-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QfSRc6GTZiMHQip+DxxDJCd0sxUoss2yqVdQ/nbKQVJoYJ6t0MVWkojMkZ/dCFri v9jIjYc4d7MQHF35N3baDA== 0000912057-01-506307.txt : 20010409 0000912057-01-506307.hdr.sgml : 20010409 ACCESSION NUMBER: 0000912057-01-506307 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DONNA KARAN INTERNATIONAL INC CENTRAL INDEX KEY: 0001012369 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', CHILDREN'S & INFANTS' UNDERGARMENTS [2340] IRS NUMBER: 133882426 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-03600 FILM NUMBER: 1590393 BUSINESS ADDRESS: STREET 1: 550 SEVENTH AVE CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2127891500 MAIL ADDRESS: STREET 1: 550 SEVENTH AVE CITY: NEW YORK STATE: NY ZIP: 10018 10-K 1 a2038805z10-k.txt 10-K UNITED STATES DRAFT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- ANNUAL REPORT ON FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ 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 (IRS Employer incorporation or organization) Identification No.) 550 Seventh Avenue New York, New York 10018 (Address of principal executive office) (zip code) Registrant's telephone number, (including area code): (212) 789-1500 Securities registered pursuant to Section 12(b) of the Act: None Name of each exchange Title of each class on which registered - ------------------- ------------------- Common Stock New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ----------- 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. | | The aggregate market value of Registrant's Common Stock held by nonaffiliates as of March 28, 2001 was $101,872,962 based on 11,194,831 such shares outstanding on such date and the closing sales price for the Common Stock on such date of $9.10 as reported on the New York Stock Exchange. As of March 28, 2001, the Registrant had 22,253,254 shares of Common Stock outstanding.* PART III incorporates information by reference from the Registrant's definitive Proxy Statement for its 2001 Annual Meeting of Shareholders to be filed with the Commission within 120 days of December 31, 2000. - --------- * 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. 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(R), DKNY(R), 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 major brands are: o Donna Karan New York(R), which addresses the lifestyle needs of the luxury goods customer. o DKNY(R), which addresses the spirit and energy of New York and includes a wide range of merchandise from evening to work to weekend. o DKNY Jeans(TM), which addresses the jeans market, primarily targeted to a younger, more casual consumer. 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. ("Gabrielle Studio"). On January 17, 2001, Gabrielle Studio was acquired by a corporation owned by LVMH, Moet Hennessey Louis Vuitton Inc., a Delaware corporation ("LVMH") and a wholly-owned subsidiary of LVMH Moet Hennessey Louis Vuitton, S.A., a French corporation. Previously, Gabrielle Studio had been owned by Ms. Donna Karan, Chairman of the Board and Chief Designer of the Company, Mr. Stephan Weiss, Vice Chairman of the Company and Ms. Karan's husband, and certain of their 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 2000, approximately 65.6% of the Company's net revenues were derived from sales within the United States and approximately 34.4% were derived from sales outside the United States. See Note 16 in 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. Recent Developments On December 18, 2000, the Company announced that it had received a proposal from LVMH to enter into merger negotiations (the "LVMH Merger Offer") to acquire all of the outstanding shares of common stock of the Company for a price of $8.50 per share in cash. On April 2, 2001, the Company and LVMH announced that they had entered into an Agreement and Plan of Merger, dated as of March 31, 2001 (the "Merger Agreement"), which sets forth the terms and conditions of the proposed acquisition of the Company by LVMH. Pursuant to the Merger Agreement, an indirect wholly-owned subsidiary of LVMH will be merged with and into the Company (the "Merger") and the Company will survive the Merger as an indirect subsidiary of LVMH. The Merger Agreement provides that the stockholders of the Company will receive $10.75 in cash for each share of common stock of the Company. The Merger is subject to the approval of the stockholders of the Company and the satisfaction of other customary closing conditions, including the receipt of required regulatory approvals. 2 Wholesale The Company's wholesale segment consists of womenswear, menswear, and accessories products offered principally under the Donna Karan New York, DKNY, and DKNY Jeans brands. The Company's total wholesale net revenues for fiscal 2000 were $490.7 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. 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:
Dresses Skirts and Shirts and (Other than Jackets Pants Bodysuits Sweaters Evening Wear) ------- ----- --------- -------- ------------- Womenswear: Donna Karan New York Collection (black label) ..... $1,100-2,600 $495-950 $395-795 $320-800 $795-1,650 Signature (gold label) ....... 795-995 230-450 175-395 295-430 495-800 DKNY ........................... 220-495 65-295 45-225 80-295 130-395 Suits Sportscoats Trousers ----- ----------- -------- Menswear: Donna Karan New York Collection (black label) ... $1,395-1,825 $850-1,450 $250-275 Signature (gold label) ..... 795-950 550-695 175-195 DKNY ......................... -- 200-295 70-150 Small Leather Handbags Goods Shoes -------- ----- ----- Accessories: Donna Karan New York ......... $425-3,500 -- $225-595 DKNY ......................... 60-350 25-140 110-295 DKNY Jeans/Active ............ 55-95 20-60 25-200
Womenswear The Company designs, sources, markets, and distributes womenswear principally under the Donna Karan New York, DKNY, and DKNY Jeans 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, 3 and accessories that when layered in combinations achieved a varied, but consistent, high fashion look. In general, there are three annual seasonal presentations for each Donna Karan New York and DKNY collection: Fall, Resort, and Spring. The Spring and Fall collections typically are presented at major fashion shows or media presentations, 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 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 marketed 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, and DKNY Jeans brands. Generally, there are three annual seasonal presentations for the Donna Karan New York collection: Fall, Resort and Spring; and four annual seasonal presentations for the DKNY and DKNY Jeans collection: Fall, Resort, Spring, and Summer. 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 4 a broader audience and more widely distributed, this collection is priced below the Donna Karan New York 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. For the Fall 2000 season, the Company launched DKNY underwear for men in the United States. Other products in the DKNY collection, including suitings and dress furnishings and finished pant programs, are being manufactured and sold by licensees of the Company in certain territories. 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. For the Spring 2001 season, the DKNY underwear collection was launched in Europe and the Middle East. The Company also expects to introduce a DKNY tailored clothing line in the international market for the Fall 2001 season. International DKNY Jeans apparel collection Starting with the Spring 2000 season, the Company began to expand its DKNY Jeans apparel business for men and women in the European and Middle Eastern markets. The DKNY Jeans apparel collection is positioned as a modern lifestyle collection targeted to a younger, more casual consumer in the international jeans market. These collections are sold through international department stores, specialty stores, and the Company's free-standing International Retail Stores. Accessories The Company sells accessory products primarily under the Donna Karan New York, DKNY, DKNY Active, and CITY DKNY 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 and accessories for women and luxury footwear for men. These collections are sold to the Company's free-standing International Retail Stores and to a limited number of better department and specialty stores. For the Fall 2000 season, the Company re-introduced the Donna Karan New York handbag collection for women. This collection is being sold to the Company's free-standing stores and International Retail Stores and to a limited number of better department and specialty stores. DKNY 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. 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, independent footwear stores, and specialty athletic stores worldwide. CITY DKNY Collection. For the Spring 2001 season, the Company launched in the United States a woman's accessories and footwear collection under the CITY DKNY brand name to address the women's "better" accessory 5 category. Under this brand, the retail price range of footwear is suggested to be $59 - $79 and of handbags is suggested to be $49 - $79. This new collection is designed for wide distribution through domestic department and specialty 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 2000, other than Federated Department Stores (including Bloomingdale's, Macy's and affiliated stores) which accounted for 10.2% of the Company's revenues. The Company's 10 largest wholesale customers accounted for approximately 40.4% of the Company's revenues during 2000. 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 typically range from 250 to 2,600 square feet for womenswear, 200 to 1,200 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 utilizes 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 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 businesses. The Company's licensing revenues for fiscal 2000 were $45.2 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations." 6 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. As of March 1, 2001, 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:
Licensee Licensed Mark Products -------- ------------- -------- 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 and of Liz Claiborne, Inc. DKNY Active active lifestyle products (Western Hemisphere) LC Libra, LLC, a subsidiary of Liz CITY DKNY Women's careerwear and sportswear Claiborne, Inc. Hanes Hosiery, a division of Sara Lee Donna Karan New York Women's pantyhose, legwear, and Corp. DKNY socks Wacoal America, Inc. Donna Karan New York Women's intimate apparel DKNY Oxford Industries Inc. DKNY Girls, boys, infants, and toddler apparel (United States & Canada) DKNY Kids Peerless Delaware, Inc. DKNY Men's tailored clothing (United States & Canada) Phillips-Van Heusen Corp. (North America) DKNY Men's dress shirts 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. & The Max DKNY Women's and men's belts Leather Group, Inc. DKNY Jeans Men's small leather goods CSB Home Fashions, Inc. Donna Karan New York Bed and bath products DKNY CWF Children Worldwide Fashion S.A. DKNY Girls, boys, infants, and (Europe & Middle East) DKNY Jeans toddler apparel DKNY Active
7 Fossil, Inc. Donna Karan New York Men's, women's, and children's DKNY 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 eyewear DKNY accessories DKNY Active Swank, Inc. DKNY Women's fashion jewelry Swimwear Anywhere, Inc. DKNY Women's swimwear and swimwear-related apparel Echo Lake Industries, Ltd. Donna Karan New York Men's hosiery Cavalco Confezioni S.A. (Europe) Donna Karan Signature Men's dress shirts DKNY Butterick Company, Inc. (Vogue Patterns) Donna Karan New York Paper patterns and knitting patterns DKNY
The Company has 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 2000, the DKNY women's fragrance was launched both domestically and internationally and the men's DKNY fragrance launched domestically. The men's DKNY fragrance will be launched internationally in 2001. DKNY Jeans, DKNY Active, and CITY DKNY 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 rights 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 rights to market, distribute, and sell such new collection in the United States and Canada. This line has launched for the Spring 2001 season under the new label CITY DKNY and includes item-oriented pieces such as jackets, dresses, shirts, sweaters, skirts, and pants. This line is 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 2000, the Company entered 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 8 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 replaced the Company's retail development agreement with HPL-21 and its existing boutique arrangements with a related company owned by the Ong family, and converted the majority of the Company's wholesale business with such entities into a regional royalty-based licensing business. As of December 31, 2000, there were 18 full-price free-standing boutiques operating in this region under this agreement. As of December 31, 2000, the Company also had entered into regional licenses for Australia and New Zealand, South Korea, and Mexico. Retailing The Company is pursuing a strategy to expand its channels of distribution by opening full-price, free-standing retail stores in the United States (and to a lesser extent in foreign countries), while continuing to license to others the right to open free-standing stores internationally. In fiscal 2000, the Company's net revenues from its retail operations were $126.8 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 locations. In 2000 the Company opened DKNY full-price, free-standing stores in Ala Moana, Hawaii; Northbrooke, Illinois; Dallas, Texas; and South Coast, California. As of December 31, 2000, the Company operated 17 full-price, free-standing retail stores, two of which are operated under the Donna Karan New York name and 15 of which are operated under the DKNY name. Of these 17 stores, 14 are located in the United States and three are located in the United Kingdom. Company-Owned Outlet Stores As of December 31, 2000, the Company operated 52 outlet stores in the United States and three outlet stores in the United Kingdom. During 2000, the Company continued a remerchandising program through which certain core 9 products are 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. On an ongoing basis, the Company will continue to evaluate the profitability of the Company-owned stores, and from time to time close certain non-performing locations. 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 specified geographical area. These licenses are granted on a royalty-free basis but require certain minimum purchases of the Company's products. 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 December 31, 2000, there were 90 free-standing International Retail Stores owned by third parties unaffiliated with the Company (including stores operated by regional licensees). 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 December 31, 2000, 17 outlet stores under the DKNY Jeans mark were open. 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 is anticipated to open in 2001. In connection with the purchase of Gabrielle Studio in January 2001, LVMH agreed to assume the rights and obligations of Ms. Karan's affiliate with respect to the Donna Karan New York flagship store. 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 December 31, 2000, the Company employed a design staff of approximately 80 people, some of whom have assumed substantial design responsibilities under Ms. Karan's supervision. 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. 10 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, independent third-party 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, third-party 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 330 worldwide. During 2000, approximately 66% of direct purchases of raw materials, labor, and finished goods were produced in Hong Kong, Taiwan, South Korea, and other Asian countries; approximately 8% were produced in the United States and its territories; approximately 20% were produced in Europe; and approximately 6% 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 2000. 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. The Company also retains independent buying agents in certain other territories to assist the Company in selecting and overseeing independent third-party manufacturers, sourcing fabric and other products and materials, monitoring quota and other trade regulations, as well as performing some quality control functions. The Company uses a variety of raw materials, principally consisting of woven and knitted fabrics and yarns. During 2000, approximately 12% 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 sometimes 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 11 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. 12 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, 2001, backlog was $225.4 million, as compared to $252.7 million at March 14, 2000. 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 for which orders are not received 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 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. At the time of the consummation of the Company's initial public offering, Gabrielle Studio licensed the right to use such trademarks in connection with such specified retained products and services to Ms. Karan (the "Reserved Rights License"). 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. On January 17, 2001, Gabrielle Studio was acquired by a corporation owned by LVMH. Previously, Gabrielle Studio had been owned by Ms. Donna Karan, Chairman of the Board and Chief Designer of the Company, Mr. Stephan Weiss, Vice Chairman of the Company and Ms. Karan's husband, and certain of their affiliated trusts. In connection with the purchase of Gabrielle Studio by LVMH, the Reserved Rights License agreement was canceled and replaced with a new license between Gabrielle Studio and GD II, LLC, a limited liability company controlled by Ms. Karan. 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. 13 Gabrielle Studio has 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's affiliates. 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 elsewhere herein or in the 2001 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 December 31, 2000, the Company had approximately 2,060 employees, including 1,720 in the United States and 340 in foreign countries. Approximately 1,125 employees are engaged in the Company's wholesale, licensing, and corporate operations and 915 employees in the Company's retail operations (most of whom are part-time employees). Approximately 225 of the Company's United States employees are members of three local affiliates of the Union of Needletrades, Industrial & Textile Employees, which operates under collective bargaining agreements. These collective bargaining agreements expire in May 2001. While the Company believes it will be able to renew these agreements on similar terms and conditions, there can be no assurance new agreements will be reached and that failure to reach new collective bargaining agreements may have a material effect on the Company. 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 current year or expected in the near future. The Company's licensed products and licensees are also 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. 14 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 failure to consummate the Merger, the possibility of a termination of the Company's license with Gabrielle Studio, a bankruptcy of Gabrielle Studio, transfer of the stock of Gabrielle Studio, or a change in the relationship under the Gabrielle License following the consummation of LVMH's purchase of Gabrielle Studio; (iii) the timing and expense associated with, and effects of, strategic initiatives being implemented by the Company and risks associated with the timing, expense and/or changes in the Company's strategic plan associated with a proposed merger; (iv) risks associated with the receipt, pricing, and timing of customer orders; (v) general competitive factors and risks associated with a downturn in the overall financial condition of the apparel industry, the retail industry, and the general economy; (vi) timing of and costs associated with new Company-owned store openings and the Company's economic ability to continue to open new stores; (vii) risks associated with the Company's increasing royalty revenues as a percent of the Company's total revenues and net income and risks associated with a lack of operational or financial control over the Company's licensees; (viii) risks to the Company's existing wholesale businesses from the Company's licensing of related products; (ix) a change in retailer or consumer acceptance of the Company's products; (x) the variability of the Company's results in any period due to the seasonal nature of the business, the timing and level of the Company's sales, the timing of launch of new products and collections and opening of new doors, fashion trends, and the timing, terms, consummation, or success of any joint ventures, licenses, or other dispositions of product lines; (xi) consolidation and restructuring in the retail industry causing a decrease in the number of stores that sell the Company's products, or an increase in the ownership concentration within the retail industry; (xii) social, political and economic risks to the Company's foreign operations and customers, including changes in foreign investment and trade policies and regulations of the host countries and of the United States; (xiii) changes in laws, regulations, and policies, including changes in accounting standards, that affect, or will affect, the Company in the United States and abroad; (xiv) foreign currency fluctuations affecting the Company's results of operations and value of its foreign assets, the relative price at which the Company and foreign competitors sell their products in the same markets, and the Company's operating and manufacturing costs outside of the United States; (xv) shipment delays, depletion of inventory, and increased production costs resulting from disruption at any of the Company's facilities or other causes; (xvi) changes in product mix to ones which are less profitable; (xvii) infringements of the Company's trademarks and other proprietary rights, imitations or diversions of the Company's products, or inability to obtain trademark protection outside the United States for one or more of the Company's marks; (xviii) political or economic instability resulting in the disruption of trade from the countries in which the Company's contractors, suppliers, licensees, or customers are located, the imposition of additional regulations relating to imports, the imposition of additional duties, taxes, and other charges on imports, significant fluctuations of the value of the dollar against foreign currencies, or restriction on transfer of funds; (xix) the inability of a contractor to deliver the Company's products in a timely manner thereby causing the Company to miss the delivery date requirements of its customers, which in turn could result in the cancellation of orders, refusal to accept deliveries, or a reduction in the selling price; or (xx) the violation of labor or other laws by the Company, any independent manufacturer, or any licensee. The Company undertakes no obligation to publicly update or revise any forward-looking statements made herein or elsewhere whether as a result of new information, future events, or otherwise. 15 Item 2. PROPERTIES Certain information concerning the Company's principal facilities, all of which are leased, is set forth below:
Location Use Approximate Area -------- --- in Square Feet -------------- 550 Seventh Avenue ......... Principal executive and administrative offices; design facilities, 70,000 New York, New York sales offices, and showrooms West 40th Street ........... DKNY's executive and administrative offices, including its 140,000* New York, New York design facilities, sales offices, production offices, and showrooms Carlstadt, New Jersey ...... Distribution and warehouse facility; administrative offices 356,000 Kowloon, Hong Kong ......... Distribution and warehouse facility; production control, sourcing, and quality control 45,700
- ---------- * Excludes approximately 62,800 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 2001 and 2012. 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 December 31, 2000, the Company operated 17 full-price retail stores and 55 retail outlet stores in leased premises, with an aggregate approximate square footage of 360,000. The leases for these stores expire between 2001 and 2021. The Company expects to renew, for the applicable option renewal period, or extend certain of those leases that expire in 2001. 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. Item 3. LEGAL PROCEEDINGS In December 2000, several putative class actions were filed in state court in Delaware and New York in connection with the LVMH Merger Offer. The actions filed in Delaware Chancery Court (New Castle County) are captioned: Harbor Finance Partners v. Donna Karan, et al., C.A. No. 18559-NC; Donna Houghton v. Donna Karan, et al., C.A. 18566-NC; Daniel Oringer v. Donna Karan, et al., C.A. No. 18567-NC; Phil Dorfman v. Donna Karan, et al., C.A. No. 18568-NC; E. Janet Allred v. Donna Karan, et al., C.A. No. 18569-NC; and Frederick V. Mauer v. Donna Karan, et al., C.A. No. 18574-NC. The actions filed in New York Supreme Court are captioned: Alice Berman v. Donna Karan International Inc., et al., Index No. 125465/00; Harbor Finance Partners v. Donna Karan, et al., Index No. 605638/00; and Rolling Investor Group, Inc. v. Donna Karan International Inc., et al., Index No. 600032/01 (the actions filed in New York and Delaware are collectively referred to as the "LVMH Actions"). All of the complaints name the Company, Donna Karan, Stephan Weiss, and John Idol as defendants. Two of the complaints also name the Company's outside Board members as defendants and three of the complaints also name LVMH as defendants. The LVMH Actions allege, inter alia, that the price offered by LVMH to purchase the Company's common stock is inadequate, the defendants breached their fiduciary duties in connection with the LVMH Merger Offer, and 16 that Donna Karan and Stephan Weiss furthered their own interests at the expense of the Company's interests, in allegedly negotiating with LVMH concerning the proposed sale of the Company to LVMH. Following the commencement of the LVMH Actions, counsel for the Company and the other defendants entered into (i) a stipulation with counsel for plaintiffs in the actions filed in New York staying such actions and providing that the outcome of those actions will be governed by the outcome of the actions filed in Delaware; and (ii) a stipulation with counsel for plaintiffs in the actions filed in Delaware providing that such actions will be consolidated and that defendants need not respond to the individual complaints pending the filing of a consolidated amended complaint. No consolidated amended complaint has been filed and discovery has not commenced. The Company is also involved from time to time in routine legal matters and litigation incidental to its business. While the outcome of these matters, as well as the LVMH Actions, could have a material adverse effect on the Company's results of operations and cash flows in the period in which such outcome is determined, in the Company's opinion, the results of these matters are not expected to 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: Name Age Position - ---- --- -------- Donna Karan 52 Chairman of the Board and Chief Designer Stephan Weiss 62 Vice Chairman and Director John D. Idol 42 Chief Executive Officer and Director Joseph B. Parsons 47 Chief Financial and Operations Officer and Treasurer Lee Goldenberg 50 Corporate Executive Vice President - Worldwide Operations Lynn E. Usdan 41 Corporate Senior Vice President, General Counsel, and Secretary 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. 17 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. Joseph B. Parsons has served as Chief Financial and Operations Officer since October 2000 and as Treasurer of the Company since June 1996. Mr. Parsons served as Corporate Executive Vice President and Chief Financial Officer of the Company from February 1996 until October 2000, and as Chief Administrative Officer from January 1999 until October 2000. From January 1993 to February 1996, Mr. Parsons held increasingly responsible financial positions with the Company, most recently as Vice President-Finance. 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. 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. Donna Karan and Stephan Weiss are married to each other. There are no other family relationships among the directors and executive officers. 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 2000 and 1999. Fiscal 2000 Fiscal 1999 Fiscal 2000 Fiscal 1999 ----------- ----------- Quarter High Low High Low - ------- ---- --- ---- --- First ................ $9.00 $6.87 $ 8.88 $ 5.56 Second ............... $7.87 $6.12 $11.00 $ 7.13 Third ................ $6.75 $5.75 $ 9.69 $ 7.19 Fourth ............... $9.00 $4.50 $ 9.19 $ 6.13 As of March 28, 2001, the number of holders of record of the Company's Common Stock was approximately 1,200. As of March 28, 2001, 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. 18 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.
