTED (A) (B)
(C)..................................... 19.3 2.9% 2.3 0.4% (29.8) (4.6%)
------ ----- ------ ----- ------ -----
NET INCOME (LOSS)......................... 10.0 1.5% 0.1 -- (81.4) (12.7%)
One-time credit........................... (2.9) -- -- -- -- --
Restructuring and non-recurring charges... 5.5 -- -- -- 38.2 --
Valuation allowance....................... (4.0) -- -- -- 24.0 --
------ ----- ------ ----- ------ -----
NET INCOME, AS ADJUSTED (A) (B) (C) (D)... $ 8.6 1.3% $ 0.1 -- $(19.2) (3.0%)
====== ===== ====== ===== ====== =====
</TABLE>
- ------------------------
(a) In fiscal 1999, excludes a $5.0 million one-time credit recorded in net
revenues relating to the ELI beauty license; $11.0 million restructure and
other non-recurring charges recorded as $0.8 million in cost of sales,
$6.1 million in selling, general and administrative expenses, and
$4.1 million in restructuring charges, recorded net of $1.4 million of prior
year's restructuring charges that were determined to be no longer necessary.
20
<PAGE>
(b) In fiscal 1998, excludes certain sales of merchandise to LCI relating to the
DKNY JEANS license.
(c) In fiscal 1997, excludes $23.4 million of charges related to the wind-down
of the Company's beauty business; $12.5 million related to the wind-down of
the DKNY JEANS business; $8.6 million of restructuring charges; and
$17.0 million of other charges, primarily nonrecurring, related to strategic
initiatives.
(d) In fiscal 1999, excludes a $4.0 million credit recorded in provision
(benefit) for income taxes, attributable to the reduction in a previously
recorded valuation allowance due to the realization of certain deferred tax
assets. In fiscal 1997, excludes a valuation allowance of $24.0 million
recorded in provision (benefit) for income taxes.
SIGNIFICANT TRANSACTIONS
In December 1999, the Company consummated the grant to LCI of the exclusive
rights to design, produce, market and sell a new line of women's career and
casual sportswear, which line is expected to launch for the Spring 2001 season
under a new label. Under the agreement, LCI is obligated to pay the Company a
royalty equal to a percentage of net sales of such licensed product. Upon
consummation of the transaction, the Company received $6.4 million. See Note 7
in the notes to financial statements contained elsewhere herein.
In November 1999, the Company announced that it was implementing a series of
strategic initiatives intended to further reduce costs and streamline
operations, and focus on key business areas. The strategic initiatives include
consolidating the DONNA KARAN NEW YORK and DKNY women's divisions, integrating
the marketing and public relations functions into one unit, closing seven
non-performing outlet stores, recognizing an impairment of under-performing
assets and certain other non-recurring charges. As a result of the strategic
initiatives, the Company recorded restructuring and other non-recurring charges
of $11.0 million. See Note 9 in the notes to financial statements contained
elsewhere herein.
In January 1999, the Company acquired the assets of three free-standing
retail stores in the United Kingdom which were previously owned and operated by
a Singapore based company, for approximately $17.4 million. The aggregate
purchase price was financed with working capital and the issuance of
subordinated notes payable which mature in January 2002. See Note 11 in the
notes to financial statements contained elsewhere herein.
In January 1998, the Company granted LCI the exclusive, long-term rights to
the DKNY JEANS and DKNY ACTIVE trademarks for apparel products and to source,
market, distribute, and sell both collections in the Western Hemisphere. In
connection therewith and with the sale to LCI of certain usable inventory and
other assets relating to the existing business, the Company received
$30.0 million in fiscal 1997 and receives additional royalties from LCI based on
sales of such jeanswear and related apparel and activewear products. In
connection with the transaction with LCI, in fiscal 1997 the Company recorded a
loss of $12.5 million, which represents the writedown of inventory to net
realizable value, as well as other costs necessary to exit its existing jeans
business. See Note 7 in the notes to financial statements contained elsewhere
herein.
The Company sells its products in Japan through Donna Karan Japan, a
Japanese corporation. In March 1998, the Company and a nonaffiliated party sold
all of their outstanding shares in Donna Karan Japan to a Japanese public
company. At the same time, Donna Karan Japan was granted a 16-year exclusive
license to import, manufacture, license, and/or distribute DONNA KARAN NEW YORK
and DKNY products in Japan, with certain exceptions. In addition, Donna Karan
Japan was granted the exclusive right to develop and operate a total of 12 DONNA
KARAN NEW YORK and DKNY retail boutiques in Japan over the term of the
agreement. Upon consummation of this transaction, the Company received
$15.9 million. The Company receives a royalty on net sales of licensed products
and a servicing fee on net sales of Donna
21
<PAGE>
Karan products imported by Donna Karan Japan. See Note 6 in the notes to
financial statements contained elsewhere herein.
In fiscal 1997, the Company granted to ELI exclusive worldwide rights to the
DONNA KARAN NEW YORK and DKNY trademarks for the manufacture, marketing,
distribution, and sale of beauty and beauty-related products, including
fragrances, cosmetics, skincare products, and beauty-related accessories. In
connection therewith and with the sale to ELI of certain assets relating to the
existing business, the Company received $25.0 million in fiscal 1997 and
receives additional royalties from ELI based on sales of such beauty and
beauty-related products. In fiscal 1997, the Company recorded a loss of
$21.1 million related to the wind-down of the Company's beauty business (net of
a $2.2 million gain in connection with the consummation of this transaction).
See Note 8 in the notes to financial statements contained elsewhere herein.
On December 16, 1997 the Company announced a restructuring and strategic
plan to reduce expenses and streamline operations. The major strategic
initiatives were aimed at strengthening financial performance by reducing costs,
increasing efficiencies, increasing licensing royalties and focusing on key
business areas. As a result of the restructuring and strategic plan, and the
May 28, 1997 plan aimed at containing costs and restructuring certain of its
operations, in fiscal 1997 the Company recognized restructuring charges of
$8.6 million, charges of $23.4 million related to the wind-down of the Company's
beauty business, charges of $12.5 million related to the wind-down of the DKNY
JEANS business and $17.0 million of other charges, primarily nonrecurring,
related to strategic initiatives. See Note 9 in the notes to financial
statements contained elsewhere herein.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues in fiscal 1999 increased $39.2 million, or 6.3%, to
$661.8 million as compared to fiscal 1998 and decreased $16.1 million, or 2.5%,
to $622.6 million for fiscal 1998 as compared to fiscal 1997. Excluding the
one-time recognition of deferred revenue in fiscal 1999 related to the ELI
beauty license consummated in fiscal 1997 (the "licensing credit") and certain
sales of merchandise to LCI relating to the DKNY JEANS license in fiscal 1998,
net revenues in fiscal 1999 increased $61.0 million, or 10.2%, as compared to
the prior year. Excluding certain sales of merchandise to LCI in fiscal 1998
relating to the DKNY JEANS license and sales in fiscal 1997 related to the
Company's beauty business, net revenues in fiscal 1998 decreased $24.2 million,
or 3.9%, as compared to the prior year.
In fiscal 1999, net revenues increased due to a $16.7 million, or 90.4%,
increase in licensing revenues and a $37.1 million, or 39.7%, increase in retail
sales, partially offset by a $14.6 million, or 2.9%, decrease in wholesale
revenues. In fiscal 1998, net revenues decreased due to a $29.0 million, or
5.4%, decrease in wholesale revenues partially offset by an $8.9 million, or
92.2%, increase in licensing revenues and a $22.8 million, or 32.3%, increase in
retail sales.
Wholesale revenues in fiscal 1999 decreased $14.6 million, or 2.9%, to
$496.3 million as compared to $510.9 million in the prior year. Exclusive of
certain sales of merchandise to LCI relating to the DKNY JEANS license in fiscal
1998, wholesale revenues increased $12.2 million, or 2.5%. The increase was
primarily attributable to an increase in sales from accessories and the menswear
business, partially offset by a decrease in sales from the women's business and
elimination of sales in the DKNY KIDS business which was licensed in 1998. In
fiscal 1998, wholesale revenues, exclusive of the Company's beauty business and
certain sales of merchandise to LCI related to the DKNY JEANS license, decreased
$55.8 million, or 10.3%, or as compared to the prior year, primarily due to a
decrease in revenues of the womenswear and menswear businesses.
Licensing revenues in fiscal 1999 increased 90.4%, from $18.5 million in
fiscal 1998 to $35.1 million in fiscal 1999. Exclusive of the one-time
recognition of the licensing credit in fiscal 1999 as a result of satisfying
certain conditions of the ELI beauty license, licensing revenues increased
$11.7 million or 63.3%.
22
<PAGE>
The increase was primarily due to royalties from: the Company's regional
Japanese license; DKNY JEANS and ACTIVE license; and, growth in sales of certain
other new and existing licensed products. In fiscal 1998, licensing revenues
increased $8.9 million, or 92.2%, to $18.5 million as compared to fiscal 1997.
In fiscal 1998, the increase in licensing revenues was primarily due to
royalties from the Company's DKNY JEANS and ACTIVE license, as well as growth in
sales of certain other new and existing licensed products.
Retail sales in fiscal 1999 increased $37.1 million, or 39.7%, to
$130.4 million as compared to $93.3 million in the prior year. The increase was
primarily attributable to: the recent opening and acquisition of full-price
free-standing stores; an increase in the number of outlet stores; and a 5.0%
increase in comparable store sales. In fiscal 1998, retail sales increased
$22.8 million, or 32.3%, to $93.3 million as compared to fiscal 1997. The
increase in fiscal 1998 was primarily due to an increase in the number of outlet
stores, a slight increase in comparable store sales, and the opening of four
Company-owned, full-price free-standing retail stores.
GEOGRAPHIC
Net revenues in the United States in fiscal 1999 increased approximately
9.4% to $462.8 million as compared to fiscal 1998 and increased approximately
1.8% to $422.9 million in fiscal 1998 as compared to fiscal 1997. Exclusive of
the one-time recognition of the licensing credit in fiscal 1999; certain sales
of merchandise to LCI relating to the DKNY JEANS license in fiscal 1998; and
sales of the DKNY KIDS business which was licensed in fiscal 1998, net revenues
in the United States increased $65.8 million, or 16.8%, in fiscal 1999 as
compared to fiscal 1998.
Net revenues in Japan in fiscal 1999 decreased 40.2% to $27.8 million as
compared to fiscal 1998 and decreased 30.4% to $46.5 million in fiscal 1998 as
compared to fiscal 1997. In fiscal 1999, the decrease was primarily attributable
to the planned decrease in wholesale revenues to Japan, as a result of the
Company's licensing agreement with Donna Karan Japan. In fiscal 1998, the
decrease was primarily attributable to the general economic conditions in Japan.
Additionally, the Company anticipates further decreases in wholesale revenues in
Japan, while at the same time recording increased royalties, as Donna Karan
Japan completes its transition of its business exclusively from importing and
reselling products to primarily manufacturing and selling products. See Note 6
in the notes to financial statements.
Net revenues for other geographic areas increased 11.8% to $171.2 million in
fiscal 1999 as compared to fiscal 1998 and decreased 2.0% to $153.2 million in
fiscal 1998 as compared to fiscal 1997. The increase in fiscal 1999 was
primarily attributable to the Company's free-standing retail stores in the
United Kingdom.
RESTRUCTURING CHARGES (CREDITS), NET AND OTHER NON-RECURRING CHARGES
In fiscal 1999, the Company recorded restructuring and other non-recurring
charges in the amount of approximately $11.0 million primarily related to
strategic initiatives including: division consolidations, asset write-downs,
personnel related expenses, the closing of non-performing outlet stores and
certain other non-recurring charges. These charges were classified as
$0.8 million in cost of sales, $6.1 million in selling, general and
administrative expenses and $4.1 million in restructuring charges. Additionally,
in fiscal 1999 the Company determined that certain amounts related to its prior
restructuring were no longer necessary and credited into income approximately
$1.4 million. In fiscal 1998, the Company utilized $5.5 million of its reserves
previously established in connection with its fiscal 1997 restructuring plan and
credited into income approximately $0.3 million of the restructuring accrual,
which was determined to no longer be required. In fiscal 1997, the Company
recorded restructuring and other charges in the amount of $8.6 million primarily
related to severance costs and related benefits. See Note 9 in the notes to
financial statements.
23
<PAGE>
GROSS PROFIT
Gross profit in fiscal 1999 was 31.9% of net revenues as compared to 24.7%
of net revenues in fiscal 1998 and 19.0% of net revenues in fiscal 1997.
Excluding the one-time recognition of the licensing credit of $5.0 million and
the non-recurring charges of $0.8 million in fiscal 1999 and the impact of the
DKNY JEANS sales to LCI in fiscal 1998, gross profit margin for fiscal 1999
increased to 31.5% as compared to 25.9% in fiscal 1998. The increase in fiscal
1999, exclusive of the credit and the effect of the DKNY JEANS sales to LCI, was
primarily attributable to a change in the revenue mix to higher margin licensing
business and full-price retail stores. Excluding the impact of the DKNY JEANS
sales to LCI in fiscal 1998 and the effect of beauty business sales in fiscal
1997, gross profit margin for fiscal 1998 increased to 25.9% as compared to
20.6% in fiscal 1997. In fiscal 1997, the gross profit was impacted by the
wind-down of the Company's beauty and DKNY JEANS businesses, and other charges,
primarily nonrecurring, related to strategic initiatives. As a result of these
transactions, the Company recorded charges which were included in cost of sales
of $11.7 million related to the beauty business, $9.4 million related to the
DKNY JEANS business and $1.6 million related to strategic initiatives. Exclusive
of these charges, gross profit was 23.6% of net revenues for fiscal 1997. The
increase, as adjusted for DKNY JEANS sales, beauty business sales, and other
charges, to 25.9% in fiscal 1998 as compared to 23.6% in fiscal 1997, primarily
reflected the impact of greater licensing revenues, shifts in product mix, and
lower operating costs attributable to production efficiencies achieved as a
result of the Company's cost reduction initiatives.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to 29.3% of net
revenues in fiscal 1999, as compared with 24.4% and 32.0% of net revenues in
fiscal 1998 and fiscal 1997, respectively. Exclusive of the licensing credit in
fiscal 1999 and the effect of the DKNY JEANS sales to LCI in fiscal 1998,
selling, general and administrative expenses were 29.5% and 25.5% of net
revenues for fiscal 1999 and 1998, respectively. In fiscal 1999, selling,
general and administrative expenses included non-recurring charges of
$6.1 million related to strategic initiatives. Exclusive of such non-recurring
charges, selling, general and administrative expenses were $187.7 million, or
28.6% of net revenues. In fiscal 1999, the increase was primarily a result of an
increase in the number of the Company's full-price free-standing retail stores
and certain initiatives in the wholesale segment. In fiscal 1998, the decrease
was primarily attributable to the absence of charges, primarily nonrecurring,
and lower selling, marketing, advertising and personnel and related expenses,
primarily as a result of the Company's strategic initiatives, including the
licensing of the beauty and DKNY JEANS businesses. Additionally, in fiscal 1999
and 1998, costs associated with the Company's ongoing licensing efforts
increased.
OPERATING INCOME (LOSS)
Operating income increased $12.4 million to $14.7 million in fiscal 1999 as
compared to fiscal 1998 and increased $93.6 million to $2.3 million in fiscal
1998 as compared to a loss of $91.3 million in fiscal 1997. Exclusive of the
licensing credit, and net restructuring and other charges, primarily
nonrecurring, operating income was $19.1 million in fiscal 1999 and the
operating loss was $29.8 million in fiscal 1997. Operating income (loss) as a
percent of net revenues for fiscal 1999 was 2.2%, as compared to 0.4% and
(14.3%), in fiscal 1998 and fiscal 1997, respectively. Exclusive of the
non-recurring items, operating income (loss) as a percent of net revenues for
fiscal 1999 and fiscal 1997 was 2.9% and (4.6%), respectively. In fiscal 1999,
the increase in operating income is attributable to increased operating profit
in the licensing segment, decreased operating losses in the retail segment, and
increased operating profit in the wholesale segment. In fiscal 1998, the
increase in operating income is attributable to higher gross profits, decreased
selling, general and administrative expenses, and the absence of restructuring
and other non-recurring charges.
24
<PAGE>
EQUITY IN (LOSS) EARNINGS OF AFFILIATE
Equity in (loss) earnings of affiliate was approximately ($0.1) million in
fiscal 1998 as compared with $1.4 million in fiscal 1997. In March 1998, the
Company sold all of its outstanding shares in Donna Karan Japan, to a
nonaffiliated party. In fiscal 1998, the decrease was due to a decrease in
earnings of the operations of Donna Karan Japan. See Note 6 in the notes to
financial statements contained elsewhere herein.
INTEREST EXPENSE, NET
Interest expense, net of interest income, increased $2.0 million to
$4.1 million in fiscal 1999 as compared to fiscal 1998 and decreased
$0.4 million to $2.1 million in fiscal 1998 from $2.5 million in fiscal 1997. In
fiscal 1999, the increase was primarily attributable to an increase in average
borrowings during the year. In fiscal 1998, the decrease was primarily
attributable to lower borrowings during the last quarter of fiscal 1998.
