<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
--------------------
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11805
--------------------
DONNA KARAN INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3882426
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
550 Seventh Avenue, New York, New York 10018
(Address of principal executive offices)
(Zip Code)
(212) 789-1500
(Registrant's telephone number, including area code)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
At May 12, 2000, the Registrant had 21,992,908 shares of Common Stock
outstanding.*
*Does not include 18 shares of Class A Common Stock, par value $.01 per share,
and two shares of Class B Common Stock, par value $.01 per share, outstanding as
of such date.
================================================================================
<PAGE>
DONNA KARAN INTERNATIONAL INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements PAGE
----
Statements of Income --
Three months ended April 2, 2000 and April 4, 1999.......... 3
Balance Sheets --
April 2, 2000 and January 2, 2000........................... 4
Statements of Cash Flows --
Three months ended April 2, 2000 and April 4, 1999.......... 5
Notes to Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 14
2
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
APRIL 2, APRIL 4,
2000 1999
----------- --------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
NET REVENUES ............................................... $ 172,770 $ 160,720
Cost of sales .............................................. 116,791 113,521
----------- --------------
GROSS PROFIT ............................................... 55,979 47,199
Selling, general, and administrative expenses .............. 49,766 42,476
----------- --------------
OPERATING INCOME ........................................... 6,213 4,723
Interest expense, net ...................................... 571 929
----------- --------------
INCOME BEFORE INCOME TAXES ................................. 5,642 3,794
Provision for income taxes ................................. 2,314 1,631
----------- --------------
NET INCOME ................................................. $ 3,328 $ 2,163
=========== ==============
Net income per common share:
Basic ................................................. $ 0.15 $ 0.10
=========== ==============
Diluted ............................................... $ 0.15 $ 0.10
=========== ==============
Weighted average common shares outstanding:
Basic ................................................ 21,600,400 21,599,200
=========== ==============
Diluted ............................................... 21,748,500 21,615,700
=========== ==============
</TABLE>
See Notes to Financial Statements
3
<PAGE>
DONNA KARAN INTERNATIONAL INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 2, JANUARY 2,
2000 2000
----------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .......................... $ 5,834 $ 15,038
Accounts receivable, net of allowances of $30,598 at
April 2, 2000 and $27,193 at January 2, 2000 ... 82,318 86,314
Inventories ........................................ 64,824 82,792
Deferred income taxes .............................. 26,350 26,408
Prepaid expenses and other current assets .......... 16,944 17,567
--------- ---------
TOTAL CURRENT ASSETS ........................... 196,270 228,119
Property and equipment, net ............................ 39,795 41,512
Deferred income taxes .................................. 18,874 19,543
Deposits and other noncurrent assets ................... 15,335 15,117
--------- ---------
$ 270,274 $ 304,291
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ................................... $ 28,580 $ 57,923
Accrued expenses and other current liabilities ..... 61,854 71,339
Borrowing under revolving line of credit ........... 4,298 --
--------- ---------
TOTAL CURRENT LIABILITIES ....................... 94,732 129,262
--------- ---------
Subordinated notes payable ............................. 8,209 8,209
Deferred income ........................................ 31,284 34,051
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 35,000,000 shares
authorized, shares issued 21,989,949 at April 2,
2000 and 21,600,264 at January 2, 2000 .......... 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 .......................... 188,471 188,471
Retained deficit .................................... (50,383) (53,711)
Accumulated other comprehensive loss ................ (1,119) (991)
--------- ---------
137,185 133,985
Less: Treasury stock, at cost (17,770 shares) ....... (419) (419)
Unearned compensation ......................... (717) (797)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ...................... 136,049 132,769
--------- ---------
$ 270,274 $ 304,291
========= =========
</TABLE>
See Notes to Financial Statements
4
<PAGE>
DONNA KARAN INTERNATIONAL INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
APRIL 2, APRIL 4,
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income ........................................................................ $ 3,328 $ 2,163
Adjustments to reconcile net income to net cash used for
operating activities:
Depreciation and amortization ................................................. 3,805 3,779
Provision for bad debts ....................................................... (11) 145
Amortization of deferred income ............................................... (4,038) (3,243)
Deferred income taxes ......................................................... 726 1,154
Other, net .................................................................... 80 159
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable .................................... 4,007 (18,198)
Decrease in inventories ....................................................... 17,968 18,473
Decrease in prepaid expenses and other
current assets .............................................................. 623 93
Increase in deposits and other noncurrent assets .............................. (1,862) (725)
Decrease in accounts payable, accrued expenses, and
other current liabilities ................................................... (34,917) (22,781)
(Decrease) increase in deferred income ........................................ (2,767) 500
-------- --------
NET CASH USED FOR OPERATING ACTIVITIES ....................................... (13,058) (18,481)
-------- --------
INVESTING ACTIVITIES
Purchase of free-standing retail stores ....................................... -- (9,200)
Purchase of property and equipment ............................................ (444) (3,493)
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES ....................................... (444) (12,693)
-------- --------
FINANCING ACTIVITIES
Net proceeds of revolving credit facility ..................................... 4,298 31,731
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................................... 4,298 31,731
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .......................... (9,204) 557
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .............................. 15,038 7,448
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................... $ 5,834 $ 8,005
======== ========
</TABLE>
See Notes to Financial Statements
5
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
results of operations of Donna Karan International Inc. and its subsidiaries
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Certain amounts in the consolidated financial statements of the prior
period have been reclassified to conform to the current period presentation for
comparative purposes.