Fiscal Year Ended ---------------------------------------------------------------------------- December 31, January 2, January 3, December 28, December 29, 2000 2000 1999 1997 1996 ------------ ------------ ------------ ------------ ------------ (Dollars in thousands, except per share data) Statement of Income Data: Net revenues (1) ................................. $ 662,695 $ 661,837 $ 622,646 $ 638,725 $ 612,840 Gross profit (1) (2) (3) ......................... 217,915 211,151 154,087 121,407 200,776 Selling, general, and administrative expenses (2) (3) (4) (5) ........................ 193,170 193,827 152,089 204,088 187,474 Restructuring charges (credits), net (2) (3) ..... (200) 2,645 (267) 8,635 -- ------------ ------------ ------------ ------------ ------------ Operating income (loss) .......................... (24,945) 14,679 2,265 (91,316) 13,302 Equity in (loss) earnings of affiliate (6) ....... -- -- (65) 1,435 3,089 Interest expense, net ............................ (2,595) (4,090) (2,050) (2,515) (8,534) Gain on sale of interests in affiliate (6) ....... -- -- 88 -- -- ------------ ------------ ------------ ------------ ------------ Income (loss) before provision for income taxes ................................... 22,350 10,589 238 (92,396) 7,857 Provision (benefit) for income taxes (7) ......... 3,163 553 110 (11,034) (17,179) ------------ ------------ ------------ ------------ ------------ Net income (loss) ................................ $ 19,187 $ 10,036 $ 128 ($ 81,362) $ 25,036 ============ ============ ============ ============ ============ Net income (loss) per common shares (8): Basic .......................................... $ 0.89 $ 0.46 $ 0.01 $ (3.78) $ 0.02 Diluted ........................................ $ 0.87 $ 0.46 $ 0.01 $ (3.78) $ 0.02 Weighted average common shares outstanding (8): Basic .......................................... 21,604,767 21,599,500 21,598,264 21,512,050 18,742,533 Diluted ........................................ 22,055,974 21,702,700 21,631,664 21,512,050 18,742,533 Balance Sheet Data: Working capital ................................ $ 110,993 $ 98,857 $ 91,668 $ 79,989 $ 146,805 Total assets ................................... 324,214 304,291 278,729 287,488 311,695 Total long-term debt, including Current portion .............................. 8,209 8,209 -- 36 318 Stockholders' equity ............................. 152,860 132,769 122,104 122,464 203,791
- ------------------------------------ (1) Included in the financial statements for the fiscal year ended January 2, 2000 is 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 December 31, 2000 are credits of $1.6 million related to previously recorded restructuring charges that were determined to be no longer necessary. This amount is included as follows: $0.8 million as cost of sales; $0.6 million as selling, general and administrative expenses; and $0.2 million as restructuring credits. Included in the financial statements for the fiscal year ended January 2, 2000 are restructuring and other non-recurring charges of $11.0 million as follows: $0.8 million as cost 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 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 are 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 is recorded as cost of sales, $10.9 million is 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 19 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 the financial statements for the fiscal year ended December 31, 2000 were $2.4 million in expenses related to the LVMH Merger Offer, which have been classified as selling, general and administrative expenses. (5) Included in selling, general and administrative expenses for the fiscal year ended December 29, 1996 are 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 $3.2 million related to the purchase of all sales and marketing plans, patterns, samples, fabrics and other materials developed by a former licensee in connection with the termination of a license agreement. (6) On March 31, 1995, the Company sold 70% of its interest in the operations of Donna Karan Japan to a nonaffiliated party. 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 and $3.1 million for the quarter ended March 30, 1998 and fiscal 1997 and 1996, respectively. An agreement with Donna Karan Japan provides for a management fee payable to the Company based upon net sales of Donna Karan Japan, which amount is 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. (7) The provision for income taxes for the fiscal years ended December 31, 2000 and January 2, 2000 are net of $6.0 million and $4.0 million reductions, respectively, in a previously recorded valuation allowance due to the recognition of certain deferred tax assets. The benefit for income taxes for the fiscal year ended December 28, 1997 is 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 includes a $19.0 million tax benefit which was recorded by the Company concurrent with becoming subject to Federal and additional state income taxes. (8) Options outstanding during 1997 were not included in the calculation of earnings per share because the effect would be antidilutive. Net income per common share data for 1996 are presented on a pro forma basis. Pro forma net income per common share for the year ended December 29, 1996 is based upon the following shares outstanding for the period from January 1, 1996 to the date of the Company's initial public offering in July 1998 (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. For the period subsequent to the Offering, there were 21,468,034 shares outstanding. The net income used in the calculation of pro forma per common share information excludes the reduction of interest costs of $3.5 million and the reduction in amortization of deferred financing costs of $0.8 million and the related tax effect of $1.8 million. Basic and diluted pro forma net income per common share are the same since there was no dilutive effect of options in 1996. 20 Pro forma net income is as follows (in thousands): Year Ended December 29, 1996 ------------ Pro forma-unaudited Historical income before income taxes ................... $ 7,857 Pro forma adjustments other than income taxes ........... 1,436 ------------ Pro forma income before income taxes .................... 6,421 Pro forma provision for income taxes .................... 3,537 ------------ Pro forma net income .................................... $ 2,884 ============ 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 for the fiscal years ended December 31, 2000 ("fiscal 2000"), January 2, 2000 ("fiscal 1999"), and January 3, 1999 ("fiscal 1998") (adjusted for transaction costs related to the LVMH Merger Offer, 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 to the provision for income taxes) and reflects the basis of presentation described in Note 1 in the notes to financial statements included elsewhere herein. The Company utilizes a 52- or 53-week fiscal year ending on the Sunday nearest December 31. Fiscal 2000 and fiscal 1999 results include 52 weeks as compared to 53 weeks in fiscal 1998. 21
------------------------------------------------------------------------ Adjusted Statements of Operations ------------------------------------------------------------------------ Fiscal 2000 Fiscal 1999 Fiscal 1998 --------------------- --------------------- --------------------- Net revenues $ 662.7 100.0% $ 661.8 100.0% $ 622.6 100.0% Sales of merchandise to LCI -- -- -- -- (26.8) -- One-time credit -- -- (5.0) -- -- -- -------- -------- -------- -------- -------- -------- Net revenues, as adjusted (a) (b) 662.7 100.0% 656.8 100.0% 595.8 100.0% -------- -------- -------- -------- -------- -------- Gross profit 217.9 32.9% 211.1 31.9% 154.1 24.7% One-time credit -- -- (5.0) -- -- -- Restructuring and non-recurring charges (credits) (0.8) -- 0.8 -- -- -- -------- -------- -------- -------- -------- -------- Gross profit, as adjusted (a) (c) 217.1 32.8% 206.9 31.5% 154.1 25.9% -------- -------- -------- -------- -------- -------- Selling, general and administrative expenses 193.2 29.2% 193.8 29.3% 152.1 24.4% Restructuring and non-recurring (charges) credits 0.6 -- (6.1) -- -- -- Transaction costs for proposed merger (2.4) -- -- -- -- -- -------- -------- -------- -------- -------- -------- Selling, general and administrative expenses, as adjusted (a) (c) (d) 191.4 28.9% 187.7 28.6% 152.1 25.5% -------- -------- -------- -------- -------- -------- Operating income 24.9 3.8% 14.7 2.2% 2.3 0.4% One-time credit -- -- (5.0) -- -- -- Restructuring and non-recurring charges (credits) (1.6) -- 9.6 -- -- -- Transaction costs for proposed merger 2.4 -- -- -- -- -- -------- -------- -------- -------- -------- -------- Operating income, as adjusted (a)(b)(c)(d) 25.7 3.9% 19.3 2.9% 2.3 0.4% -------- -------- -------- -------- -------- -------- Net income 19.2 2.9% 10.0 1.5% 0.1 -- One-time credit -- -- (2.9) -- -- -- Restructuring and non-recurring charges (credits) (0.9) -- 5.5 -- -- -- Transaction costs for proposed merger 1.4 -- -- -- -- Valuation allowance (6.0) -- (4.0) -- -- -- -------- -------- -------- -------- -------- -------- Net income, as adjusted (a) (b) (c) (d) (e) $ 13.7 2.1% $ 8.6 1.3% $ 0.1 -- ======== ======== ======== ======== ======== ========
(a) In fiscal 1999, excluded $5.0 million one-time credit recorded in net revenues, related to the ELI beauty license; $11.0 million restructure and other nonrecurring 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. (b) In fiscal 1998, excluded certain sales of merchandise to LCI relating to the DKNY Jeans license. (c) In fiscal 2000, excluded credits related to previous restructuring charges that were determined to be no longer necessary, recorded as follows: $0.8 million as cost of sales; $0.6 million as selling, general and administrative expenses; and $0.2 million as restructuring credits. (d) In fiscal 2000, excluded $2.4 million in transaction costs related to the LVMH Merger Offer. (e) In fiscal 2000 and fiscal 1999, excluded $6.0 million and $4.0 million credits, respectively, 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. 22 Significant Transactions In December 2000, the Company announced that it had received a proposal from LVMH to enter into merger negotiations to acquire all of the outstanding stock of the Company for a purchase price of $8.50 per share in cash. On April 2, 2001, the Company and LVMH announced that they had entered into a Merger Agreement, which sets forth the terms and conditions of the proposed acquisition of the Company by LVMH. Pursuant to the Merger Agreement, an indirect wholly-owned subsidiary of LVMH will be merged with and into the Company and the Company will survive the Merger as an indirect subsidiary of LVMH. The Merger is subject to the approval of the stockholders of the Company and the satisfaction of other customary closing conditions, including the receipt of required regulatory approvals. During fiscal 2000, the Company incurred $2.4 million in expenses related to the LVMH Merger Offer, which have been classified as selling, general and administrative expenses (see Note 13 in the notes to financial statements contained elsewhere herein). 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 in the United States and Canada, which line launched for the Spring 2001 season under the CITY DKNY 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 (see Note 7 in the notes to financial statements contained elsewhere herein). In connection with the transaction with LCI, in fiscal 1997 the Company recorded a loss of $12.5 million, which represented the writedown of inventory to net realizable value, as well as other costs necessary to exit its existing jeans business. 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 Karan New York products imported by Donna Karan Japan. See Note 6 in the notes to financial statements contained elsewhere herein. Results of Operations Net Revenues Net revenues in fiscal 2000 increased $0.9 million to $662.7 million as compared to fiscal 1999 and increased $39.2 million, or 6.3%, to $661.8 million for fiscal 1999 compared to fiscal 1998. Excluding the one-time recognition of deferred revenue in fiscal 1999 related to the ELI beauty license consummated in fiscal 1997 (the "licensing credit"), net revenues increased $5.9 million in fiscal 2000 as compared to the prior year. Excluding the licensing credit in fiscal 1999 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. 23 In fiscal 2000, net revenues increased due to a $10.1 million, or 28.8%, increase in licensing revenues substantially offset by a $3.6 million, or 2.8%, decrease in retail sales and a $5.6 million, or 1.1% decrease in wholesale revenues. 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. Wholesale revenues in fiscal 2000 decreased $5.6 million, or 1.1%, to $490.7 million as compared to $496.3 million in the prior year. The decrease was primarily attributable to a decrease in revenues in the women's and accessories businesses, partially offset by an increase in the menswear business. 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. Licensing revenues in fiscal 2000 increased 28.8% to $45.2 million in fiscal 2000 from $35.1 million in fiscal 1999. Exclusive of the one-time recognition of the licensing credit in fiscal 1999, licensing revenues increased $15.1 million, or 50.1%. The increase was primarily due to new product licenses, as well as growth under certain existing license agreements. 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, licensing revenues increased $11.7 million or 63.3%. 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. Retail sales in fiscal 2000 decreased $3.6 million, or 2.8%, to $126.8 million as compared to $130.4 million in the prior year. The decrease was primarily attributable to a 9.7% decrease in comparable store sales and a decrease in the number of outlet stores, partially offset by an increase in the number of full-price free-standing stores. 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 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. Geographic Net revenues in the United States in fiscal 2000 decreased approximately 6.0% to $434.8 million as compared to fiscal 1999 and increased approximately 9.4% to $462.8 million in fiscal 1999 as compared to fiscal 1998. 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 2000 decreased 20.6% to $22.1 million as compared to fiscal 1999 and decreased 40.2% to $27.8 million in fiscal 1999 as compared to fiscal 1998. In both fiscal 2000 and 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 DKJ. See Note 6 in the notes to financial statements. Net revenues for other geographic areas increased 20.1% to $205.7 million in fiscal 2000 as compared to fiscal 1999 and increased 11.8% to $171.2 million in fiscal 1999 as compared to fiscal 1998. The increase in fiscal 2000 was primarily attributable to increased sales in the Company's International DKNY Jeans business. 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 2000 and fiscal 1999 the Company determined that certain amounts related to its prior restructuring were no longer necessary. Accordingly, the Company credited into income $1.6 million in fiscal 2000 and $1.4 million in fiscal 1999 related to these restructuring charges. The credit in fiscal 2000 was classified as $0.8 million in cost of sales, $0.6 million in selling, 24 general and administrative expenses and $0.2 million in restructuring charges. Of the total amount, $1.0 million was a credit from the 1999 restructure, while $0.6 related to a restructure charge that was taken in 1997. The credit in 1999 was classified as restructuring charges (credits). Gross Profit Gross profit in fiscal 2000 was 32.9% of net revenues as compared to 31.9% of net revenues in fiscal 1999 and 24.7% of net revenues in fiscal 1998. Excluding the $0.8 million in non-recurring charges that were determined to be no longer necessary in fiscal 2000, and the one-time recognition of the licensing credit of $5.0 million and the non-recurring charges of $0.8 million in fiscal 1999, gross profit margin for fiscal 2000 increased to 32.8% as compared to 31.5% in fiscal 1999. The increase in fiscal 2000 was primarily related to a change in the revenue mix to higher margin licensing business and full-price retail stores. Excluding the one-time recognition of the credit of $5.0 million and the restructuring charge 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. Selling, General and Administrative Expenses Selling, general and administrative expenses were 29.2% of net revenues in fiscal 2000, as compared with 29.3% and 24.4% of net revenues in fiscal 1999 and fiscal 1998, respectively. Exclusive of the 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 2000, selling, general and administrative expenses include $2.4 million in transaction costs related to the LVMH Merger Offer, as well as the reversal of $0.6 million in restructuring and non-recurring charges that were deemed to be no longer necessary. Exclusive of these items, selling, general and administrative expenses were $191.4 million, or 28.9% of net revenues. In fiscal 1999, selling, general and administrative expenses include non-recurring charges of $6.1 million related to strategic initiatives. Exclusive of the credit and the non-recurring charges, selling, general and administrative expenses were $187.7 million, or 28.6% of net revenues. The increase in fiscal 2000 and fiscal 1999, as compared to fiscal 1998 was primarily a result of the growth of the Company's full-price free-standing retail stores and certain initiatives in the wholesale segment, as well as increased costs associated with the Company's ongoing licensing efforts. Operating Income Operating income increased $10.2 million to $24.9 million in fiscal 2000 as compared to fiscal 1999 and increased $12.4 million to $14.7 million in fiscal 1999 as compared to $2.3 million in fiscal 1998. Exclusive of the transaction costs and the reversal of the restructuring and non-recurring charges, operating income in fiscal 2000 was $25.7 million. Exclusive of the credit, and net restructuring and other charges, primarily nonrecurring, operating income in fiscal 1999 was $19.3 million. Operating income as a percent of net revenues for fiscal 2000 was 3.8%, as compared to 2.2% and 0.4%, in fiscal 1999 and fiscal 1998, respectively. Exclusive of the non-recurring items, operating income as a percent of net revenues for fiscal 2000 and fiscal 1999 was 3.9% and 2.9%, respectively. In fiscal 2000, 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 as well as the absence of restructuring and other non-recurring charges. 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. Interest Expense, Net Interest expense, net of interest income, decreased $1.5 million to $2.6 million in fiscal 2000 as compared to fiscal 1999 and increased $2.0 million to $4.1 million in fiscal 1999 from $2.1 million in fiscal 1998. In fiscal 2000, the decrease is primarily attributable to lower borrowings during the first and second quarters of fiscal 2000. In fiscal 1999, the increase is primarily attributable to an increase in average borrowings during the year. 25 Provision for Income Taxes The provision for income taxes represents Federal, foreign, state and local income taxes. The provision for income taxes for fiscal 2000, 1999 and 1998 was $3.2 million, $0.6 million and $0.1 million, respectively. In fiscal 2000 and fiscal 1999, the Company recognized a tax credit of $6.0 million and $4.0 million, respectively, relating to an adjustment of its valuation allowance. Prior to the tax credit, the provision was $9.2 million and $4.6 million, in fiscal 2000 and fiscal 1999, respectively. 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 $6.0 million and $4.0 million were determined to be no longer required in fiscal 2000 and 1999, respectively, based on taxable income in those years. As of December 31, 2000, the remaining valuation allowance was $14.0 million. Net Income Net income was $19.2 million in fiscal 2000, as compared to $10.0 million in fiscal 1999 and $0.1 million in fiscal 1998. Exclusive of the transaction costs, the reversal of the restructuring and non-recurring charges, and the reduction of the valuation allowance, net income in fiscal 2000 was $13.7 million. Exclusive of the non-recurring and unusual items, and the reduction of the tax valuation allowance, net income in fiscal 1999 was $8.6 million. In fiscal 2000, the increase was primarily attributable to increased gross profit margins. In fiscal 1999, the increase was primarily attributable to increased net revenues and gross profit margins. Net Income (Loss) per Common Share Net income per common share on a diluted basis was $0.87 per share in fiscal 2000, as compared to $0.46 per share in fiscal 1999, and $0.01 per share in fiscal 1998. Exclusive of the transaction costs, the reversal of the restructuring and non-recurring charges and the reduction in the tax valuation allowance, net income per common share, on a diluted basis in fiscal 2000 was $0.62 per share. Exclusive of the credit, the net restructuring and other non-recurring charges, and the reduction in the tax valuation allowance, net income per common share on a diluted basis in fiscal 1999 was $0.40 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 (including the construction of new shop-in-shops and outlet and full-price free-standing retail stores), and investments in the start-up of new collections and the extension of existing collections. At December 31, 2000, the Company had cash and cash equivalents of $15.5 million compared with $15.0 million at January 2, 2000. In February 2000, the Company amended the $150.0 million revolving Credit Facility (the "Facility") in place at January 2, 2000 and extended its term to expire on May 1, 2003. The Facility includes a $90.0 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 December 31, 2000 and January 2, 2000, there were no direct borrowings 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 with bank lines of credit and proceeds from 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, which launched in Spring 2001 under the CITY DKNY label. In March 1998, the Company received $15.2 million related to 26 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 2000 was $6.9 million, as compared to $27.8 million in fiscal 1999, and $39.5 million in fiscal 1998. The fiscal 2000 decrease primarily reflects higher net income and a decrease in net accounts receivable, partially offset by higher inventories, prepaid expenses and other current assets, and deposits and other noncurrent assets, as well as a lower increase in accounts payable, accrued expenses and other current liabilities. The fiscal 1999 decrease primarily reflects 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, and deposits and other current assets, partially offset by an increase in accounts payable, accrued expenses and other current liabilities, a lesser decrease in inventory and an increase in net income. Net cash used for investing activities in fiscal 2000 was $6.4 million, as compared to $20.2 million in fiscal 1999 and $7.5 million in fiscal 1998. Net cash used for investing activities primarily reflects capital expenditures which amounted to $6.4 million, $11.0 million and $8.2 million in fiscal 2000, 1999 and 1998, respectively. Spending for all three periods primarily reflects expenditures for equipment, machinery, computers, office furniture, leasehold improvements, outlet stores, and 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. See Note 11 in the notes to financial statements. As of December 31, 2000, the Company had outstanding commitments for capital expenditures of approximately $2.5 million. The Company borrows on a seasonal basis for working capital and other purposes. In fiscal 2000, the Company had $33 thousand in proceeds from the exercise of stock options. 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 relates to the repayment of amounts outstanding under the Company's Facility and the repayment of a note payable to a principal stockholder. 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 Euro, 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 or losses 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 December 31, 2000, the Company had contracts to exchange foreign currencies in the form of forward exchange contracts in the amount of $131.2 million. 27 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. 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 December 31, 2000 was approximately $3.8 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 may 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 2000 and fiscal 1999, revenue from sales to Asia represented approximately 6.7% and 8.1%, respectively, of the Company's wholesale net revenues including approximately 3.4% and 4.9% to Japan, respectively, and approximately 3.3% and 3.2%, respectively, to other areas in Asia. The Company has continued to 28 experience a declining sales trend in fiscal 2000 as compared to fiscal 1999, which the Company believes was due, in part, to the general economic conditions in Asia. 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 free-standing full price retail business, the Company's operating performance may not reflect the typical seasonality of the apparel industry. 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 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 currently conducting business in both the Euro and the national currencies of the participating nations. 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 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which is required to be adopted in fiscal years beginning after June 15, 2000. The Company will adopt the provisions of this Statement effective January 1, 2001. This statements requires that all derivatives be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in fair value be recognized currently in earnings unless specific hedge accounting criteria are met. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The cumulative effect of adoption of this Statement will not be material to the Company's results of operations or financial condition. 29 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 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 2001 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A (the "Company's 2001 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 2001 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 2001 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 2001 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 DONNA KARAN INTERNATIONAL INC. INDEX TO FINANCIAL STATEMENTS Years ended December 31, 2000, January 2, 2000 and January 3, 1999 Page ---- Report of Independent Auditors ............................................ F-2 Statements of Income for the years ended December 31, 2000, January 2, 2000 and January 3, 1999.................................... F-3 Balance Sheets as of December 31, 2000 and January 2, 2000................. F-4 Statements of Stockholders' Equity for the years ended December 31, 2000, January 2, 2000 and January 3, 1999..................................... F-5 Statements of Cash Flows for the years ended December 31, 2000, January 2, 2000 and January 3, 1999..................................... F-6 Notes to Financial Statements ............................................. F-7 F - 1 REPORT OF INDEPENDENT AUDITORS The Board of Directors of Donna Karan International Inc. We have audited the consolidated balance sheets of Donna Karan International Inc. and subsidiaries (the "Company") as of December 31, 2000 and January 2, 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 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. at December 31, 2000 and January 2, 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 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 13, 2001, except for Note 18 as to which the date is April 2, 2001 F - 2 DONNA KARAN INTERNATIONAL INC. STATEMENTS OF INCOME