PROVISION (BENEFIT) FOR INCOME TAXES
The provision (benefit) for income taxes represents Federal, foreign, state
and local income taxes. The provision (benefit) for income taxes for fiscal
1999, 1998 and 1997 was $0.6 million, $0.1 million and ($11.0) million,
respectively. In fiscal 1999, the Company recognized a tax credit of
$4.0 million relating to an adjustment of its valuation allowance. Prior to the
tax credit, the provision was $4.6 million. Realization of the future tax
benefits related to any deferred tax assets is dependent primarily on the
Company's ability to generate sufficient taxable income within the net operating
loss carryforward period. Due to the inherent uncertainties in estimating future
taxable income, in fiscal 1997 the Company provided for a valuation allowance of
$24.0 million, of which $4.0 million was determined to be no longer required in
fiscal 1999, and was reduced to $20.0 million.
NET INCOME (LOSS)
Net income was $10.0 million in fiscal 1999, as compared to $0.1 million in
fiscal 1998 and a net loss of $81.4 million in fiscal 1997. Exclusive of the
licensing credit, the net restructuring and other non-recurring charges, and the
credit and charge related to the tax valuation allowance, net income in fiscal
1999 was $8.6 million and net loss was $19.2 million in fiscal 1997. In fiscal
1999, the increase was primarily attributable to increased net revenues and
gross profit margins. In fiscal 1998, the improvement in net income as compared
to fiscal 1997 (excluding the restructuring and nonrecurring charges) was
primarily attributable to increased gross profit and lower selling, general and
administrative expenses. The net loss in fiscal 1997 was due to the reduced
margin in fiscal 1997, as well as the restructuring and nonrecurring charges
recorded in fiscal 1997, as described above.
NET INCOME (LOSS) PER COMMON SHARE
Net income per common share on a diluted basis was $0.46 per share in fiscal
1999, as compared to $0.01 per share in fiscal 1998, and a net loss per common
share on a diluted basis of ($3.78) per share in fiscal 1997. Exclusive of the
licensing credit, the net restructuring and other non-recurring charges, and the
credit and charge related to the tax valuation allowance, net income per common
share on a diluted basis in fiscal 1999 was $0.40 per share and in fiscal 1997
net loss per common share on a diluted basis was ($0.89) per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds have historically been, and are
expected to continue to be, cash flow from operations and borrowings under its
revolving credit facility. The Company's principal need for funds is to finance
working capital (principally inventory and receivables), capital expenditures
25
<PAGE>
(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 January 2, 2000, the Company had
cash and cash equivalents of $15.0 million compared with $7.4 million at
January 3, 1999.
In September 1996, the Company entered into a $150.0 million revolving
credit facility (the "Facility"), which was amended in 1999, 1998 and 1997.
Subsequent to the end of fiscal 1999, the Company amended the Facility and
extended its term to expire on May 1, 2003. The Facility includes a
$70.0 million subfacility for letters of credit and a $30.0 million subfacility
for loans in certain foreign currencies. Borrowings under the Facility bear
interest at a fixed spread over the lead bank's prime rate or, at the option of
the Company, at a fixed spread over the LIBOR and are limited to a borrowing
base calculated on eligible accounts receivable, inventory and letters of
credit. The Facility is secured by accounts receivable and inventory of the
Company and a pledge of all the equity interests of the subsidiaries of the
Company. The Facility includes financial and other restrictive covenants,
including a limitation on additional debt, which can be incurred, and on the
amount of dividends which the Company can pay. The Facility is used for working
capital requirements and general corporate purposes. At January 2, 2000 and
January 3, 1999, there were no amounts outstanding under the Facility. In
connection with the Company's acquisition of three stores in the United Kingdom
in fiscal 1999, the Company issued subordinated notes payable which are due
January 2, 2002. See Note 11 in the notes to financial statements. The Company
had a $6.7 million note payable to a principal stockholder as of December 28,
1997, which was repaid by the Company during the first quarter of 1998.
The Company has supplemented its cash flow from operations and bank lines of
credit with proceeds from the Offering and its license and strategic alliances.
In December 1999, the Company received from LCI $6.4 million related to the
grant of rights for the production, marketing, and sale of a new line of career
and casual sportswear for women. In March 1998, the Company received
$15.2 million related to a 16-year exclusive license to import, manufacture,
license and/or distribute DONNA KARAN NEW YORK and DKNY products in Japan, with
certain exceptions. In January 1998, the Company received from LCI
$30.0 million related to the granting of rights for the marketing, distribution,
and sale of DKNY JEANS and ACTIVEWEAR apparel products in the Western
Hemisphere. In November 1997, the Company received from ELI $25.0 million
related to the grant of worldwide rights for the manufacturing, marketing,
distribution and sale of beauty and beauty-related products and the sale of
certain assets relating to the existing business.
Net cash provided by operating activities in fiscal 1999 was $27.8 million,
as compared to net cash provided by operating activities of $39.5 million in
fiscal 1998, and net cash used in operating activities of $54.9 million in
fiscal 1997. The fiscal 1999 decrease primarily reflected the Company's
recording of greater deferred income associated with the Company's licensing
agreements in the prior-year, a greater increase in accounts receivable,
deferred taxes, deposits and other current assets, and a lesser decrease in
inventory, partially offset by an increase in accounts payable, accrued expenses
and other current liabilities and an increase in net income. The fiscal 1998
increase primarily reflects the Company's increased net earnings, the recording
of deferred revenues associated with the Company's recent licensing agreements,
lower inventory levels, a decrease in deferred income taxes, partially offset by
a decrease in accounts payable, accrued expenses, and other current liabilities,
an increase in accounts receivable and prepaid expenses and other current
assets, and a lesser increase in deposits and other noncurrent assets. Net cash
used for investing activities in fiscal 1999 was $20.2 million, as compared to
$7.5 million in fiscal 1998 and $9.8 million in fiscal 1997. Net cash used for
investing activities primarily reflects the Company's acquisition of
free-standing retail stores and increased purchases of property and equipment.
The Company borrows on a seasonal basis for working capital and other
purposes. In fiscal 1999, the Company used no net cash in financing activities.
Net cash used for financing activities of $29.1 million in fiscal 1998 primarily
related to the repayment of amounts outstanding under the Company's Facility and
the repayment of a note payable to a principal stockholder. Net cash provided by
financing activities in fiscal 1997 primarily reflects borrowings.
26
<PAGE>
Capital expenditures amounted to $11.0 million, $8.2 million and
$9.8 million in fiscal 1999, 1998 and 1997, respectively. Spending for all three
periods primarily reflects expenditures for leasehold improvements, outlet
stores, equipment, machinery, computers, and office furniture, and in fiscal
1999 and 1998 reflects spending for full-price free-standing retail stores.
Additionally, in fiscal 1999, the Company used cash of $9.2 million in the
acquisition of three free-standing stores in the United Kingdom. As of
January 2, 2000, the Company had outstanding commitments for capital
expenditures of approximately $2.5 million.
The Company uses derivative financial instruments for the purpose of
managing its exposure to adverse fluctuations in foreign currency exchange
rates. The Company does not utilize derivative financial instruments for trading
or other speculative purposes. The Company conducts business in many foreign
currencies. As a result, it is subject to foreign currency exchange rate risk
due to the effects that foreign exchange rate movements of these currencies,
principally the Italian lire, U.K. pound, and Dutch guilder, have on the
Company's costs and cash flows. The Company addresses its risks through a
program of risk management, the principal objective of which is to minimize the
effect of foreign exchange rate movements on the Company's operating activities.
The Company enters into forward exchange contracts to hedge purchases,
accounts receivable and accounts payable denominated in foreign currencies for
periods consistent with its identified exposures. Gains and losses related to
qualifying hedges of these exposures are deferred and recognized in operating
income when the underlying hedged transaction occurs. The Company from
time-to-time also enters into purchased foreign currency options to hedge
anticipated transactions where there is a high probability that anticipated
exposures will materialize. Any gains realized on such options that qualify as
hedges are deferred and recognized in operating income when the underlying
hedged transaction occurs. Premiums on foreign currency options are amortized
over the period being hedged. Foreign currency transactions that do not qualify
as hedges are marked-to-market on a current basis with gains and losses
recognized through income and reflected in operating expenses. In addition, any
previously deferred gains and losses on hedges that are terminated prior to the
transaction date are recognized in current income when the hedge is terminated.
The contracts have varying maturities with none exceeding 24 months.
As a matter of policy, the Company enters into contracts with parties which
are major international banks and financial institutions that have at least an
"A" (or equivalent) credit rating. The Company's exposure to credit loss in the
event of nonperformance by any of the counterparties is limited to only the
recognized, but not realized, gains attributable to the contracts. Management
believes risk of loss is remote, and in any event, would be immaterial. Costs
associated with entering into such contracts have not been material to the
Company's financial results. At January 2, 2000, the Company had contracts to
exchange foreign currencies in the form of forward exchange contracts in the
amount of $115.8 million.
The Company extends credit to its customers, including those who have
accounted for significant portions of the Company's gross revenues. Accordingly,
the Company may have significant exposure for accounts receivable from its
customers, or group of customers under common ownership. The Company has credit
policies and procedures, which it uses to manage its credit risk. To further
manage its credit risk, the Company insures its accounts receivable under credit
risk insurance policies, subject to certain limitations.
The Company anticipates that it will be able to satisfy its ongoing cash
requirements for the foreseeable future, primarily with cash flow from
operations, supplemented by borrowings under its Facility and, from
time-to-time, amounts received in connection with strategic transactions,
including licensing arrangements. Events that may impact this include, but are
not limited to, future events that may have the effect of reducing available
cash balances (such as unexpected operating losses or increased capital or other
expenditures), as well as future circumstances that might reduce or eliminate
the availability of external financing.
27
<PAGE>
DERIVATIVE FINANCIAL INSTRUMENTS
The Company conducts business in many foreign currencies. As a result, it is
subject to foreign currency exchange rate risk due to the effects that foreign
exchange rate movements of these currencies have on the Company's costs and on
the cash flows which it receives from its foreign subsidiaries. The Company
believes that currently it has no other material market risk exposures. The
Company addresses its risks through a controlled program of risk management that
includes the use of derivative financial instruments. The Company primarily
enters into foreign currency forward exchange contracts to reduce the effects of
fluctuating foreign currency exchange rates, and accordingly categorizes these
instruments as entered into for purposes other than trading. See Note 3 in the
notes to financial statements.
The Company uses a value-at-risk model to assess the market risk of its
derivative financial instruments. Value-at-risk represents the potential losses
for an instrument or portfolio from adverse changes in market factors, for a
specified time period and confidence level. The Company estimates value-at-risk
across all of its derivative financial instruments using a model with historical
volatilities and correlations calculated over the past 250-day period. 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 January 2, 2000 was approximately $1.8 million.
The Company's calculated value-at-risk exposure represents an estimate of
reasonably possible net losses that would be recognized on its portfolio of
derivative financial instruments assuming hypothetical movements in future
market rates and is not necessarily indicative of actual results which may or
may not occur. It does not represent the maximum possible loss nor any expected
loss that may occur, since actual future gains and losses will differ from those
estimated, based upon actual fluctuations in market rates, operating exposures
and the timing thereof, and changes in the Company's portfolio of derivative
financial instruments during the year.
The Company believes however, that any loss incurred would be offset by the
effects of currency movements on the respective underlying transaction for which
the hedge is intended.
OUTLOOK
The Company continues to invest in additional full-price free-standing
retail stores, expand its licensing activities, implement its strategic plan,
and respond to external market conditions, and as a result, selling, general and
administrative expenses are expected to increase as a percent of net revenues.
Additionally, the Company is continuing its strategy of identifying and pursuing
new licensing opportunities, which are intended to be complementary to its
existing product lines. The Company believes that this strategy will enable it
to expand its product offerings as well as enter into new international markets.
Through these strategic alliances and the roll-out of existing licenses, the
Company anticipates increased licensing revenues as a result of extending and
broadening the reach of its brands and products. However, the Company's ability
to maintain and increase licensing revenue is dependent upon certain factors not
within the Company's control, including the retail performance of products sold
by licensees. Lastly, as the Company diversifies its revenue mix, lessening the
Company's dependency on any one particular business, further declines in the
women's wholesale business may occur.
In fiscal 1999 and fiscal 1998, revenue from sales to Asia represented
approximately 8.1% and 11.7%, respectively, of the Company's wholesale net
revenues including approximately 4.9% and 8.9% to Japan, respectively, and
approximately 3.2% and 2.7%, respectively, to other areas in Asia. The Company
has continued to experience a declining sales trend in fiscal 1999 as compared
to fiscal 1998, which the Company believes was due to the transition of the
Donna Karan Japan business and, in part, to the general economic conditions and
currency fluctuations in Asia. Additionally, the Company anticipates further
decreases in wholesale revenues in Japan, while at the same time receiving
increased royalties, as Donna Karan Japan completes its transition of its
business exclusively from importing and reselling products to primarily
manufacturing and selling products.
28
<PAGE>
SEASONALITY OF BUSINESS
The Company's business varies with general seasonal trends that are
characteristic of the apparel and retail industries, and it generally
experiences lower net revenues and net income (or higher net losses) in the
first half of each fiscal year, as compared to the second half of its fiscal
year. Accordingly, the Company's outstanding borrowings under its revolving
credit facility, historically, have been lower on or about its fiscal year end.
On a quarterly basis, the Company's operations may vary with production and
shipping schedules, the introduction of new products, and variation in the
timing of certain holidays from year to year. The Company historically has
experienced lower net revenues and operating income in the second quarter than
in other quarters due to (i) lower demand among retail customers typical of the
apparel industry, and (ii) certain expenses that are constant throughout the
year being relatively higher as a percentage of net revenues. As the Company's
business continues to evolve and as it increases its full-price free-standing
retail business, the Company's operating performance may not reflect the typical
seasonality of the apparel industry.
YEAR 2000
The efficient operation of the Company's business is dependent in part on
its computer software programs and operating systems (collectively, "Programs
and Systems"). The Company believes it has successfully addressed the Year 2000
issue, enabling its systems to recognize and process transactions for the Year
2000 and thereafter. As of December 31, 1999, the Company had completed
remediation and testing of all internal computer systems and application
software. The Company will be monitoring and testing the internal systems
through the early part of 2000.
The Company to date has not been made aware of any situations from its
significant vendors, customers, transportation carriers, and financial
institutions about their Year 2000 state of readiness which may otherwise impact
the Company's operations.
Based upon current information, the Company estimates that the costs of
addressing the Year 2000 issue have not been material and are expected to
continue to be immaterial. Although the Company is not currently aware of any
material operational issues or costs associated with preparing its internal
systems for the Year 2000, there can be no assurance that there will not be
increased costs associated with, the implementation of any necessary systems and
changes to address Year 2000 issues. Additionally, while the Company does not
currently have the ability to track internal employee costs specifically related
to the Year 2000 project, these costs are not expected to have a material impact
on the Company's results of operations or financial condition.
The Company continues to believe that the Year 2000 issue will not pose
significant operational problems for its computer systems. However, there can be
no assurance that there will not be a delay in, the implementation of the
necessary systems and changes to address future Year 2000 issues, or the systems
from third parties (i.e. suppliers, customers, and financial institutions) with
whom the Company relies on directly, or indirectly, to be Year 2000 compliant,
are not operational. As such, the Year 2000 could have a material adverse effect
on the Company's future results of operations or financial condition.
As of April 3, 2000, the Company has not experienced any significant
problems related to the Year 2000 issue which would have a material impact on
the Company.
EURO CONVERSION
As part of the European Economic and Monetary Union (EMU), a single currency
(the "Euro") will replace the national currencies of most of the European
countries in which the Company conducts business. The conversion rates between
the Euro and the participating nations currencies were fixed irrevocably as of
January 1, 1999, with the participating national currencies being removed from
circulation between January 1 and June 30, 2002 and replaced by Euro notes and
coinage. During the "transition
29
<PAGE>
period" from January 1, 1999 through December 31, 2001, public and private
entities as well as individuals may pay for goods and services using either
checks, drafts, or wire transfers denominated in Euro or the participating
country's national currency.
Under the regulations governing the transition to a single currency, there
is a "no compulsion, no prohibition" rule which states that no one is obliged to
use the Euro until the notes and coinage have been introduced on January 1,
2002. The Company is studying the impact of the Euro on its business and
believes it will be able to conduct transactions in the Euro by January 1, 2002.
Full conversion of operations to the Euro is expected to be completed by the
time national currencies are removed from circulation. The anticipated cost
related to software and business process conversion to the Euro is currently not
expected to be material.
ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137 "Accounting for
Derivatives Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133." This statement defers the effective date of SFAS
No. 133 until June 15, 2000. In June 1998, the FASB issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative financial
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000 and does not require
retroactive restatements of prior period financial statements. This statement
requires the recognition of all derivative instruments as either assets or
liabilities in the statement of financial position and to measure those
instruments at fair value. The Company is still determining the effects, of
adopting SFAS No. 133, will have on its financial position or the results of its
operations. However, the statement will likely result in a change in the
Company's reported assets and liabilities and may affect earnings and
comprehensive income, as defined by SFAS No. 130 "Reporting Comprehensive
Income."