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. On a quarterly basis, the Company's operations may vary as a result
of, among other things, production and shipping schedules, the introduction of
new products, and variations in the timing of certain holidays from year to
year. The results of operations for any interim period are not necessarily
indicative of the results of operations to be expected for a full year. For
further information, refer to the consolidated financial statements and
accompanying footnotes included in the Company's Annual Report on Form 10-K for
the year ended January 2, 2000.
NET INCOME PER COMMON SHARE
In accordance with the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share," net income per common share
amounts ("basic EPS") were computed by dividing net income by the weighted
average number of common shares outstanding and contingently issuable shares
(which satisfy certain conditions) and excluded any potential dilution. Net
income per common share amounts assuming dilution ("diluted EPS") were computed
by reflecting potential dilution from the issuance of restricted stock and the
exercise of stock options. SFAS No. 128 requires the presentation of both basic
EPS and diluted EPS on the face of the statements of income.
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations for net income is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
APRIL 2, APRIL 4,
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
NUMERATOR:
Net income attributable to common stock .......... $ 3,328 $ 2,163
=========== ===========
DENOMINATOR:
Weighted average common shares outstanding--
Basic ....................................... 21,600,400 21,599,200
Effect of dilutive securities: ................... 148,100 16,500
----------- -----------
Weighted average common shares outstanding--
Diluted ..................................... 21,748,500 21,615,700
=========== ===========
Basic EPS ........................................ $ 0.15 $ 0.10
=========== ===========
Diluted EPS ...................................... $ 0.15 $ 0.10
=========== ===========
</TABLE>
6
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
INVENTORIES
Inventory includes only those items considered saleable or usable in
future periods, and is stated at the lower of cost or market, with cost being
determined on the first-in, first-out method.
Inventories consist of the following:
<TABLE>
<CAPTION>
APRIL 2, JANUARY 2,
2000 2000
------- ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials .......................... $ 422 $ 2,947
Work in process ........................ 1,788 2,730
Finished goods ......................... 62,614 77,115
------- -------
$64,824 $82,792
======= =======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is computed primarily on the straight-line basis over the estimated
useful lives of the assets ranging from 5 to 7 years. Leasehold improvements are
amortized on a straight-line basis over the shorter of the expected useful lives
or the lease term, which in certain instances include the anticipated renewal
period.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
APRIL 2, JANUARY 2,
2000 2000
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Machinery, equipment, and fixtures ............. $ 28,217 $ 28,281
Leasehold improvements ......................... 62,284 61,776
-------- --------
90,501 90,057
Less accumulated depreciation .................. (50,706) (48,545)
-------- --------
$ 39,795 $ 41,512
======== ========
</TABLE>
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
APRIL 2, JANUARY 2,
2000 2000
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accrued operating expenses ..................... $ 15,390 $ 17,326
Unearned revenues .............................. 14,081 14,852
Accrued royalties .............................. 9,746 10,559
Accrued compensation ........................... 8,604 14,061
Accrued income taxes ........................... 6,593 6,469
Accrued restructuring and other charges ........ 4,337 5,370
Accrued taxes other than income taxes .......... 2,098 1,722
Other .......................................... 1,005 980
-------- --------
$ 61,854 $ 71,339
======== ========
</TABLE>
7
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
RESTRUCTURING AND OTHER CHARGES
For the three months ended April 2, 2000, the Company utilized
approximately $0.7 million of reserves previously established in connection with
its fiscal 1999 restructuring plan. As of April 2, 2000, 67 additional employees
were terminated, as a result of the Company's strategic initiatives initiated in
fiscal 1999. The Company anticipates utilizing the remaining balance of its
reserves during fiscal 2000.