Year Ended -------------------------------------------- December 31, January 2, January 3, 2000 2000 1999 ------------ ------------ ------------ (Dollars in thousands, except per share data) Net revenues ..................................... $ 662,695 $ 661,837 $ 622,646 Cost of sales .................................... 444,780 450,686 468,559 ------------ ------------ ------------ Gross profit ..................................... 217,915 211,151 154,087 Selling, general, and administrative expenses .... 193,170 193,827 152,089 Restructuring charges (credits), net ............. (200) 2,645 (267) ------------ ------------ ------------ Operating income ................................. 24,945 14,679 2,265 Other income (expense): Equity in loss of affiliate ................ -- -- (65) Interest income ............................ 498 97 599 Interest expense ........................... (3,093) (4,187) (2,649) Gain on sale of interests in affiliates .... -- -- 88 ------------ ------------ ------------ Income before income taxes ....................... 22,350 10,589 238 Provision for income taxes ....................... 3,163 553 110 ------------ ------------ ------------ Net income ....................................... $ 19,187 $ 10,036 $ 128 ============ ============ ============ Net income per common share: Basic ...................................... $ 0.89 $ 0.46 $ 0.01 Diluted .................................... $ 0.87 $ 0.46 $ 0.01 Weighted average common shares outstanding: Basic ...................................... 21,604,767 21,599,500 21,598,264 Diluted .................................... 22,055,974 21,702,700 21,631,664
See notes to financial statements F - 3 DONNA KARAN INTERNATIONAL INC. BALANCE SHEETS
December 31, January 2, 2000 2000 --------- --------- (In thousands) ASSETS Current assets Cash and cash equivalents ....................................................... $ 15,535 $ 15,038 Accounts receivable, net of allowances of $36,178 and $27,193 respectively ..... 85,007 86,314 Inventories ..................................................................... 88,691 82,792 Deferred income taxes ........................................................... 28,297 26,408 Prepaid expenses and other current assets ....................................... 27,920 17,567 --------- --------- Total current assets ................................................................ 245,450 228,119 Property and equipment, at cost - net ............................................... 38,987 41,512 Deferred income taxes ............................................................... 19,650 19,543 Deposits and other noncurrent assets ................................................ 20,127 15,117 --------- --------- $ 324,214 $ 304,291 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable ................................................................ $ 76,956 $ 57,923 Accrued expenses and other current liabilities .................................. 57,501 71,339 --------- --------- Total current liabilities ....................................................... 134,457 129,262 --------- --------- Subordinated notes payable .......................................................... 8,209 8,209 Deferred income ..................................................................... 28,688 34,051 Commitments and contingencies (Note 13) Stockholders' equity Common stock, $0.01 par value, 35,000,000 shares authorized, 22,127,805 shares at December 31, 2000, and 21,600,264 shares at January 2, 2000 issued and outstanding ....................................................... 221 216 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 ...................................................... 192,348 188,471 Retained deficit ................................................................ (34,524) (53,711) Accumulated other comprehensive loss ............................................ (1,415) (991) --------- --------- 156,630 133,985 Less: Treasury stock, at cost (16,270 shares and 17,770 shares, respectively) ... (384) (419) Unearned compensation ................................................... (3,386) (797) --------- --------- Total stockholders' equity .................................................... 152,860 132,769 --------- --------- $ 324,214 $ 304,291 ========= =========
See notes to financial statements F - 4 DONNA KARAN INTERNATIONAL INC. STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended ----------------------------------- December 31, January 2, January 3, 2000 2000 1999 --------- --------- --------- (In thousands) Common stock, beginning of year ............................ $ 216 $ 216 $ 216 Restricted stock award ..................................... 5 -- -- --------- --------- --------- Common stock, end of year .................................. 221 216 216 --------- --------- --------- Additional paid-in capital, beginning of year .............. 188,471 188,479 188,491 Restricted stock award ..................................... 3,869 (8) (12) Stock options exercised .................................... 33 -- -- Vesting of restricted stock award .......................... (25) -- -- --------- --------- --------- Additional paid-in capital, end of year .................... 192,348 188,471 188,479 --------- --------- --------- Retained deficit, beginning of year ........................ (53,711) (63,747) (63,875) Net income ................................................. 19,187 10,036 128 --------- --------- --------- Retained deficit, end of year .............................. (34,524) (53,711) (63,747) --------- --------- --------- Treasury stock, beginning of year .......................... (419) (443) (479) Vesting of restricted stock award .......................... 35 24 36 --------- --------- --------- Treasury stock, end of year ................................ (384) (419) (443) --------- --------- --------- Unearned compensation, beginning of year ................... (797) (1,195) (1,434) Restricted stock award ..................................... (3,874) -- -- Amortization ............................................... 1,285 398 239 --------- --------- --------- Unearned compensation, end of year ......................... (3,386) (797) (1,195) --------- --------- --------- Accumulated other comprehensive loss, beginning of year .... (991) (1,206) (455) Foreign currency translation, adjustments .................. (424) 215 (751) --------- --------- --------- Accumulated other comprehensive loss, end of year .......... (1,415) (991) (1,206) Total stockholders' equity ................................. $ 152,860 $ 132,769 $ 122,104 ========= ========= ========= Comprehensive income (loss) ................................ $ 18,763 $ 10,251 $ (623) ========= ========= =========
See notes to financial statements F - 5 DONNA KARAN INTERNATIONAL INC. STATEMENTS OF CASH FLOWS
Year Ended -------------------------------------- December 31, January 2, January 3, 2000 2000 1999 ---------- ---------- ---------- (In thousands) Operating activities Net income ..................................................... $ 19,187 $ 10,036 $ 128 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .............................. 16,281 19,406 11,169 Amortization of deferred income ............................ (12,847) (14,494) (7,956) Provision for bad debts .................................... (1,215) 2,717 1,544 Deferred income taxes ...................................... (1,996) (4,211) (989) Provision for restricted stock compensation ................ 1,285 398 239 Other, net ................................................. 10 16 (266) Changes in operating assets and liabilities: Decrease (increase) in accounts receivable ................. 3,222 (18,054) (4,383) (Increase) decrease in inventories ......................... (5,899) 10,819 22,541 (Increase) decrease in prepaid expenses and other current assets .......................................... (11,053) 1,294 (6,790) Increase in deposits and other noncurrent assets ........... (12,351) (6,464) (3,508) Increase (decrease) in accounts payable, accrued expenses, and other current liabilities ................. 17,618 28,785 (8,616) (Decrease) increase in deferred income ..................... (5,363) (2,444) 36,360 ---------- ---------- ---------- Net cash provided by operating activities ................. 6,879 27,804 39,473 ---------- ---------- ---------- Investing activities Purchase of free-standing retail stores ........................ -- (9,200) -- Proceeds from sale of affiliate ................................ -- -- 646 Purchase of property and equipment ............................. (6,415) (11,014) (8,158) ---------- ---------- ---------- Net cash used in investing activities ..................... (6,415) (20,214) (7,512) ---------- ---------- ---------- Financing activities Net repayment of revolving credit facility ..................... -- -- (22,314) Repayment of note payable to principal ......................... -- -- (6,700) Other .......................................................... 33 -- (36) ---------- ---------- ---------- Net cash provided by (used for) financing activities ...... 33 -- (29,050) ---------- ---------- ---------- Net increase in cash and cash equivalents .......................... 497 7,590 2,911 Cash and cash equivalents at beginning of year ..................... 15,038 7,448 4,537 ---------- ---------- ---------- Cash and cash equivalents at end of year ........................... $ 15,535 $ 15,038 $ 7,448 ========== ========== ==========
See notes to financial statements F - 6 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 years ended December 31, 2000, January 2, 2000, and January 3, 1999. 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 2000 and fiscal 1999 consisting of a 52-week year and fiscal 1998 consisting of a 53-week year. Certain amounts in the financial statements of prior years have been reclassified to conform to the current year presentation. Net Income per Common Share In accordance with the requirements of Financial Accounting Standards ("SFAS") No. 128, 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 excluding any potential dilution. Net income 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 income. Reconciliation between the numerators and denominators of the basic and diluted EPS computations is as follows:
December 31, January 2, January 3, 2000 2000 1999 ----------- ----------- ----------- (Dollars in thousands, except per share data) Numerator: Net income attributable to common stock .......... $ 19,187 $ 10,036 $ 128 =========== =========== =========== Denominator: Weighted average common shares outstanding-- Basic ......................................... 21,604,767 21,599,500 21,598,264 Effect of dilutive securities: Stock options ............................... 17,533 103,200 33,400 Restricted common stock ..................... 433,674 -- -- ----------- ----------- ----------- Weighted average common shares outstanding-- Diluted ....................................... 22,055,974 21,702,700 21,631,664 =========== =========== =========== Basic EPS ........................................ $ 0.89 $ 0.46 $ 0.01 =========== =========== =========== Diluted EPS ...................................... $ 0.87 $ 0.46 $ 0.01 =========== =========== ===========
See notes to financial statements F - 7 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS Inventories Inventory is stated at the lower of cost or market, with cost being determined on the first-in, first-out method. December 31, January 2, 2000 2000 ---------- ---------- (In thousands) Raw materials .................................... $ 3,522 $ 2,947 Work in process .................................. 3,920 2,730 Finished goods ................................... 81,249 77,115 ---------- ---------- $ 88,691 $ 82,792 ========== ========== Property and Equipment Property and equipment are carried at cost less accumulated depreciation. 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, 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. At December 31, 2000 and January 2, 2000, the unamortized balance of these costs of $17.5 million and $11.8 million, respectively, was included in "Deposits and other noncurrent assets" in the accompanying balance sheets. Amortization expense of these costs for the years ended December 31, 2000, January 2, 2000 and January 3, 1999 amounted to approximately $6.5 million, $5.1 million and $4.4 million, respectively. Major classes of property and equipment consist of the following: December 31, January 2, 2000 2000 -------- -------- (In thousands) Machinery, equipment and fixtures .................. $ 29,688 $ 28,281 Leasehold improvements ............................. 63,359 61,776 -------- -------- 93,047 90,057 Less accumulated depreciation and amortization ..... (54,060) (48,545) -------- -------- $ 38,987 $ 41,512 ======== ======== Depreciation and amortization of property and equipment amounted to $9.0 million, $9.6 million, and $5.5 million for the years ended December 31, 2000, January 2, 2000 and January 3, 1999, 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 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). F - 8 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities are comprised of the following: December 31, January 2, 2000 2000 ----------- ----------- (In thousands) Accrued expenses ................................... $ 13,169 $ 17,326 Unearned revenues .................................. 7,367 14,852 Accrued compensation ............................... 12,712 14,061 Accrued royalties .................................. 12,920 10,559 Accrued income taxes ............................... 6,868 6,469 Accrued restructuring and other charges ............ 892 5,370 Accrued taxes other than income taxes .............. 2,671 1,722 Other .............................................. 902 980 ----------- ----------- $ 57,501 $ 71,339 =========== =========== 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 anticipated discounts, returns and allowances. Income from licensing agreements is recognized when earned and is included in net revenues. Shipping and handling costs related to merchandise sales are classified as selling, general and administrative expenses. 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 December 31, 2000 and January 2, 2000, advertising costs totaling $4.3 million and $1.9 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 the years ended December 31, 2000, January 2, 2000, and January 3, 1999 were $35.8 million, $34.1 million and $31.0 million, respectively. 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 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS 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 $5.7 million and $9.4 million of short-term deposits at December 31, 2000 and January 2, 2000, respectively. Statement of Cash Flows Supplemental disclosures of cash flow information: Year Ended ---------------------------------------- December 31, January 2, January 3, 2000 2000 1999 ----------- ----------- ----------- (In thousands) Cash paid during the year for: Interest ........................ $ 2,353 $ 2,825 $ 1,507 =========== =========== =========== Taxes ........................... $ 6,220 $ 673 $ 6,174 =========== =========== =========== 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 income. Such adjustments amounted to approximately $0.4 million of unrealized translation losses and $0.2 million of unrealized translation gains in fiscal 2000 and fiscal 1999, respectively. Gains and losses from foreign currency transactions are included in operations. 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 the years ended December 31, 2000, January 2, 2000 and January 3, 1999, gains and losses on foreign exchange contracts offset gains and losses on the underlying transactions. Management Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. Actual results could differ from those estimates and assumptions. Impact of Recently Issued Accounting Standards In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101 "Revenue Recognition in Financial Statements." The effective date has been deferred pending additional interpretive guidance. Based on current interpretations, no material impact on the Company's Financial Statement is anticipated. F - 10 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which is required to be adopted in fiscal years beginning after June 15, 2000. The Company will adopt the provisions of this Statement effective January 1, 2001. This Statement requires that all derivatives be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in fair value be recognized currently in earnings unless specific hedge accounting criteria are met. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company's cumulative effect of adoption of this Statement will not be material to the Company's results of operations or financial condition. Note 2. - Borrowings In February 2000, the Company amended the $150.0 million revolving Credit Facility ("facility") in place at January 2, 2000 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. 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. At December 31, 2000 and January 2, 2000, there were no direct borrowings outstanding under the Facility. 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 December 31, 2000, and January 2, 2000 unamortized financing costs of approximately $0.6 million and $0.6 million, respectively were included in "Deposits and other noncurrent assets" in the accompanying balance sheets. Amortization of deferred financing costs of approximately $0.8 million, $1.3 million and $1.3 million in fiscal 2000, 1999 and 1998, respectively, were included in interest expense. Letters of credit outstanding were approximately $56.6 million and $60.3 million at December 31, 2000 and January 2, 2000, respectively. 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. F - 11 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS 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 counterpart. 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 operations 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, Dutch Guilder, Japanese Yen and the European Economical Monetary Union Euro. Deferred unrealized gains and losses from derivative financial instruments consist of the following:
December 31, 2000 January 2, 2000 ------------------------ --------------------------- Notional Notional amounts Gains Losses amounts Gains Losses -------- ------ ---- -------- ------ ------- (In thousands) Forward exchange contracts $131,198 $ -- $901 $115,772 $2,859 $ --
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. Borrowing under revolving line of credit and Subordinated notes payable: The fair value of the Company's debt approximates its carrying value, primarily because they bear interest at a variable rate. Forward exchange contracts: The fair value of forward exchange contracts is the estimated amount the Company would receive or pay to terminate the agreements, as determined by dealer quotes. F - 12 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS The estimated fair values of the Company's financial instruments are as follows:
December 31, 2000 January 2, 2000 ------------------- ------------------- Notional Fair Notional Fair Amount Value Amount Value -------- -------- -------- -------- (In thousands) Nonderivatives Cash and cash equivalents ............ $ 15,535 $ 15,535 $ 15,038 $ 15,038 Subordinated notes payable ........... 8,209 8,209 8,209 8,209 Derivatives Forward exchange contracts ........... $131,198 $132,059 $115,772 $119,598
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 $1.1 million, $1.3 million and $1.7 million for the fiscal years ended December 31, 2000, January 2, 2000 and January 3, 1999, respectively. Pension expense approximated $0.4 million, $0.6 million and $0.7 million for the fiscal years ended December 31, 2000, January 2, 2000 and January 3, 1999, 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 December 31, 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, net of forfeitures, were approximately $0.3 million, $0.8 million and $0.8 million for the fiscal years ended December 31, 2000, January 2, 2000 and January 3, 1999, 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 addition, amounts under the deferred compensation plan will become fully vested upon a change in control of the Company (as defined in the plan). In fiscal 2000, 1999 and 1998, expenses under these plans were approximately $8.0 million, $7.8 million and $5.9 million, respectively. F - 13 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS Note 5. - Leases Rent expense included in the Company's financial statements was approximately $33.7 million, $32.3 million and $23.5 million for the fiscal years ended December 31, 2000, January 2, 2000, and January 3, 1999, respectively. At December 31, 2000, future minimum annual rental commitments under noncancellable operating leases for office, warehouse and retail facilities, and equipment are as follows (in thousands): 2001 ...................................................... $ 24,392 2002 ...................................................... 22,177 2003 ...................................................... 19,862 2004 ...................................................... 17,842 2005 ...................................................... 17,239 Thereafter ...................................................... 80,741 --------- $ 182,253 ========= 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 December 31, 2000, future offsets to annual rental commitments as a result of these subleases are as follows (in thousands): 2001 ..................................................... $ 1,626 2002 ..................................................... 1,543 2003 ..................................................... 1,310 2004 ..................................................... 1,143 2005 ..................................................... 1,143 Thereafter ..................................................... 2,535 ---------- $ 9,300 ========== 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 is being amortized 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 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 in the fiscal year ended January 3, 1999. Equity in DKJ's loss amounted to approximately $0.1 million for the fiscal year ended January 3, 1999. As a result of the Company's agreement with DKJ in 1995, which provided for a fee based upon net sales of DKJ, the Company recognized management fee income, recorded as an offset of selling, general, and administrative expenses of approximately $0.4 million, $0.6 million and $0.8 million during the years ended December 31, 2000, January 2, 2000, and January 3, 1999, respectively. F - 14 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS Note 7. - Apparel Licensing Agreement In December 1999, the Company consummated an agreement to 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 launched for the Spring 2001 season under the CITY DKNY 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 recognized as earned. 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 an agreement 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 is being amortized over the term of the agreement. Aggregate minimum royalties for the initial 15-year term are $152.0 million. Note 8. - Beauty Licensing Agreement On November 10, 1997, the Company and Estee Lauder Inc. ("ELI") consummated an agreement 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. 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 approximated $4.3 million and $6.7 million, respectively. As a result of the strategic initiatives approximately 160 positions were eliminated in the Company. 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. F - 15 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS 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 charge includes $0.8 million related to cost of sales and $2.5 million classified as selling, general and administrative expenses. The major components of the fiscal 1999 restructuring and other charges are as follows:
Utilized -------------------- Balance at Original Not December 31, Accrual Cash Noncash Utilized 2000 -------------------- -------------------------------- Writedown of long-lived assets ............... $ 4,827 $ -- $ 4,827 $ -- $ -- Exit costs (including inventory markdowns) ... 2,155 791 294 1,001 68 Employee termination and severance costs ..... 2,283 2,095 -- -- 188 Other ........................................ 1,686 610 440 -- 636 -------- -------- -------- -------- -------- $ 10,951 $ 3,496 $ 5,561 $ 1,001 $ 892 ======== ======== ======== ======== ========
During the year ended December 31, 2000, the Company utilized approximately $2.6 million of reserves previously established in connection with its fiscal 1999 restructuring plan and reversed $1.0 that was no longer deemed necessary. The Company anticipates utilizing the remaining balance of its reserves during fiscal 2001. During 2000 and 1999, the Company reevaluated its restructuring reserves that were established as a result of the restructuring and strategic plan announced in 1997. All of the strategic initiatives under these plans are completed 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 $0.6 million in the fourth quarter of 2000, and $1.4 million in the fourth quarter of 1999. As of December 31, 2000 no amounts remain accrued related to this plan. In fiscal 1998, the Company utilized $5.5 million of its reserves previously established in connection with its 1997 restructuring plan and credited into income approximately $0.3 million of the restructuring accrual, which was determined to no longer be required. F - 16 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS Note 10. - Related Party Transactions 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 $30.6 million, $25.0 million and $19.5 million in royalty expense for the years ended December 31, 2000, January 2, 2000, and January 3, 1999, respectively, which was included in cost of sales. Included in accrued expenses at December 31, 2000 and January 2, 1999, was royalties payable of $12.9 million and $10.6 million, respectively. 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. In January 2001, LVMH Moet Hennessey Louis Vuitton SA ("LVMH") consummated the acquisition of Gabrielle Studio from two of the Company's principal stockholders and their affiliated trusts. The Company believes that its relationship under the Gabrielle license will not materially change under this new ownership. 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 states that the Company will provide the affiliated entity with certain management services related to the operation of the store in exchange for a fee. The store will also be entitled to offer a limited amount of non-branded products. In connection with the purchase of Gabrielle Studio in January 2001, LVMH agreed to assume the rights and obligations of Ms. Karan's affiliate in connection with the construction and operation of the Donna Karan New York flagship store. The assumption of such rights and obligations by LVMH shall be effective no earlier than June 15, 2001 and no later than September 15, 2001. 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 which mature in January 2002, and bear interest at LIBOR. The acquisition was accounted for as a purchase business combinaiton, with any excess of the remaining purchase price over the estimated fair value of the assets acquired, being recorded as goodwill. F - 17 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS Note 12. - Stock Options and Restricted Stock The Company has three 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"). The other two plans are for non-employee directors (the "Non-Employee Director Stock Option Plan" and the "Non-Employee Director Restricted Stock 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 options awarded under these plans. If compensation cost for the stock options awarded had been determined based on the fair value at the grant dates for awards in fiscal 2000, 1999 and 1998 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):
Year Ended ------------------------------------- December 31, January 2, January 3, 2000 2000 1999 ---------- ---------- ---------- Net income - as reported ................... $ 19,187 $ 10,036 $ 128 ========== ========== ========== Net income (loss) - pro forma .............. $ 16,732 $ 6,624 $ (1,829) ========== ========== ========== Net income (loss) per common share - basic As reported ........................... $ 0.89 $ 0.46 $ 0.01 Pro forma ............................. $ 0.77 0.31 (0.08) Net income (loss) per common share - diluted As reported ........................... $ 0.87 $ 0.46 $ 0.01 Pro forma ............................. $ 0.76 0.31 (0.08)