In August 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") No. 98-5 "Reporting on the Costs of Start-up
Activities." This statement establishes accounting standards for the costs of
start-up activities which qualify as preoperating costs, preopening costs, and
organization costs, and requires that all such costs be expensed as incurred.
SOP No. 98-5 is effective for financial statements for fiscal years beginning
after December 15, 1998 and does not require retroactive restatement of prior
financial statements. In the year of initial adoption, the effects of SOP
No. 98-5 shall be treated as the cumulative effect of an accounting change, with
no pro forma restatement required. The adoption of SOP No. 98-5 did not have a
material impact on the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is set forth in Item 7 under the heading
"Derivative Financial Instruments" and in Note 3 to the Company's financial
statements included in this Annual Report on Form 10-K and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Financial Statements" for a listing of the financial
statements and supplementary data filed with this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
30
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Executive officers of the Company is set forth
in Part I of this Annual Report on Form 10-K.
Information with respect to Directors of the Company which is called for by
this Item 10 is incorporated by reference to the information set forth under the
heading "Election of Directors" in the Company's Proxy Statement relating to its
2000 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A (the
"Company's 2000 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Information called for by this Item 11 is incorporated by reference to the
information set forth under the heading "Executive Compensation" in the
Company's 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by this Item 12 is incorporated by reference to the
information set forth under the headings "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Company's 2000
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Information called for by this Item 13 is incorporated by reference to the
information set forth under the headings "Election of Directors," "Employment
Arrangements," and "Certain Relationships and Related Transactions" in the
Company's 2000 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements - See "Index to Financial Statements"
2. Financial Statement Schedule - Schedule II Valuation and Qualifying
Accounts and Reserves
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
3. Exhibits - see "Exhibit Index"
(b) The Company filed no reports on Form 8-K during the last quarter of the
period covered by this report.
31
<PAGE>
DONNA KARAN INTERNATIONAL INC.
INDEX TO FINANCIAL STATEMENTS
YEARS ENDED JANUARY 2, 2000, JANUARY 3, 1999 AND DECEMBER 28, 1997
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Auditors.............................. F-2
Statements of Operations for the years ended January 2,
2000, January 3, 1999 and December 28, 1997............... F-3
Balance Sheets as of January 2, 2000 and January 3, 1999.... F-4
Statements of Stockholders' Equity for the years ended
January 2, 2000, January 3, 1999 and December 28, 1997.... F-5
Statements of Cash Flows for the years ended January 2,
2000, January 3, 1999, and December 28, 1997.............. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of
Donna Karan International Inc.
We have audited the accompanying consolidated balance sheets of Donna Karan
International Inc. and subsidiaries (the "Company") as of January 2, 2000 and
January 3, 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended January 2, 2000. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Donna Karan
International Inc. and subsidiaries at January 2, 2000 and January 3, 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended January 2, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
March 21, 2000
F-2
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
------------- ------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
NET REVENUES............................................. $ 661,837 $ 622,646 $ 638,725
Cost of sales............................................ 450,686 468,559 517,318
---------- ---------- ----------
GROSS PROFIT............................................. 211,151 154,087 121,407
Selling, general, and administrative expenses............ 193,827 152,089 204,088
Restructuring charges (credits), net..................... 2,645 (267) 8,635
---------- ---------- ----------
OPERATING INCOME (LOSS).................................. 14,679 2,265 (91,316)
Other income (expense):
Equity in (loss) earnings of affiliate................. -- (65) 1,435
Interest income........................................ 97 599 560
Interest expense....................................... (4,187) (2,649) (3,075)
Gain on sale of interests in affiliates................ -- 88 --
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES........................ 10,589 238 (92,396)
Provision (benefit) for income taxes..................... 553 110 (11,034)
---------- ---------- ----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK........... $ 10,036 $ 128 $ (81,362)
========== ========== ==========
Net income (loss) per common share:
Basic.................................................. $ 0.46 $ 0.01 $ (3.78)
Diluted................................................ $ 0.46 $ 0.01 $ (3.78)
Weighted average common shares outstanding:
Basic.................................................. 21,599,500 21,598,264 21,512,050
Diluted................................................ 21,702,700 21,631,664 21,512,050
</TABLE>
See notes to financial statements
F-3
<PAGE>
DONNA KARAN INTERNATIONAL INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 15,038 $ 7,448
Accounts receivable, net of allowances of $27,193 and
$29,872 respectively.................................... 86,314 70,977
Inventories............................................... 82,792 89,825
Deferred income taxes..................................... 26,408 24,688
Prepaid expenses and other current assets................. 17,567 18,860
-------- --------
Total current assets.................................... 228,119 211,798
Property and equipment, at cost--net........................ 41,512 33,675
Deferred income taxes....................................... 19,543 17,052
Deposits and other noncurrent assets........................ 15,117 16,204
-------- --------
$304,291 $278,729
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 57,923 $ 59,266
Accrued expenses and other current liabilities............ 71,339 60,864
-------- --------
Total current liabilities............................... 129,262 120,130
-------- --------
Subordinated notes payable.................................. 8,209 --
Deferred income............................................. 34,051 36,495
Commitments and contingencies (Note 13)
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 35,000,000 shares
authorized, 21,600,264 shares at January 2, 2000, and
21,599,264 shares at January 3, 1999 issued and
outstanding............................................. 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................................ 188,471 188,479
Retained deficit.......................................... (53,711) (63,747)
Accumulated other comprehensive loss...................... (991) (1,206)
-------- --------
133,985 123,742
Less: Treasury stock, at cost (17,770 shares and 18,770
shares, respectively)................................... (419) (443)
Unearned compensation................................... (797) (1,195)
-------- --------
Total stockholders' equity.............................. 132,769 122,104
-------- --------
$304,291 $278,729
======== ========
</TABLE>
See notes to financial statements
F-4
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Common stock, beginning of year............................. $ 216 $ 216 $ 215
Stock award................................................. -- -- 1
-------- -------- --------
Common stock, end of year (1)............................... 216 216 216
-------- -------- --------
Paid-in capital, beginning of year.......................... 188,479 188,491 186,899
Stock award................................................. (8) (12) 1,592
-------- -------- --------
Paid-in capital, end of year (1)............................ 188,471 188,479 188,491
-------- -------- --------
Retained deficit, beginning of year......................... (63,747) (63,875) 17,487
Net income (loss)........................................... 10,036 128 (81,362)
-------- -------- --------
Retained deficit, end of year (1)........................... (53,711) (63,747) (63,875)
-------- -------- --------
Treasury stock, beginning of year........................... (443) (479) (479)
Stock award................................................. 24 36 --
-------- -------- --------
Treasury stock, end of year (1)............................. (419) (443) (479)
-------- -------- --------
Unearned compensation, beginning of year.................... (1,195) (1,434) --
Compensation earned (stock award)........................... 398 239 (1,434)
-------- -------- --------
Unearned compensation, end of year (1)...................... (797) (1,195) (1,434)
-------- -------- --------
Accumulated other comprehensive loss, beginning of year..... (1,206) (455) (331)
Foreign currency translation adjustments.................... 215 (751) (124)
-------- -------- --------
Accumulated other comprehensive loss, end of year (1)....... (991) (1,206) (455)
-------- -------- --------
Comprehensive income (loss)................................. $ 10,251 $ (623) $(81,486)
======== ======== ========
TOTAL STOCKHOLDERS' EQUITY.................................. $132,769 $122,104 $122,464
======== ======== ========
</TABLE>
- ------------------------
(1) The sum of these items comprises total stockholders' equity.
See notes to financial statements
F-5
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $10,036 $ 128 $(81,362)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities, as adjusted
for effect of sale of interests in Donna Karan Japan:
Depreciation and amortization........................... 19,406 11,169 13,115
Amortization of deferred income......................... (14,494) (7,956) --
Provision for bad debts................................. 2,717 1,544 843
Deferred income taxes................................... (4,211) (989) (9,439)
Other, net.............................................. 414 (27) 1,403
Write-off of property, plant and equipment.............. -- -- 3,301
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.............. (18,054) (4,383) 4,789
Decrease (increase) in inventories...................... 10,819 22,541 (11,686)
Decrease (increase) in prepaid expenses and other
current assets........................................ 1,294 (6,790) 2,218
Increase in deposits and other noncurrent assets........ (6,464) (3,508) (6,368)
Increase (decrease) in accounts payable, accrued
expenses, and other current liabilities............... 28,785 (8,616) 28,264
(Decrease) increase in deferred income.................. (2,444) 36,360 --
------- ------- --------
NET CASH PROVIDED BY (USED FOR) OPERATING
ACTIVITIES.......................................... 27,804 39,473 (54,922)
------- ------- --------
INVESTING ACTIVITIES
Purchase of free-standing retail stores................... (9,200) -- --
Proceeds from sale of affiliate........................... -- 646 --
Purchase of property and equipment........................ (11,014) (8,158) (9,823)
------- ------- --------
NET CASH (USED FOR) INVESTING ACTIVITIES.............. (20,214) (7,512) (9,823)
------- ------- --------
FINANCING ACTIVITIES
Net (repayment) proceeds of revolving credit facility..... -- (22,314) 22,314
(Repayment) proceeds of note payable to principal......... -- (6,700) 6,700
Payments under capital lease.............................. -- (36) (282)
------- ------- --------
NET CASH (USED FOR) PROVIDED BY FINANCING
ACTIVITIES.......................................... -- (29,050) 28,732
------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 7,590 2,911 (36,013)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 7,448 4,537 40,550
------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $15,038 $ 7,448 $ 4,537
======= ======= ========
</TABLE>
See notes to financial statements
F-6
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Donna Karan
International Inc. and subsidiaries ("DKI" or the "Company"). The accompanying
financial statements include the results of operations of DKI for the fiscal
year ended January 2, 2000, January 3, 1999, and December 28, 1997. All
significant intercompany balances and transactions have been eliminated. The
equity method of accounting was used for Donna Karan Japan K.K. ("DKJ") since
the date the Company sold 70% of its interest to a nonaffiliated party and until
March 1998, when the Company and such nonaffiliated party sold all of their
remaining outstanding shares to a Japanese public company (see Note 6).
The Company's fiscal year consists of the 52- or 53-week period ending on
the Sunday nearest December 31, with fiscal 1999 and fiscal 1997 consisting of a
52-week year and fiscal 1998 consisting of a 53-week year.
Certain amounts in the financial statements and notes thereto of prior years
have been reclassified to conform to the current year presentation for
comparative purposes.
NET INCOME (LOSS) PER COMMON SHARE
In accordance with the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 128, net income (loss) per common share amounts ("basic
EPS") were computed by dividing net income (loss), by the weighted average
number of common shares outstanding and contingently issuable shares (which
satisfy certain conditions) and excluded any potential dilution. Net income
(loss) per common share amounts assuming dilution ("diluted EPS") were computed
by reflecting potential dilution from the exercise of stock options. SFAS
No. 128 requires the presentation of both basic EPS and diluted EPS on the face
of the statements of operations.
Reconciliation between the numerators and denominators of the basic and
diluted EPS computations is as follows:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
---------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
NUMERATOR:
Net income (loss) attributable to common stock........... $ 10,036 $ 128 $ (81,362)
========== ========== ==========
DENOMINATOR:
Weighted average common shares outstanding--
Basic.................................................. 21,599,500 21,598,264 21,512,050
Effect of dilutive securities: stock options............. 103,200 33,400 --
---------- ---------- ----------
Weighted average common shares outstanding--
Diluted................................................ 21,702,700 21,631,664 21,512,050
========== ========== ==========
Basic EPS................................................ $ 0.46 $ 0.01 $ (3.78)
========== ========== ==========
Diluted EPS.............................................. $ 0.46 $ 0.01 $ (3.78)
========== ========== ==========
</TABLE>
Options to purchase 1,741,500 shares of common stock at various prices
outstanding during fiscal 1997 were not included in the calculation of earnings
per share because the effect would have been antidilutive.
F-7
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials........................................... $ 2,947 $ 6,588
Work in process......................................... 2,730 4,654
Finished goods.......................................... 77,115 78,583
------- -------
$82,792 $89,825
======= =======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
For financial statement purposes depreciation of machinery, equipment and
fixtures, including amounts accounted for under capital leases, is computed
using straight-line and accelerated methods based on their estimated useful
lives, which range from 5 to 7 years. Leasehold improvements are amortized on a
straight-line basis over the lease term, and which in certain instances include
the anticipated renewal period.
The Company's share of the cost of constructing in-store shop displays is
capitalized and amortized using the straight-line method over their estimated
useful lives of 4 years. The Company's share of the cost of constructing
full-price free-standing retail stores under license agreements is capitalized
and amortized on a straight-line basis over their estimated useful lives of
8 years. At January 2, 2000 and January 3, 1999, the unamortized balance of
these costs of $11.8 million and $12.8 million, respectively, was included in
"Deposits and other noncurrent assets" in the accompanying balance sheets.
Amortization expense of these costs for the years ended January 2, 2000,
January 3, 1999 and December 28, 1997 amounted to approximately $5.1 million,
$4.4 million and $4.2 million, respectively.
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Machinery, equipment and fixtures....................... $28,281 $25,443
Leasehold improvements.................................. 61,776 44,924
------- -------
90,057 70,367
Less accumulated depreciation and amortization.......... (48,545) (36,692)
------- -------
$41,512 $33,675
======= =======
</TABLE>
Depreciation and amortization of property and equipment amounted to
$9.6 million, $5.5 million, and $7.9 million for the years ended January 2,
2000, January 3, 1999 and December 28, 1997, respectively.
LONG-LIVED ASSETS
The Company accounts for long-lived assets, including intangibles, at the
lower of amortized cost or fair value, less disposition costs. Whenever events
or changes in circumstances have indicated that the
F-8
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
carrying amount of assets might not be recoverable, the Company, using its best
estimates, reviews for impairment the carrying value of those long-lived assets.
In fiscal 1999, the Company identified certain underperforming stores as a
result of this review, and recorded a charge of approximately $3.7 million,
related to this impairment loss (see Note 9).
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Accrued expenses........................................ $17,326 $17,395
Unearned revenues....................................... 14,852 14,865
Accrued compensation.................................... 14,061 12,396
Accrued royalties....................................... 10,559 5,795
Accrued income taxes.................................... 6,469 27
Accrued restructuring and other charges................. 5,370 8,087
Accrued taxes other than income taxes................... 1,722 1,856
Other................................................... 980 443
------- -------
$71,339 $60,864
======= =======
</TABLE>
REVENUE RECOGNITION
Revenues from merchandise sales are recognized upon shipment of products to
the customer or, in the case of sales by Company-owned stores, when payment is
received. The Company reports its sales on a net basis, which is computed by
deducting from gross sales the amount of actual and anticipated discounts,
returns and allowances. Income from licensing agreements is recognized when
earned and is included in net revenues.
ADVERTISING AND PROMOTION
Costs associated with the production of advertising are expensed upon the
first showing of the related advertisement, which is generally less than six
months after the production costs are incurred. At January 2, 2000 and
January 3, 1999, advertising costs totaling $1.9 million and $2.6 million,
respectively, were included in "Prepaid expenses and other current assets" in
the accompanying balance sheets. Advertising and marketing expenses, including
costs related to the Company's Creative Services Department, for fiscal 1999,
1998 and 1997 were $34.1 million, $31.0 million and $47.2 million, respectively.
Advertising and marketing expenses, including costs related to the Company's
Creative Services Department, exclusive of the beauty business, were
$36.1 million for fiscal 1997.
STORE PRE-OPENING COSTS
In accordance with Accounting Standards Executive Committee ("AcSec")
Statement of Position ("SOP") No. 98-5 "Reporting on the Costs of Start-up
Activities," costs associated with the opening or remodeling of stores, such as
pre-opening rent and payroll, are expensed as incurred. In fiscal 1999, the
Company expensed $1.9 million of costs associated with the opening of its DKNY
flagship store on Madison Avenue in New York City, New York.
F-9
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for the
reporting and display of comprehensive income and its components in a full set
of financial statements. Comprehensive income (loss) as reported by the Company
is comprised of net income (loss) and other comprehensive (loss), which contains
gains or losses from foreign currency translation, and is reflected in the
Company's Statements of Stockholders' Equity (see Note 15).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. Cash includes approximately
$9.4 million and $5.4 million of short-term deposits at January 2, 2000 and
January 3, 1999, respectively.
STATEMENT OF CASH FLOWS
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year for:
Interest................................ $2,825 $1,507 $2,369
====== ====== ======
Taxes................................... $ 673 $6,174 $5,605
====== ====== ======
</TABLE>
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
For foreign operations, local currencies are considered the functional
currency. All assets and liabilities of foreign subsidiaries and affiliates are
translated at year-end rates of exchange, while results of operations are
translated at weighted average rates of exchange for the year. Unrealized
translation gains or losses are generally reported in stockholders' equity as
accumulated other comprehensive loss. Such adjustments amounted to approximately
$0.2 million of unrealized translation gains and $0.8 million of unrealized
translation losses in fiscal 1999 and fiscal 1998, respectively. Gains and
losses from foreign currency transactions are included in other comprehensive
income (loss) (see Note 15).
