<<

. 205
( 208 .)



>>

207
Part 4 Additional Cases




Develop Division-speci¬c Solutions”The challenges faced by our company vary by
division. For example, the DKNY® women's collection has addressed the heightened
competition in the bridge market by segmenting its collection, while our Donna Karan
New York® women's collection divisions are working to improve operational ef¬ciencies.
Senior management is working with each Division President to develop individual strat-
egies to pro¬tably exploit each of our growth opportunities.
Increase Size of Board of Directors and Strengthen Management Team”In the
last six months, in order to pro¬tably exploit our many opportunities, we built a stronger




Donna Karan International
Board of Directors and management team. We have added three accomplished out-
side Board members, M. William Benedetto, Andrea Jung, and Ann McLaughlin. We
also appointed Dewey K. Shay, our new Senior Executive Vice President and Chief
Administrative Of¬cer, as a member of the Company's Board of Directors.
Despite the ¬nancial impact in 1996 of the items and investments discussed above, we
have great enthusiasm for the future. We are experiencing strong sales growth across
many of our divisions and have made important investments for the future by segmenting
our women's apparel collections. In addition, we are developing a more tightly focused
growth strategy, and are committed to controlling costs. The positive feedback we have
received from our retailers and customers on our newly segmented Donna Karan New
York® Signature and “D” by DKNY® collections, the potential of our DKNY® Kids line and
other licensing opportunities and the excitement internally about our businesses also
engender optimism for the future. We want to thank all of our employees, retailers, ven-
dors, and loyal customers. With your help, we look forward to continuing to build on the
global recognition and success of our brands.


Donna Karan Stephen L. Ruzow
Chairman of the Board, President and
Chief Executive Of¬cer, Chief Operating Of¬cer
and Chief Designer
938 Case: Donna Karan International Inc.




208 Part 4 Additional Cases




REPORT OF INDEPENDENT AUDITORS


The Board of Directors of
Donna Karan International Inc.

We have audited the consolidated balance sheet of Donna Karan International Inc. (the
“Company”) as of December 29, 1996, and the related consolidated statements of
Donna Karan International




income, stockholders' equity and partners' capital and cash ¬‚ows for the year then ended.
We have also audited the combined balance sheet of The Donna Karan Company and
af¬liates as of December 31, 1995, and the related combined statements of income and
cash ¬‚ows for each of the two years in the period ended December 31, 1995. Our audits
also included the ¬nancial statement schedule listed in the Index at Item 14(a). These
¬nancial statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these ¬nancial statements and schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable assur-
ance about whether the ¬nancial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the ¬nancial statements. An audit also includes assessing the accounting principles used
and signi¬cant estimates made by management, as well as evaluating the overall ¬nan-
cial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the ¬nancial statements referred to above present fairly, in all material
respects, the consolidated ¬nancial position of Donna Karan International Inc. as of
December 29, 1996, and the consolidated results of their operations and their cash ¬‚ows
for the year then ended, and the combined ¬nancial position of The Donna Karan Com-
pany and af¬liates as of December 31, 1995, and the combined results of their opera-
tions and their cash ¬‚ows for each of the two years in the period ended December 31,
1995 in conformity with generally accepted accounting principles. Also, in our opinion,
the related ¬nancial statement schedule, when considered in relation to the basic ¬nan-
cial statements taken as a whole, present fairly in all material aspects the information set
forth therein.


ERNST & YOUNG LLP


New York, New York
March 25, 1997
939
Case: Donna Karan International Inc.




209
Part 4 Additional Cases




Donna Karan International Inc., Statements of Income (Note 1)

Year Ended:
.................................................................................
January 1, December 31, December 29,
(in thousands, except per-share amounts) 1995 1995 1996
....................................................................................................................................................
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $420,164 $510,126 $612,840




Donna Karan International
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . 271,172 330,689 412,064
Gross pro¬t . . . . . . . . . . . . . . . . . . . . . . . . . . . 148,992 179,437 200,776
Selling, general, and administrative expenses . . 119,995 136,906 187,474
Operating income . . . . . . . . . . . . . . . . . . . . . . 28,997 42,531 13,302
Other income (expense) . . . . . . . . . . . . . . . .
Equity in earnings of af¬liate . . . . . . . . . . . . . ” 2,519 3,089
Interest income . . . . . . . . . . . . . . . . . . . . . . . ” ” 548
Interest expense . . . . . . . . . . . . . . . . . . . . . . (8,862) (7,650) (7,125)
Interest expense on distribution notes . . . . . . . ” ” (1,957)
Other expense . . . . . . . . . . . . . . . . . . . . . . . (2,651) ” ”
Gain on sale of interests in af¬liates. . . . . . . . ” 18,673 ”
Income before income taxes . . . . . . . . . . . . . . . 17,484 56,073 7,857
Provision (bene¬t) for income taxes . . . . . . . . . . 1,139 2,398 (17,179)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,345 $ 53,675 $ 25,036