The pro forma effect on net income for fiscal 2000, 1999 and 1998 is not representative of the pro forma effect on net income in future years since compensation cost is allocated on a straight-line basis over the vesting periods of the grants which extends beyond the reported years. 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: Year Ended ------------------------------------- December 31, January 2, January 3, 2000 2000 1999 ------------ ---------- ---------- Expected volatility .................... 60.6% 57.4% 59.2% Average expected option life ........... 6 years 6 years 6 years Average risk free interest rate ........ 5.1% 6.7% 5.1% Dividend yield ......................... 0.0% 0.0% 0.0% 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 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 2000, fiscal 1999 and fiscal 1998 vest on a yearly basis in 33 1/3% increments, beginning on the first anniversary of the date of grant. Common stock reserved for future grants under the Stock Incentive Plan aggregated 1,056,420 shares as of December 31, 2000. F - 18 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS 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 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. Common stock reserved for future grants under the Non-Employee Director Stock Option Plan aggregated 70,000 shares as of December 31, 2000. A summary of the Company's stock option programs as of fiscal 2000, 1999 and 1998 and changes during the years then ended, are presented below:
Non-Employee Director Stock Incentive Plan Stock Option Plan --------------------------- --------------------------- Weighted Weighted Average Average Exercise Exercise Shares price Shares price ---------- ---------- ---------- ---------- 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 Granted ................................ 131,433 7.44 3,000 7.06 Exercised .............................. (5,168) 6.41 -- -- Forfeited or cancelled ................. (905,168) 10.35 (8,000) 19.90 --------- ---------- Outstanding at December 31, 2000 ....... 769,107 $ 6.74 30,000 $ 13.22 ========= ==========
The weighted average fair value of options granted during 2000, 1999 and 1998 was $4.52, $4.21 and $5.36 per share, respectively. For various price ranges, weighted average characteristics of outstanding stock options at December 31, 2000 are as follows:
Outstanding Exercisable ----------------------------------------------- ---------------------------- Weighted Weighted Range of Remaining average average Exercise prices Options life (years) exercise price Options exercise price - ------------------------ ------------- --------------- --------------- ------------ --------------- Stock Incentive Plan $5.94 to $6.25 .......................... 510,089 6.4 $ 6.24 455,279 $ 6.25 $7.00 to $7.44 .......................... 251,518 5.8 7.23 72,848 7.16 $24.00 .................................. 7,500 5.4 24.00 7,500 24.00 ------- ------- $5.94 to $24.00 .......................... 769,107 6.2 6.74 535,627 6.62 ======= ======= Non-Employee Director Stock Option Plan $7.06 to $11.00 .......................... 13,000 8.6 $ 8.29 10,000 $ 10.77 $13.25 to $21.13 ......................... 17,000 5.6 17.00 17,000 17.00 ------- ------- $7.06 to $21.13 .......................... 30,000 6.9 13.22 27,000 14.69 ======= =======
F - 19 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS In January 2000, The Company' 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 the 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. In addition, in March 2000, under the Stock Incentive Plan, the Company awarded 140,791 restricted shares of common stock to executive officers and certain key employees. The restricted shares will vest on the fifth anniversary of the date of the grant or earlier in 20% increments if the Company's common stock attains certain price levels. All of the restricted shares awarded in 2000 are subject to certain restrictions on transferability and a risk of forfeiture. The market value of these shares on the date of grant has been recorded as unearned compensation, and is being charged to selling, general and administrative expenses over the corresponding vesting period. Under the Non-Employee Director Restricted Stock Plan, each non-employee director is entitled to receive a grant of 500 shares of common stock as of the first day of the month following the annual meeting of stockholders, which 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). The following table summarizes the activity of restricted stock for fiscal 2000:
Non-Employee Director Stock Incentive Plan Restricted Stock Plan ----------------------- ----------------------- Weighted Weighted Average Average Shares Fair Value Shares Fair Value -------- -------- -------- -------- Unvested shares outstanding, beginning of period 150,000 $ 10.63 1,500 $ 11.00 Shares awarded 529,017 7.44 1,500 7.06 Shares forfeited (9,644) 7.44 -- -- Shares vested -- -- (1,500) 11.00 -------- -------- -------- -------- Unvested shares outstanding, end of period 669,373 $ 8.15 1,500 $ 7.06 ======== ======== ======== ========
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 calls for a severance package, if the employee is terminated without cause during the one year period subsequent to a change in control, of three times the employee's base salary plus three times the bonus compensation for the immediately prior fiscal year. The employee is also entitled to receive $750,000 on the earlier of six months following a change in control, or termination without cause on or after a change in control. If these payments, as well as any other benefits due to the employee, are subject to an excise tax under the Internal Revenue Code of 1986 as "excess parachute payments", then the employee will be entitled to receive a tax gross-up so that the employee is in the same tax position as if there were no such excise tax. This same agreement contains a provision whereby the Company has granted 150,000 shares of restricted common stock to the 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. As of December 31, 2000, all 150,000 shares were subject to the forfeiture provisions. These shares have been recorded as unearned 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, or 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 the fiscal 2000, 1999 and 1998 amounted to approximately $319,000, $398,000 and $239,000, F - 20 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS respectively. Another employment agreement contains a deferred compensation clause whereby the employee is entitled to $1 million plus interest in October 2005. This amount becomes vested at the rate of 20% per year in the event the employee is terminated without cause, and becomes fully vested upon a change in control of the Company. The Company has a severance plan that covers certain executive officers and key employees of the Company. In the event of a change in control, as defined, each covered employee who is terminated without cause during the one year period subsequent to, or 90 days prior to, the change in control is entitled to receive, in addition to severance benefits payable under such individual's employment contract or other severance benefits due, a lump sum payment equal to the employees then current annual salary. The Company has an Executive Incentive Plan ("EIP") whereby bonuses are generally paid to certain executive officers and key employees, based on pre-determined performance criteria. In the event of a change in control, under the terms of the EIP, the Company is obligated to make at least a pro-rata payment of each employee's target bonus for that plan year up to the date of the change in control. However, the Company may elect to make an additional payment of up to the employee's full bonus target for such plan year. All payments made under this change in control provision will reduce the employee's final award for such plan year. The Company also has a Voluntary Deferred Compensation Plan for Non-Employee Directors of the Company. This plan 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 December 2000, several putative class actions were filed in state court in Delaware and New York (collectively the "LVMH Actions") in connection with the offer of LVMH to acquire the outstanding shares of the Company for a price of $8.50 per share (the "LVMH Offer"). All of the complaints name the Company, its Chairman, its Vice Chairman and its Chief Executive Officer as defendants. Two of the complaints also name the Company's outside Board members as defendants and three of the complaints also name LVMH as a defendant. The LVMH Actions allege, inter alia, that the price offered by LVMH to purchase the Company's common stock is inadequate, that defendants breached their fiduciary duties in connection with the LVMH Offer and that the Chairman and Vice Chairman furthered their own interest at the expense of the Company's interests, in allegedly negotiating with LVMH concerning the proposed sale of the Company to LVMH. Following the commencement of the LVMH Actions, counsel for the Company and the other defendants entered into (i) a stipulation with counsel for plaintiffs in the actions filed in New York staying such actions and providing that the outcome of those actions will be governed by the outcome of the actions filed in Delaware; and (ii) a stipulation with counsel for plaintiffs in the actions filed in Delaware providing that such actions will be consolidated and that defendants need not respond to the individual complaints pending the filing of a consolidated amended complaint. No consolidated amended complaint has been filed and discovery has not commenced. The Company is also involved from time to time in routine legal matters and litigation incidental to its business. While the outcome of these matters, as well as the LVMH Actions, could have a material adverse effect on the Company's results of operations and cash flows in the period in which such outcome is determined, in the Company's opinion, the results of these matters are not expected to have a material effect on the Company's financial position or results of operations. F - 21 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS 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:
Year Ended ---------------------------------------------- December 31, January 2, January 3 2000 2000 1999 ------------ ------------ ------------ (In thousands) Current income taxes: Federal Taxes ................................................. $ 3,523 $ 2,907 $ (2,374) State and local taxes ......................................... 1,115 1,485 1,245 Foreign taxes ................................................. 521 372 2,227 ------------ ------------ ------------ 5,159 4,764 1,098 Deferred income taxes .............................................. (1,996) (4,211) (988) ------------ ------------ ------------ $ 3,163 $ 553 $ 110 ============ ============ ============
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:
Year Ended ----------------------------- December 31, January 2, 2000 2000 ------------ ------------ (In thousands) Current: Uniform inventory capitalization ....................................... $ 2,728 $ 2,717 Allowance for doubtful accounts and other receivable related reserves .. 15,911 10,428 Inventory .............................................................. 5,222 6,572 Other accruals ......................................................... 9,778 11,123 Deferred revenue ....................................................... 2,963 5,989 Net foreign operating loss carryforwards ............................... 737 1,074 ------------ ------------ 37,339 37,903 ------------ ------------ Non-Current: Deferred revenue ....................................................... 11,562 11,404 Depreciation ........................................................... 11,304 13,711 Foreign tax credit carryforwards ....................................... 1,742 2,933 ------------ ------------ 24,608 28,048 ------------ ------------ Valuation allowance ...................................................... (14,000) (20,000) ------------ ------------ $ 47,947 $ 45,951 ============ ============
The Company has available foreign net operating loss carryforwards of approximately $2.4 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 $1.7 million which expire from fiscal 2002 through fiscal 2004. F - 22 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS 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 2000 and 1999, the Company recognized certain deferred tax assets and reduced the valuation allowance by $6.0 million and $4.0 million, respectively, based upon taxable income in those years. The valuation allowances at December 31, 2000 and January 2, 2000 were $14.0 million and $20.0 million, respectively. The foreign and domestic components of income before income taxes were a foreign income of $4.8 million and domestic income of $17.5 million in 2000 and foreign loss of $4.1 million and domestic income of $14.6 million in 1999. A reconciliation between the provision for income taxes computed by applying the statutory Federal income tax rate to income before taxes and the actual provision for income taxes is as follows:
Year Ended ------------------------------------------------ December 31, January 2, January 3, 2000 2000 1999 ------------ ------------ ------------ (In thousands) Federal statutory rate ............................... $ 7,822 $ 3,706 $ 83 State and local taxes, net of Federal tax benefits ... 892 711 770 Taxes related to foreign income, net of credits ...... (619) (389) (1,080) Valuation allowance .................................. (6,000) (4,000) -- Other items, net ..................................... 1,068 525 337 ------------ ------------ ------------ $ 3,163 $ 553 $ 110 ============ ============ ============ Effective tax rate ................................... 14.2% 5.2% 46.2% ============ ============ ============
Exclusive of the impact of the valuation allowance, the Company's effective tax rate was 41.0% and 43.0% in fiscal 2000 and fiscal 1999, respectively. F - 23 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS Note 15. - Comprehensive Income (loss) Comprehensive income (loss) is comprised of net income and other comprehensive income (loss), which contains gains or losses from foreign currency translation. The change in accumulated other comprehensive loss, exclusive of deferred income taxes, for the years ended at December 31, 2000 and January 2, 2000 is as follows:
Year Ended ----------------------------- December 31, January 2, 2000 2000 ------------ ------------ (In thousands) Foreign currency translation, beginning of year .. $ (991) $ (1,206) Current period income (loss) ..................... (424) 215 ------------ ------------ Foreign currency translation, end of year ........ $ (1,415) $ (991) ============ ============
Other comprehensive income (loss) is as follows:
Year Ended --------------------------------------------- December 31, January 2, January 3, 2000 2000 1999 ------------ ------------ ------------ (In thousands) Foreign currency translation adjustments, before taxes ............................. $ (424) $ 215 $ (751) Provision (benefit) for taxes (1) ........... -- -- -- ------------ ------------ ------------ Foreign currency translation adjustments, net of taxes ............................. $ (424) $ 215 $ (751) ============ ============ ============
- ------------------- (1) For fiscal 2000, 1999 and 1998 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 - 24 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS 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 and DKNY brands to department stores, specialty stores, boutiques, and to the Company's owned and licensed free-standing stores. The accessories division also sells products under the DKNY Jeans, DKNY Active and CITY DKNY brands. The Company also sells products in Europe under the DKNY Jeans brand. The licensing division forms strategic alliances with companies, through which it licenses the right to develop, market, and sell products under the Donna Karan New York, DKNY, DKNY Jeans, DKNY Active and CITY DKNY 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, domestic 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: December 31, January 2, January 3, 2000 2000 1999 ------------ ------------ ------------ (In thousands) Net revenues: United States ........... $ 434,845 $ 462,752 $ 422,947 Japan ................... 22,102 27,842 46,528 Other ................... 205,748 171,243 153,171 ------------ ------------ ------------ $ 662,695 $ 661,837 $ 622,646 ============ ============ ============ In fiscal 2000, the Company had one customer who accounted for 10.2% of revenues. In fiscal 1998 sales to entities affiliated with a Singapore-based company, including DKJ, and certain free-standing international retail stores, were 10.5% of the Company's revenues. In fiscal 1999, no customer accounted for greater than 10% of revenues. Sales to Japan for the quarter ended March 28, 1998 were made to a 30% owned subsidiary (see Note 6). F - 25 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS Intersegment sales and transfers are recorded at amounts that approximate cost. All intercompany revenues and profit or loss is eliminated in consolidation.
Wholesale Licensing Retail Total --------- --------- --------- --------- (In thousands) December 31, 2000 Net revenues from external customers........................ $ 490,684 $ 45,246 $ 126,765 $ 662,695 Intersegment revenues ...................................... 68,834 -- -- 68,834 Segment operating profit (loss) ............................ 16,068(1) 21,260 (12,383)(1) 24,945 Segment assets ............................................. 258,910 10,100 55,204 324,214 January 2, 2000 Net revenues from external customers........................ $ 496,288 $ 35,142(3) $ 130,407 $ 661,837 Intersegment revenues ...................................... 74,179 -- -- 74,179 Segment operating profit (loss) ............................ 14,556(2) 18,022(3) (17,899)(2)(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
- -------------------- (1) In fiscal 2000, the Company reversed previously recorded and other non-recurring charges of $1.6 million that were no longer deemed necessary, and recorded costs related to the LVMH Merger Offer of $2.4 million. Exclusive of these charges and credits, operating profit (loss) for the wholesale and retail segments would have been $17.8 million and ($13.4) million, respectively. (2) 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. (3) In fiscal 1999, includes 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. (4) 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 note (2) above) and the opening costs, segment operating loss in fiscal 1999 was $10.1 million. F - 26 DONNA KARAN INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS Note 17. - Quarterly Results of Operations (Unaudited) The following summarizes the unaudited quarterly operating results of the Company for fiscal 2000 and fiscal 1999 (in thousands, except per share amounts):
2000 Quarter Ended --------------------------------------------------- April 2 July 2(1) Oct. 1 Dec. 31(2)(3) --------- --------- --------- ------------- Net revenues .......................... $ 172,770 $ 120,513 $ 203,741 $ 165,671 Gross profit .......................... 55,979 32,324 72,648 56,964 Net income (loss) ..................... 3,329 (6,982) 13,980 8,860 Net income (loss) per common share: Basic ............................... 0.15 (0.32) 0.65 0.41 Diluted ............................. 0.15 (0.32) 0.63 0.40 1999 Quarter Ended ------------------------------------------------- April 4 July 4 Oct. 3(4) Jan. 2(5) --------- --------- --------- --------- 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
- ------------------------ (1) In fiscal 2000, includes the reversal of previously recorded restructuring and other non-recurring charges of $1.0 million that were no longer deemed necessary. Exclusive of these reversals, net loss per common share on a fully diluted basis was $0.34 per share. (2) In fiscal 2000, includes the reversal of previously recorded restructuring and other non-recurring charges of $0.6 million that were no longer deemed necessary, costs related to a proposed merger of $2.4 million, and a $6.0 million reduction in a previously recorded income tax valuation allowance (see Note 14). Exclusive of these charges and credits, net income per common share on a fully diluted bases was $0.18 per share. (3) In the fourth quarter of fiscal 2000, gross profit includes $1.4 million, or $0.04 per share on a fully diluted basis, as a result of the resolution of certain amounts with third parties related to product costs, offset in part by unfavorable inventory variances. The net effect in the full fiscal year 2000 for these items was not material. (4) 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 fully diluted basis was $0.46 per share. (5) 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 credits, net income per common share on a fully diluted basis was $0.19 per share. Note 18. - Subsequent Event On April 2, 2001, the Company and LVMH announced that they had entered into an Agreement and Plan of Merger, dated as of March 31, 2001 (the "Merger Agreement"), which sets forth the terms and conditions of the proposed acquisition of the Company by LVMH. Pursuant to the Merger Agreement, an indirect wholly-owned subsidiary of LVMH will be merged with and into the Company (the "Merger") and the Company will survive the Merger as an indirect subsidiary of LVMH. The Merger is subject to the approval of the stockholders of the Company and the satisfaction of other customary closing conditions, including the receipt of required regulatory approvals. F - 27 DONNA KARAN INTERNATIONAL INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Three Years Ended January 2, 2000 (In thousands)
Balance at Charged to Additions Balance at Beginning of Costs and Charged to Other End of Description Period Expenses Accounts Deductions Period -------- -------- -------- -------- -------- Year ended December 31, 2000 Allowance for doubtful accounts ........ $ 1,745 $ (1,215) -- $ (397) $ 927 Allowance for chargebacks .............. 19,792 31,112 -- 21,613 29,291 Allowance for cash discounts ........... 1,861 12,259 -- 12,416 1,704 Allowance for sales returns ............ 3,795 26,496 -- 26,035 4,256 -------- -------- -------- -------- -------- $ 27,193 $ 68,652 $-- $ 59,667 $ 36,178 ======== ======== ======== ======== ======== 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 ======== ======== ======== ======== ========
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 30, 2001 DONNA KARAN INTERNATIONAL INC. By /s/ John D. Idol ---------------------------- John D. Idol Chief Executive Officer 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. Signature Title Date --------- ----- ---- /s/ Donna Karan Chairman of the Board and March 30, 2001 - ------------------------ Chief Designer Donna Karan /s/ Stephan Weiss Vice Chairman of the Board March 30, 2001 - ------------------------ Stephan Weiss /s/ John D. Idol Chief Executive Officer and March 30, 2001 - ------------------------ Director John D. Idol /s/ M. William Benedetto Director March 30, 2001 - ------------------------ M. William Benedetto /s/ John Eyler Director March 30, 2001 - ------------------------ John Eyler /s/ Ann McLaughlin Director March 30, 2001 - ------------------------ Ann McLaughlin /s/ Frank R. Mori Director March 30, 2001 - ------------------------ Frank R. Mori /s/ Joseph B. Parsons Chief Financial and Operations March 30, 2001 - ------------------------ Officer (Principal Financial Joseph B. Parsons Officer and Principal Accounting Officer) EXHIBIT INDEX Exhibit No. Description of Exhibits - ----------- ----------------------- 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 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) 10.3 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) 10.4 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) 10.5 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) 10.6 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)* 10.7 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)* 10.8 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) 10.9 Employment Agreement, dated as of October 15, 1996, between The Donna Karan Company and Joseph B. Parsons (Incorporated by reference from 10.9 Exhibit 10.14 to the Company's Form 10-K for the year ended December 29, 1996)* 10.10 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)* 10.11 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)* 10.12 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)* 10.13 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)* 10.14 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). 10.15 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) 10.16 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)* 10.17 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) * 10.18 Amendment No. 2 to Employment Agreement, dated as of November 1, 1999, by and between the Company and Donna Karan (Incorporated by reference from Exhibit 10.25 to the Company's Form 10-K for the year ended January 2, 2000)* 10.19 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 (Incorporated by reference from Exhibit 10.27 to the Company's Form 10-K for the year ended January 2, 2000) 10.20 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 (Incorporated by reference from Exhibit 10.28 to the Company's Form 10-K for the year ended January 2, 2000) 10.21 Fifth Amendment, dated as of June 9, 2000, among The Donna Karan Company, The Donna Karan Company Store, G.P., Donna Karan Studio, and DK Footwear Partners, the financial institutions from time to time parties thereto as lenders, the financial institutions from time to time parties thereto as issuing banks, Citibank, N.A., as administrative agent, The Chase Manhattan Bank and Nationsbank, N.A., as co-agents. (Incorporated by reference from Exhibit 10.1 to the Company's Form 10-Q for the quarter ended July 2, 2000). 10.22 Sixth Amendment dated as of November 20, 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 issuing banks, Citibank, N.A., as administrative agent, The Chase Manhattan Bank and Nations bank N.A., as co-agents. 10.23 Amendment, dated as of November 30, 2000, to the Employment Agreement among the Company, The Donna Karan Company, and John D. Idol and related letter agreement, dated as of December 14, 2000.* 10.24 Employment Agreement, dated as of October 10, 2000, between The Donna Karan Company and Joseph B. Parsons.* 10.25 Amendment, dated October 10, 2000, to the Employment Agreement between the Company and Lee Goldenberg* 10.26 Donna Karan International Inc. 1996 Non-Employee Director Stock Option Plan (as amended and restated through December 8, 2000)* 10.27 Donna Karan International Inc. 1996 Stock Incentive Plan (as amended and restated through December 8, 2000)* 10.28 Donna Karan International Inc. Wealth Accumulation Plan, effective December 28, 1997 (amended and restated through December 8, 2000)* 10.29 Donna Karan International Inc. Executive Incentive Plan, effective December 28, 1997 (amended and restated through December 8, 2000)* 10.30 Donna Karan International Inc. 1998 Non-Employee Director Restricted Stock Plan (as amended and restated through December 8, 2000)* 10.31 Donna Karan International Inc. Deferred Bonus Plan, effective as of February 1, 1999 (amended and restated through December 8, 2000)* 10.32 Donna Karan International Inc. Executive Severance Plan, effective as of November 30, 2000 (as amended through December 8, 2000)* 10.33 Amendment, dated as of March 30, 2001, to the Employment Agreement among the Company, The Donna Karan Company, and John D. Idol.* 21.1 Subsidiaries of the Company 23.1 Consent of Ernst & Young LLP * Exhibit is a management contract or compensatory plan or arrangement.