The Company enters into forward exchange contracts and from time-to-time
purchases foreign currency options to hedge foreign currency transactions for
periods consistent with its identified exposures. These financial instruments
are designed to minimize exposure and reduce risk from exchange rate
fluctuations in the regular course of business. The Company does not engage in
speculation. Gains and losses on foreign exchange contracts which hedge
exposures on firm foreign currency commitments are deferred and recognized as
adjustments to the bases of those assets. For fiscal 1999, 1998, and 1997, gains
and losses on foreign exchange contracts were not material (see Note 3).
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 estimates and assumptions.
F-10
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 137 "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133." This statement defers the
effective date of SFAS No. 133 until June 15, 2000. In June 1998, the FASB
issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting standards for
derivative financial instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000
and does not require retroactive restatements of prior period financial
statements. This statement requires the recognition of all derivative
instruments as either assets or liabilities in the statement of financial
position and to measure those instruments at fair value. The Company is still
determining the effects, of adopting SFAS No. 133, will have on its financial
position or the results of its operations. However, the statement will likely
result in a change in the Company's reported assets and liabilities and may
affect earnings and comprehensive income, as defined by SFAS No. 130 "Reporting
Comprehensive Income."
In August 1998, AcSec issued SOP No. 98-5 "Reporting on the Costs of
Start-up Activities." This statement establishes accounting standards for the
costs of start-up activities which qualify as preoperating costs, preopening
costs, and organizational costs and requires that all such costs be expensed as
incurred. SOP No. 98-5 is effective for financial statements for fiscal years
beginning after December 31, 1998 and does not require retroactive restatement
of prior period financial statements. In fiscal 1999, the Company expensed
$1.9 million of costs associated with the opening of its DKNY flagship store on
Madison Avenue in New York City, New York.
NOTE 2. BORROWINGS
In September 1996, the Company entered into a new $150.0 million, revolving
Credit Facility as amended during 1997, 1998 and in 1999 (the "Facility").
Subsequent to the end of fiscal 1999, the Company amended the Facility and
extended its term, to expire on May 1, 2003. Direct borrowings under the
Facility bear interest at a fixed spread over the lead bank's prime rate or, at
the option of the Company, at a fixed spread over the LIBOR and are limited to a
borrowing base calculated on eligible accounts receivable, inventory, and
letters of credit. At January 2, 2000, the weighted average interest rate on the
outstanding balance was 8.6%. The Facility is secured by accounts receivable and
inventory of the Company, as well as a pledge of all equity interests of the
subsidiaries of the Company. The Facility also contains certain restrictive
covenants which, among other things, require the Company to maintain certain
financial ratios and restrict investments, incurrence of additional
indebtedness, and payment of dividends.
In connection with the Facility, the Company incurred certain financing
costs which were deferred and are being amortized over the remaining term of the
Facility. At January 2, 2000 and January 3, 1999 unamortized financing costs of
approximately $0.6 million and $1.5 million, respectively, were included in
"Deposits and other noncurrent assets" in the accompanying balance sheets.
Amortization of deferred financing costs of approximately $1.3 million,
$1.3 million and $0.6 million in fiscal 1999, 1998 and 1997, respectively, were
included in interest expense.
Letters of credit outstanding were approximately $60.3 million and
$56.0 million at January 2, 2000 and January 3, 1999, respectively.
F-11
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS RISK
The Company selectively uses a combination of derivative financial
instruments to maintain the value-at-risk inherent in its foreign currency
exposures within acceptable parameters, as determined by senior management. The
purpose of this approach is to reduce the Company's exposure to market risk
resulting from fluctuations in foreign exchange rates. Derivative financial
instruments currently utilized by the Company principally include forward
exchange contracts and from time-to-time purchased foreign currency options.
Hedges are executed centrally to facilitate the netting of offsetting currency
exposures, to ensure control over the use of derivative financial instruments
and to minimize transaction costs. The Company does not hold or enter into
financial instruments for trading or speculative purposes.
The Company has a policy of only entering into contracts with counterparties
that have at least an "A" (or equivalent) credit rating. The counterparties to
these contracts are major financial institutions and the Company does not have
significant exposure to any one counterparty. Management believes that risk of
loss is remote and in any event would be immaterial.
FOREIGN EXCHANGE RISK MANAGEMENT
The Company enters into forward exchange contracts to hedge inventory
purchases, accounts receivable and accounts payable denominated in foreign
currencies for periods consistent with its identified exposures. Gains and
losses related to qualifying hedges of these exposures are deferred and
recognized in operating income when the underlying hedged transaction occurs.
The Company also enters into purchased foreign currency options from
time-to-time to hedge anticipated transactions where there is a high probability
that anticipated exposures will materialize. Any gain realized on such options
that qualify as hedges are deferred and recognized in operating income when the
underlying hedged transactions occurs. Foreign currency transactions, which do
not qualify as hedges, are marked-to-market on a current basis with associated
gains and losses reflected in operating income. In addition, any previously
deferred gains and losses on hedges which are terminated prior to the
transaction date are recognized in current income when the hedge is terminated.
The contracts have varying maturities with none exceeding 24 months. Foreign
currencies exchanged under these contracts are principally the Italian Lira,
U.K. pound and Dutch Guilder.
Deferred unrealized gains and losses from derivative financial instruments
consist of the following:
<TABLE>
<CAPTION>
JANUARY 2, 2000 JANUARY 3, 1999
------------------------------ ------------------------------
NOTIONAL NOTIONAL
AMOUNT GAINS LOSSES AMOUNTS GAIN LOSS
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Forward exchange
contracts................. $115,772 $2,859 $ -- $71,556 $17 $2,913
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents:
The carrying amount approximated fair value, primarily because of the
short maturity of cash equivalent instruments.
F-12
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Borrowing under revolving line of credit and Subordinated notes payable:
The fair value of the Company's debt approximates its carrying value.
Forward exchange contracts:
The fair value of forward exchange contracts is the estimated amount the
Company would receive or pay to terminate the agreements.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
JANUARY 2, 2000 JANUARY 3, 1999
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NONDERIVATIVES
Cash and cash equivalents............. $ 15,038 $ 15,038 $ 7,448 $ 7,448
Subordinated notes payable............ 8,209 8,209 -- --
DERIVATIVES
Forward exchange contracts............ $115,772 $119,598 $71,556 $68,660
</TABLE>
NOTE 4. EMPLOYEE BENEFIT PLANS
The Company is required to make contributions to a multi-employer union
pension and health and welfare plan. These payments are based on wages paid to
the Company's union employees and amounts paid to contractors utilized by the
Company. The Company does not participate in the management of the plans and has
not been furnished with any information with respect to the type of benefits
provided, vested and nonvested benefits or plan assets. Health and welfare plan
expense approximated $1.3 million, $1.7 million and $2.4 million for fiscal
1999, 1998, and 1997, respectively. Pension expense approximated $0.6 million,
$0.7 million and $1.1 million for fiscal 1999, 1998, and 1997, respectively.
Separate actuarial calculations regarding the Company's share of plan benefits
and net assets available for plan benefits have not been determined.
Under the Employee Retirement Income Security Act of 1974, as amended, an
employer, upon withdrawal from or termination of a multi-employer plan, is
required to continue funding its proportionate share of the plan's unfunded
vested benefits. As of January 2, 2000, the Company had no intention of
withdrawing from the plan.
The Company sponsors a defined contribution benefit plan covering its
non-union employees with a minimum of six months of eligible service. The
Company matches employee contributions at a rate of 50%, to a maximum of 6% of
an employee's annual salary. Under the terms of the plan, a participant is 100%
vested in the employer's matching contribution after six years of credited
service. Expenses under this plan were approximately $0.8 million, $0.8 million
and $1.0 million for fiscal 1999, 1998, and 1997, respectively.
During 1997, the Company adopted a bonus plan covering executives and
certain members of management. Individual bonus payments are based on management
and compensation levels, performance goals and the Company's overall
performance. The Company also adopted a deferred compensation plan covering
certain senior executives, which is based on compensation, is dependent upon the
Company achieving profitability, and vests after a five year period. In fiscal
1999 and 1998, expenses under these plans were approximately $7.8 million and
$5.9 million, respectively.
F-13
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. LEASES
Rent expense included in the Company's financial statements was
approximately $32.3 million, $23.5 million and $20.7 million for fiscal 1999,
1998, and 1997, respectively. At January 2, 2000, future minimum annual rental
commitments under noncancellable operating leases for office, warehouse and
retail facilities, and equipment are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 22,965
2001........................................................ 20,891
2002........................................................ 16,174
2003........................................................ 14,565
2004........................................................ 13,482
Thereafter.................................................. 81,342
--------
$169,419
========
</TABLE>
In addition, certain of the leases contain options to renew for periods up
to 10 years and others include contingent payments based on sales.
The Company has entered into certain sub-lease arrangements. At January 2,
2000, future offsets to annual rental commitments as a result of these subleases
are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 1,445
2001........................................................ 1,445
2002........................................................ 1,143
2003........................................................ 1,143
2004........................................................ 1,143
Thereafter.................................................. 4,573
-------
$10,892
=======
</TABLE>
NOTE 6. SALE OF INTERESTS IN AFFILIATES
In March 1998, the Company and a nonaffiliated party sold all of their
remaining outstanding shares in DKJ to a nonaffiliated party, a Japanese public
company. At the same time, DKJ was granted a 16-year exclusive license to
import, manufacture, license and/or distribute DONNA KARAN NEW YORK and DKNY
products in Japan, with certain exceptions. In addition, DKJ was granted the
exclusive right to develop and operate a total of 12 DONNA KARAN NEW YORK and
DKNY retail boutiques in Japan over the term of the agreement. On consummation
of the transaction, the Company received $15.9 million which will be amortized
in accordance with the terms of the agreement. The Company receives a royalty on
net sales of licensed products and a servicing fee on net sales of Donna Karan
products imported by DKJ.
In consideration of the sale of its interest in DKJ, the Company received
approximately $646,000 and recognized a gain, net of transaction costs, of
approximately $88,000. Equity in (loss) earnings amounted to approximately
($0.1) million and $1.4 million, for fiscal 1998 and 1997, respectively. As a
result of the Company's agreement with DKJ in 1995, which provided for a fee
based upon certain net sales of DKJ, the Company recognized management fee
income, recorded as an offset of selling, general, and administrative expenses
of approximately $0.6 million, $0.8 million and $1.5 million during fiscal 1999,
1998, and 1997, respectively.
F-14
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. APPAREL LICENSING AGREEMENTS
In December 1999, the Company consummated the grant to Liz Claiborne Inc.
("LCI") the exclusive right to design, produce, market and sell a new line of
women's career and casual sportswear, which line is expected to launch for the
Spring 2001 season under a new label. Under the agreement, LCI is obligated to
pay the Company a royalty equal to a percentage of net sales of such licensed
product. Upon consummation of the transaction, the Company received
$6.4 million, which will be amortized in accordance with the terms of the
agreement. The initial term of the license agreement is for 6 years through
December 31, 2005, with an option to renew for two additional 5-year periods, if
certain sales thresholds are met.
On January 8, 1998, the Company and LCI consummated a transaction whereby
the Company granted to LCI exclusive, long-term rights to the DKNY JEANS and
DKNY ACTIVE trademarks for apparel products to market, distribute and sell both
collections in the Western Hemisphere. Under the agreement, LCI is obligated to
pay the Company a royalty equal to a percentage of net sales of the DKNY JEANS
and ACTIVE products. The initial term of the license agreement is for 15 years
through December 31, 2012, with an option to renew for an additional 15-year
period if certain sales thresholds are met, which would continue the license
through December 31, 2027. Upon consummation of the transaction, the Company
received from LCI $30.0 million which will be amortized in accordance with the
terms of the agreement. Aggregate minimum royalties for the initial 15-year term
are $152.0 million. In connection with the transaction with LCI, the Company
recorded a loss in fiscal 1997 of $12.5 million, which represents the write down
of inventory to net realizable value, as well as other costs necessary to exit
its existing jeans business. Of this amount, $9.4 million was classified as cost
of sales and $3.1 million was classified as selling, general and administrative
expenses.
NOTE 8. BEAUTY LICENSING AGREEMENT
On November 10, 1997, the Company and Estee Lauder Inc. ("ELI") consummated
the transaction whereby the Company granted to ELI exclusive worldwide rights to
the DONNA KARAN NEW YORK and DKNY trademarks for the manufacture, marketing,
distribution and sale of beauty and beauty-related products, including
fragrances, cosmetics, skincare products, and beauty-related accessories. In
connection therewith and with the sale to ELI of certain other assets relating
to the existing business, the Company received $25.0 million and receives
additional royalties from ELI based on sales of such beauty and beauty-related
products. As a result of the closing of the transaction with ELI, the Company
recorded a loss of approximately $21.1 million (net of a $2.2 million gain in
connection with the consummation of this transaction) in fiscal 1997, of which
$11.7 million was recorded as cost of sales, $10.9 million was recorded as sales
returns and $0.7 million was recorded as selling, general and administrative
expenses. This loss represents reserves recorded, primarily related to
inventories, receivables and severance to cover the write-down of its existing
beauty business, and is net of a gain of approximately $2.2 million, included in
selling, general and administrative expenses, representing the portion of the
proceeds recognized as income reduced by the cost of exiting the beauty
business. Subsequent to closing the transaction, the Company recorded an
operating loss of approximately $2.3 million related to the beauty business.
F-15
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table presents certain pro forma condensed financial
information for fiscal 1997 for the Company as if the beauty business had been
shut down prior to fiscal 1997 including the aforementioned loss of
approximately $21.1 million:
<TABLE>
<CAPTION>
DECEMBER 28, 1997
------------------------------
AS PRO
REPORTED BEAUTY FORMA
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues................................... $638,725 $18,682 $620,043
Operating (loss)............................... (91,316) (33,722) (57,594)
Net (loss)..................................... (81,362) (30,046) (51,316)
Current assets................................. 230,763 1,677 229,086
Total assets................................... 287,488 1,677 285,811
</TABLE>
The aforementioned loss of approximately $21.1 million related to the
wind-down of the Company's beauty business is reflected in the results in the
beauty business for fiscal 1997.
In fiscal 1999, as a result of satisfying certain conditions of the ELI
beauty license, the Company recognized a one-time licensing credit of
$5.0 million.
NOTE 9. RESTRUCTURING AND OTHER CHARGES
On November 2, 1999 the Company announced that it was implementing a series
of strategic initiatives intended to further reduce costs, increase efficiencies
and focus on key business areas. In connection with the strategic initiatives,
and in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and EITF Issue
94-3 "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)," the Company recorded in the fourth quarter restructuring and
other non-recurring charges of $11.0 million, of which $0.8 million was
classified as cost of sales, $6.1 million as selling, general and administrative
expenses and $4.1 million as restructuring charges. The strategic initiatives
include consolidating the DONNA KARAN NEW YORK and DKNY womens' divisions,
integrating the marketing and public relations functions into one unit, closing
seven non-performing outlet stores, recognizing an impairment of
under-performing assets and certain other non-recurring charges. The cash and
noncash elements of the restructuring charge approximate $4.3 million and
$6.7 million, respectively. As a result of the strategic initiatives
approximately 160 positions were eliminated in the Company. At January 2, 2000,
42 employees were terminated.
Included in the aforementioned strategic initiatives and concurrent with the
Company's annual planning process, the Company determined that the estimated
future undiscounted cash flows were below the carrying value of certain retail
stores. Accordingly, during the fourth quarter of fiscal 1999, the Company
adjusted the carrying value of these stores to their estimated fair value and
recorded an impairment charge of $3.7 million, which has been classified as
selling, general and administrative expenses. The Company calculated the present
value of projected cash flows to determine the fair value of the store assets.
Additionally, as a result of the strategic initiatives, certain
under-performing co-op shops were identified to be abandoned, and seven
non-performing outlet stores were scheduled to be closed, resulting in the
recording of a charge of approximately $1.1 million and $2.2 million,
respectively. The charges include $0.8 million related to cost of sales and
$2.5 million classified as selling, general and administrative expenses.
F-16
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The major components of the fiscal 1999 restructuring and other charges are
as follows:
<TABLE>
<CAPTION>
UTILIZED BALANCE AT
ORIGINAL ------------------- JANUARY 2,
ACCRUAL CASH NONCASH 2000
--------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Writedown of long-lived assets................ $ 4,827.0 $ -- $4,827.0 $ --
Exit costs (including inventory markdowns).... 2,155.0 605.4 257.4 1,292.2
Employee termination and severance costs...... 2,283.0 340.0 -- 1,943.0
Other......................................... 1,686.0 19.0 440.2 1,226.8
--------- ------ -------- --------
$10,951.0 $964.4 $5,524.6 $4,462.0
========= ====== ======== ========
</TABLE>
As a result of the restructuring and strategic plan announced on
December 16, 1997 and the May 28, 1997 plan aimed at containing costs and
restructuring certain of its operations, the Company recognized in fiscal 1997
restructuring charges of $8.6 million, which include $7.1 million related to
severance, $0.8 million related to abandoning lease space, $0.7 million to close
the Company's Prato, Italy office; and other charges, primarily nonrecurring,
amounting to $17.0 million, including, $5.9 million for the realignment of a
retail and distribution arrangement in Europe, $3.6 million relating to
additional severance costs and other costs recorded during the cost containment
review process which have been classified as $15.4 million of selling, general
and administrative expense and approximately $1.6 million of cost of sales. The
charges relating to the May 28, 1997 plan included restructuring charges of
$1.6 million and other charges of $3.6 million.