The balance of the fiscal 1999 restructuring and other charges are as
follows:
<TABLE>
<CAPTION>
BALANCE AT UTILIZED BALANCE AT
JANUARY 2, -------------- APRIL 2,
(IN THOUSANDS) 2000 CASH NONCASH 2000
- -------------- ---------- ---- ------- ----------
<S> <C> <C> <C> <C>
Exit costs (including inventory markdowns) . $1,292 $107 $ -- $1,185
Employee termination and severance costs ... 1,943 515 -- 1,428
Other ...................................... 1,227 121 -- 1,106
------ ---- ---- ------
$4,462 $743 $ -- $3,719
====== ==== ==== ======
</TABLE>
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective income tax rate was 41.0% and 43.0% for the three
months ended April 2, 2000 and April 4, 1999, respectively. This rate reflects
the effect of state and local taxes, tax rates in certain foreign jurisdictions,
and certain nondeductible expenses.
STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
THREE MONTHS ENDED
------------------
APRIL 2, APRIL 4,
2000 1999
-------- -------
(IN THOUSANDS)
CASH PAID FOR:
Interest paid .................................... $ 352 $ 822
======== ======
Income taxes paid ................................. $ 2,798 $ 121
======== ======
NON-CASH ACTIVITIES:
Issuance of subordinated notes payable in
connection with the purchase of free-standing
retail stores ..................................... $ -- $8,209
======== ======
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses reported in those financial statements. Actual results could differ
from those based upon such estimates and assumptions.
8
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- COMPREHENSIVE INCOME
Comprehensive income and its components, are as follows:
THREE MONTHS ENDED
------------------------
APRIL 2, APRIL 4,
2000 1999
------- -------
(IN THOUSANDS)
Net income ..................................... $ 3,328 $ 2,163
------- -------
Other comprehensive (loss):
Foreign currency translation .............. (128) (286)
------- -------
Comprehensive income ........................... $ 3,200 $ 1,877
======= =======
Accumulated other comprehensive (loss) is as follows:
FOREIGN
CURRENCY
TRANSLATION
--------------
(IN THOUSANDS)
Beginning balance ....................................... $ (991)
Current-period change ................................... (128)
-------
Ending balance .......................................... $(1,119)
=======
NOTE 3 -- SEGMENT INFORMATION
Information related to the Company's reportable business segments are as
follows:
WHOLESALE LICENSING RETAIL TOTAL
--------- --------- ------ --------
(IN THOUSANDS)
THREE MONTHS ENDED
APRIL 2, 2000
- --------------------
Net revenues from external
customers ........................ $135,324 $10,414 $ 27,032 $172,770
Intersegment revenues .............. 16,889 -- -- 16,889
Segment operating profit (loss) ... 5,808 4,509 (4,104) 6,213
Segment assets ..................... 204,941 5,512 59,821 270,274
THREE MONTHS ENDED
APRIL 4, 1999
- --------------------
Net revenues from external
customers ........................ $130,422 $ 6,845 $ 23,453 $160,720
Intersegment revenues .............. 17,376 -- -- 17,376
Segment operating profit (loss) ... 4,679 2,636 (2,592) 4,723
Segment assets ..................... 233,517 2,672 54,334 290,523
9
<PAGE>
DONNA KARAN INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
Information related to the Company's geographic segments are as
follows:
THREE MONTHS ENDED
---------------------------
APRIL 2, APRIL 4,
2000 1999
-------- --------
(IN THOUSANDS)
Net revenues:
United States ....................... $105,286 $101,421
Japan ............................... 5,249 7,795
Other ............................... 62,235 51,504
-------- --------
$172,770 $160,720
======== ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Donna Karan International Inc. (together with its subsidiaries, the
"Company") is one of the world's leading international fashion design houses.