EX-10.22 2 a2038805zex-10_22.txt EXHIBIT 10.22 Exhibit 10.22 EXECUTION COPY SIXTH AMENDMENT Dated as of November 20, 2000 This SIXTH AMENDMENT (the "Sixth 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. AMENDMENTS 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 "Eligible Receivables" in Section 1.01 of the Credit Agreement is amended by adding at the end thereof the following: "Notwithstanding anything to the contrary contained herein, no Receivable arising under a Borrower's consumer private label credit card program shall be an Eligible Receivable." (b) Section 9.02 of the Credit Agreement is amended by adding at the end thereof a new clause (vii) to read as follows: (vii) the sale of accounts by The Donna Karan Company Store, G.P. to Hudson United Bank pursuant to the Consumer Credit Card Program Agreement dated as of November 20, 2000 among Hudson United Bank, The Donna Karan Company Store, G.P. and Donna Karan Studio." (c) Section 9.03 of the Credit Agreement is amended by renumbering the second clause (viii) at the end thereof to "(ix)" and adding a new clause (x) at the end of Section 9.03 to read as follows: "(x) the Lien granted pursuant to, and the UCC-1 financing statements filed in connection with, the Consumer Credit Card Program Agreement dated as of November 20, 2000 among Hudson United Bank, The Donna Karan Company Store, G.P. and Donna Karan Studio." SECTION 2. CONDITIONS OF EFFECTIVENESS. This Sixth Amendment shall become effective when the Administrative Agent shall have received counterparts of this Sixth 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 Sixth 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 Sixth 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 Sixth 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 Sixth 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 Sixth 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 Sixth 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 Sixth 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: ---------------------------- CITIBANK, N.A., as Administrative Agent and Lender By: /s/ ---------------------------------- Vice President THE CHASE MANHATTAN BANK, as Co-Agent and Lender By: /s/ ---------------------------------- Title: ---------------------------- BANKAMERICA BUSINESS CREDIT, as Co-Agent and Lender By: /s/ ---------------------------------- Title: ---------------------------- PNC BUSINESS CREDIT 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: ---------------------------- EX-10.23 3 a2038805zex-10_23.txt EXHIBIT 10.23 EXHIBIT 10.23 AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT, effective as of the 30th day of November, 2000, to the Employment Agreement dated as of July 25, 1997 among Donna Karan International Inc. (the "Company"), a Delaware corporation, The Donna Karan Company ("DKCo."), a New York partnership and John D. Idol ("Executive"). W I T N E S S E T H: WHEREAS, the Company, DKCo. and the Executive have previously entered into the Employment Agreement; WHEREAS, the Company has consulted with and retained a compensation consultant to review the payments and benefits payable to the Executive under the Employment Agreement upon the occurrence of a change in control or ownership of the Company; WHEREAS, the compensation consultant concurred with the Company that certain changes to the Employment Agreement are appropriate and reasonable in light of competitive compensation practices; and WHEREAS, the Company, DKCo. and the Executive desire to amend the Employment Agreement. NOW, THEREFORE, in consideration of the foregoing, the parties hereto agree as follows: 1. Section 3(g) of the Employment Agreement is hereby amended, effective as of April 1, 2000, by adding the following language at the end thereof: "Notwithstanding the foregoing, the Company (i) shall be relieved of the obligation under subsection (i)(C) to recommend to the Committee that the Executive be granted on or about April 1, 2000 and 2001 Options to purchase 100,000 shares of common stock of the Company and (ii) undertakes to recommend to the Committee at the applicable time that the Executive be awarded on or about April 1, 2000 and April 1, 2001 shares of restricted common stock under the Plan intended to have the same economic value on a Black-Scholes basis as the Options that would have been granted pursuant to subsection (i)(C), as determined by the Committee in its sole discretion, but in no event more than 62,000 shares of restricted common stock annually. Shares of restricted stock granted pursuant to this Section 3(g) shall vest at the end of five (5) years from the date of grant provided the Executive is continuously employed by the DK Companies or earlier, in 20% increments, if the common stock attains price levels specified by the Committee in its sole discretion at the time of the grant. The measurement of "attaining" shall be determined on the same basis as the restricted stock grants being made on or after April 1, 2000." 2. A new Section 3(i) is hereby added to the Employment Agreement to read as follows: "(i) TRANSACTION BONUS. The Executive shall be entitled to receive a transaction bonus equal to $750,000 at the time specified herein, provided that, the Executive shall continue to be employed by the Company or any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to its business and/or assets, for a period not to exceed six months following a Change in Control (as defined in Section 11(b)). The bonus payable pursuant to this Section 3(i) shall be paid in a lump sum in cash within 10 days following the earliest of: (i) the expiration of the six month period following the Change in Control (as defined in Section 11(b)), provided that Executive is continuously employed by the Company or any successor for such six month period unless the Executive dies or incurs a Disability during such six month period; (ii) the date Executive's employment with the Company or any successor is terminated without Cause on or after the occurrence of a Change in Control (as defined in Section 11(b)); or (iii) the date Executive's employment with the Company or any successor is terminated by the Executive for Good Reason. Only one bonus may be paid pursuant to this Section 3(i)." 3. A new Section 3(j) is hereby added to the Employment Agreement to read as follows: "(j) SPECIAL PERFORMANCE BONUS. Subject to the terms of a written agreement of even date mutually agreed to between the Company and the Executive, the Executive shall be entitled to receive a special performance bonus equal to $1,250,000, provided that he satisfies the terms and conditions of such agreement. The bonus payable pursuant to this Section 3(j) shall be paid in a lump sum in cash within 10 days following the consummation of the transaction contemplated under the written agreement referenced herein. Only one bonus may be paid pursuant to this Section 3(j)." 4. Section 6 of the Employment Agreement is hereby amended by deleting Subsections 6(a) and 6(b) in their entirety and by redesignating Subsections 6(c) and 6(d) as Subsections 6(a) and 6(b), respectively. -2- 5. The definition of "Restricted Period," as defined in Section 6(c) of the Employment Agreement (and which has been redesignated as Section 6(a)) is hereby amended in its entirety to read as follows: ", during the Employment Period and until the first anniversary of either the date of the termination of Executive's employment by the Company or any other DK Company under this Agreement or the date the Executive terminates his employment under this Agreement for Good Reason (the "Restricted Period")," 6. Section 6(c) of the Employment Agreement (which has been redesignated as Section 6(a)) is hereby amended by adding the following language at the end thereof: "Notwithstanding the foregoing, in partial consideration for the payments and benefits contemplated under Sections 3(i), 3(j) and 11(b) of this Agreement, as amended, upon the occurrence of a Change in Control, the Restricted Period shall be extended until the second anniversary of either the date of termination of Executive's employment by the Company or any other DK Company under this Agreement or the date the Executive terminates his employment under this Agreement for Good Reason." 7. Section 11(b) of the Employment Agreement is hereby amended, effective December 8, 2000, by substituting "paragraphs (a), (b) or (c) of Exhibit A to the Company's Executive Severance Plan" for "Section II.E.(a) or II.E.(b) of the Plan" therein but, solely with respect to Section 11(b)(i) and 11(b)(ii), such substitution shall be subject to and conditioned upon the confirmation that the accounting treatment applicable to such amendment to the stock awards described in Section 11(b)(i) and 11(b)(ii), is consistent with the accounting treatment for such stock awards prior to such amendment. 8. Section 11(b) of the Employment Agreement is hereby further amended by substituting "thirty-six" for "eighteen" in subsection (iii) therein and by adding the following language at the end thereof: "; provided, however, that in the event that the Executive commences other full time employment that offers substantially similar or improved group health and life insurance and long-term disability coverage, such continuation of coverage by the Company shall immediately cease. The Company also shall provide outplacement services, up to a maximum of $50,000, for the Executive for a period of one year commencing on the Executive's date of termination, but in no event extending beyond the date on which the Executive commences other full time employment." 9. Section 11(c) of the Employment Agreement is hereby amended in its entirety to read as follows: "(c) (i) In the event any payment that is either received by the Executive or paid by the Company on his behalf or any property or -3- any other benefit provided to him under this Agreement or under any other plan, arrangement or agreement with the Company or any other person whose payments or benefits are treated as contingent on a change of ownership or control of the Company (or in the ownership of a substantial portion of the assets of the Company) or any person affiliated with the Company or such person (but only if such payment or other benefit is in connection with the Executive's employment by the Company) (collectively the "Company Payments"), will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (and any similar tax that may hereafter be imposed by any taxing authority), the Company shall pay to the Executive an additional amount (the "Gross-up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Company Payments and any federal, state, and local income or payroll tax upon the Gross-up Payment provided for by this subsection (i), but before deduction for any federal, state, and local income or payroll tax on the Company Payments, shall be equal to the Company Payments. (ii) For purposes of determining whether any of the Company Payments and Gross-up Payments (collectively the "Total Payments") will be subject to the Excise Tax and determining the amount of such Excise Tax: (A) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Code Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the opinion (based on a substantial authority standard) of the Company's independent certified public accountants appointed prior to any change in ownership (as defined under Code Section 280G(b)(2)) or tax counsel selected by such accountants or the Company, provided that such counsel advised the Company with regard to tax matters prior to any such change in ownership (the "Accountants"), such Total Payments (in whole or in part), (1) do not constitute "parachute payments," (2) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code or (3) are otherwise not subject to the Excise Tax; and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (iii) For purposes of determining the amount of the Gross-up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-up Payment is to be made and -4- state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence for the calendar year in which the Company Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year. In the event that the Excise Tax is determined by the Accountants to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the prior Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the portion of the Gross-up Payment being repaid by the Executive if such repayment results in a reduction in Excise Tax or federal, state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest at the rate provided in Section 1274(b)(2)(B) of the Code or penalties payable with respect to such excess) at the time that the amount of such excess is finally determined." 10. LEGAL FEES. The Company shall promptly pay or reimburse the Executive for his reasonable costs of entering into this Amendment, including specifically, the fees and expenses of his counsel, up to a maximum of $25,000. 11. AGREEMENT OTHERWISE UNCHANGED. The Employment Agreement, as so amended, shall remain in full force and effect. 12. COUNTERPARTS. This Amendment may be executed in counterparts, each of which shall be deemed an original, but both of which together shall constitute the same agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -5- IN WITNESS WHEREOF, the parties have duly executed this Amendment as of the date first written above. DONNA KARAN INTERNATIONAL INC. By: /s/ William Benedetto --------------------------- Name: Title: THE DONNA KARAN COMPANY By: DONNA KARAN INTERNATIONAL INC., GENERAL PARTNER By: /s/ William Benedetto --------------------------- Name: Title: EXECUTIVE /s/ John D. Idol ------------------------------- John D. Idol -6- EX-10.24 4 a2038805zex-10_24.txt EXHIBIT 10.24 Exhibit 10.24 October 10, 2000 Mr. Joseph B. Parsons c/o Donna Karan International Inc. 550 Seventh Avenue New York, NY 10018 Dear Joe: WHEREAS, The Donna Karan Company (the "Company"), a New York general partnership, and you (the "Executive") are parties to an employment agreement, dated October 15, 1996; and WHEREAS, the Company and Executive deem it necessary and desirable to amend and restate the above-referenced employment agreement in order to restate the current terms of Executive's employment; NOW, THEREFORE, the parties agree on the terms set forth below in this letter agreement: 1. DUTIES. Executive shall continue to be employed as the Corporate Executive Vice President and Chief Financial and Administrative Officer of the Company until on or about October 30, 2000 and as Chief Financial and Operations Officer of the Company commencing on or about October 30, 2000 and no later than December 1, 2000. Executive shall also continue to serve as the Chief Financial and Administrative Officer of Donna Karan International Inc. ("DKI") until on or about October 30, 2000 and serve as the Chief Financial and Operations Officer of DKI commencing on or about October 30, 2000 and no later than December 1, 2000. Executive shall perform, for the Company and its Affiliates, such duties and services commensurate with Executive's position as are from time to time assigned to Executive by the Chief Executive Officer of the Company. Executive will report to the Chief Executive Officer and shall devote Executive's full working time and efforts to the business of the Company and its Affiliates and to the performance of Executive's duties under this Agreement. Executive shall be available to travel as the needs of the business require. "Affiliates" shall mean all companies or entities which the Company directly or indirectly controls, is controlled by or is under common control with. 2. TERM. The Company agrees to continue to employ Executive and Executive agrees to continue to serve, on the terms and conditions of this Agreement, for a period commencing on or about October 10, 2000 (the "Effective Date") and ending on December 31, 2003 unless earlier terminated pursuant to the terms hereof (the "Initial Employment Term"). The Initial Employment Term shall be extended for successive one-year terms (each, an "Additional Employment Term") unless the Company or the Executive gives written notice of non-extension at least 12 months prior to the end of the Initial Employment Term or the then Additional Employment Term, unless earlier terminated pursuant to the terms hereof. During the term Executive is employed hereunder, the Initial Employment Term and the Additional Employment Terms, if applicable, collectively shall be referred to as the "Employment Term." 3. COMPENSATION. (a) BASE SALARY. For Executive's services under this Agreement, as of the January 3, 2000, the Company shall pay Executive an annualized base salary of $450,000 payable in accordance with the Company's customary payroll practices from time to time in effect. The Executive's annual base salary shall be increased to $475,000, effective as of January 1, 2001 and to $500,000, effective as of January 1, 2002. Thereafter, the Company will review Executive's compensation annually and may, in its sole discretion, increase Executive's base salary. (b) ANNUAL CASH BONUSES. (i) During the Employment Term, Executive shall be entitled to a cash bonus (the "Bonus") with a target of between 50% and 100% of Executive's annual base salary, in accordance with the terms and provisions of the Company's then existing bonus plan generally applicable to executive officers, which, for fiscal years after the 2000 fiscal year, may be a plan approved by DKI shareholders which is intended to comply with the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") (the "Bonus Plan"). The Bonus shall be determined annually at the same time bonuses are determined for similarly situated employees of the Company, in accordance with the Bonus Plan, and shall be payable at the same time and in the same manner as bonuses are paid to other similarly situated employees of the Company. A copy of the 2000 Executive Bonus Program has been furnished to Executive. (ii) During the Employment Term, the target and performance goals for the Bonus, including but not limited to the extent to which they will be based on corporate performance, divisional performance, or other criteria consistent with the terms and provisions of the Bonus Plan, shall be established annually by the Company in accordance with the Bonus Plan. Executive acknowledges that for fiscal years after the 2000 fiscal year, the Bonus payable to Executive may be conditioned upon performance goals or criteria established by the Incentive Compensation Subcommittee (the "Subcommittee") of the Board of Directors of DKI under the Bonus Plan. Executive also acknowledges that, after the Effective Date, any cash payment in the nature of incentive compensation (and specifically excluding any expense reimbursement, payment under a non-incentive based plan which is expressly made in lieu of non-cash benefits, and any payment of deferred compensation as described in Section 5(d) or otherwise) made in excess of Executive's base salary in a fiscal year shall be credited against the Bonus payable, if any, for such fiscal year. (c) RESTRICTED STOCK. Commencing in 2000 and for each fiscal year during the Employment Term hereof, Executive shall be eligible to receive annual awards of restricted shares generally available to similarly situated employees of the Company, in accordance with the Company's then current annual program. A copy of the 2000 Executive Officer Restricted Share Grant Program previously has been furnished to Executive. (d) DEFERRED COMPENSATION. (i) Commencing in 2000 and for each fiscal year during the Employment Term, Executive also shall be eligible to participate in a deferred compensation program in accordance with the Company's then current deferred compensation program, provided, however, that the Company undertakes to recommend to the Subcommittee that, under such program, commencing for the 2001 fiscal year, the contribution to be made by the Company (on a bookkeeping accounting basis) on behalf of the Executive, be increased from 5% to 20% of Executive's cash compensation earned (base salary and bonus) while a participant during the program year, subject to the terms and conditions of the then existing deferred compensation program. A copy of the 2000 Wealth Accumulation Program previously has been furnished to Executive. (ii) In addition to the foregoing, Executive shall be entitled to receive from the Company $1,000,000 plus accrued interest at the annual rate of 9% compounded monthly (the "Deferred Amount"), payable in a single lump sum in cash within 30 days of the fifth anniversary of the Effective Date; provided, however, that if (i) there is a future disposition of the properties and business of DKI substantially in its entirety by merger, consolidation, sale of assets or otherwise, or (ii) Executive is terminated by the Company without Cause (as defined below) within one year following a Change in Control (as defined below) of DKI, then in either such case the Deferred Amount shall become fully vested and payable in a single lump sum in cash within 30 days of the closing of the transaction relating to such disposition or of the date of termination of employment following the Change in Control, as the case may be. During the Employment Term, Executive shall vest in the Deferred Amount at a rate of one-fifth of the Deferred Amount as of the Effective Date and one-fifth as of each of the first four anniversaries of the Effective Date commencing on the Effective Date (each such date shall be referred to as a "Vesting Date"). If, during the Employment Term and prior to any Vesting Date, Executive's employment is terminated by the Company without Cause or Executive terminates his employment for Good Reason as provided below, Executive shall (i) forfeit any unvested portion of the Deferred Amount; and (ii) receive payment of any vested portion of the Deferred Amount in a single lump sum in cash within 30 days of the effective date of termination. Executive acknowledges that, notwithstanding any vesting of the Deferred Amount, (i) he has no rights that are greater than those of an unsecured general creditor of the Company, (ii) he has no right to receive the vested portion of the Deferred Amount except under the circumstances set forth in this Section 3(d)(ii); and (iii) the arrangement described under this Section 3(d)(ii) will be unfunded, payable out of the Company's general assets and subject to the risk of the Company's creditors. For purposes of this Section 3(d)(ii), "Change In Control" shall mean the acquisition by any "person" (as such term is used in Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")) other than a person who is a stockholder of DKI on the effective date of the registration statement filed under the Securities Act of 1933, as amended relating to the first public offering of securities of DKI of 50% or more of the voting power of securities of DKI; excluding, however, the following: (x) any acquisition by DKI or a subsidiary or an affiliate of any of the foregoing, or (y) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by DKI or a subsidiary. (e) PARTICIPATION IN BENEFIT PLANS AND OTHER BENEFITS. Executive also shall be entitled to (i) participate in all other Executive benefit plans generally available to similarly situated employees of the Company, subject to Executive's eligibility therefor, (ii) four weeks of paid vacation per annum, (iii) a car allowance of $1,200 per month, plus monthly parking expenses and (iv) travel in accordance with the Company's travel policy generally applicable to similarly situated employees of the Company. (f) SUCCESSOR EXECUTIVE COMPENSATION PROGRAMS. The Company hereby reserves the right from time to time to amend, alter, or rescind the executive bonus, annual equity, and deferred compensation programs and plans referred to in Sections 3(b), 3(c) and 3(d)(i); provided, however, that the Company agrees that during the Employment Term Executive shall be entitled to participate in executive compensation programs of a similar type and at a level generally applicable to similarly situated employees of the Company, subject to the approval of such programs and plans by the applicable compensation committee of the Board of Directors and legal limitations. 4. SEVERANCE PAYMENTS. (a) TERMINATION IN GENERAL. The Executive's employment under this Agreement may be terminated by any party on not less than three months prior written notice to the other, except that, in the case of termination of the Executive's employment for Cause, as defined below, no prior notice need be given. Any Party may waive the right to such notice in writing. In the event of termination of the Executive's employment hereunder as of any date, the rights and obligations of the parties hereto in respect of such termination of the Executive's employment shall be as set forth below (b) SEVERANCE PAYMENTS. The Company may terminate Executive's employment at any time with or without Cause (as defined below). If during the Employment Term, Executive's employment with the Company is terminated by the Company without Cause (which right the Company shall have at any time during the Employment Term) and other than as a result of death, notice of non-extension of Employment Term as provided in Section 2 of this Agreement or as provided in Section 5 of this Agreement, upon Executive's execution and effectiveness of a general release of Claims (as hereinafter defined) which is acceptable in form and substance to the Company, the Company shall pay to Executive an amount equal to the sum of (i) Executive's then current annual base salary and (ii) the bonus which Executive earned during the last fiscal year of the Company which ended prior to Executive's termination date (the "Severance Amount"). The Severance Amount shall be paid in equal installments over a 12-month period in accordance with the Company's customary payroll practices (but not as an employee). Executive agrees to accept the Severance Amount in full settlement of all Claims. No Severance Amount shall be payable by reason of termination due to the death or disability of the Executive, termination for Cause, or non-extension of the Employment Term in accordance with Section 2 of this Agreement. As used in this paragraph, "Claims" shall mean all claims arising, prior to the date of the general release, against the Company and its Affiliates and their respective officers, directors, agents, executives and employees in such capacities, other than claims for vested accrued benefits, vested deferred amounts as set forth in Section 3(d), vested stock options, or vested restricted stock under the terms of their respective plans and claims for unreimbursed authorized business expenses. (c) TERMINATION OF SEVERANCE PAYMENTS. Notwithstanding Section 4(b) above, if Executive violates the provisions of Section 6 of this Agreement after Executive's termination of employment, Executive shall have no further right to the payment of any Severance Amount payable thereafter under this Agreement. (d) "CAUSE." As used in this Agreement, "Cause" shall mean (i) repeated neglect of the Executive's duties if the Executive has failed to attend to those duties within ten (10) business days after written notice from the Company, (ii) the Executive's commission of (x) an act constituting fraud, or (y) a felony, or (z) any other dishonest act intended to enrich the Executive at the expense of the Company or any of its Affiliates, (iii) gross negligence in the performance of the Executive's duties resulting in material harm to the Company or any of its Affiliates, or (iv) any other material breach of the terms of this Agreement after written notice from the Company and ten (10) business days to correct same. (e) SALARY AND ACCRUED BENEFITS. If Executive's employment with the Company is terminated for any reason, including death, the Company shall pay to Executive (or his estate) any unpaid base salary and other accrued benefits to which Executive is entitled on the date of termination under the terms of the Company's compensation plans including bonus accrued but unpaid as of such date. (f) GOOD REASON. In the event that (i) either the Company or DKI reduces Executive's title, or materially reduces Executive's authority, in either case without Executive's consent; (ii) that either the Company or DKI fails to cause Executive to become Chief Financial and Operations Officer as provided in Section 1 above; or (iii) the Company otherwise breaches this Agreement resulting in any material harm to Executive, then, following written notice to the Company giving the Company 30 days to correct same, Executive shall be entitled to terminate Executive's employment and such termination shall be treated as a termination by the Company without Cause, as described in (b) above. Notwithstanding the foregoing, Executive acknowledges that (x) if for any reason while Chief Financial and Operations Officer Executive ceases to be Chief Financial Officer of the Company or DKI so long as the Chief Financial Officer reports to the Executive or (y) if following a future disposition of the properties and business of DKI substantially in its entirety by merger, consolidation, sale of assets or otherwise with or to an entity having an annual net revenues of at least $400 million, Executive ceases to be Chief Operations Officer and is or becomes Chief Financial Officer, such change in title shall not trigger Executive's right to terminate employment with the Company under this paragraph (f) and shall not be considered as a termination by the Company without Cause. (g) RESIGNATION OF OFFICES AND DIRECTORSHIPS. Effective upon the date of termination of Executive's employment with the Company, Executive shall be deemed to have resigned as an officer, if applicable, of the Company and the Affiliates and as a director, if applicable, of the subsidiaries of DKI and shall execute any documents required by the Company and the Affiliates to evidence the same. 5. DISABILITY, ILLNESS, ETC. If by reason of Executive's physical or mental incapacity Executive is unable to perform Executive's material duties for a period of more than 90 days, whether or not consecutive, in any 365-day period, the compensation otherwise payable to Executive during such period shall be discontinued for any portion of such period in excess of 90 days, and the Company, at its option, may at any time after such 90-day period while Executive is incapacitated terminate this Agreement upon written notice to Executive. In the event of such termination, Executive will not be entitled to any Severance Amount. Executive will be entitled to Executive's share of any bonus for the year of such termination pro-rated for that portion of the calendar year during which Executive was not disabled, plus 90 days. 6. ADDITIONAL PROVISIONS. (a) CONFIDENTIAL INFORMATION. All confidential information relating to the business of Company or its Affiliates or their respective officers, directors, executives or employees, or of any customer, supplier, or licensee of the Company or its Affiliates ("Confidential Information") which Executive now or hereafter possesses as a result of his employment by the Company or its Affiliates shall not be furnished, published, disclosed, or made accessible by Executive to any other person, firm, or corporation either during or after the termination of Executive's employment or used by Executive except while employed hereunder in the regular course of business and for the benefit of the Company and its Affiliates, in each case without the prior written permission of the Company. Executive shall return all tangible evidence of such confidential information to the Company prior to or on the date of termination of Executive's employment. As used in this Section 6(a), "Confidential Information" shall exclude that information which is or comes into the public domain through no fault of Executive or which Executive obtains after the termination of Executive's employment by the Company from a third party who to the knowledge of Executive has the right to disclose such information. The foregoing shall not prohibit compliance with legal process provided that Executive gives the Company prompt written notice thereof and cooperates with the Company in its efforts to obtain a protective order for the Confidential Information. (b) NON-COMPETITION AND NON-SOLICITATION. (i) In view of the unique and valuable services it is expected Executive has rendered and will continue to render to the Company and its Affiliates, the relationship Executive has and will have with the customers of the Company and its Affiliates, Executive's knowledge of the customers, trade secrets, and other proprietary information relating to the business of the Company and its Affiliates and their customers, suppliers and licensees and similar knowledge regarding the Company and its Affiliates which Executive has obtained and will continue to obtain, and in consideration of the rights granted to Executive under this Agreement, Executive agrees that Executive will not during