In the fourth quarter of 1999, the Company also reevaluated its 1997
restructuring plans. Most of the strategic initiatives under these plans are
completed or near completion and have resulted in costs being less than
originally anticipated. As a result, the Company determined that certain amounts
related to the restructuring accrual were no longer necessary and credited into
income approximately $1.4 million.
In fiscal 1998, the Company utilized $5.5 million of its reserves previously
established in connection with its restructuring plan and credited into income
approximately $0.3 million of the restructuring accrual, which was determined to
no longer be required.
NOTE 10. RELATED PARTY TRANSACTIONS
In October 1998, the Company and a wholly-owned affiliate of Ms. Donna
Karan, Chairman of the Board and Chief Designer of the Company, entered into a
boutique license agreement (the "Boutique Agreement"), granting the affiliated
entity the right to open and operate a DONNA KARAN NEW YORK flagship collection
store. The store, which is anticipated to open in 2001, will be located at 819
Madison Avenue in New York City. The Boutique Agreement stated that the Company
will provide the affiliated entity with certain management services related to
the operation of the store in exchange for a fee. In fiscal 1999 and 1998 no
fees were earned. The store will also be entitled to offer a limited amount of
non-branded products.
In July 1996, the Company entered into a licensing agreement (the "Gabrielle
License") with Gabrielle Studio, Inc. ("Gabrielle Studio"), a corporation owned
by two of the Company's principal stockholders and their affiliated trusts,
which grants the Company the exclusive rights, in perpetuity, to use the
trademarks "DONNA KARAN", "DONNA KARAN NEW YORK", "DKNY", "DK" and all
variations thereof. Under the Gabrielle License, the Company pays Gabrielle
Studio a royalty on net sales of products bearing the licensed mark. The Company
incurred $25.0 million, $19.5 million and $17.6 million in royalty expense for
fiscal 1999, 1998, and 1997, respectively, which was included in cost of sales.
Included in accrued
F-17
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
expenses at January 2, 2000 and January 3, 1999, was royalties payable of
$10.6 million and $5.8 million, respectively.
The note payable to a principal stockholder of $6.7 million at December 28,
1997 incurred interest at 8% per annum and was repaid during fiscal 1998.
Sales to DKJ (see Note 6) amounted to 3.7%, 7.3% and 9.8% of the Company's
gross revenues for fiscal 1999, 1998, and 1997, respectively.
NOTE 11. ACQUISITIONS
In January 1999, the Company acquired the assets of three free-standing
retail stores in the United Kingdom which were previously owned and operated by
a Singapore-based company, for approximately $17.4 million. The aggregate
purchase price was financed with working capital and the issuance of
subordinated notes payable (the "Notes") which mature in January 2002.
The acquisition was accounted for as a purchase, with any excess of the
remaining purchase price over the estimated fair value of the assets acquired,
being recorded as goodwill. Subject to certain post-closing adjustments to the
purchase price, in accordance with the terms of the assets purchase agreement,
the principal amount of the Notes may be adjusted in the future.
NOTE 12. STOCK OPTIONS
The Company has two option plans which reserve shares of common stock for
issuance. One plan is for employees, officers, advisors and independent
consultants of the Company (the "Stock Incentive Plan"), and the other is for
non-employee directors (the "Non-Employee Director Stock Option Plan"). Options
and restricted stock granted under the plans will become fully vested upon a
change in control of the Company (as defined in the plan). The Company has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
for the stock option plans. If compensation cost for the stock option plans had
been determined based on the fair value at the grant dates for awards in fiscal
1999, 1998 and 1997 consistent with the provisions of SFAS No. 123, the
Company's pro forma net income (loss) and net income (loss) per common share
would have been as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
---------- ---------- ------------
<S> <C> <C> <C>
Net income (loss)--as reported.............. $10,036 $ 128 $(81,362)
======= ======= ========
Net income (loss)--pro forma................ $ 6,624 $(1,829) $(83,359)
======= ======= ========
Net income (loss) per common share--basic
As reported............................... $ 0.46 $ 0.01 $ (3.78)
Pro forma................................. 0.31 (0.08) (3.87)
Net income (loss) per common share--diluted
As reported............................... $ 0.46 $ 0.01 $ (3.78)
Pro forma................................. 0.31 (0.08) (3.87)
</TABLE>
F-18
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
---------- ---------- ------------
<S> <C> <C> <C>
Expected volatility......................... 57.4% 59.2% 51.3%
Average expected option life................ 6 years 6 years 6 years
Average risk free interest rate............. 6.7% 5.1% 5.7%
Dividend yield.............................. 0.0% 0.0% 0.0%
</TABLE>
Under the Stock Incentive Plan, which was amended in fiscal 1997, options to
purchase shares of common stock and awards of restricted shares of common stock
of up to a combined 2,600,000 shares may be granted (includes an award of
105,100 shares granted at the Company's initial public offering and 150,000
shares of restricted common stock (see Note 13)). The exercise price of the
options may not be less than 100% of the fair market value of a share of common
stock at the time of grant. An incentive stock option may not be exercised
within one year of the date of grant, and no options may be exercised after ten
years from the effective date of the plan. The options granted in fiscal 1999,
fiscal 1998 and fiscal 1997 vest on a yearly basis in 33 1/3% increments,
beginning on the first anniversary of the date of grant.
Under the Non-Employee Director Stock Option Plan, options to purchase up to
100,000 shares of common stock may be granted, subject to adjustments in certain
circumstances. Each eligible director, on the initial grant date, is granted
options to purchase 7,500 shares of common stock. Each year, other than with
respect to the year in which an eligible director receives an initial grant of
options, each eligible director will receive an additional option to purchase
1,000 shares of common stock. Upon the exercise of an option, the purchase price
paid will be 100% of the fair market value of such share at the time of the
grant of the option. Options granted will be exercisable on or after the first
anniversary of the date of grant, and will expire on the tenth anniversary of
the date of grant.
A summary of the Company's stock option programs as of fiscal 1999, 1998 and
1997 and changes during the years then ended, are presented below:
<TABLE>
<CAPTION>
NON-EMPLOYEE DIRECTOR
STOCK INCENTIVE PLAN STOCK OPTION PLAN
--------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- -------------- -------- --------------
<S> <C> <C> <C> <C>
Outstanding at December 28,
1997.......................... 1,741,500 $18.74 23,500 $17.98
Granted......................... 953,717 8.90 3,000 15.56
Forfeited or Cancelled.......... (1,413,707) 20.16 -- --
---------- ------
Outstanding at January 3,
1999.......................... 1,281,510 9.85 26,500 17.71
Granted......................... 405,540 6.87 9,500 8.53
Exercised....................... (1,459) 6.25 -- --
Forfeited or Cancelled.......... (137,581) 12.12 (1,000) 15.56
---------- ------
Outstanding at January 2,
2000.......................... 1,548,010 8.80 35,000 15.28
========== ======
</TABLE>
The weighted average fair value of options granted during fiscal 1999 and
1998 was $4.21 and $5.36 per share, respectively.
F-19
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For various price ranges, weighted average characteristics of outstanding
stock options at January 2, 2000 are as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------- ------------------------
REMAINING WEIGHTED WEIGHTED
RANGE OF EXERCISE PRICES OPTIONS LIFE (YEARS) AVERAGE PRICE OPTIONS AVERAGE PRICE
- ------------------------ --------- ------------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
STOCK INCENTIVE PLAN
$ 5.94 to $ 6.25....................... 651,470 6.8 $ 6.22 436,852 $ 6.25
$ 7.00 to $10.44....................... 697,540 8.9 9.00 100,000 10.44
$12.38 to $24.00....................... 199,000 7.8 16.54 110,698 15.06
--------- -------
$ 5.94 to $24.00....................... 1,548,010 7.8 8.80 647,550 8.40
========= =======
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
$ 7.88 to $11.00....................... 10,500 9.1 $ 8.76 1,000 $10.94
$13.25 to $21.13....................... 24,500 6.9 18.07 24,500 18.07
--------- -------
$ 7.88 to $21.13....................... 35,000 7.6 15.28 25,500 17.79
========= =======
</TABLE>
In January 2000, the Company's Incentive Compensation Subcommittee approved
an exchange program which permitted the Company's executive officers to elect to
have the Company cancel all of their existing vested and unvested options, and
receive an award of restricted shares of common stock intended to have the same
economic value as the options, determined on a Black-Scholes basis. The
restricted shares will vest on the third anniversary of the date of grant or
earlier in 20% increments if the Company's common stock attains certain price
levels. As a result of the program, options to purchase 770,000 shares were
cancelled and 388,226 restricted shares were awarded.
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with key executives which provide for
guaranteed minimum compensation, minimum cash bonuses, stock options and
termination payments and benefits. One employment agreement contains a provision
whereby the Company has granted 150,000 shares of restricted common stock to a
key employee. These shares are subject to certain restrictions on
transferability and a risk of forfeiture. The forfeiture provisions expire at
the earlier of five years from the date of grant or upon the attainment of
certain market value goals for the common stock or if employment is terminated
by the Company without cause or by the executive for good reason. As of
January 2, 2000, all 150,000 shares were subject to the forfeiture provisions.
These shares have been recorded as unearned stock grant compensation and are
presented as a separate component of stockholders' equity. The unearned
compensation is being charged to selling, general and administrative expenses
over the five-year vesting period, until such time as the market value goals are
attained, in which case the expense will be accelerated to match the amounts
earned. Total expense for fiscal 1999 and fiscal 1998 amounted to approximately
$398,000 and $239,000, respectively.
The Company also has a Non-Employee Director Restricted Stock Plan and a
Voluntary Deferred Compensation Plan. The Company's 1998 Non-Employee Director
Restricted Stock Plan entitles each non-employee director to receive a grant of
restricted stock of 500 shares of common stock as of the first day of the month
following the annual meeting of stockholders, which award will vest on the first
anniversary of the date of grant. In addition, the restricted stock award will
become fully vested upon a change in control of the Company (as defined in the
plan).
F-20
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Voluntary Deferred Compensation Plan for Non-Employee Directors of the
Company provides that an eligible director, at the election of the director, may
defer payment of his or her cash retainer and meeting fees for five years or
until he or she ceases to be a director. The deferred amounts, at the election
of the director, during the deferral period either (i) are credited with
interest at prescribed rates or (ii) are converted to the equivalent of that
number of shares of the Company's common stock (based on the market price at the
time of the deferral) that could be purchased with the deferred amounts. All
payments under the Deferred Compensation Plan are in the form of cash. The
Deferred Compensation Plan provides that lump-sum payments of all deferred
compensation will be made as soon as administratively feasible following the
date that (i) the participating director ceases to be a member of the Board of
Directors or (ii) the Deferred Compensation Plan is terminated.
In 1997, the Company was a defendant in a consolidated purported class
action, which alleges violations of certain sections of the federal securities
laws. In 1998, the United States Court of Appeals dismissed the action in all
respects.
The Company is involved from time to time in routine legal matters and
litigation incidental to its business. Although the outcome of any such matters
and litigation cannot be determined with certainty, management is of the opinion
that the final outcome of these matters and litigation will not have a material
effect on the Company's financial position or results of operations.
NOTE 14. INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes" which requires the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial carrying amounts and the tax basis of existing assets and
liabilities.
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current income taxes:
Federal taxes............................. $2,907 $(2,374) $ (2,903)
State and local taxes..................... 1,485 1,245 787
Foreign taxes............................. 372 2,227 521
------ ------- --------
4,764 1,098 (1,595)
Deferred income taxes....................... (4,211) (988) (9,439)
------ ------- --------
$ 553 $ 110 $(11,034)
====== ======= ========
</TABLE>
F-21
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant items
comprising the Company's net deferred tax asset were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------
JANUARY 2, JANUARY 3,
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Current:
Uniform inventory capitalization.......................... $ 2,717 $ 3,560
Allowance for doubtful accounts and other receivable
related reserves........................................ 10,428 10,459
Inventory reserves........................................ 6,572 8,601
Other book accruals....................................... 11,123 8,417
Deferred revenue.......................................... 5,989 6,008
Net operating loss carry forwards......................... 1,074 1,838
-------- --------
37,903 38,883
-------- --------
Non-Current:
Deferred revenue.......................................... 11,404 14,710
Depreciation.............................................. 13,711 8,813
Foreign tax credit carry forwards......................... 2,933 3,334
-------- --------
28,048 26,857
-------- --------
Valuation allowance......................................... (20,000) (24,000)
-------- --------
$ 45,951 $ 41,740
======== ========
</TABLE>
The Company has available state net operating loss carryforwards of
approximately $8.5 million to offset future taxable income. The state net
operating loss carryforwards expire through fiscal 2018. Additionally, the
Company has available foreign net operating loss carryforwards of approximately
$3.5 million to offset future taxable income. The foreign net operating loss
carryforwards do not expire. In addition, the Company has foreign tax credit
carryforwards of approximately $2.9 million which expire from fiscal 2001
through fiscal 2004.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors including the Company's ability to generate sufficient
taxable income within the net operating loss carry forward period and potential
limitations imposed by the Internal Revenue Code. Due to the inherent
uncertainties in estimating future taxable income, the Company recorded a
valuation allowance of $24.0 million in fiscal 1997. During fiscal 1999, the
Company realized certain deferred tax assets and reduced the valuation allowance
by $4.0 million to $20.0 million.
The foreign and domestic components of income (loss) before income taxes
were a foreign loss of $4.1 million and domestic income of $14.6 million in
fiscal 1999, a foreign loss of $0.06 million and domestic income of
$0.3 million in fiscal 1998 and foreign income of $2.6 million and domestic loss
of $95.0 million in fiscal 1997.
F-22
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A reconciliation between the provision for income taxes computed by applying
the statutory Federal income tax rate to income (loss) before taxes and the
actual provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal statutory rate...................... $ 3,706 $ 83 $(32,339)
State and local taxes, net of Federal tax
benefits.................................. 711 770 (4,620)
Taxes related to foreign income, net of
credits................................... (389) (1,080) 739
Valuation allowance......................... (4,000) -- 24,000
Other items, net............................ 525 337 1,186
------- ------- --------
$ 553 $ 110 $(11,034)
------- ------- --------
Effective tax rate.......................... 5.2% 46.2% (11.9)%
======= ======= ========
</TABLE>
Exclusive of the impact of the valuation allowance, the Company's effective
tax rate was 43.0% and 37.9% in fiscal 1999 and fiscal 1997, respectively.
NOTE 15. COMPREHENSIVE INCOME (LOSS)
In fiscal 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." Comprehensive income (loss) is comprised of
net income (loss) and other comprehensive income (loss), which contains gains or
losses from foreign currency translation. Accumulated other comprehensive loss
at January 2, 2000 and January 3, 1999 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------
JANUARY 2, JANUARY 3,
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Accumulated other comprehensive loss, beginning of
year.................................................. $(1,206) $ (455)
Current-period change................................... 215 (751)
------- -------
Accumulated other comprehensive loss, end of year....... $ (991) $(1,206)
======= =======
</TABLE>
Other comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Foreign currency translation adjustments,
before taxes.............................. $215 $(751) $(124)
Provision (benefit) for taxes (1)........... -- -- --
---- ----- -----
Foreign currency translation adjustments,
net of taxes.............................. $215 $(751) $(124)
==== ===== =====
</TABLE>
- ------------------------
(1) For fiscal 1999, 1998, and 1997 there was no sale or liquidation of the
Company's investment in a foreign entity. As such, no reclassification
adjustments were required and gross amounts were displayed exclusive of any
provision for income taxes.
F-23
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. SEGMENT INFORMATION
The Company has three reportable business segments: wholesale, licensing,
and retail. The Company's wholesale business consists of three divisions:
womenswear, menswear, and accessories, all of which sell products under the
DONNA KARAN NEW YORK, DKNY, DKNY JEANS and DKNY ACTIVE brands to department
stores, specialty stores, boutiques, and to the Company's owned and licensed
free-standing stores. The licensing division licenses to third parties the right
to develop, market, and sell products under the DONNA KARAN NEW YORK, DKNY, DKNY
JEANS, and DKNY ACTIVE brands, and licenses, on a royalty-free basis,
free-standing stores under the DONNA KARAN NEW YORK, DKNY and DKNY JEANS names.
The retail division operates outlet stores and full-price free-standing retail
stores.
The Company's reportable segments are individual business units that offer
different products and services. They are managed separately because each
business requires different strategic initiatives, promotional campaigns,
marketing, and advertising, based upon its own individual positioning in the
market.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based upon profit or loss from operations before interest expense
and interest income, nonrecurring gains and losses, and income taxes.
Information related to the Company's geographic segments are as follows:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues:
United States............................... $462,752 $422,947 $415,513
Japan....................................... 27,842 46,528 66,839
Other....................................... 171,243 153,171 156,373
-------- -------- --------
$661,837 $622,646 $638,725
======== ======== ========
</TABLE>
Sales to Japan for the quarter ended March 28, 1998 and fiscal year 1997
were made to a 30% owned subsidiary (see Note 6).