The Company designs, contracts for the manufacture of, markets, retails and
distributes collections of men's and women's clothing, sportswear, accessories,
and shoes under the DONNA KARAN NEW YORK, DKNY, DKNY JEANS and DKNY ACTIVE brand
names. The Company also selectively has granted licenses for the manufacture and
distribution of certain other products under the DONNA KARAN NEW YORK, DKNY,
DKNY JEANS and DKNY ACTIVE brand names, including beauty and beauty-related
products, jeanswear, activewear, hosiery, intimate apparel, eyewear, and
children's apparel.
RESULTS OF OPERATIONS
The Company's business is comprised of wholesale, licensing, and retail
activities. The Company utilizes a 52- or 53-week fiscal year ending on the
Sunday nearest December 31. The following discussion provides information and
analysis of the Company's results of operations for the three months ended April
2, 2000 and April 4, 1999.
The following tables set forth certain segment data:
THREE MONTHS ENDED
----------------------
APRIL 2, APRIL 4,
2000 1999
-------- --------
(IN MILLIONS)
Net revenues from external customers:
By segments:
Wholesale ................................. $ 135.4 $ 130.4
Licensing ................................. 10.4 6.8
Retail .................................... 27.0 23.5
-------- --------
$ 172.8 $ 160.7
======== ========
By geographic area:
United States ............................. $ 105.3 $ 101.4
Japan ..................................... 5.2 7.8
Other ..................................... 62.3 51.5
-------- --------
$ 172.8 $ 160.7
======== ========
Segment operating profit (loss):
Wholesale ................................. $ 5.8 $ 4.7
Licensing ................................. 4.5 2.6
Retail .................................... (4.1) (2.6)
-------- --------
$ 6.2 $ 4.7
======== ========
10
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain condensed statement of income data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
APRIL 2, APRIL 4,
2000 1999
----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenues ............................... $ 172.8 100.0% $ 160.7 100.0%
-------- --------
Gross profit ............................... 56.0 32.4 47.2 29.4
Selling, general and administrative
expenses ............................... 49.8 28.8 42.5 26.4
Operating income ........................... 6.2 3.6 4.7 2.9
Net income ................................. 3.3 1.9 2.2 1.4
</TABLE>
NET REVENUES
Net revenues for the three months ended April 2, 2000 increased $12.1
million, or 7.5%, to $172.8 million as compared to net revenues of $160.7
million in the corresponding prior-year period.
Wholesale revenues for the three months ended April 2, 2000 increased $5.0
million, or 3.8%, to $135.4 million as compared to $130.4 million in the
corresponding prior-year period. The increase was attributable to an increase in
sales from International DKNY JEANS and the menswear and accessories businesses,
partially offset by a decrease in sales from the women's business.
Licensing revenues for the three months ended April 2, 2000 increased $3.6
million, or 52.1%, to $10.4 million as compared to $6.8 million in the
corresponding prior-year period. The increase was primarily due to royalties
from the Company's DKNY JEANS and ACTIVE license; regional Japanese license; and
growth in sales of certain other new and existing licensed products.
Retail revenues for the three months ended April 2, 2000 increased $3.5
million, or 15.3%, to $27.0 million as compared to $23.5 million in the
corresponding prior-year period. The increase was primarily attributable to an
increase in the number of full-price free-standing retail stores, somewhat
offset by a 5.5% decrease in comparable store sales and a decrease in the number
of outlet stores.
GEOGRAPHIC
Net revenues for the United States for the three months ended April 2,
2000 increased $3.9 million, or 3.8%, to $105.3 million as compared to $101.4
million in the corresponding prior-year period. The increase was primarily
attributable to increased retail and licensing revenues.
Net revenues for Japan for the three months ended April 2, 2000 decreased
$2.6 million, or 32.7%, to $5.2 million as compared to $7.8 million in the
corresponding prior-year period. The decrease was primarily attributable to the
planned decrease in wholesale revenues to Japan, as a result of the Company's
licensing agreement with DKJ. The Company anticipates further decreases in
wholesale revenues in Japan, while at the same time receiving increased
royalties, as DKJ transitions its business exclusively from importing and
reselling products to primarily manufacturing and selling products.