the period Executive is employed by the Company or any of its Affiliates Participate In (as herein defined) any other business or organization, whether or not such business or organization now is or shall then be competing with or of a nature similar to the business of the Company or any of its Affiliates or their licensees. Nothing herein shall prevent Executive from owning publicly traded securities representing less than 1% of the equity of a publicly traded company. (ii) Executive further agrees that while Executive is employed by the Company or any of its Affiliates and thereafter (notwithstanding the reason or basis for the termination of Executive's employment with the Company or its Affiliates) for a period of 12 months (which at any time on or after a future disposition of the properties and business of DKI substantially in its entirety by merger, consolidation, sale of assets or otherwise or a change in ownership of DKI within the meaning of Section 280G(b)(2)(A)(i)(I) and (II) of the Code ("Sale Event") shall apply for a period of 24 months after the termination of Executive's employment with the Company or any of its Affiliates), Executive shall not, directly or indirectly, hire, engage or retain, or aid or assist any other person or entity to hire, engage, or retain (A) (x) any designers of the Company or its Affiliates, (y) any person who held the position of Director or any equivalent or more senior position at the Company or any of its Affiliates, or (z) any person who acted as one of the Company's or its affiliates' outside consultants, in each instance at the time of termination of Executive's employment or within the one-year period prior thereto (or if there is a Sale Event, a six-month period prior thereto), (B) any person employed by a licensee of the Company or its Affiliates who worked on the Donna Karan or DKNY brand at the time of termination of Executive's employment or within the one-year period prior thereto (or if there is a Sale Event, a six-month period prior thereto), or (C) any person or entity that supplied piece goods or designs to, or that manufactured or sold apparel to, the Company or any of its Affiliates during the one-year period prior thereto (or if there is a Sale Event, a six-month period prior thereto). (c) "PARTICIPATE IN." For purposes of this Section 6, the term "Participate In" shall mean: "directly or indirectly, for Executive's own benefit or for, with, or through any other person, firm, or corporation, own, manage, operate, control, loan money to, or participate in the ownership, management, operation, or control of, or be connected as a director, officer, executive, partner, consultant, agent, independent contractor, or otherwise with, or acquiesce in the use of Executive's name in." (d) NON-DISPARAGEMENT. During the period of Executive's employment and thereafter, the Executive agrees that he shall not disparage the Company or its Affiliates or their respective officers, directors, executives or licensees and, except for statements made in connection with the performance of his duties hereunder, shall not publish or make any statement which is reasonably forseeable to become public with respect to the Company or its Affiliates, or any of their respective directors, officers, executives or licensees. (e) COPYRIGHTS, INVENTIONS, ETC. Any interest in patents, patent applications, inventions, technological innovations, copyrights, copyrightable works, developments, discoveries, designs, concepts, ideas and processes ("Such Inventions") which Executive now or hereafter during the period he is employed by the Company or any of its Affiliates under this Agreement or otherwise may own or develop either individually or with others relating to the fields in which any of the Company or its Affiliates may then be engaged or contemplates being engaged shall belong to the Company or any of its Affiliates and forthwith upon request of the Company, Executive shall execute all such assignments and other documents (including applications for patents, copyrights, trademarks and assignments thereof) and take all such other action as the Company may reasonably request in order to assign to and vest in the Company or its Affiliates all Executive's right, title, and interest (including, but not limited to, waivers to any moral rights) in and to Such Inventions throughout the world, free and clear of liens, mortgages, security interests, pledges, charges and encumbrances. Executive acknowledges that all copyrightable works created by the Executive as an employee will be "works made for hire" on behalf of the Company and its Affiliates and that the Company and its Affiliates shall have all rights therein in perpetuity throughout the world. The Executive hereby appoints any officer of the Company as the Executive's duly authorized attorney-in-fact to execute, file, prosecute and protect Such Inventions before any government agency, court or authority. If for any reason the Company does not own any Such Invention, the Company and its Affiliates shall have the exclusive and royalty free right to use in their businesses, and to make products therefrom, Such Invention as well as any improvements or know-how related thereto. (f) EQUITABLE REMEDIES; SURVIVAL. Executive acknowledges that a breach or threatened breach of any of the provisions of this Section 6 will cause irreparable harm and that any remedy at law may be inadequate and that accordingly the Company, in addition to its remedies at law, shall be entitled to seek an injunction or specific performance or any other mode of equitable relief without the necessity of showing any actual damage, posting a bond or furnishing other security. The provisions of this Section 6 shall survive the termination of this Agreement. 7. EXCISE TAX. In the event that the aggregate present value of the Executive's payments under this Agreement, and any plan, program or arrangement maintained by the Company constitutes an "excess parachute payment" (within the meaning of Section 280G(b)(1) of the Code), and the excise tax on such payment would cause the net parachute payments (after taking into account federal, state and local income, payroll and excise taxes) to which the Executive otherwise would be entitled to be less than what the Executive would have netted (after taking into account federal, state and local taxes) had the present value of his total parachute payments equalled $1.00 less than three times his "base amount" (within the meaning of Section 280G(b)(2)(A) of the Code), his payments hereunder (starting with any lump sum payment) shall be reduced (by the minimum possible amount) so that the aggregate present value equals $1.00 less than three times such base amount. For purposes of this calculation, it shall be assumed that the Executive's tax rate is the maximum marginal federal, state and local income tax rate on earned income, with such maximum federal rate to be computed with regard to Code Section 1(g), if applicable. The determination of the amount of any such reduction shall be made by the Executive in the first instance but in the event the Company disagrees with such determination, the Executive shall select, at the Company's expense, a law firm or accounting firm from among those regularly consulted by the Company in the twelve months preceding the change in control regarding federal income tax or employee benefit matters and such law firm or accounting firm shall determine the amount of such reduction and such determination shall be final and binding on the Executive and the Company. In such case, subject to the Company's reasonable approval, the Executive may request the Company to reduce amounts of compensation or benefits payable or provided to Executive in the order specified by Executive, provided, however, that any nontaxable compensation or benefits including, without limitation, health benefits, shall be the last items reduced hereunder. DKI will use commercially reasonable efforts to solicit the opinion of Ernst & Young or other accounting firm regarding the value of the restrictive covenants set forth in Sections 6(a) and (b) of this Agreement that could clearly and convincingly constitute reasonable compensation for purposes of calculating parachute amounts under Section 280G of the Code; such advice to be delivered in the form of a preliminary letter in approximately 30 days following execution of this Agreement or as soon as practicable thereafter, and to be followed with a written opinion in approximately 20 days thereafter or as soon as practicable thereafter. Solely with respect to any change in ownership of DKI (within the meaning of Section 280G(b)(2)(A)(i)(I) or (II) occurring within one year following the Effective Date, the law firm or accounting firm engaged to calculate the determination contemplated under the first paragraph of this Section 7 (the "Parachute Determination") shall be directed to calculate such Parachute Determination in a manner which treats as reasonable compensation not constituting a parachute payment an amount equal to or exceeding the value of the restrictive covenants as determined by Ernst & Young (or such other accounting firm), as contemplated under the immediately preceding sentence; provided, however, that (i) DKI is in substantially the same or better financial position as of the effective date of the Parachute Determination as compared to the effective date of the valuation of the restrictive covenants as determined by Ernst & Young (or such other accounting firm); and (ii) the law has not changed in a manner which discredits or otherwise challenges any methodology, valuation or approach which is similar to the methodology, valuation or approach used by Ernst & Young (or such other accounting firm) and no court of competent jurisdiction has invalidated any such methodology, valuation or approach for purposes of determining reasonable compensation under Section 280G of the Code. In the event that item (i) in the preceding sentence is untrue, DKI will use its commercially reasonable efforts to request the law firm or accounting firm engaged to make the Parachute Determination to adjust the value of the restricted covenant as determined by Ernst & Young (or such other accounting firm) in a manner which reflects the change in DKI's financial position, provided, however, that item (ii) in the preceding sentence is true. 8. EXPENSES. Executive shall be entitled to reimbursement for all reasonable out-of-pocket expenses incurred in accordance with the Company's then existing policies, upon submission and approval of written statements and bills in accordance with the Company's applicable expense reimbursement and related policies and procedures as in effect from time to time. Notwithstanding the foregoing, after notice of termination of employment by the Company or Executive, Executive shall be entitled to reimbursement of such expenses incurred after the date of such notice of termination only if approved in advance by the Chief Executive Officer of the Company. 9. ARBITRATION. Any dispute arising out of, or in any manner relating to, this Agreement or the termination of Executive's employment with the Company, other than injunctive relief pursuant to Section 6(f), shall be resolved in arbitration before a panel of three arbitrators before the American Arbitration Association in the City of New York according to its then existing commercial rules and regulations. The parties agree that in any such arbitration, the arbitrators shall not have the power to reform or modify this Agreement in any way and to that extent their powers are so limited. The parties also agree that in any such arbitration, the arbitrators may not award punitive damages to any party. The determination of the arbitrators shall be final and binding on the parties hereto and judgment thereon may be entered in any court of competent jurisdiction. Except as required by law, neither the Company nor Executive shall issue any press release or make any statement which is reasonably foreseeable to become public with respect to any arbitration or any proceedings in connection therewith without receiving the prior written consent of the other party to the content of such press release or statement. 10. ENTIRE AGREEMENT. This Agreement represents the entire understanding among the parties relating to the subject matter hereof, amends and restates the letter agreement between the parties dated October 15, 1996, supersedes all prior oral or written understandings and agreements relating hereto, and may not be amended, terminated or discharged except in writing signed by all of the parties hereto. 11. ASSIGNMENT; BINDING EFFECT. Executive shall not assign or otherwise transfer its rights or obligations hereunder and such rights shall not be subject to commutation, encumbrance, or the claims of creditors, and any attempt by Executive to do any of the foregoing shall be void and of no force or effect. The provisions of this Agreement shall be binding upon and inure to the benefit of Executive and Executive's heirs and personal representatives, and shall be binding upon and inure to the benefit of the Company and its successors and assigns. 12. NOTICE. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered by courier, by hand or by telecopy against receipt to the party to whom it is to be given at the address of such party set forth in this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 12) and with a copy, in the case of the Company, to the General Counsel at the address set forth in this Agreement. Notice to Executive's estate shall be sufficient if addressed to Executive as provided in this Section 12. Any notice or other communication shall be deemed given at the time of receipt thereof. 13. GOVERNING LAW. This Agreement shall be deemed entered into in the State of New York and shall be governed in all respects by the laws of New York applicable to agreements made and to be performed therein, without giving effect to conflicts of law principles. For purposes of Section 6(f) and except as specifically provided in Section 9, the Executive and the Company both consent to the jurisdiction of the state courts of the State of New York and the Federal courts whose districts encompass any part of New York in connection with any dispute arising under this Agreement and hereby waive, to the maximum extent permitted by law, any objection based on FORUM NON CONVENIENS, to the conducting of any such proceeding in such jurisdiction. The Executive and the Company each consent to service of process in any action brought in such courts by registered or certified mail sent to the address indicated on the first page hereof. The Executive and the Company both waive trial by jury in connection with the trial of any action or dispute in connection with this Agreement or matters of a similar nature. 14. WAIVER. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing, signed by the party giving the waiver. 15. SEPARABILITY. If any provision of this Agreement shall be deemed to be invalid, illegal, or unenforceable by reason of the extent, duration, or geographical scope thereof, or otherwise, then the parties agree that the arbitration panel making such determination shall reduce such extent, duration, geographical scope, or other provisions hereof to the extent required to render them valid, legal, and enforceable, and in its reduced form such restriction shall then be enforceable in the manner contemplated hereby. Further if any provision of this Agreement or any part hereof is found to be void or unenforceable, the same shall in no way affect any other provision of this Agreement or remaining part hereof, which shall be given full effect without regard to the invalid or unenforceable part thereof or the validity or enforceability of this Agreement. 16. REPRESENTATIONS. Executive represents and warrants that the entering into and performance of this Agreement will not be in violation of any other agreement to which Executive is a party and no activities of Executive currently conflict with the non-competition provisions provided herein. If the foregoing is correct, please sign and return to us a copy of this letter agreement, which when signed shall constitute a binding agreement. DONNA KARAN INTERNATIONAL INC. By: /s/ John D. Idol ----------------------------- John D. Idol Chief Executive Officer THE DONNA KARAN COMPANY By: Donna Karan International Inc., a general partner By: /s/ John D. Idol ----------------------------- John D. Idol Chief Executive Officer Agreed to: /s/ Joseph B. Parsons - --------------------------- Joseph B. Parsons EX-10.25 5 a2038805zex-10_25.txt EXHIBIT 10.25 Exhibit 10.25 October 10, 2000 Mr. Lee Goldenberg C/o The Donna Karan Company 550 Seventh Avenue New York, New York 10018 Dear Lee: This letter sets forth the agreement between The Donna Karan Company (the "Company") and you regarding the following modification to the terms of your employment by the Company set forth in your December 18, 1998 employment agreement with the Company (the "Employment Agreement"): 1. The Initial Employment Term shall be extended until December 31, 2003. Any extension thereafter shall be as provided in Section 2 of the Agreement. 2. All capitalized terms not otherwise defined herein shall be as defined in the Agreement. Further, except as expressly modified herein, all other provisions of the Agreement shall remain in full force and effect. 3. This letter, together with the Agreement (as modified 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. If the foregoing is correct, please sign and return a copy of this letter, which when signed will constitute a binding agreement. THE DONNA KARAN COMPANY By: Donna Karan International Inc. By: /s/ John D. Idol ------------------------------ John D. Idol Chief Executive Officer Agreed to: /s/ Lee Goldenberg - ----------------------- Lee Goldenberg EX-10.26 6 a2038805zex-10_26.txt EXHIBIT 10.26 Exhibit 10.26 - -------------------------------------------------------------------------------- DONNA KARAN INTERNATIONAL INC. 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN (As amended and restated through December 8, 2000) - -------------------------------------------------------------------------------- Table of Contents Page ---- I. Purposes of the Plan...................................................1 II. Definitions............................................................1 III. Effective Date.........................................................2 IV. Administration.........................................................2 A. Duties of the Committee..........................................2 B. Advisors.........................................................3 C. Determinations...................................................3 D. Disinterested or Non-Employee Directors..........................3 V. Shares; Adjustment Upon Certain Events.................................3 A. Shares to be Delivered; Fractional Shares........................3 B. Number of Shares.................................................3 C. Adjustments; Recapitalization, etc...............................3 VI. Awards and Terms of Options............................................5 A. Grant............................................................5 B. Date of Grant....................................................5 C. Option Agreement.................................................5 D. Option Terms.....................................................6 E. Expiration.......................................................6 F. Acceleration of Exercisability...................................6 VII. Effect of Termination of Directorship..................................7 A. Death, Disability or Otherwise Ceasing to be a Director..........7 B. Cancellation of Options..........................................7 VIII. Nontransferability of Options..........................................7 IX. Rights as a Stockholder................................................8 X. Termination, Amendment and Modification................................8 XI. Use of Proceeds........................................................9 XII. General Provisions.....................................................9 A. Right to Terminate Directorship..................................9 B. Trusts, etc......................................................9 i Page ---- C. Notices..........................................................9 D. Severability of Provisions......................................10 E. Payment to Minors, Etc..........................................10 F. Headings and Captions...........................................10 G. Controlling Law.................................................10 H. Section 16(b) of the Act........................................10 XIII. Issuance of Stock Certificates; Legends; Payment of Expenses....................................10 A. Stock Certificates..............................................10 B. Legends.........................................................10 C. Payment of Expenses.............................................11 XIV. Listing of Shares and Related Matters.................................11 XV. Withholding Taxes.....................................................11 Form of Option Agreement Exhibit A ii DONNA KARAN INTERNATIONAL INC. 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN I. Purposes of the Plan The purposes of this 1996 Non-Employee Director Stock Option Plan (the "Plan") are to enable the Donna Karan International Inc. (the "Company") to attract, retain and motivate the directors who are important to the success and growth of the business of the Company and to create a long-term mutuality of interest between the directors and the stockholders of the Company by granting the directors options to purchase Common Stock (as defined herein). II. Definitions In addition to the terms defined elsewhere herein, for purposes of this Plan, the following terms will have the following meanings when used herein with initial capital letters: A. "Act" means the Securities Exchange Act of 1934, as amended, and all rules and regulations promulgated thereunder. B. "Board" means the Board of Directors of the Company. C. "Code" means the Internal Revenue Code of 1986, as amended (or any successor statute). D. "Committee" means the Board or a duly appointed committee of the Board to which the Board has delegated its power and functions hereunder. E. "Common Stock" means the common stock of the Company, par value $.01 per share, any common stock into which the common stock may be converted and any common stock resulting from any reclassification of the common stock. F. "Company" means the Donna Karan International Inc., a Delaware corporation, and any successor thereto. G. "Disability" shall mean a total and permanent disability, as defined in Section 22(e)(3) of the Code. H. "Eligible Director" means a director of the Company who is not an active employee of the Company or any Related Person and who is not an officer, director or employee of (i) any entity which, directly or indirectly, beneficially owns or controls 5% or more of the combined voting power of the then outstanding voting securities of the Company (or any Related Person) entitled to vote generally in the election of directors or (ii) any entity controlling, controlled by or under common control (within the meaning of Rule 405 of the Securities Act) with any such entity. Notwithstanding the foregoing, during the calendar year 1996, Stephan Weiss, Donna Karan, Frank R. Mori and Tomio Taki shall not be considered Eligible Directors and may not be granted any Options under the Plan for calendar year 1996. I. "Fair Market Value" shall mean, for purposes of this Plan, unless otherwise required by any applicable provision of the Code or any regulations issued thereunder, as of any date, the last sales prices reported for the Common Stock on the applicable date, (i) as reported by the principal national securities exchange in the United States on which it is then traded, or (ii) if not traded on any such national securities exchange, as quoted on an automated quotation system sponsored by the National Association of Securities Dealers, or if the sale of the Common Stock shall not have been reported or quoted on such date, on the first day prior thereto on which the Common Stock was reported or quoted. J. "Option" means the right to purchase the number of Shares granted in the Option agreement at a prescribed purchase price on the terms specified in the Plan. K. "Participant" means an Eligible Director who is granted an Option under the Plan, which Option has not expired. L. "Related Person" means, other than the Company (a) any corporation that is defined as a subsidiary corporation in Section 424(f) of the Code; (b) any corporation or trade or business (including, without limitation, a partnership or limited liability company) which is controlled 50% or more by the Company or one of its subsidiaries (whether by ownership of stock, assets or an equivalent ownership interest); (c) any corporation that is defined as a parent corporation in Section 424(e) of the Code; or (d) any corporation or trade or business (including, without limitation, a partnership or limited liability company) which controls 50% or more of the Company (whether by ownership of stock, assets or an equivalent ownership interest). M. "Securities Act" means the Securities Act of 1933, as amended, and all rules and regulations promulgated thereunder. N. "Share" means a share of Common Stock. O. "Termination of Directorship" with respect to an individual means that individual is no longer acting as a director (whether a non-employee director or employee director) of the Company. III. Effective Date The Plan shall become effective as of ________________ (the "Effective Date"). Grants of Options under the Plan will be made after the Effective Date of the Plan pursuant to Article VI(B) of this Plan. IV. Administration A. Duties of the Committee. The Plan shall be administered by the Committee. The Committee shall have full authority to interpret the Plan and to decide any questions and settle all controversies and disputes that may arise in connection with the Plan; to establish, amend and rescind 2 rules for carrying out the Plan; to administer the Plan, subject to its provisions; to prescribe the form or forms of instruments evidencing Options and any other instruments required under the Plan and to change such forms from time to time; and to make all other determinations and to take all such steps in connection with the Plan and the Options as the Committee, in its sole discretion, deems necessary or desirable. Any determination, action or conclusion of the Committee shall be final, conclusive and binding on all parties. B. Advisors. The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan, and may rely upon any advice or opinion received from any such counsel or consultant and any computation received from any such consultant or agent. Expenses incurred by the Committee in the engagement of such counsel, consultant or agent shall be paid by the Company. C. Determinations. Each determination, interpretation or other action made or taken pursuant to the provisions of this Plan by the Committee shall be final, conclusive and binding for all purposes and upon all persons, including, without limitation, the Participants, the Company, directors, officers and other employees of the Company, and the respective heirs, executors, adminis trators, personal representatives and other successors in interest of each of the foregoing. D. Disinterested or Non-Employee Directors. Notwithstanding anything herein to the contrary and solely to the extent required under Section 16(b) of the Act, the Committee may not take any action which would cause any Eligible Director to cease to be a "disinterested person" or "non-employee director" for purposes of Rule 16b-3 promulgated under the Act, as then in effect or any successor provisions ("Rule 16b-3"), with regard to any stock option or other equity plan of the Company. V. Shares; Adjustment Upon Certain Events A. Shares to be Delivered; Fractional Shares. Shares to be issued under the Plan shall be made available, at the sole discretion of the Board, either from authorized but unissued Shares or from issued Shares reacquired by Company and held in treasury. No fractional Shares will be issued or transferred upon the exercise of any Option nor will any compensation be paid with regard to fractional shares. B. Number of Shares. Subject to adjustment as provided in this Article V, the maximum aggregate number of Shares authorized for issuance under the Plan shall be 100,000. Where an Option is for any reason cancelled, or expires or terminates unexercised, the Shares covered by such Option shall again be available for the grant of Options, within the limits provided by the preceding sentence. C. Adjustments; Recapitalization, etc. The existence of this Plan and the Options granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting Common Stock, the dissolution or liquidation of the Company or any sale or transfer of all or part of its assets or business, 3 or any other corporate act or proceeding, in which case the provisions of this Article V(C) shall govern outstanding Options: 1. The Shares with respect to which Options may be granted are Shares of Common Stock as presently constituted, but, if and whenever the Company shall effect a subdivision, recapitalization or consolidation of Shares or the payment of a stock dividend on Shares without receipt of consideration, the aggregate number and kind of shares of capital stock issuable under this Plan shall be proportionately adjusted, and each holder of a then outstanding Option shall have the right to purchase under such Option, in lieu of the number of Shares as to which the Option was then exercisable but on the same terms and conditions of exercise set forth in such Option, the number and kind of shares of capital stock which he or she would have owned after such sub-division, recapitalization, consolidation or dividend if immediately prior thereto he had been the holder of record of the number of Shares as to which such Option was then exercisable. 2. If the Company merges or consolidates with one or more corporations and the Company shall be the surviving corporation, thereafter upon exercise of an Option theretofore granted, the Participant shall be entitled to purchase under such Option in lieu of the number of Shares as to which such Option shall then be exercisable, but on the same terms and conditions of exercise set forth in such Option, the number and kind of shares of capital stock or other property to which the Participant would have been entitled pursuant to the terms of the agreement of merger or consolidation if, immediately prior to such merger or consolidation, the Participant had been the holder of record of the number of Shares as to which such Option was then exercisable. 3. If the Company shall not be the surviving corporation in any merger or consolidation, or if the Company is to be dissolved or liquidated, then, unless the surviving corporation assumes the Options or substitutes new Options which are determined by the Board in its sole discretion to be substantially similar in nature and equivalent in terms and value for Options then outstanding, upon the effective date of such merger, consolidation, liquidation or dissolution, any unexercised Options shall expire without additional compensation to the holder thereof; provided, that, the Committee shall deliver notice to each Participant at least twenty (20) days prior to the date of consummation of such merger, consolidation, dissolution or liquidation which would result in the expiration of the Options and during the period from the date on which such notice of termination is delivered to the consummation of the merger, consolidation, dissolution or liquidation, each Participant shall have the right to exercise in full effective as of such consummation all the Options that are then outstanding (without regard to limitations on exercise otherwise contained in the Options) but contingent on occurrence of the merger, consolidation, dissolution or liquidation, and, provided that, if the contemplated transaction does not take place within a ninety (90) day period after giving such notice for any reason whatsoever, the notice, accelerated vesting and exercise shall be null and void and if and when appropriate new notice shall be given as aforesaid. Notwithstanding the foregoing and solely to the extent required by Section 16(b) of the Act, the Options held by persons subject to Section 16(b) of the Act that would not have vested under the Plan except pursuant to Article VI(F) prior to the effective date of such merger, consolidation, liquidation or dissolution shall not expire on such date but shall expire thirty (30) days after they would have otherwise vested under the Plan and shall after the effective date of such merger, consolidation, liquidation or dissolution represent only the right to receive the number and kind of shares of capital stock or other property to which the Participant would have been entitled if immediately prior to the effective date of such 4 merger, consolidation, liquidation or dissolution the Participant had been the holder of record of the number of Shares as to which such Option was then exercisable. 