In fiscal 1999, 1998, and 1997 sales to entities affiliated with HPL,
including DKJ, and certain free-standing international retail stores, accounted
for approximately 5.6%, 10.5%, and 16.0% of the Company's revenues,
respectively. Additionally, in fiscal 1997 the Company's wholesale segment had
one customer which accounted for approximately 13.0%, of the Company's revenues.
Primarily all of the Company's identifiable assets are located in the United
States.
F-24
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Intersegment sales and transfers are recorded at amounts that approximate
cost. All intercompany revenues and profit or loss is eliminated in
consolidation.
<TABLE>
<CAPTION>
WHOLESALE LICENSING RETAIL BEAUTY TOTAL
--------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
JANUARY 2, 2000
Net revenues from external
customers.......................... $496,288 $35,142 $130,407 $ -- $661,837
Intersegment revenues................ 74,179 -- -- -- 74,179
Segment operating profit (loss)...... 14,556(1) 18,022(2) (17,899)(1)(3) --(4) 14,679
Segment assets....................... 240,440 4,729 59,122 -- 304,291
JANUARY 3, 1999
Net revenues from external
customers.......................... 510,872 18,458 93,316 -- 622,646
Intersegment revenues................ 56,420 -- -- -- 56,420
Segment operating profit (loss)...... 11,999 6,382 (16,116) -- 2,265
Segment assets....................... 242,399 1,421 34,909 -- 278,729
DECEMBER 28, 1997
Net revenues from external
customers.......................... 539,892 9,602 70,549 18,682 638,725
Intersegment revenues................ 61,318 -- -- 1,490 62,808
Segment operating profit (loss)...... (48,974)(4) 4,889 (13,509) (33,722)(4) (91,316)
Segment assets....................... 249,725 1,100 34,986 1,677 287,488
</TABLE>
- ------------------------
(1) In December 1999, the Company recorded restructuring and non-recurring
charges related to the consolidation of divisions, the impairment of
under-performing assets, and the closing of outlet stores (see Note 9).
Exclusive of these charges, operating profit (loss) for the wholesale and
retail segments was $18.2 million and ($12.0) million, respectively.
(2) In fiscal 1999, includes the recognition of a one-time licensing credit of
$5.0 million, related to the ELI beauty license (see Note 8). Exclusive of
the one-time licensing credit, segment net revenues and operating profit in
fiscal 1999 was $30.1 million and $13.0 million, respectively.
(3) In fiscal 1999, the Company expensed $1.9 million of costs associated with
the opening of its DKNY flagship store on Madison Avenue in New York City,
New York (see Note 1). Prior to the charges (see (1) above) and the opening
costs, segment operating loss in fiscal 1999 was $10.1 million.
(4) In November 1997, the Company exited the beauty business and recorded
restructuring and other charges (see Notes 8 and 9).
F-25
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following summarizes the unaudited quarterly operating results of the
Company for fiscal 1999 and fiscal 1998 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------
1999 APR. 4 JULY 4 OCT. 3(1) JAN. 2(2)
- ---- -------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues........................ $160,720 $122,033 $202,511 $176,573
Gross profit........................ 47,199 33,638 72,498 57,816
Net income (loss)................... 2,163 (7,870) 12,951 2,792
Net income (loss) per common share:
Basic............................. 0.10 (0.36) 0.60 0.13
Diluted........................... 0.10 (0.36) 0.60 0.13
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------
1998 MAR. 29 JUNE 28 SEPT. 27 JAN. 3
- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues........................ $181,153 $124,854 $170,569 $146,070
Gross profit........................ 42,531 24,701 50,226 36,629
Net income (loss)................... 2,070 (6,318) 7,565 (3,189)
Net income (loss) per common share:
Basic............................. 0.10 (0.29) 0.35 (0.15)
Diluted........................... 0.10 (0.29) 0.35 (0.15)
</TABLE>
- ------------------------
(1) In fiscal 1999, includes recognition of the one-time licensing credit,
relating to the ELI beauty license, amounting to $5.0 million (see Note 8).
Exclusive of the licensing credit, net income per common share on a diluted
basis was $0.46 per share.
(2) In fiscal 1999, includes restructuring and other non-recurring charges of
$9.6 million (see Note 9) and a $4.0 million reduction in a previously
recorded income tax valuation allowance (see Note 14). Exclusive of these
charges and tax credit, net income per common share on a diluted basis was
$0.19 per share.
F-26
<PAGE>
DONNA KARAN INTERNATIONAL INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
THREE YEARS ENDED JANUARY 2, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO ADDITIONS BALANCE AT
BEGINNING OF COSTS AND CHARGED TO OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ------------ ---------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 2, 2000
Allowance for doubtful accounts.... $ 1,242 $ 2,717 $ -- $ 2,214 $ 1,745
Allowance for chargebacks.......... 21,107 15,057 -- 16,372 19,792
Allowance for cash discounts....... 2,584 12,243 -- 12,966 1,861
Allowance for sales returns........ 4,939 16,199 -- 17,343 3,795
------- ------- ---- ------- -------
$29,872 $46,216 $ -- $48,895 $27,193
------- ------- ---- ------- -------
YEAR ENDED JANUARY 3, 1999
Allowance for doubtful accounts.... $ 1,182 $ 1,544 $ -- $ 1,484 $ 1,242
Allowance for chargebacks.......... 37,357 13,144 -- 29,394 21,107
Allowance for cash discounts....... 2,940 14,279 -- 14,635 2,584
Allowance for sales returns........ 10,556 18,579 -- 24,196 4,939
------- ------- ---- ------- -------
$52,035 $47,546 $ -- $69,709 $29,872
------- ------- ---- ------- -------
YEAR ENDED DECEMBER 28, 1997
Allowance for doubtful accounts.... $ 1,661 $ 843 $ -- $ 1,322 $ 1,182
Allowance for chargebacks.......... 18,847 43,329 -- 24,819 37,357
Allowance for cash discounts....... 3,198 18,647 -- 18,905 2,940
Allowance for sales returns........ 3,051 36,000 -- 28,495 10,556
------- ------- ---- ------- -------
$26,757 $98,819 $ -- $73,541 $52,035
======= ======= ==== ======= =======
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: March 31, 2000
<TABLE>
<S> <C> <C>
DONNA KARAN INTERNATIONAL INC.
By: /s/ JOHN D. IDOL
-----------------------------------------
John D. Idol
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DONNA KARAN Chairman of the Board and
------------------------------------------- Chief Designer March 31, 2000
Donna Karan
/s/ STEPHAN WEISS Vice Chairman of the Board
------------------------------------------- March 31, 2000
Stephan Weiss
/s/ JOHN D. IDOL Chief Executive Officer and
------------------------------------------- Director March 31, 2000
John D. Idol
/s/ M. WILLIAM BENEDETTO Director
------------------------------------------- March 31, 2000
M. William Benedetto
/s/ JOHN EYLER Director
------------------------------------------- March 31, 2000
John Eyler
/s/ ANN MCLAUGHLIN Director
------------------------------------------- March 31, 2000
Ann McLaughlin
/s/ FRANK R. MORI Director
------------------------------------------- March 31, 2000
Frank R. Mori
Executive Vice President and
Chief Financial and
/s/ JOSEPH B. PARSONS Administrative Officer
------------------------------------------- (Principal Financial Officer March 31, 2000
Joseph B. Parsons and Principal Accounting
Officer)
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
<C> <S>
2.1 Agreement and Plan of Contribution, dated as of June 10,
1996, among the Company, Takihyo Inc., Donna Karan, Stephan
Weiss, Stephan Weiss, as trustee under Trust Agreement for
the benefit of Lisa Weiss Keyes, Corey Weiss, and Gabrielle
Karan, Stephan Weiss, as trustee under Trust Agreement for
the benefit of Donna Karan, Gabrielle Studio, Inc., Tomio
Taki, Frank R. Mori, Christopher Mori, and Heather Mori
(Incorporated by reference from Exhibit 2.1 to the Company's
Registration Statement on Form S-1, dated June 27, 1996)
3.1 Amended and Restated Certificate of Incorporation of the
Company (Incorporated by reference from Exhibit 3.2 to the
Company's Registration Statement on Form S-1, dated June 27,
1996)
3.2 Bylaws of the Company (Incorporated by reference from
Exhibit 3.3 to the Company's Registration Statement on Form
S-1, dated June 27, 1996)
3.3 Amendment No.1 to By-laws of the Company (Incorporated by
reference from Exhibit 3.1 to the Company's Form 10-Q for
the quarter ended September 28, 1997)
10.1 Second Amended and Restated Credit Agreement, dated as of
January 29, 1998 among The Donna Karan Company, The Donna
Karan Company Store, G.P., Donna Karan Studio, DK Footwear
Partners, the institutions time to time parties thereto, and
Citibank, N.A., as administrative agent (Incorporated by
reference from Exhibit 10.1 to the Company's Form 10-K for
the year ended December 28, 1997)
10.2 1996 Stock Incentive Plan of the Company (Incorporated by
reference from Exhibit A to the Company's Proxy Statement,
dated May 8, 1997)*
10.3 1996 Non-Employee Director Stock Option Plan (Incorporated
by reference from Exhibit 10.3 to the Company's Registration
Statement on Form S-1, dated June 27, 1996)*
10.4 Registration Rights Agreement, dated as of June 10, 1996,
among the Company, Donna Karan, Stephan Weiss, Stephan
Weiss, as trustee under Trust under trust agreement for the
benefit of Lisa Weiss Keyes, Corey Weiss, and Gabrielle
Karan, Stephan Weiss, as trustee under Trust Agreement for
the benefit of Donna Karan, Gabrielle Studio, Inc., Takihyo
Inc., Tomio Taki, Frank R. Mori, Christopher Mori, and
Heather Mori (Incorporated by reference from Exhibit 10.4 to
the Company's Registration Statement on Form S-1, dated June
27, 1996)
10.5 License Agreement, dated as of July 3, 1996, between
Gabrielle Studio, Inc. and Donna Karan Studio (Incorporated
by reference from Exhibit 10.5 to the Company's Registration
Statement on Form S-1, dated June 27, 1996)
10.6 Guaranty of License, dated as of July 3, 1996, from the
Company to Gabrielle Studio, Inc. (Incorporated by reference
from Exhibit 10.6 to the Company's Registration Statement on
Form S-1, dated June 27, 1996)
10.7 License Agreement, dated as of July 3, 1996, between Donna
Karan Studio and Stephan Weiss (Incorporated by reference
from Exhibit 10.7 to the Company's Registration Statement on
Form S-1, dated June 27, 1996)
10.8 Employment Agreement, dated as of July 3, 1996, between the
Company and Donna Karan (Incorporated by reference from
Exhibit 10.8 to the Company's Registration Statement on Form
S-1, dated June 27, 1996)*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
<C> <S>
10.9 Employment Agreement, dated as of July 3, 1996, between the
Company and Stephan Weiss (Incorporated by reference from
Exhibit 10.9 to the Company's Registration Statement on Form
S-1, dated June 27, 1996)*
10.10 Stockholders Agreement, dated as of June 10, 1996, among
Donna Karan, Stephan Weiss, Stephan Weiss as trustee under
Trust Agreement for the benefit of Lisa Weiss Keyes, Corey
Weiss, and Gabrielle Karan, Stephan Weiss as trustee under
Trust Agreement for the benefit of Donna Karan, Gabriel
Studio, Inc., Takihyo Inc., Tomio Taki, Frank R. Mori,
Christopher Mori, and Heather Mori (Incorporated by
reference from Exhibit 10.10 to the Company's Registration
Statement on Form S-1, dated June 27, 1996)
10.11 Employment Agreement, dated as of October 15, 1996, between
The Donna Karan Company and Joseph B. Parsons (Incorporated
by reference from Exhibit 10.14 to the Company's Form 10-K
for the year ended December 29, 1996)*
10.12 Employment Agreement, dated as of July 25, 1997, among the
Company, The Donna Karan Company and John D. Idol, and
related bonus programs. (Incorporated by reference from
Exhibit 10.5 to the Company's Form 10-Q for the quarter
ended September 28, 1997)*
10.13 Amendment No. 1 to Employment Agreement between the Company
and Donna Karan (Incorporated by reference from Exhibit 10.2
to the Company's 10-Q for the quarter ended September 28,
1997)*
10.14 Amendment No. 1 to Employment Agreement between the Company
and Stephan Weiss (Incorporated by reference from Exhibit
10.3 to the Company's Form 10-Q for the quarter ended
September 28, 1997)*
10.15 Amendment No. 2 to Employment Agreement between the Company
and Stephan Weiss (Incorporated by reference from Exhibit
10.4 to the Company's Form 10-Q for the quarter ended
September 28, 1997)*
10.16 Agreement, dated as of September 30, 1997, between The Donna
Karan Company and Estee Lauder Inc. (Incorporated by
reference from Exhibit 2.1 to the Company's Form 8-K, dated
November 10, 1997).
10.17 Executive Incentive Plan (Incorporated by reference from
Exhibit 10.17 to the Company's Form 10-K for the year ended
December 28, 1997)*
10.18 Wealth Accumulation Plan (Incorporated by reference from
Exhibit 10.18 to the Company's Form 10-K for the year ended
December 28, 1997)*
10.19 Donna Karan International Inc. Deferred Compensation Plan
(Incorporated by reference from Exhibit 10.19 to the
Company's Form 10-K for the year ended January 3, 1999)*
10.20 Amended and Restated Second Amendment, dated as of October
30, 1998, among The Donna Karan Company, The Donna Karan
Company Store, G.P., Donna Karan Studio, and DK Footwear
Partners, the financial institutions time to time parties
thereto as lenders, the financial institutions from time to
time parties thereto as issuing banks, and Citibank, N.A.,
as administrative agent (Incorporated by reference from
Exhibit 10.20 to the Company's Form 10-K for the year ended
January 3, 1999)
10.21 Employment Agreement, dated as of December 18, 1998, between
the Company and Lee Goldenberg. (Incorporated by reference
from Exhibit 10.21 to the Company's Form 10-K for the year
ended January 3, 1999)*
10.22 1998 Non-Employee Director Restricted Stock Plan
(Incorporated by reference from Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended June 28, 1998) *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
<C> <S>
10.23 Amendment to 1996 Non-Employee Director Stock Option Plan
(Incorporated by reference from Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended June 28, 1998) *
10.24 Voluntary Deferred Compensation Plan for Non-Employee
Directors (Incorporated by reference from Exhibit 10.3 to
the Company's Form 10-Q for the quarter ended June 28, 1998)
*
10.25 Amendment No. 2 to Employment Agreement, dated as of
November 1, 1999, by and between the Company and Donna Karan
*
10.26 Amendment No. 1 to Donna Karan International Inc. Deferred
Compensation Plan*
10.27 Third Amendment, dated as of May 15, 1999, 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
10.28 Fourth Amendment, dated as of February 14, 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
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Exhibit is a management contract or compensatory plan or arrangement.
<PAGE>
Exhibit 10.25
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
This AMENDMENT NO. 2 ("Amendment"), dated as of the 1st day of
November, 1999, by and between DONNA KARAN INTERNATIONAL INC., a Delaware
corporation having an office at 550 Seventh Avenue, New York, New York 10018
(the "Company"), and DONNA KARAN (the "Executive").
W I T N E S S E T H
WHEREAS, the Company and the Executive are parties to that
certain Employment Agreement, dated as of the 3rd day of July, 1996, which was
amended by Amendment No. 1 dated as of the 25th day of July, 1997 (such
agreement, as amended, the "Agreement"); and
WHEREAS, the Company and the Executive wish to amend further the
Agreement on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, it is hereby agreed as
follows:
1. AMENDMENT OF SECTION 6(a). Section 6(a) of the Agreement is
hereby amended and restated to read in its entirety as follows:
(a) pay to Executive a base salary at the rate of $500,000
per annum, such amount to be paid in equal installments on
the Company's regular payroll dates; PROVIDED, HOWEVER,
that for the period commencing November 1, 1999 through
the earlier of the termination of this Agreement or
December 31, 2001, the Company shall pay to Executive a
base salary at the rate of $100,000 per annum. In years
subsequent to 1996, such salary shall be adjusted by the
percentage increase in the Consumer Price Index for all
Urban Customers ("CPI-U") for the month of November
immediately preceding the relevant annual period over the
CPI-U of the preceding annual period. The "CPI-U" referred
to herein is that CPI-U published by the Bureau of Labor
Statistics, U.S. Department of Labor, for all United
States cities (U.S. city average), based upon 1982-4
equaling 100, or the successor or supplement thereto if
publication thereof should be discontinued or modified.
2. ACKNOWLEDGMENT. Executive hereby expressly acknowledges and
agrees that the changes in her base salary as set forth in this Amendment does
not constitute "good reason" as set forth in Section 9(b)(iii) of the Agreement.
<PAGE>
3. SEPARABILITY. In the event that any provision or any
portion of any provision of this Amendment shall be held to be void or
unenforceable, the remaining provisions of this Amendment (and the balance of
any provisions held void or unenforceable in part only) shall continue in full
force and effect.