Net revenues for other geographic areas for the three months ended April
2, 2000 increased $10.8 million, or 21.0%, to $62.3 million as compared to $51.5
million in the corresponding prior-year period. The increase was attributable to
increased wholesale revenues and the Company's three free-standing retail stores
in the United Kingdom.
GROSS PROFIT
Gross profit as a percentage of net revenues for the three months
ended April 2, 2000 was 32.4%, as compared to 29.4% for the corresponding
prior-year period. The increase primarily reflected the change in the revenue
mix to higher margin full-price retail stores and increased margins in the
wholesale business.
11
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to 28.8% of net
revenues for the three months ended April 2, 2000, as compared to 26.4% in the
corresponding prior-year period. The increase was primarily a result of the
growth of the Company's full-price free-standing retail stores.
OPERATING INCOME
Operating income for the three months ended April 2, 2000 increased $1.5
million, or 31.5%, to $6.2 million as compared to $4.7 million in the
corresponding prior-year period. The increase was attributable to increased
operating profit in the wholesale and licensing segments, partially offset by
increased operating losses in the retail segment. The decline in the retail
segment was primarily attributable to increased costs associated with a greater
number of stores operating in the current period, as compared to the
corresponding prior-year period.
INTEREST EXPENSE, NET
Interest expense, net was $0.6 million for the three months ended April 2,
2000 as compared to $0.9 million for the corresponding prior-year period. The
decrease was primarily attributable to a decrease in average borrowings during
the three months ended April 2, 2000, as compared to the corresponding
prior-year period.
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective income tax rate for the three months ended April 2,
2000 and April 4, 1999 was 41.0% and 43.0%, respectively. These rates reflect
the effects of state and local taxes, tax rates in certain foreign
jurisdictions, and certain nondeductible expenses.
NET INCOME
Net income for the three months ended April 2, 2000 increased $1.1
million, or 53.9%, to $3.3 million, as compared to $2.2 million in the
corresponding prior-year period. The increase was primarily attributable to
increased net revenues and gross profit margins somewhat offset by increased
selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds have historically been, and are
expected to continue to be, cash flow from operations and borrowings under its
revolving credit facility (as herein defined). The Company's principal need for
funds is to finance working capital (principally inventory and receivables),
capital expenditures (including the renovation of existing shop-in-shops and
construction of new shop-in-shops, outlet and full-price free-standing retail
stores), and investments in the start-up of new collections and the extension of
existing collections. At April 2, 2000, the Company had cash and cash
equivalents of $5.8 million, as compared to $8.0 million at April 4, 1999.
The Company has a $150.0 million, three-year revolving credit facility (the
"Facility"). The Facility is used for working capital requirements and general
corporate purposes. In February 2000, the Company amended the Facility and
extended its term to expire on May 1, 2003. At April 2, 2000, $4.3 million was
outstanding under the Facility, as compared to $31.7 million for the
corresponding prior-year period.
Net cash used for operating activities was $13.1 million for the three
months ended April 2, 2000 as compared to $18.5 million in the corresponding
prior-year period. The decrease in net cash used for operating activities
primarily reflects a decrease in accounts receivable and the Company's improved
profitability, partially offset by the Company's recording of deferred revenues
associated with the Company's licensing agreements in the corresponding
prior-year period and a greater decrease in accounts payable. Net cash used for
investing activities decreased $12.2 million for the three months ended April 2,
2000 as compared to the corresponding prior-year period, primarily due to the
Company's acquisition of free-standing retail stores in the corresponding
prior-year period and decreased purchases of property and equipment in the
current period. Financing activities reflect borrowings under the Company's
Facility. Net cash provided by financing activities was $4.3 million for the
three months ended April 2, 2000, as compared to $31.7 million in the
corresponding prior-year period. The decrease in net cash provided by financing
activities was primarily due to lesser amounts outstanding under the Company's
Facility in the current period as compared with the corresponding prior-year
period.