Pro forma”unaudited:
Historical income before income taxes. . . . . . . . $ 56,073 $ 7,857
Pro forma adjustments other than income taxes . 23,943 1,436
Pro forma income before income taxes . . . . . . . 32,130 6,421
Pro forma provision for income taxes . . . . . . . . 13,705 3,537
Pro forma net income. . . . . . . . . . . . . . . . . . . . $ 18,425 2,884
Pro forma net income per share . . . . . . . . . . . . $ 0.91 $ 0.02
Pro forma weighted average common shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . 16,017,032 18,742,533
....................................................................................................................................................
See “Notes to Financial Statements.”
940 Case: Donna Karan International Inc.




210 Part 4 Additional Cases




Donna Karan International Inc.”Balance Sheets

(in thousands) December 31, 1995 December 29, 1996
...................................................................................................................................................
ASSETS
Current assets:
Cash and cash equivalents $ 12,153 $ 40,550
Accounts receivable, net of allowances of $26,757 at
Donna Karan International




December 29, 1996 and $22,507 at December 31, 1995 62,231 73,770
Inventories 85,655 100,680
Deferred income taxes 1,302 25,207
Prepaid expenses and other current assets 8,644 14,466
Total current assets $169,985 $254,673
Property and equipment, at cost”net 22,505 32,402
Deferred income taxes 380 6,106
Deposits and other noncurrent assets 11,105 18,514
$203,975 $311,695
LIABILITIES AND STOCKHOLDERS™ EQUITY
AND PARTNERS™ CAPITAL
Current liabilities:
Accounts payable $ 53,825 $ 73,394
Accrued expenses and other current liabilities 15,766 34,192
Current portion of long-term debt 7,759 282
Total current liabilities $ 77,350 $107,868
Long-term debt 45,779 36
Commitments and contingencies
Shareholders™ equity and partners™ capital:
Common stock of predecessor 1,146 ”
Common stock, $0.01 par value, 35,000,000 shares
authorized, 21,468,034 shares issued and outstanding ” 215
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, issues and outstanding ” ”
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding ” ”
Additional paid-in capital ” 186,899
Retained earnings and partners™ capital 79,748 17,487
Cumulative translation adjustment (48) (331)
$ 80,846 $204,270
Less treasury stock, at cost (19,958 shares) ” (479)
Total stockholders™ equity and partners™ capital $ 80,846 $203,791
$203,975 $311,695
...................................................................................................................................................
See notes to financial statements.
941
Case: Donna Karan International Inc.




211
Part 4 Additional Cases




Donna Karan International Inc.”Statements of Cash Flow

Year Ended
December 31, December 29,
(in thousands) January 1, 1995 1995 1996
..................................................................................................................................................
Operating Activities
Net income $16,345 $53,675 $25,036




Donna Karan International
Adjustments to reconcile net income to net cash (used in)
provided by operating activities, as adjusted for
effect of sale of Donna Karan Japan:
Depreciation and amortization 7,590 6,742 11,309
Provision for bad debts 773 3,122 62
Equity in earnings of af¬liate, net of cash received ” (2,519) (1,734)
Deferred taxes ” ” (29,631)
Stock bonus award ” ” 2,522
Gain on sale of interests in af¬liated ” (18,673) ”
Loss on sale of property and equipment ” 32 ”
Changes in operating assets and liabilities:
Increase in accounts receivable (9,658) (14,392) (11,601)
Increase in inventories (6,410) (29,611) (15,308)
Increase in prepaid expenses and other current
assets (2,253) (2,876) (5,822)
Increase in deposits and other noncurrent assets (3,543) (4,956) (10,619)
Increase in accounts payable, accrued expenses,
and other current liabilities 4,887 27,905 37,995
Net cash provided by operating activities $ 7,731 $18,449 $ 2,209
Investing Activities
Purchase of property and equipment ($ 3,445) ($ 4,289) ($16,262)
Net cash from sales of interests in af¬liates 23,526
” ”
Proceeds from sale of property and equipment 42
” ”
Net cash (used in) provided by investing activities ($ 3,445) $19,279 ($16,262)

Planning Activities
Payment of revolving credit facility, net ($40,903) ($ 3,253) ($ 7,961)
Proceeds of long-term debt 50,000 10,000 ”
Payments under capital leases (230) (237) (259)
Payments of long-term debt ” (15,000) (45,000)
Payment of distribution notes ” ” (114,484)
Issuance of common stock ” ” 236,020
Purchase of treasury stock ” ” (479)
Distribution to partners (10,770) (20,813) (25,387)
Net cash (used in) provided by ¬nancing activities ($ 1,903) ($29,303) $42,450
Increase in cash $ 2,383 $ 8,425 $28,397

<<

. 205
( 208 .)



>>