4. ENTIRE AGREEMENT. This Amendment, together with the
Agreement (as amended hereby), contains the full and complete understanding and
agreement of the parties with respect to the subject matter hereof and
supercedes all prior agreements and understandings between the parties with
respect to the subject matter hereof.
5. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the principles of conflicts of law provisions thereof.
6. THE AGREEMENT. Except as expressly set forth herein, all
other provisions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the day and year first above written.
DONNA KARAN INTERNATIONAL INC.
By: /s/ John D. Idol
--------------------------------
Name: John D. Idol
Title: Chief Executive Officer
/s/ Donna Karan
-------------------------------
DONNA KARAN
2
<PAGE>
EXHIBIT 10.26
AMENDMENT NO.1
TO
DONNA KARAN INTERNATIONAL INC.
DEFERRED BONUS PLAN
Pursuant to Section 20 of the Donna Karan International Inc.
Deferred Bonus Plan (the "Plan"), Donna Karan International Inc. (the
"Company") hereby adopts this Amendment No. 1 to the Plan, effective January
24, 2000:
1. The third and fourth sentences of Section 4(a) of the Plan are
amended in their entirety to read as follows:
"The election to defer an Award must be made at such time as the
Company shall prescribe but in no event later than the
first day of March of the Plan Year in which the Award to
which the deferral relates is earned. Notwithstanding
the foregoing, in the case of the Plan Year in which an
individual first becomes an Eligible Employee (other than
as a result of the adoption of the Plan), such individual
may make an election to defer an Award earned during such
Plan Year within thirty (30) days of the date of initial
eligibility (but only with respect to compensation for
services after such date)."
IN WITNESS WHEREOF, the Company has caused this Amendment No. 1 to be
executed by its officer duly authorized, this 24th day of January, 2000.
DONNA KARAN INTERNATIONAL INC.
BY: /s/ Lynn E. Usdan
--------------------------
Name: Lynn E. Usdan
Title: Secretary
<PAGE>
Exhibit 10.27
EXECUTION COPY
THIRD AMENDMENT
Dated as of May 15, 1999
This THIRD AMENDMENT (the "Third Amendment") among The Donna
Karan Company, a New York general partnership, The Donna Karan Company Store,
G.P., a New York general partnership, Donna Karan Studio, a New York general
partnership, and DK Footwear Partners, a New York general partnership
(collectively, the "Borrowers"), the financial institutions from time to time
parties thereto as lenders (the "Lenders"), the financial institutions from time
to time parties thereto as issuing banks (the "Issuing Banks"), Citibank, N.A.,
in its capacity as administration agent for the Lenders and the Issuing Banks
(the "Administrative Agent"), The Chase Manhattan Bank and Nationsbank, N.A., in
their capacity as co-agents (the "Co-Agents").
PRELIMINARY STATEMENTS:
(1) The Borrowers, the Lenders, the Issuing Banks, the
Co-Agents and the Administrative Agent have entered into a Second Amended and
Restated Credit Agreement dated as of January 29, 1998, as amended from time to
time (as so amended, the "Credit Agreement"). Unless otherwise defined herein,
the terms defined in the Credit Agreement shall be used herein as therein
defined.
(2) The Borrowers and the Lenders have agreed to amend the
Credit Agreement as hereinafter set forth.
SECTION 1. AMENDMENT TO CREDIT AGREEMENT. The Credit Agreement
is, effective as of the date hereof and subject to the satisfaction of the
conditions precedent set forth in Section 2 hereof, hereby amended as follows:
(a) The definition of "Fixed Charge Coverage Ratio" set forth
in Section 1.01 of the Credit Agreement is amended by deleting such
definition in its entirety and substituting therefor the following:
"FIXED CHARGE COVERAGE RATIO' means, for any Financial
Covenant Period, the ratio of (i) EBITDA PLUS the Net Cash
Proceeds of Asset Sales received during such period MINUS
Capital Expenditures made during such period (excluding
$9,200,000, representing the cash portion of the purchase
price for the UK Acquisition, from the fourth fiscal quarter
of 1999) MINUS the Investments made pursuant to SECTION
9.04(iv) during such period MINUS any dividends payments or
stock repurchases with respect to the Common Stock during such
period MINUS any cash payment of taxes made during such
period, to (ii) Cash Interest Expense for such period PLUS any
principal payment of Funded Debt made during such period."
(b) Section 9.14 of the Credit Agreement is amended by
deleting such Section in its entirety and substituting therefor the
following:
"9.14. CAPITAL EXPENDITURES. No member of the Donna Karan
Group shall make or incur Capital Expenditures (a) during
Fiscal Year 1998 if the aggregate amount of Capital
<PAGE>
Expenditures for the Donna Karan Group PLUS the aggregate
amount of the Investments made pursuant to SECTION 9.04(iv)
would exceed Seventeen Million Eight Hundred Thousand Dollars
($17,800,000) for such Fiscal Year, (b) during Fiscal Year
1999 if the aggregate amount of Capital Expenditures for the
Donna Karan Group PLUS the aggregate amount of the Investments
made pursuant to SECTION 9.04(iv) (excluding $9,200,000
representing the cash portion of the purchase price for the UK
Acquisition) would exceed Seventeen Million Two Hundred
Thousand Dollars ($17,200,000) for such Fiscal Year, and (c)
during Fiscal Year 2000 if the aggregate amount of Capital
Expenditures for the Donna Karan Group PLUS the aggregate
amount of the Investments made pursuant to SECTION 9.04(iv)
would exceed Twenty Million Five Hundred Thousand Dollars
($20,500,000) for such Fiscal Year; PROVIDED, HOWEVER, that
the Donna Karan Group may carry forward from one Fiscal Year
to another Fiscal Year any Capital Expenditures permitted
hereunder, but not made or incurred in such Fiscal Year, in an
amount of up to Five Million Dollars ($5,000,000); PROVIDED,
FURTHER, that cost of Equipment purchased to replace Equipment
damaged or destroyed shall not be included in the calculations
for Capital Expenditures under this SECTION 9.14 to the extent
of the amount of insurance proceeds received and applied
against the Obligations."
SECTION 2. CONDITIONS OF EFFECTIVENESS. This Third Amendment
shall become effective when the Administrative Agent shall have received
counterparts of this Third Amendment executed by the Borrowers and the Requisite
Lenders.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWERS.
Each Borrower represents and warrants as follows:
(a) After giving effect to this Third Amendment, all of the
representations and warranties contained in Section 6.01 of the Credit
Agreement and in the other Loan Documents shall be true in all material
respects.
(b) After giving effect to this Third Amendment, no Default or
Event of Default shall have occurred and be continuing.
SECTION 4. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. (a)
Upon the effectiveness of this Third Amendment, on and after the date hereof
each reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof" or words of like import referring to the Credit Agreement, and each
reference in the other Loan Documents to "the Credit Agreement", "thereunder",
"thereof" or words of like import referring to the Credit Agreement, shall mean
and be a reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement
and all other Loan Documents, are and shall continue to be in full force and
effect and are hereby in all respects ratified and confirmed. Without limiting
the generality of the foregoing, the Loan Documents and all of the Collateral
described therein do and shall continue to secure the payment of all obligations
of the Borrowers under the Credit Agreement, the Notes and the other Loan
Documents, in each case as amended hereby.
(c) The execution, delivery and effectiveness of this Third
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of any
2
<PAGE>
Lender or the Agent under any of the Loan Documents, nor constitute a waiver of
any provision of any of the Loan Documents.
SECTION 5. EXECUTION IN COUNTERPARTS. This Third Amendment may
be executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute but
one and the same agreement.
SECTION 6. GOVERNING LAW. This Third Amendment shall be
governed by, and construed in accordance with, the laws of the State of New
York.
IN WITNESS WHEREOF, the parties hereto have caused this Third
Amendment to be executed as of the date first above written.
THE DONNA KARAN COMPANY
By: Donna Karan International Inc.,
a general partner
By: /s/
---------------------------------
Title:_________________________
DONNA KARAN STUDIO
By: Donna Karan International Inc.,
a general partner
By: /s/
---------------------------------
Title:_________________________
THE DONNA KARAN COMPANY STORE, G.P.
By: Donna Karan International Inc.,
a general partner
By: /s/
---------------------------------
Title:_________________________
DK FOOTWEAR PARTNERS
By: Donna Karan International Inc.,
a general partner
By: /s/
---------------------------------
Title:_________________________
CITIBANK, N.A., as Administrative Agent and Lender
3
<PAGE>
By: /s/
---------------------------------
Vice President
THE CHASE MANHATTAN BANK, as Co-Agent
and Lender
By: /s/
---------------------------------
Title:
NATIONSBANK N.A., as Co-Agent and Lender
By: /s/
---------------------------------
Title:
NC BANK NATIONAL ASSOCIATION
By: /s/
---------------------------------
Title:
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By: /s/
---------------------------------
Title:
NATIONAL CITY COMMERCIAL FINANCE, INC.
By: /s/
---------------------------------
Title:
JACKSON NATIONAL LIFE INSURANCE CO.,
By: PPM FINANCE, INC., its Attorney-in-Fact
By: /s/
---------------------------------
Title:
4
<PAGE>
Exhibit 10.28
EXECUTION COPY
FOURTH AMENDMENT
Dated as of February 14, 2000
This FOURTH AMENDMENT (the "Fourth Amendment") among The Donna
Karan Company, a New York general partnership, The Donna Karan Company Store,
G.P., a New York general partnership, Donna Karan Studio, a New York general
partnership, and DK Footwear Partners, a New York general partnership
(collectively, the "Borrowers"), the financial institutions from time to time
parties thereto as lenders (the "Lenders"), the financial institutions from time
to time parties thereto as issuing banks (the "Issuing Banks"), Citibank, N.A.,
in its capacity as administration agent for the Lenders and the Issuing Banks
(the "Administrative Agent"), The Chase Manhattan Bank and Nationsbank, N.A., in
their capacity as co-agents (the "Co-Agents").
PRELIMINARY STATEMENTS:
(1) The Borrowers, the Lenders, the Issuing Banks, the
Co-Agents and the Administrative Agent have entered into a Second Amended and
Restated Credit Agreement dated as of January 29, 1998, as amended from time to
time (as so amended, the "Credit Agreement"). Unless otherwise defined herein,
the terms defined in the Credit Agreement shall be used herein as therein
defined.
(2) The Borrowers and the Lenders have agreed to amend the
Credit Agreement as hereinafter set forth.
SECTION 1. AMENDMENT TO CREDIT AGREEMENT. The Credit Agreement
is, effective as of the date hereof and subject to the satisfaction of the
conditions precedent set forth in Section 2 hereof, hereby amended as follows:
(a) The definition of "Acceptance Termination Date" set forth
in Section 1.01 of the Credit Agreement is amended by deleting such
definition in its entirety and substituting therefor the following:
"'ACCEPTANCE TERMINATION DATE' means the day which is the
earliest of (i) January 31, 2003, (ii) the termination of the
Commitments pursuant to SECTION 11.02(a), (iii) the date of
termination in whole of the Domestic Commitments pursuant to
SECTION 3.01(a) and (iv) the date of the termination of the
Acceptance Commitment pursuant to SECTION 2.04(l)."
(b) The first sentence of the definitions of "Applicable Fixed
Rate Margin" and the "Applicable Floating Rate Margin" is amended by
inserting the word "first" before the term "EBITDA certificate".
<PAGE>
(c) The definition of "Commitment Termination Date" set forth
in Section 1.01 of the Credit Agreement is amended by deleting such
definition in its entirety and substituting therefor the following:
"'COMMITMENT TERMINATION DATE' means the day which is the
earliest of (A) May 1, 2003, (B) the termination of the
Commitments pursuant to SECTION 11.02(a) and (C) the date of
termination in whole of the Commitments pursuant to SECTION
3.01(a)."
(d) The definition of "EBITDA" set forth in Section 1.01 of
the Credit Agreement is amended by deleting such definition in its
entirety and substituting therefor the following:
"'EBITDA' means, for any Financial Covenant Period, for Donna
Karan International and its Subsidiaries on a consolidated
basis (i) the sum of the amounts for such period of (A) Net
Income, (B) depreciation and amortization expense, (C)
interest expense, (D) federal, state, local and foreign income
taxes and (E) unusual expense associated with the write-off of
the capitalized portion of financing costs; MINUS (ii) gains
from Asset Sales (but including expense reimbursements in
connection with Asset Sales closing in 1996); PLUS (iii)
losses from Asset Sales; MINUS (iv) extraordinary gains; MINUS
(v) interest income; MINUS (vi) any gain relating to the
accumulated effect of any change in accounting method; PLUS
(vii) any loss relating to the accumulated effect of any
change in accounting method; PLUS (viii) the non-cash
restructuring charges and other non-recurring non-cash charges
incurred in Fiscal Year 1999 in an amount not to exceed
$7,000,000, each item in clauses (i) through (viii) calculated
in conformity with GAAP for such period."
(e) The definition of "Fixed Charge Coverage Ratio" set forth
in Section 1.01 of the Credit Agreement is amended by deleting such
definition in its entirety and substituting therefor the following:
"'FIXED CHARGE COVERAGE RATIO' means, for any Financial
Covenant Period, the ratio of (i) EBITDA PLUS the Net Cash
Proceeds of Asset Sales received during such period MINUS
Capital Expenditures made during such period (excluding
$9,200,000, representing the cash portion of the purchase
price for the UK Acquisition, from the fourth fiscal quarter
of 1999) MINUS the Investments made pursuant to SECTION
9.04(iv) during such period MINUS any dividends payments or
stock repurchases with respect to the Common Stock during such
period MINUS any cash payment of taxes made during such
period, to (ii) Cash Interest Expense for such period PLUS any
principal payment of Funded Debt made during such period
(excluding for each fiscal quarter in Fiscal Year 2002, the
amount of any repayment of the subordinated indebtedness
incurred by The Donna Karan Company and Donna Karan Stores
(U.K.) Limited owing to B.S. Ong/Club 21 and/or its affiliates
provided that such amount does not exceed $8,700,000."
2
<PAGE>
(f) The definition of "Indebtedness" set forth in Section 1.01
of the Credit Agreement is amended by deleting such definition in its
entirety and substituting therefor the following:
"'INDEBTEDNESS' means, as applied to any Person at any time,
(a) all indebtedness, obligations or other liabilities of such
Person (i) for borrowed money or evidenced by debt securities,
debentures, acceptances, notes or other similar instruments,
and any accrued interest, fees and charges relating thereto,
(ii) under profit payment agreements or in respect of
obligations to redeem, repurchase or exchange any Securities
of such Person or to pay dividends in respect of any stock,
(iii) with respect to letters of credit issued for such
Person's account, (iv) to pay the deferred purchase price of
property or services, except accounts payable and accrued
expenses arising in the ordinary course of business, (v) in
respect of Capital Leases; (b) Accommodation Obligations with
respect to indebtedness, obligations or other liabilities of a
Person of a type set forth in clause (a); (c) all
indebtedness, obligations or other liabilities of such Person
or others secured by a Lien (other than a Customary Permitted
Lien) on any property of such Person, whether or not such
indebtedness, obligations or liabilities are assumed by such
Person, all as of such time; (d) all indebtedness, obligations
or other liabilities of such Person in respect of Interest
Rate Contracts and foreign exchange contracts, net of
liabilities owed to such Person by the counterparties thereon;
(e) all preferred stock subject (upon the occurrence of any
contingency or otherwise) to mandatory redemption; and (f) all
contingent Contractual Obligations with respect to any of the
foregoing."
(g) Clause (f) of Section 7.01 of the Credit Agreement is
amended by deleting such Section in its entirety and substituting
therefor the following:
"(f) EBITDA REPORT. On or prior to February 28 of each Fiscal
Year, a certificate, signed by Donna Karan International's
chief financial officer or controller, setting forth
calculations (with such specificity as the Requisite Lenders
may reasonably request) for the determination of EBITDA for
the immediately preceding Fiscal Year and compliance with
Section 10.06."
(h) Clause (v) of Section 9.01 of the Credit Agreement is
amended by deleting such Section in its entirety and substituting
therefor the following:
"(v) Indebtedness incurred under foreign exchange hedging
contracts;"
(i) Section 9.01 of the Credit Agreement is further amended by
adding at the end thereof a new clause (x) to read as follows:
"(x) Indebtedness incurred by one member of the Donna Karan
Group owing to another member of the Donna Karan Group."
3
<PAGE>
(j) Section 9.03 of the Credit Agreement is amended by adding
at the end thereof a new clause (viii) to read as follows:
"(viii) Liens on cash in an aggregate amount not to exceed
$4,000,000 securing Indebtedness permitted under SECTION
9.01(v)."
(k) Section 9.04 of the Credit Agreement is amended by adding
at the end thereof a new clause (v) to read as follows:
"(v) Investments by any member of the Donna Karan Group in any
of its Subsidiaries in existence on February 1, 2000 and any
Subsidiary created in compliance with SECTION 9.09(b)."
(l) Section 9.06 of the Credit Agreement is amended by adding
at the end thereof a new clause (viii) to read as follows:
"(viii) the repayment of the subordinated indebtedness
incurred by The Donna Karan Company and Donna Karan Stores
(U.K.) Limited owing to B.S. Ong/Club 21 and/or its affiliates
in an amount not to exceed $8,700,000; PROVIDED that at the
time of such repayment and after giving effect thereto the
Borrowers have Availability of at least $30,000,000."