12
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As a matter of policy, the Company enters into forward exchange contracts
with parties who are major international banks and financial institutions that
have at least an "A" (or equivalent) credit rating. The Company's exposure to
credit loss in the event of nonperformance by any of the counterparties is
limited to only the recognized, but not realized, gains attributable to the
contracts. Management believes risk of loss is remote and in any event would be
immaterial. Costs associated with entering into such contracts have not been
material to the Company's financial results. At April 2, 2000, the Company had
contracts to exchange foreign currencies in the form of forward exchange
contracts in the amount of $141.6 million. The Company's measured value-at-risk
from holding such derivative instruments, using a variance/co-variance model
with a 95 percent confidence level, assuming normal market conditions at April
2, 2000 was approximately $2.3 million.
Capital expenditures, primarily for leasehold improvements and leasehold
improvements related to outlet and full-price free-standing retail stores,
equipment, machinery, computers and office furniture, were approximately $0.4
million and $3.5 million for the three months ended April 2, 2000 and April 4,
1999, respectively. As of May 12, 2000, the Company had outstanding commitments
for additional capital expenditures during fiscal 2000 of approximately $3.5
million. The Company anticipates that it will incur additional capital
expenditures in fiscal 2000 relating to its retail business initiatives and
other matters.
The Company anticipates that it will be able to satisfy its ongoing cash
requirements for the foreseeable future with cash flow from operations,
supplemented by borrowings under its Facility and, from time to time, amounts
received in connection with strategic transactions, including licensing
arrangements. Events that may impact this include, but are not limited to,
future events that may have the effect of reducing available cash balances (such
as unexpected operating losses or increased capital or other expenditures), as
well as future circumstances that might reduce or eliminate the availability of
external financing.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that have been made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The words
and phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimates," "projects," "believes," "plans" or similar
expressions, are intended to identify "forward-looking statements" 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;
13
<PAGE>
DONNA KARAN INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(xiv) foreign currency fluctuations affecting the Company's results of
operations and value of its foreign assets, the relative price at which the
Company and foreign competitors sell their products in the same markets, and the
Company's operating and manufacturing costs outside of the United States; (xv)
shipment delays, depletion of inventory, and increased production costs
resulting from disruption at any of the Company's facilities or other causes;
(xvi) changes in product mix to ones which are less profitable; (xvii)
infringements of the Company's trademarks and other proprietary rights,
imitations or diversions of the Company's products, or inability to obtain
trademark protection outside the United States for one or more of the Company's
marks; (xviii) political or economic instability resulting in the disruption of
trade from the countries in which the Company's contractors, suppliers,
licensees, or customers are located, the imposition of additional regulations
relating to imports, the imposition of additional duties, taxes, and other
charges on imports, significant fluctuations of the value of the dollar against
foreign currencies, or restriction on transfer of funds; (xix) the inability of
a contractor to deliver the Company's products in a timely manner thereby
causing the Company to miss the delivery date requirements of its customers,
which in turn could result in the cancellation of orders, refusal to accept
deliveries, or a reduction in the selling price; (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's third party 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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 - Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the
three months ended April 2, 2000.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DONNA KARAN INTERNATIONAL INC.
(Registrant)
Date: May 17, 2000 By: /s/ John D. Idol
------------------------------------
John D. Idol
Chief Executive Officer
Date: May 17, 2000 By: /s/ Joseph B. Parsons
------------------------------------
Joseph B. Parsons
Executive Vice President,
Chief Financial and
Administrative Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DONNA
KARAN INTERNATIONAL INC. FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> APR-02-2000
<CASH> 5,834
<SECURITIES> 0
<RECEIVABLES> 112,916
<ALLOWANCES> 30,598
<INVENTORY> 64,824
<CURRENT-ASSETS> 196,270
<PP&E> 90,501
<DEPRECIATION> 50,706
<TOTAL-ASSETS> 270,274
<CURRENT-LIABILITIES> 94,732
<BONDS> 0
0
0
<COMMON> 216
<OTHER-SE> 135,833
<TOTAL-LIABILITY-AND-EQUITY> 270,274
<SALES> 172,770
<TOTAL-REVENUES> 172,770
<CGS> 116,791
<TOTAL-COSTS> 116,791
<OTHER-EXPENSES> 49,776
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 571
<INCOME-PRETAX> 5,642
<INCOME-TAX> 2,314
<INCOME-CONTINUING> 3,328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,328
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.15
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