(m) Section 9.13 of the Credit Agreement is amended by
deleting such Section in its entirety and substituting therefor the
following:
"9.13. OPERATING LEASES. No member of the Donna Karan Group
shall become liable in any way, whether directly or by
assignment or by Accommodation Obligation, for the obligations
of a lessee under any Operating Lease, except:
(a) the Operating Lease entered into in December 1997
by The Donna Karan Company Stores G.P. for the Madison Avenue
store in New York, New York; and
(b) Operating Leases, if immediately after giving
effect to the incurrence of Rental Payments with respect
thereto, the aggregate amount of all Rental Payments with
respect to such Operating Leases does not exceed (i) in Fiscal
Years 2000 and 2001, an amount equal to $45,000,000 MINUS the
amount of Rental Payments for such Fiscal Year with respect to
the Operating Lease permitted by SECTION 9.13(a), (ii) in
Fiscal Year 2002, an amount equal to $55,000,000 MINUS the
amount of Rental Payments for such Fiscal Year with respect to
the Operating Lease permitted by SECTION 9.13(a), and (iii) in
Fiscal Year 2003, an amount equal to $65,000,000 MINUS the
amount of Rental Payments for such Fiscal Year with respect to
the Operating Lease permitted by SECTION 9.13(a)."
4
<PAGE>
(n) Section 9.14 of the Credit Agreement is amended by
deleting such Section in its entirety and substituting therefor the
following:
"9.14. CAPITAL EXPENDITURES. No member of the Donna Karan
Group shall make or incur Capital Expenditures (a) during
Fiscal Year 2000 if the aggregate amount of Capital
Expenditures for the Donna Karan Group PLUS the aggregate
amount of the Investments made pursuant to SECTION 9.04(iv)
would exceed Twenty Million Five Hundred Thousand Dollars
($20,500,000) for such Fiscal Year, (b) during Fiscal Years
2001 and 2002 if the aggregate amount of Capital Expenditures
for the Donna Karan Group PLUS the aggregate amount of the
Investments made pursuant to SECTION 9.04(iv) would exceed
Twenty Seven Million Five Hundred Thousand Dollars
($27,500,000) for any such Fiscal Year and (c) during the
first six months of Fiscal Year 2003 if the aggregate amount
of Capital Expenditures for the Donna Karan Group PLUS the
aggregate amount of the Investments made pursuant to SECTION
9.04(iv) would exceed Thirteen Million Seven Hundred Fifty
Thousand Dollars ($13,750,000) for such six month period;
PROVIDED, HOWEVER, that the Donna Karan Group may carry
forward from one Fiscal Year to another Fiscal Year any
Capital Expenditures permitted hereunder, but not made or
incurred in such Fiscal Year, in an amount of up to Twelve
Million Dollars ($12,000,000); PROVIDED, FURTHER, that cost of
Equipment purchased to replace Equipment damaged or destroyed
shall not be included in the calculations for Capital
Expenditures under this SECTION 9.14 to the extent of the
amount of insurance proceeds received and applied against the
Obligations."
(o) Section 10.01 of the Credit Agreement is amended by
deleting such Section in its entirety and substituting therefor the
following:
"10.01. MINIMUM ADJUSTED NET WORTH. The Adjusted Net Worth of
Donna Karan International and its Subsidiaries on a
consolidated basis at the end of each fiscal quarter set forth
below shall not be less than the amount set forth opposite
such quarter:
<TABLE>
<CAPTION>
Fiscal Quarter Minimum Amount
-------------- --------------
<S> <C> <C>
First Fiscal Quarter 1998 $100,000,000
Second Fiscal Quarter 1998 $ 95,000,000
Third Fiscal Quarter 1998 $100,000,000
Fourth Fiscal Quarter 1998 $115,000,000
First Fiscal Quarter 1999 $115,000,000
Second Fiscal Quarter 1999 $115,000,000
Third Fiscal Quarter 1999 $120,000,000
Fourth Fiscal Quarter 1999 $120,000,000
First Fiscal Quarter 2000 $120,000,000
Second Fiscal Quarter 2000 $120,000,000
Third Fiscal Quarter 2000 $125,000,000
Fourth Fiscal Quarter 2000 $125,000,000
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C>
First Fiscal Quarter 2001 $125,000,000
Second Fiscal Quarter 2001 $125,000,000
Third Fiscal Quarter 2001 $125,000,000
Fourth Fiscal Quarter 2001 $125,000,000
First Fiscal Quarter 2002 $125,000,000
Second Fiscal Quarter 2002 $125,000,000
Third Fiscal Quarter 2002 $125,000,000
Fourth Fiscal Quarter 2002 $125,000,000
First Fiscal Quarter 2003 $125,000,000
</TABLE>
(p) Section 10.02 of the Credit Agreement is amended by
deleting such Section in its entirety and substituting therefor the
following:
"10.02. MINIMUM INTEREST COVERAGE RATIO. The Interest Coverage
Ratio of Donna Karan International and its Subsidiaries on a
consolidated basis at the end of each fiscal quarter set forth
below shall not be less than the ratio set forth opposite such
quarter:
<TABLE>
<CAPTION>
Fiscal Quarter Ratio
-------------- -----
<S> <C> <C>
Fourth Fiscal Quarter 1998 3.00 to 1.0
First Fiscal Quarter 1999 3.00 to 1.0
Second Fiscal Quarter 1999 3.00 to 1.0
Third Fiscal Quarter 1999 3.00 to 1.0
Fourth Fiscal Quarter 1999 4.50 to 1.0
First Fiscal Quarter 2000 4.50 to 1.0
Second Fiscal Quarter 2000 5.00 to 1.0
Third Fiscal Quarter 2000 5.00 to 1.0
Fourth Fiscal Quarter 2000 5.00 to 1.0
First Fiscal Quarter 2001 5.00 to 1.0
Second Fiscal Quarter 2001 5.00 to 1.0
Third Fiscal Quarter 2001 5.00 to 1.0
Fourth Fiscal Quarter 2001 5.00 to 1.0
First Fiscal Quarter 2002 5.00 to 1.0
Second Fiscal Quarter 2002 5.00 to 1.0
Third Fiscal Quarter 2002 5.00 to 1.0
Fourth Fiscal Quarter 2002 5.00 to 1.0
First Fiscal Quarter 2003 5.00 to 1.0"
</TABLE>
(q) Section 10.03 of the Credit Agreement is amended by
deleting such Section in its entirety and substituting therefor the
following:
"10.03. MINIMUM FIXED CHARGE COVERAGE RATIO. The Fixed Charge
Coverage Ratio of Donna Karan International and its
Subsidiaries on a consolidated basis at the end of each fiscal
quarter set forth below shall not be less than the ratio set
forth opposite such quarter:
6
<PAGE>
<TABLE>
<CAPTION>
Fiscal Quarter Ratio
-------------- -----
<S> <C> <C>
First Fiscal Quarter 2000 2.00 to 1.0
Second Fiscal Quarter 2000 2.00 to 1.0
Third Fiscal Quarter 2000 2.00 to 1.0
Fourth Fiscal Quarter 2000 3.00 to 1.0
First Fiscal Quarter 2001 3.00 to 1.0
Second Fiscal Quarter 2001 3.00 to 1.0
Third Fiscal Quarter 2001 3.00 to 1.0
Fourth Fiscal Quarter 2001 3.00 to 1.0
First Fiscal Quarter 2002 3.00 to 1.0
Second Fiscal Quarter 2002 3.00 to 1.0
Third Fiscal Quarter 2002 3.00 to 1.0
Fourth Fiscal Quarter 2002 3.00 to 1.0
First Fiscal Quarter 2003 3.00 to 1.0"
(r) Section 10.04 of the Credit Agreement is amended by
deleting such Section in its entirety and substituting therefor the
following:
"10.04. MINIMUM WORKING CAPITAL RATIO. The Working Capital
Ratio of Donna Karan International and its Subsidiaries on a
consolidated basis at the end of each fiscal quarter set forth
below shall not be less than the ratio set forth opposite such
quarter:
<CAPTION>
Fiscal Quarter Ratio
-------------- -----
<S> <C> <C>
Fourth Fiscal Quarter 1999 1.40 to 1.0
First Fiscal Quarter 2000 1.40 to 1.0
Second Fiscal Quarter 2000 1.40 to 1.0
Third Fiscal Quarter 2000 1.40 to 1.0
Fourth Fiscal Quarter 2000 1.40 to 1.0
First Fiscal Quarter 2001 1.40 to 1.0
Second Fiscal Quarter 2001 1.40 to 1.0
Third Fiscal Quarter 2001 1.40 to 1.0
Fourth Fiscal Quarter 2001 1.40 to 1.0
First Fiscal Quarter 2002 1.40 to 1.0
Second Fiscal Quarter 2002 1.40 to 1.0
Third Fiscal Quarter 2002 1.40 to 1.0
Fourth Fiscal Quarter 2002 1.40 to 1.0
First Fiscal Quarter 2003 1.40 to 1.0"
</TABLE>
(s) Section 10.05 of the Credit Agreement is amended by
deleting such Section in its entirety and substituting therefor the
following:
"10.05. MAXIMUM LEVERAGE RATIO. The Leverage Ratio of Donna
Karan International and its Subsidiaries on a consolidated
basis at the end of each fiscal
7
<PAGE>
quarter set forth below shall not be greater than the ratio
set forth opposite such quarter:
<TABLE>
<CAPTION>
Fiscal Quarter Ratio
-------------- -----
<S> <C> <C>
Fourth Fiscal Quarter 1998 2.00 to 1.0
First Fiscal Quarter 1999 2.00 to 1.0
Second Fiscal Quarter 1999 2.00 to 1.0
Third Fiscal Quarter 1999 3.00 to 1.0
Fourth Fiscal Quarter 1999 2.00 to 1.0
First Fiscal Quarter 2000 2.00 to 1.0
Second Fiscal Quarter 2000 2.00 to 1.0
Third Fiscal Quarter 2000 2.00 to 1.0
Fourth Fiscal Quarter 2000 2.00 to 1.0
First Fiscal Quarter 2001 2.00 to 1.0
Second Fiscal Quarter 2001 2.00 to 1.0
Third Fiscal Quarter 2001 2.00 to 1.0
Fourth Fiscal Quarter 2001 2.00 to 1.0
First Fiscal Quarter 2002 2.00 to 1.0
Second Fiscal Quarter 2002 2.00 to 1.0
Third Fiscal Quarter 2002 2.00 to 1.0
Fourth Fiscal Quarter 2002 2.00 to 1.0
First Fiscal Quarter 2003 2.00 to 1.0"
(t) Section 10.06 of the Credit Agreement is amended by
deleting such Section in its entirety and substituting therefor the
following:
"10.06. EBITDA. The EBITDA for Donna Karan International and
its Subsidiaries on a consolidated basis at the end of the
fourth fiscal quarter for each Fiscal Year set forth below
shall not be less than the amount set forth opposite such
Fiscal Year:
<CAPTION>
Fiscal Year Amount
----------- ------
<S> <C> <C>
1999 $25,000,000
2000 $33,000,000
2001 $35,000,000
2002 $40,000,000"
</TABLE>
SECTION 2. CONDITIONS OF EFFECTIVENESS. This Fourth Amendment
shall become effective when (a) the Administrative Agent shall have received
counterparts of this Fourth Amendment executed by the Borrowers and the Lenders
and (b) the Borrowers shall have paid to the Administrative Agent, for the
ratable benefit of the Lenders, a fee in the amount of one-eighth of one percent
(0.125%) of the amount of the Commitments.
8
<PAGE>
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWERS.
Each Borrower represents and warrants as follows:
(a) After giving effect to this Fourth Amendment, all of the
representations and warranties contained in Section 6.01 of the Credit
Agreement and in the other Loan Documents shall be true in all material
respects.
(b) After giving effect to this Fourth Amendment, no Default
or Event of Default shall have occurred and be continuing.
SECTION 4. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. (a)
Upon the effectiveness of this Fourth Amendment, on and after the date hereof
each reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof" or words of like import referring to the Credit Agreement, and each
reference in the other Loan Documents to "the Credit Agreement", "thereunder",
"thereof" or words of like import referring to the Credit Agreement, shall mean
and be a reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement
and all other Loan Documents, are and shall continue to be in full force and
effect and are hereby in all respects ratified and confirmed. Without limiting
the generality of the foregoing, the Loan Documents and all of the Collateral
described therein do and shall continue to secure the payment of all obligations
of the Borrowers under the Credit Agreement, the Notes and the other Loan
Documents, in each case as amended hereby.
(c) The execution, delivery and effectiveness of this Fourth
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of any Lender or the Agent under any of the Loan
Documents, nor constitute a waiver of any provision of any of the Loan
Documents.
SECTION 5. EXECUTION IN COUNTERPARTS. This Fourth Amendment
may be executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute but
one and the same agreement.
SECTION 6. GOVERNING LAW. This Fourth Amendment shall be
governed by, and construed in accordance with, the laws of the State of New
York.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Amendment to be executed as of the date first above written.
THE DONNA KARAN COMPANY
By: Donna Karan International Inc.,
a general partner
By: /s/
---------------------------------
Title:___________________________
DONNA KARAN STUDIO
By: Full Requirements Merchandising, Inc.,
a general partner
By: /s/
---------------------------------
Title:___________________________
THE DONNA KARAN COMPANY STORE, G.P.
By: Donna Karan International Inc.,
a general partner
By: /s/
---------------------------------
Title:___________________________
DK FOOTWEAR PARTNERS
By: Donna Karan International Inc.,
a general partner
By: /s/
---------------------------------
Title:___________________________
10
<PAGE>
CITIBANK, N.A., as Administrative Agent and Lender
By: /s/
---------------------------------
Vice President
THE CHASE MANHATTAN BANK, as Co-Agent
and Lender
By: /s/
---------------------------------
Title:
NATIONSBANK N.A., as Co-Agent and Lender
By: /s/
---------------------------------
Title:
PNC BANK NATIONAL ASSOCIATION
By: /s/
---------------------------------
Title:
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By: /s/
---------------------------------
Title:
11
<PAGE>
NATIONAL CITY COMMERCIAL FINANCE, INC.
By: /s/
---------------------------------
Title:
JACKSON NATIONAL LIFE INSURANCE CO.,
By: PPM FINANCE, INC., its Attorney-in-Fact
By: /s/
---------------------------------
Title:
12
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION/FORMATION
---- --------------------------------
<S> <C>
DK Footwear Partners New York general partnership
DK Shoe Corp. New York corporation
Donna Karan (H.K.) Limited Hong Kong corporation
Donna Karan Canada Inc. Canadian corporation
Donna Karan (Italy) S.r.l. Italian corporation
Donna Karan (Italy) Shoe S.r.l. Italian corporation
Donna Karan Studio New York general partnership
Formal Reserve Management, Inc. New York corporation
Full Requirements Merchandising, Inc. New York corporation
Gabby Apparel, Inc. New York corporation
The Donna Karan Company New York corporation
The Donna Karan Company Store, G.P. New York general partnership
The Donna Karan Company Store (U.K.) Limited United Kingdom corporation
The Donna Karan Store Corporation New York corporation
Tomio Tangents, Inc. New York corporation
Donna Karan UK (Holding), L.L.C. Delaware limited liability company
Donna Karan Company Stores UK Holding Ltd. United Kingdom corporation
Donna Karan Company Stores UK Retail Ltd. United Kingdom corporation
Donna Karan Management Corporation UK Ltd. United Kingdom corporation
Donna Karan Studio Holdings Inc. Delaware corporation
</TABLE>
<PAGE>
EXHIBIT 23-1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
Form S-8 No. 333-09729 and Form S-8 No. 333-58171 pertaining to the 1996 Stock
Incentive Plan and the 1996 Non-Employee Director Stock Option Plan of Donna
Karan International Inc. of our report dated March 21, 2000, with respect to the
consolidated financial statements and schedule of Donna Karan International Inc.
included in its Annual Report (Form 10-K) for the year ended January 2, 2000.
New York, New York
March 21, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DONNA
KARAN INTERNATIONAL INC. FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-END> JAN-02-2000
<CASH> 15,038
<SECURITIES> 0
<RECEIVABLES> 113,507
<ALLOWANCES> 27,193
<INVENTORY> 82,792
<CURRENT-ASSETS> 228,119
<PP&E> 90,057
<DEPRECIATION> 48,545
<TOTAL-ASSETS> 304,291
<CURRENT-LIABILITIES> 129,262
<BONDS> 0
0
0
<COMMON> 216
<OTHER-SE> 133,769
<TOTAL-LIABILITY-AND-EQUITY> 304,291
<SALES> 661,837
<TOTAL-REVENUES> 661,837
<CGS> 450,686
<TOTAL-COSTS> 450,686
<OTHER-EXPENSES> 193,827
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,187
<INCOME-PRETAX> 10,589
<INCOME-TAX> (533)
<INCOME-CONTINUING> 10,036
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,036
<EPS-BASIC> .46
<EPS-DILUTED> .46
</TABLE>