4. If as a result of any adjustment made pursuant to the preceding paragraphs of this Article V(C), any Participant shall become entitled upon exercise of an Option to receive any shares of capital stock other than Common Stock, then the number and kind of shares of capital stock so receivable thereafter shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock set forth in this Article V(C). 5. Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of Shares subject to Options theretofore granted or the purchase price per Share. VI. Awards and Terms of Options A. Grant. Upon the date of the approval of the Plan by the Board (the "Initial Grant Date"), each Eligible Director shall be automatically granted an Option to purchase 7,500 Shares, subject to the terms of the Plan. Any Eligible Director who is first elected to the Board after the Initial Grant Date shall automatically be granted, on the date of such election, an Option to purchase 7,500 Shares, subject to the terms of the Plan. Without further action by the Board or the stockholders (except as provided in Article X) of the Company, each year, other than with respect to the year in which an Eligible Director receives the initial grant of an Option, as of the first day of the month following the annual meeting of the shareholders of the Company (each such date, an "Annual Date of Grant"), each Eligible Director shall be automatically granted an Option to purchase 500 Shares or, effective as of May 1, 1998, an Option to purchase 1,000 Shares, subject, in each case, to the terms of the Plan, provided that no such Option shall be granted if on the date of grant the Company has liquidated, dissolved or merged or consolidated with another entity in such a manner that it is not the surviving entity (unless the Plan has been assumed by such surviving entity with regard to future grants). B. Date of Grant. If a grant of Options is to be made on a day on which the principal national exchange or automated quotation system sponsored by the National Association of Securities Dealers with respect to which Shares are traded is not open for trading, the grant shall be made on the first day thereafter on which such exchange or system is open for trading. Notwithstanding the foregoing, in the event no Fair Market Value can be determined pursuant to the provisions hereof, no annual grant shall be made for such fiscal year. C. Option Agreement. Options shall be evidenced by Option agreements in substantially the form annexed hereto as Exhibit A as modified from time to time. 5 D. Option Terms: 1. Exercise Price. The purchase price per share ("Purchase Price") deliverable upon the exercise of an Option shall be 100% of the Fair Market Value of such Share at the time of the grant of the Option, or the par value of the Share, whichever is the greater. 2. Period of Exercisability for Options to Purchase Shares. Except as provided in Article VI(F), Options granted to Eligible Directors shall vest and become exercisable on the first anniversary of the date of grant. 3. Procedure for Exercise. A Participant electing to exercise one or more Options shall give written notice to the Secretary of the Company of such election and of the number of Options he or she has elected to exercise. Shares purchased pursuant to the exercise of Options shall be paid for at the time of exercise in cash or by delivery of unencumbered Shares owned by the Participant for at least six months (or such longer period as required by applicable accounting standards to avoid a charge to earnings) or a combination thereof. E. Expiration. Except as otherwise provided herein, if not previously exercised each Option shall expire upon the tenth anniversary of the date of the grant thereof. F. Acceleration of Exercisability. All Options granted and not previously exercisable shall become fully exercisable immediately upon the occurrence of a Change in Control (as defined herein). For this purpose, a "Change in Control" shall be deemed to have occurred upon any of the following: (a) the acquisition by any "person" (as such term is used in Section 13(d) and 14(d) of the Act) other than a person who is a stockholder of the Company on the effective date of the registration statement filed under the Securities Act relating to the first public offering (the "Initial Public Offering") of securities of the Company (an "Initial Stockholder") of 30% or more of the voting power of securities of Company or the acquisition by an Initial Stockholder, other than an affiliate of the Company that would be a Related Person, of an additional 5% of the voting power of securities of the Company over and above that owned immediately after the closing date of the Initial Public Offering of the Company's Common Stock; excluding however, the following: (x) any acquisition by the Company or a Related Person of any of the foregoing, or (y) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or a Related Person; or (b) (i) the acquisition by any "person" (as such term is used in Section 13(d) and 14(d) of the Act) other than a person who, on the effective date of the Initial Public Offering is a holder of any ownership interest in Donna Karan Studio (an "Initial Licensee Interest Holder") of 30% or more of the voting power of Donna Karan Studio or (ii) the acquisition by an Initial Licensee Interest Holder, other than an affiliate of Gabrielle Studio, Inc. (and excluding any such acquisition resulting from a purchase, sale or transfer of Takihyo Inc. stock by and between any of the current stockholders of Takihyo Inc.) that would be a Related Person (but substituting Gabrielle Studio, Inc. for the Company in such definition) of Gabrielle Studio, Inc., of an additional 5% of the voting power of securities of the Company 6 over and above that owned immediately after the closing date of the Initial Public Offering of the Company's Common Stock; excluding however, the following: (x) any acquisition by the Company or a Related Person of any of the foregoing, or (y) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or a Related Person; or (c) any merger or sale of substantially all of the assets of the Company under circumstances where the holders of the Common Stock of the Company immediately prior to the transaction becoming public knowledge were not holders of 80% of the equity securities of the surviving entity resulting from such transaction; or (d) any change in the composition of the Board of Directors of the Company not approved by (i) a majority of the Board prior to such change and (ii) by not less than two directors of the Company who were directors prior to the time any person who was not an Initial Shareholder acquired 30% or more of the voting power of securities of the Company. VII. Effect of Termination of Directorship A. Death, Disability or Otherwise Ceasing to be a Director. Upon Termination of Directorship on account of Disability, death, resignation or failure to stand for reelection or otherwise, all outstanding Options then exercisable and not exercised by the Participant prior to such Termination of Directorship shall remain exercisable by the Participant or, in the case of death, by the Participant's estate or by the person given authority to exercise such Options by his or her will or by operation of law, until the earlier of (i) first anniversary of the Participant's Termination of Directorship or (ii) the remaining term of the Option. B. Cancellation of Options. Except as provided in Article VI(F), Options that were not exercisable during the period such person serves as a director shall not become exercisable upon a Termination of Directorship for any reason whatsoever, and such Options shall terminate and become null and void upon a Termination of Directorship. VIII. Nontransferability of Options No Option shall be transferable by the Participant otherwise than by will or under applicable laws of descent and distribution and during the lifetime of the Participant may be exercised only by the Participant or his or her guardian or legal representative. In addition, except as provided above, no Option shall be assigned, negotiated, pledged or hypothecated in any way (whether by operation of law or otherwise), and no Option shall be subject to execution, attachment or similar process. Upon any attempt to transfer, assign, negotiate, pledge or hypothecate any Option, or in the event of any levy upon any Option by reason of any execution, attachment or similar process contrary to the provisions hereof, such Option shall immediately terminate and become null and void. 7 IX. Rights as a Stockholder A Participant (or a permitted transferee of an Option) shall have no rights as a stockholder with respect to any Shares covered by such Participant's Option until such Participant (or permitted transferee) shall have become the holder of record of such Shares, and no adjustments shall be made for dividends in cash or other property or distributions or other rights in respect to any such Shares, except as otherwise specifically provided in this Plan. X. Termination, Amendment and Modification Subject to the number of Shares authorized for issuance under the Plan as provided in Article V(B), the Plan shall continue in effect without limit unless and until the Board otherwise determines. The termination of the Plan shall not terminate any outstanding Options that by their terms continue beyond such termination date. The Committee or the Board at any time or from time to time may amend this Plan to effect (i) amendments necessary or desirable in order that this Plan and the Options shall conform to all applicable laws and regulations, and (ii) any other amendments deemed appropriate, provided that no such amendment may be made if either the authority to make such amendment or the amendment would cause the Eligible Directors to cease to be "disinterested persons" or "non-employee directors" with regard to this Plan or any other stock option or other equity plan of the Company for purposes of Rule 16b-3 and further provided that solely to the extent required by Section 16(b) of the Act, the provisions of the Plan relating to the amount, price and timing of, and eligibility for, awards shall not be amended more than once every six (6) months except to comport with changes in the Code and the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. Notwithstanding the foregoing, solely to the extent required by law, the Committee or the Board may not effect any amendment that would require the approval of the stockholders of the Company under Rule 16b-3 unless such approval is obtained. In no event, unless no longer required as a condition of compliance with the requirements of Rule 16b-3, shall the Committee or the Board, without the approval of stockholders, normally entitled to vote for the election of directors of the Company: 1. increase the number of Shares available for grants under this Plan; 2. reduce the minimum exercise price at which any option may be exercised; 3. change the requirements as to eligibility for participation under this Plan; 4. change the number of Options to be granted or the date on which such Options are to be granted; or 5. increase the benefits accruing to Participants hereunder. This Plan may be amended or terminated at any time by the stockholders of the Company. 8 Except as otherwise required by law, no termination, amendment or modification of this Plan may, without the consent of the Participant or the permitted transferee of his Option, alter or impair the rights and obligations arising under any then outstanding Option. XI. Use of Proceeds The proceeds of the sale of Shares subject to Options under the Plan are to be added to the general funds of the Company and used for its general corporate purposes as the Board shall determine. XII. General Provisions A. Right to Terminate Directorship. This Plan shall not impose any obligations on the Company to retain any Participant as a director nor shall it impose any obligation on the part of any Participant to remain as a director of the Company. B. Trusts, etc. Nothing contained in the Plan and no action taken pursuant to the Plan (including, without limitation, the grant of any Option thereunder) shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company and any Participant or the executor, administrator or other personal representative or designated beneficiary of such Participant, or any other persons. If and to the extent that any Participant or such Participant's executor, administrator or other personal representative, as the case may be, acquires a right to receive any payment from the Company pursuant to the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. C. Notices. Any notice to the Company required by or in respect of this Plan will be addressed to the Company at 550 Seventh Avenue, New York, New York 10018, Attention: General Counsel, or such other place of business as shall become the Company's principal executive offices from time to time. Each Participant shall be responsible for furnishing the Committee with the current and proper address for the mailing to such Participant of notices and the delivery to such Participant of agreements, Shares and payments. Any such notice to the Participant will, if the Company has received notice that the Participant is then deceased, be given to the Participant's personal representative if such representative has previously informed the Company of his or her status and address (and has provided such reasonable substantiating information as the Company may request) by written notice under this Section. Any notice required by or in respect of this Plan will be deemed to have been duly given when delivered in person or when dispatched by telecopy or, in the case of notice to the Company, by facsimile as described above, or one business day after having been dispatched by a nationally recognized overnight courier service or three business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid. The Company assumes no responsibility or obligation to deliver any item mailed to such address that is returned as undeliverable to the addressee and any further mailings will be suspended until the Participant furnishes the proper address. 9 D. Severability of Provisions. If any provisions of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions of the Plan, and the Plan shall be construed and enforced as if such provisions had not been included. E. Payment to Minors, Etc. Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of receipt thereof shall be deemed paid when paid to such person's guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the Committee, the Company and their employees, agents and representatives with respect thereto. F. Headings and Captions. The headings and captions herein are provided for reference and convenience only. They shall not be considered part of the Plan and shall not be employed in the construction of the Plan. G. Controlling Law. The Plan shall be construed and enforced according to the laws of the State of Delaware, without giving effect to rules governing the conflict of laws. H. Section 16(b) of the Act. All elections and transactions under the Plan by persons subject to Section 16 of the Act involving shares of Common Stock are intended to comply with any applicable condition under Rule 16b-3. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void. The Committee may establish and adopt written administrative guidelines, designed to facilitate compliance with Section 16(b) of the Act, as it may deem necessary or proper for the administration and operation of the Plan and the transaction of business thereunder. XIII. Issuance of Stock Certificates; Legends; Payment of Expenses A. Stock Certificates. Upon any exercise of an Option and payment of the exercise price as provided in such Option, a certificate or certificates for the Shares as to which such Option has been exercised shall be issued by the Company in the name of the person or persons exercising such Option and shall be delivered to or upon the order of such person or persons, however, in the case of Options exercised pursuant to Section V(C)3 hereof, subject to the merger, consolidation, dissolution or liquidation triggering the rights under that section. B. Legends. Certificates for Shares issued upon exercise of an Option shall bear such legend or legends as the Committee, in its sole discretion, determines to be necessary or appropriate to prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act or to implement the provisions of any agreements between the Company and the Participant with respect to such Shares. C. Payment of Expenses. The Company shall pay all issue or transfer taxes with respect to the issuance or transfer of Shares, as well as all fees and expenses necessarily incurred by the Company in connection with such issuance or transfer and with the administration of the Plan. 10 XIV. Listing of Shares and Related Matters If at any time the Board or the Committee shall determine in its sole discretion that the listing, registration or qualification of the Shares covered by the Plan upon any national securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the grant of Options or the award or sale of Shares under the Plan, no Option grant shall be effective and no Shares will be delivered, as the case may be, unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Board. XV. Withholding Taxes The Company shall have the right to require, prior to the issuance or delivery of any shares of Common Stock, payment by the Participant of any federal, state or local taxes required by law to be withheld. 11 Exhibit A DONNA KARAN INTERNATIONAL INC. OPTION AGREEMENT PURSUANT TO THE 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN Dear [Eligible Director]: Preliminary Statement As a director of the Donna Karan International Inc. (the "Company") on the [Initial Grant Date/Annual Date of Grant (the "Grant Date")] and pursuant to the terms of the Donna Karan International Inc. 1996 Non-Employee Director Stock Option Plan, annexed hereto as Exhibit 1 (the "Plan"), you, as an Eligible Director (as defined in the Plan), have been automatically granted a nonqualified stock option (the "Option") to purchase the number of shares of the Company's common stock, par value $.01 per share (the "Common Stock"), set forth below. The terms of the grant are as follows: 1. Tax Matters. No part of the Option granted hereby is intended to qualify as an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Grant of Option. Subject in all respects to the Plan and the terms and conditions set forth herein, you are hereby granted an Option to purchase from the Company up to [_________] Shares (as defined in the Plan), at a price per Share of $_________ (the "Option Price"). 3. Exercisability. Except as provided in Article VI(F) of the Plan in the event of a Change in Control, you may exercise all or any part of your Option on or after the first anniversary of the Grant Date (the "Vesting Date"), provided you do not incur a Termination of Directorship prior to the Vesting Date. Upon the occurrence of a Change in Control (as defined in the Plan) prior to your Termination of Directorship, the Option shall immediately become exercisable with respect to all Shares subject thereto, regardless of whether the Option has vested with respect to such Shares. 4. Termination. Unless terminated otherwise pursuant to the Plan, the Option shall expire on the earlier of: (i) the tenth anniversary of the Grant Date, (ii) to the extent exercisable on the date of your Termination of Directorship, on the first anniversary of your Termination of Directorship, or (iii) to the extent not exercisable on the date of your Termination of Directorship, upon your Termination of Directorship. 5. Restriction on Transfer of Option. The Option granted hereby is not transferable otherwise than by will or under the applicable laws of descent and distribution and during your lifetime may be exercised only by you or your guardian or legal representative. In addition, the Option shall not be assigned, negotiated, pledged or hypothecated in any way (whether by operation of law or otherwise), and the Option shall not be subject to execution, attachment or similar process. Upon any attempt to transfer, assign, negotiate, pledge or hypothecate the Option, or in the event of any levy upon the Option by reason of any execution, attachment or similar process contrary to the provisions hereof, the Option shall immediately become null and void. 6. Rights as a Stockholder. You shall have no rights as a stockholder with respect to any Shares covered by the Option until you shall have become the holder of record of the Shares, and no adjustments shall be made for dividends in cash or other property, distributions or other rights in respect of any such Shares, except as otherwise specifically provided for in the Plan. 7. Provisions of Plan Control. This grant is subject to all the terms, conditions and provisions of the Plan and to such rules, regulations and interpretations relating to the Plan as may be adopted by the Committee and as may be in effect from time to time. Any capitalized term used but not defined herein shall have the meaning ascribed to such term in the Plan. The annexed copy of the Plan is incorporated herein by reference. If and to the extent that this grant conflicts or is inconsistent with the terms, conditions and provisions of the Plan, the Plan shall control, and this grant shall be deemed to be modified accordingly. 8. Notices. Any notice or communication given hereunder shall be in writing and shall be deemed to have been duly given when delivered in person or, in the case of notice to the Company, by facsimile to the facsimile number set forth below, or when dispatched by telecopy, or one business day after having been dispatched by a nationally recognized courier service or three business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, to the appropriate party at the address (or, in the case of notice to the Company, facsimile number) set forth below (or such other address as the party shall from time to time specify in accordance with Article XII(C) of the Plan.): If to the Company, to: Donna Karan International Inc. 550 Seventh Avenue New York, New York 10018 Attention: General Counsel 2 If to you, to: the address indicated on the signature page at the end of this grant. Sincerely, DONNA KARAN INTERNATIONAL INC. By:______________________________ Name: Title: Accepted: _____________ [PARTICIPANT] Address: 3 EX-10.27 7 a2038805zex-10_27.txt EXHIBIT 10.27 Exhibit 10.27 - -------------------------------------------------------------------------------- DONNA KARAN INTERNATIONAL INC. 1996 STOCK INCENTIVE PLAN (As amended and restated through December 8, 2000) - -------------------------------------------------------------------------------- Table of Contents Page I. Purposes of the Plan..................................................1 II. Definitions...........................................................1 III. Effective Date........................................................5 IV. Administration........................................................6 A. Duties of the Committee..........................................6 B. Advisors.........................................................6 C. Determinations...................................................6 V. Shares; Adjustment Upon Certain Events................................7 A. Shares to be Delivered; Fractional Shares........................7 B. Number of Shares.................................................7 C. Adjustments; Recapitalization, etc...............................7 VI. Terms of Options......................................................9 A. Grant............................................................9 B. Exercise Price...................................................9 C. Number of Shares.................................................9 D. Exercisability...................................................9 E. Exercise of Options..............................................9 F. Incentive Stock Option Limitations..............................10 G. Buy Out and Settlement Provisions...............................11 H. Modification, Extension and Renewal of Options..................11 I. Other Terms and Conditions......................................11 VII. Restricted Shares....................................................11 A. Restricted Shares................................................11 B. Awards and Certificates..........................................11 VIII. Acceleration Events..................................................13 IX. Termination of Employment............................................14 A. General.........................................................14 B. Termination by Company for Cause................................14 C. Miscellaneous...................................................14 D. Cancellation of Options.........................................14 X. Nontransferability of Awards.........................................14 XI. Rights as a Stockholder..............................................15 i Page ---- XII. Termination, Amendment and Modification..............................15 XIII. Use of Proceeds......................................................16 XIV. General Provisions...................................................16 A. Right to Terminate Employment or Consultancy....................16 B. Trusts, etc.....................................................16 C. Notices.........................................................16 D. Severability of Provisions......................................17 E. Payment to Minors, Etc..........................................17 F. Headings and Captions...........................................17 G. Controlling Law.................................................17 H. Other Benefits..................................................17 I. Costs...........................................................17 J. Section 16(b) of the Exchange Act...............................17 K. Death/Disability................................................18 XV. Issuance of Stock Certificates; Legends; Payment of Expenses.........18 A. Stock Certificates..............................................18 B. Legends.........................................................18 XVI. Listing of Shares and Related Matters................................19 XVII. Withholding of Taxes.................................................19 EXHIBIT A PERFORMANCE CRITERIA.................................................20 ii Donna Karan International Inc. 1996 Stock Incentive Plan I. Purposes of the Plan The purposes of this 1996 Stock Incentive Plan (the "Plan") are to enable Donna Karan International Inc. (the "Company"), each Designated Parent (as defined herein) and Designated Subsidiaries (as defined herein) to attract, retain and motivate certain employees and consultants who are important to the success and growth of the business of the Company, such Designated Parent and Designated Subsidiaries and to create a long-term mutuality of interest between such individuals and the stockholders of the Company by granting Awards (as defined herein) under the Plan. II. Definitions In addition to the terms defined elsewhere herein, for purposes of this Plan, the following terms will have the following meanings when used herein with initial capital letters: A. "Agreement" means an agreement evidencing the grant of an Award. B. "Award" means any Option or Restricted Shares granted pursuant to the Plan. C. "Board" means the Board of Directors of the Company. D. "Cause" means with respect to a Participant's Termination of Employment, (1) in the case where there is no employment or consulting agreement between the Company, Designated Parent or Designated Subsidiary (as applicable) and the Participant, or where there is an employment or consulting agreement, but such agreement does not define cause (or words of like import), termination due to a Participant's dishonesty, fraud, insubordination, willful misconduct, gross negligence, refusal to perform services (for any reason other than illness or incapacity) or materially unsatisfactory performance of his or her duties for the Company, Designated Parent or Designated Subsidiary, as may be applicable, or the Participant's conviction of a felony or other crime involving, in the sole discretion of the Committee, moral turpitude; or (2) in the case where there is an employment or consulting agreement between the Company, Designated Parent or Designated Subsidiary (as applicable) and the Participant, termination that is or would be deemed to be for cause (or words of like import) as defined under such agreement. The Committee shall have sole discretion to determine whether cause exists, and its determination shall be final, binding and conclusive. E. "Change In Control" means any of the following: (a) the acquisition by any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) other than a person who is a stockholder of the Company on the effective date of the registration statement filed under the Securities Act relating to the first public offering (the "Initial Public Offering") of securities of the Company (an "Initial Stockholder") of 30% or more of the voting power of securities of Company or the acquisition by an Initial Stockholder, other than an affiliate of the Company that would be a Parent or a Subsidiary, of an additional 5% of the voting power of securities of the Company over and above that owned immediately after the closing date of the Initial Public Offering of the Company's Common Stock; excluding however, the following: (x) any acquisition by the Company or a Subsidiary of any of the foregoing, or (y) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or a Subsidiary; or (b) (i) the acquisition by any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) other than a person who, on the effective date of the Initial Public Offering is a holder of any ownership interest in Donna Karan Studio (an "Initial Licensee Interest Holder") of 30% or more of the voting power of Donna Karan Studio or (ii) the acquisition by an Initial Licensee Interest Holder, other than an affiliate of Gabrielle Studio, Inc. (and excluding any such acquisition resulting from a purchase, sale or transfer of Takihyo Inc. stock by and between any of the current stockholders of Takihyo Inc.) that would be a Parent or a Subsidiary (but substituting Gabrielle Studio, Inc. for the Company in such definitions) of Gabrielle Studio, Inc., of an additional 5% of the voting power of securities of the Company over and above that owned immediately after the closing date of the Initial Public Offering of the Company's Common Stock; excluding however, the following: (x) any acquisition by the Company or a Subsidiary of any of the foregoing, or (y) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or a Subsidiary; or (c) any merger or sale of substantially all of the assets of the Company under circumstances where the holders of the Common Stock of the Company immediately prior to the transaction becoming public knowledge were not holders of 80% of the equity securities of the surviving entity resulting from such transaction; or (d) any change in the composition of the Board of Directors of the Company not approved by (i) a majority of the Board prior to such change and (ii) by not less than two directors of the Company who were directors prior to the time any person who was not an Initial Stockholder acquired 30% or more of the voting power of securities of the Company. F. "Code" means the Internal Revenue Code of 1986, as amended and all rules and regulations promulgated thereunder. G. "Committee" means the committee appointed by the Board from time to time to administer the Plan, consisting of two or more members of the Board, each of whom shall be a non-employee director as defined in Rule 16b-3 promulgated under Section 16(b) of the Exchange Act and an outside director as defined under Section 162(m) of the Code. To the extent that no Committee 2 exists which has the authority to administer the Plan, the functions of the Committee shall be exercised by the Board. If for any reason the appointed Committee does not meet the requirements of Rule 16b-3 promulgated under Section 16(b) of the Exchange Act or Code Section 162(m), such noncompliance shall not affect the validity of the awards, grants, interpretations or other actions of the Committee. H. "Common Stock" means the common stock of the Company, par value $0.01 per share, any Common Stock into which the Common Stock may be converted and any Common Stock resulting from any reclassification of the Common Stock. I. "Company" means Donna Karan International Inc., a Delaware corporation. J. "Consultant" means any executive-level consultant of, or advisor to, the Company, Designated Parent or Designated Subsidiary as determined by the Committee. K. "Designated Parent" means any Parent which has been designated from time to time by the Board to participate in the Plan. L. "Designated Subsidiary" means any Subsidiary which has been designated from time to time by the Board to participate in the Plan. M. "Disability" means (1) in the case where there is no employment agreement between the Company, Designated Parent or Designated Subsidiary (as applicable) and the Participant, or where there is an employment agreement, but such agreement does not define disability, total and permanent disability, as defined in Section 22(e)(3) of the Code; or (2) in the case where there is an employment agreement between the Company, Designated Parent or Designated Subsidiary (as applicable) and the Participant, disability as defined under such employment agreement. N. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and all rules and regulations promulgated thereunder. O. "Fair Market Value" of a share of Common Stock means, for purposes of this Plan, unless otherwise required by any applicable provision of the Code or any regulations issued thereunder, as of any date, the last sales prices reported for the Common Stock on the applicable date, (i) as reported by the principal national securities exchange in the United States on which it is then traded, or (ii) if not traded on any such national securities exchange, as quoted on an automated quotation system sponsored by the National Association of Securities Dealers, or if the sale of the Common Stock shall not have been reported or quoted on such date, on the first day prior thereto on which the Common Stock was reported or quoted. If the Common Stock is not readily tradable on a national securities exchange or any system sponsored by the National Association of Securities Dealers, its Fair Market Value shall be such amount as is set by the Committee in good faith. P. "Incentive Stock Option" means any Option awarded under this Plan intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. Notwithstanding anything herein to the contrary, Incentive Stock Option shall be granted solely to Key Employees and shall not be granted to Consultants. 3 Q. "Key Employee" means any person who is an officer or other valuable employee of the Company, (regardless of title or position) a Designated Parent or a Designated Subsidiary, as determined by the Committee in its sole discretion. R. "Non-Qualified Stock Option" means any Option awarded under this Plan that is not an Incentive Stock Option. S. "Option" means the right to purchase the number of shares granted in the Option Agreement at a prescribed purchase price on the terms specified in the Plan. T. "Parent" means, other than the Company, (i) any corporation in an unbroken chain of corporations ending with the Company which owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain or (ii) any corporation or trade or business (including, without limitation, a partnership or limited liability company) which controls 50% or more (whether by ownership of stock, assets or an equivalent ownership interest) of the Company. U. "Participant" means a Key Employee or Consultant who is granted an Award under the Plan which Award has not expired. V. "Performance Criteria" means the criteria set forth on Exhibit A hereto. W. "Performance Goals" means the performance goals, formulae or standards set by the Committee, in its sole discretion, subject to and based on the Performance Criteria, and used to establish the Restriction Period for Restricted Shares which are intended to satisfy the exception for performance-based compensation under Section 162(m) of the Code. X. "Restricted Shares" means shares of Common Stock or the right to receive shares of Common Stock, as the case may be, awarded to a Key Employee of the Company, Designated Parent or a Designated Subsidiary pursuant to Article VII. Y. "Restricted Period" means the vesting period set by the Committee which provides for the lapse of the restrictions placed on an Award of Restricted Shares. Z. "Retirement" means a Termination of Employment without Cause at or after age 65 (or, with the consent of the Committee, before age 65). AA. "Securities Act" means the Securities Act of 1933, as amended, and all rules and regulations promulgated thereunder. BB. "Share" means a share of Common Stock. CC. "Subsidiary" means, other than the Company, (i) any corporation in an unbroken chain of corporations beginning with the Company which owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain; (ii) any corporation or trade or business (including, without limitation, a partnership or limited liability 4 company) which is controlled 50% or more (whether by ownership of stock, assets or an equivalent ownership interest) by the Company or one of its Subsidiaries; or (iii) any other entity, approved by the Board as a Subsidiary under the Plan, in which the Company or any of its Subsidiaries has an equity or other ownership interest. DD. "Ten Percent Stockholder" means a person owning at the time the Option is granted Common Stock of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of a Designated Parent or Designated Subsidiary. EE. "Termination of Employment" with respect to an individual means that individual is no longer actively employed as an employee by the Company, a Parent or a Subsidiary, irrespective of whether or not such employee is receiving salary continuance pay, is continuing to participate in other employee benefit programs or is otherwise receiving severance type payments. With respect to a Consultant, "Termination of Employment" means that the Consultant is no longer acting as a Consultant to the Company, Designated Parent or Designated Subsidiary. In the event an entity shall cease to be a Subsidiary, there shall be deemed a Termination of Employment of any individual who is not otherwise an employee or Consultant of the Company, a Parent or another Subsidiary at the time the entity ceases to be a Subsidiary. In the event an entity shall cease to be a Parent, there shall be deemed a Termination of Employment of any individual who is not otherwise an employee or Consultant of the Company, another Parent or a Subsidiary at the time the entity ceases to be a Parent. III. Effective Date The Plan became originally effective on June 19, 1996 and the amendments contained herein shall become effective on April 23, 1997, subject to the approval of the Company's stockholders to the extent and in the manner provided by applicable law. Grants of Awards by the Committee under the Plan may be made on or after the Effective Date of the Plan. IV. Administration A. Duties of the Committee. The Plan shall be administered and interpreted by the Committee. The Committee shall have full authority to interpret the Plan and to decide any questions and settle all controversies and disputes that may arise in connection with the Plan; to establish, amend and rescind rules for carrying out the Plan; to administer the Plan, subject to its provisions; to select Participants in, and grant Awards under, the Plan; to determine the terms, exercise price and form of exercise payment for each Option granted under the Plan and the terms and conditions (which need not be identical) of all Awards granted under the Plan (including but not limited to Share price, any restriction or limitation, Performance Criteria, vesting schedule or acceleration thereof, or any forfeiture restrictions or waiver thereof regarding any Award and the Shares relating thereto, based on such factors, as the Committee shall determine, in its sole discretion); when and how an Award can be exercised and whether in whole or in installments; to determine whether and to what extent Incentive Stock Options and Non-Qualified Stock Options, or any 5 combination thereof, are to be granted hereunder to one or more Key Employees or Consultants; to prescribe the form or forms of instruments evidencing Awards and any other instruments required under the Plan (which need not be uniform); and to make all other determinations and to take all such steps in connection with the Plan and the Awards as the Committee, in its sole discretion, deems necessary or desirable. The Committee shall not be bound to any standards of uniformity or similarity of action, interpretation or conduct in the discharge of its duties hereunder, regardless of the apparent similarity of the matters coming before it. Any determination, action or conclusion of the Committee shall be final, conclusive and binding on all parties. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the Participants affected, to disqualify any Incentive Stock Option under such Section 422. B. Advisors. The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan, and may rely upon any advice or opinion received from any such counsel or consultant and any computation received from any such consultant or agent. Expenses incurred by the Committee in the engagement of such counsel, consultant or agent shall be paid by the Company. C. Determinations. Each determination, interpretation or other action made or taken pursuant to the provisions of this Plan by the Committee shall be final, conclusive and binding for all purposes and upon all persons, including, without limitation, the Participants, the Company, a Designated Parent and Designated Subsidiaries, directors, officers and other employees of the Company, a Designated Parent and Designated Subsidiaries, and the respective heirs, executors, administrators, personal representatives and other successors in interest of each of the foregoing. V. Shares; Adjustment Upon Certain Events A. Shares to be Delivered; Fractional Shares. Shares to be issued under the Plan shall be made available, at the sole discretion of the Board, either from authorized but unissued Shares or from issued Shares reacquired by the Company and held in treasury. No fractional Shares will be issued or transferred upon the exercise of any Option. Fractional Shares resulting from any adjustment in Awards described in Article V(C) or otherwise shall be aggregated. With respect to any remaining fractional Share, upon exercise of any Option, the Company shall pay a cash adjustment equal to the pro rata portion of the Fair Market Value of one Share on the date of exercise. B. Number of Shares. 1. General Limitation. Subject to adjustment as provided in this Article V, the maximum aggregate number of Shares that may be issued under the Plan shall be 2,600,000. If Options are for any reason canceled, or expire or terminate unexercised, the Shares covered by such Options shall again be available for the grant of Options, subject to the foregoing limit. If Restricted 6 Shares are forfeited or otherwise do not become vested, the Shares covered by such Restricted Share Agreement shall again be available for the grant of Awards, subject to the foregoing limit. 2. Individual Participant Limitation. The maximum number of Shares subject to any Option and/or Award of Restricted Shares which may be granted under the Plan to each Participant shall not exceed 750,000 Shares (subject to any adjustment as provided in this Article V) in each calendar year during the entire term of the Plan.. Notwithstanding the foregoing, in order to comply with Section 162(m) of the Code, the Committee shall take into account that (i) if an Award is canceled, the canceled Award continues to be counted against the maximum number of Shares for which Awards may be granted to a Participant under this Section V(B)(2) of the Plan, and, (ii) if after the grant of an Award, the Committee or the Board reduces the exercise price or purchase price, the transaction is treated as a cancellation of the Award and a grant of a new Award, and in such case, both the Award that is deemed to be canceled and the Award that is deemed to be granted, reduce the maximum number of Shares for which Awards may be granted to a Participant under the Plan. C. Adjustments; Recapitalization, etc. 1. The existence of the Plan and the Awards granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting Common Stock, the dissolution or liquidation of the Company, a Designated Parent or Designated Subsidiary, any sale or transfer of all or part of their assets or business or any other corporate act or proceeding. The Committee may make or provide for such adjustments in the maximum number of Shares specified in Article V(B), in the number of Shares covered by outstanding Awards granted hereunder, and/or in the exercise price, grant price or Purchase Price applicable to such Awards or such other adjustments in the number and kind of securities received upon the exercise of Options, as the Committee in its sole discretion may determine is equitably required to prevent dilution or enlargement of the rights of Participants or to otherwise recognize the effect that otherwise would result from any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, merger, consolidation, spin-off, reorganization, partial or complete liquidation, issuance of rights or warrants to purchase securities or any other corporate transaction or event having an effect similar to any of the foregoing. 2. In the event of a merger or consolidation in which the Company or a Designated Parent is not the surviving entity or in the event of any transaction that results in the acquisition of substantially all of the Company's or a Designated Parent's outstanding Common Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of the sale or transfer of all of the Company's or a Designated Parent's assets (the foregoing being referred to as "Acquisition Events"), then the Committee may in its sole discretion terminate all outstanding Options effective as of the consummation of the Acquisition Event by delivering notice of termination to each Participant at least 20 days prior to the date of consummation of the Acquisition Event; provided that, during the period from the date on which such notice of termination is delivered to the consummation of the Acquisition Event, each Participant shall have the right to exercise in full all the Options that are then outstanding (without regard to limitations on exercise otherwise contained 7 in the Options) but contingent on occurrence of the Acquisition Event, and, provided that, if the Acquisition Event does not take place within a specified period after giving such notice for any reason whatsoever, the notice and exercise shall be null and void. Notwithstanding the foregoing, at the discretion of the Committee, the provisions contained in this subsection shall be adjusted as they apply to Options granted to Participants within six months before the occurrence of an Acquisition Event if the holder of such Option is subject to the reporting requirements of Section 16(a) of the Exchange Act in such manner as determined by the Committee, including without limitation, terminating Options at specific dates after the Acquisition Event, in order to give the Participant the benefit of the Option. If an Acquisition Event occurs, to the extent the Committee does not terminate the outstanding Options pursuant to this Article V(C)(2), then the provisions of Article V(C)(1) shall apply. 3. Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor or upon conversion of shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number and class of shares and/or other securities or property subject to Awards theretofore granted or the exercise price, grant price or Purchase Price (as hereinafter defined). VI. Terms of Options A. Grant. The Committee may grant Non-Qualified Stock Options or Incentive Stock Options, or any combination thereof to Key Employees and may grant Non-Qualified Stock Options to Consultants. Notwithstanding the foregoing, in no event shall the Committee grant Options to Stephan Weiss, Donna Karan, Frank R. Mori and Tomio Taki. Each Option shall be evidenced by an Option Agreement in such form as the Committee shall approve from time to time. B. Exercise Price. The purchase price per Share (the "Purchase Price") deliverable upon the exercise of a Non-Qualified Stock Option shall be determined by the Committee and set forth in a Participant's Option Agreement, provided that the Purchase Price shall not be less than 100% of the Fair Market Value of a Share at the time of grant; provided, however, if an Incentive Stock Option is granted to a Ten Percent Stockholder, the Purchase Price shall be no less than 110% of the Fair Market Value of a Share. C. Number of Shares. With respect to an Option granted to a Participant, the Option Agreement shall specify the number of Shares underlying such Option, as determined by the Committee in its sole discretion. D. Exercisability. At the time of grant, the Committee shall specify when and on what terms the Options granted shall be exercisable. In the case of Options not immediately exercisable in full, the Committee may at any time accelerate the time at which all or any part of the Options may be exercised and may waive any other conditions to exercise. No Option shall be exercisable after the expiration of ten years from the date of grant; provided, however, the term of an 8 Incentive Stock Option granted to a Ten Percent Stockholder may not exceed five years. Each Option shall be subject to earlier termination as provided in Article IX below. Other than on a Change In Control, no Option which is granted to a Participant who is subject to Section 16(b) of the Exchange Act shall be exercisable before six months after it is granted solely to the extent required by Section 16(b) of the Exchange Act. E. Exercise of Options. 1. A Participant may elect to exercise all or any portion of the Participant's Option by giving written notice to the Committee of such election and of the number of Shares with respect to such Option which Participant has elected to purchase, accompanied by payment in full of the aggregate Purchase Price for the number of Shares for which the Option is being exercised. 2. Shares purchased pursuant to the exercise of Options shall be paid for at the time of exercise as follows: (a) in cash or by check, bank draft or money order payable to the order of Company; (b) if the Shares are traded on a national securities exchange, through the delivery of irrevocable instructions to a broker to deliver promptly to the Company an amount equal to the aggregate Purchase Price; or (c) on such other terms and conditions as may be acceptable to the Committee (which may include payment in full or in part by the transfer of Shares which, if owned by a Participant who is subject to Section 16(b) of the Exchange Act, have been held by the Participant for at least six months solely to the extent required by Section 16(b) of the Exchange Act, or the surrender of vested Options owned by the Participant) and in accordance with applicable law. F. Incentive Stock Option Limitations. To the extent that the aggregate Fair Market Value (determined as of the time of grant) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year under the Plan and/or any other stock option plan of the Company or any subsidiary or parent corporation (within the meaning of Section 424 of the Code) exceeds $100,000, such Options shall be treated as Options which are not Incentive Stock Options. To the extent that any Option does not qualify as an Incentive Stock Option (whether because of its provisions or the time or manner of its exercise or otherwise), such Option or the portion thereof which does not qualify, shall constitute a separate Non-Qualified Stock Option. To the extent permitted under Section 422 of the Code, or the applicable regulations thereunder or any applicable Internal Revenue Service pronouncement, if (i) a Participant's employment with the Company or Designated Subsidiary is terminated by reason of death, Disability, Retirement or Termination of Employment without Cause (except as otherwise provided herein), and (ii) the portion of any Incentive Stock Option that would be exercisable during the post-termination period specified under Article IX but for the $100,000 limitation currently contained in Section 422(d) 9 of the Code, is greater than the portion of such Stock Option that is immediately exercisable as an `incentive stock option' during such post-termination period under Section 422, such excess shall be treated as a Non-Qualified Stock Option. If the exercise of an Incentive Stock Option is accelerated for any reason, any portion of such Option that is not exercisable as an Incentive Stock Option by reason of the $100,000 limitation contained in Section 422(d) of the Code shall be treated as a Non-Qualified Stock Option. Should any of the foregoing provisions not be necessary in order for the Stock Options to qualify as Incentive Stock Options, or should any additional provisions be required, the Committee may amend the Plan accordingly, without the necessity of obtaining the approval of the shareholders of the Company, except as otherwise required by law. G. Buy Out and Settlement Provisions. The Committee may at any time on behalf of the Company offer to buy out an Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the Participant at the time that such offer is made. H. Modification, Extension and Renewal of Options. The Committee may modify, extend or renew outstanding Options granted under the Plan, or accept the surrender of outstanding Options (up to the extent not theretofore exercised) and authorize the granting of new Options in substitution therefor (to the extent not theretofore exercised). I. Other Terms and Conditions. Options may contain such other provisions, which shall not be inconsistent with any of the foregoing terms of the Plan, as the Committee shall deem appropriate including, without limitation, permitting "reloads" such that the same number of Options are granted as the number of shares used to pay for the exercise price of Options or shares used to pay withholding taxes ("Reloads"). With respect to Reloads, the exercise price of the new Stock Option shall be the Fair Market Value on the date of the "reload" and the term of the Stock Option shall be the same as the remaining term of the Options that are exercised, if applicable, or such other exercise price and term as determined by the Committee. VII. Restricted Shares Awards granted pursuant to this Article VII shall be evidenced by an Award Agreement in such form as the Committee shall from time to time approve and the terms and condi tions of such Awards shall be set forth therein. Restricted Shares may be issued either alone or in addition to other Awards granted under the Plan. A. Restricted Shares. The Committee shall determine the eligible persons to whom, and the time or times at which, grants of Restricted Shares will be made, the number of Shares to be awarded, the price (if any) to be paid by the recipient, the time or times within which such Awards may be subject to forfeiture, the vesting schedule and rights to acceleration thereof, and all other terms and conditions of the Awards. Notwithstanding the foregoing, in no event shall the Committee grant Restricted Shares to Stephan Weiss, Donna Karan, Frank R. Mori and Tomio Taki. The Committee may condition the grant of Restricted Shares upon the attainment of specified performance goals or such other factors as the Committee may determine, in its sole discretion. 10 B. Awards and Certificates. The prospective Participant selected to receive Restricted Shares shall not have any rights with respect to such Award, unless and until such Participant has delivered a fully executed copy of the Award Agreement to the Company and has otherwise complied with the applicable terms and conditions of such Award. Further, such Award shall be subject to the following conditions: 1. Purchase Price. The purchase price for Restricted Shares shall be fixed by the Committee and may be less than their par value and may be zero, to the extent permitted by applicable law. 2. Acceptance. Awards of Restricted Shares must be accepted within a period of sixty (60) days (or such shorter period as the Committee may specify at grant) after the Award date, by executing a Restricted Share Award Agreement and by paying whatever price (if any) the Committee has designated thereunder. 3. Certificates. Upon an Award of Restricted Shares, the Committee may, in its sole discretion, decide to either have the Company or other agent appointed by the Committee hold the share certificates representing such Restricted Shares in escrow or issue share certificates to the Participant, unless the Committee elects to use another system, such as book entries by the transfer agent , as evidencing ownership of a Restricted Share Award. If a certificate is issued, such certificate shall be registered in the name of such Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award, substantially in the following form. "The anticipation, alienation, attachment sale, transfer, assignment, pledge, encumbrance or charge of the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Donna Karan International Inc. (the "Company") 1996 Stock Incentive Plan and an Agreement entered into between the registered owner and the Company dated . Copies of such Plan and Agreement are on file at the principal office of the Company." If a stock certificate is held in custody by the Company, the Committee may require, as it determines in its sole discretion, to have the Participant deliver a duly signed stock power, endorsed in blank, relating to the Restricted Shares. 4. Restrictions/Vesting. Restricted Shares may not be sold, assigned, trans ferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution within the six (6) month period following the date the Award is granted or such other period as determined by the Committee (including no period). Any attempt to dispose of any such Shares of stock in contravention of such restrictions shall be null and void and without effect. The applicable Award Agreement shall set forth the events and/or dates upon which Restricted Shares granted to a Participant shall vest (the "Restriction Period"). Within these limits, based on service, attainment of objective performance goals established pursuant to Section VII(B)(5) below and/or such other factors or criteria as the Committee may determine, in its sole discretion, the Committee may provide for the lapse of such restrictions in installments in whole or 11 in part, or may accelerate the vesting of all or any part of any Award of Restricted Shares and/or waive the deferral limitations for all or any part of any Award of Restricted Shares. 5. Objective Performance Goals, Formulae or Standards (the "Performance Goals"). If the grant of Restricted Shares or the lapse of restrictions is based exclusively on the attainment of Performance Goals, the Committee shall establish the objective Performance Goals and the applicable vesting percentage of the Award of Restricted Shares applicable to each Participant or class of Participants in writing prior to the beginning of the applicable calendar year or at such later date as otherwise determined by the Committee (as permitted under Section 162(m) of the Code if the Award is intended to comply with Section 162(m) of the Code) and while the outcome of the Performance Goals are substantially uncertain. Such Performance Goals may incorporate provisions for disregarding (or adjusting for) changes in accounting methods, corporate transactions (including, without limitation, dispositions and acquisitions) and other similar type events or circumstances. With regard to an Award of Restricted Shares that is intended to comply with Section 162(m) of the Code, to the extent any such provision would create impermissible discretion under Section 162(m) of the Code or otherwise violate Section 162(m) of the Code, such provision shall be of no force or effect. The applicable Performance Goals shall be based on one or more of the Performance Criteria set forth in Exhibit A hereto. 6. Ownership. Except to the extent otherwise set forth in the Award Agree ment, the Participant shall possess all incidents of ownership of such shares, subject this Article VII, including the right to receive dividends with respect to such Shares, the right to vote such Shares, and , subject to and conditioned upon the full vesting of Restricted Shares, the right to tender such Shares. The Committee, in its sole discretion, as determined at the time of the Award, may permit or require the payment of dividends to be deferred. VIII. Acceleration Events Unless otherwise provided in the applicable Agreement, all Options granted and not previously exercisable shall become vested and fully exercisable immediately upon the occurrence of a Change In Control and the restrictions to which Restricted Shares granted prior to the Change In Control are subject shall lapse as if the applicable Restriction Period had ended upon such Change In Control. The Committee, in its sole discretion, may provide, as part of the Agreement or otherwise, for the purchase of any Option granted under the Plan by the Company, a Designated Parent or a Designated Subsidiary for an amount of cash equal to the excess of the Change In Control Price (as defined herein) of the shares of Common Stock covered by such Option, over the aggregate exercise price or purchase price of such Option. For purposes of this Plan, Change In Control Price shall mean the higher of (i) the highest price per share of Common Stock paid in any transaction related to a Change In Control, or (ii) the highest Fair Market Value at any time during the 60-day period preceding a Change In Control. 12 IX. Termination of Employment A. General. Unless otherwise provided in the applicable Agreement, if a Participant's employment or consultancy shall terminate due to Retirement, Disability or for any reason other than for Cause prior to the complete exercise of an Option (or deemed exercise thereof), then such Option shall thereafter be exercisable to the extent such Option is vested and shall remain exercisable for 1 year; provided, however, that no Option may be exercised after the scheduled expiration date of such Option. Solely with regard to Awards of Restricted Shares granted prior to April 23, 1997, unless otherwise provided in the Restricted Share Agreement, if a Participant's employment or consultancy shall terminate due to Retirement, Disability or for any reason other than for Cause at any time, Restricted Shares shall not be forfeited for any reason and the restrictions in Article VII(B)(4) shall continue to apply to such Restricted Shares. With regard to Awards of Restricted Shares granted on or after April 23, 1997, subject to the applicable provisions of a Restricted Share Agreement, upon a Participant's termination of employment or consultancy for any reason (other than for Cause) during the relevant Restriction Period, all Restricted Shares still subject to restriction shall vest or be forfeited in accordance with the conditions established by the Committee at grant or thereafter. Any termination of employment or consultancy by the Company for Cause will be treated in accordance with the provisions of paragraph (B) below. B. Termination by Company for Cause. Unless otherwise provided in the applicable Agreement, if a Participant's employment or consultancy with the Company, Parent or a Subsidiary shall be terminated by the Company, Parent or such Subsidiary for Cause, then all outstanding Options held by such Participant shall immediately terminate and rights to all Restricted Shares shall be forfeited immediately. C. Miscellaneous. The Committee may determine whether any given leave of absence constitutes a Termination of Employment. Awards granted under the Plan shall not be affected by any change of employment so long as the Participant continues to be an employee of the Company, Parent or a Subsidiary. D. Cancellation of Options. Except as otherwise provided in Article VIII, no Options that were not exercisable during the period of employment shall thereafter become exercisable upon a Termination of Employment for any reason or no reason whatsoever, and such Options shall terminate and become null and void upon a Termination of Employment, unless the Committee determines in its sole discretion that such Options shall be exercisable. X. Nontransferability of Awards No Award shall be transferable by the Participant otherwise than by will or under applicable laws of descent and distribution, and during the lifetime of the Participant may be exercised only by the Participant or his or her guardian or legal representative. Notwithstanding the foregoing, effective July 25, 1997, the Committee may determine at the time of grant or thereafter that a Non-Qualified Stock Option, that is otherwise not transferable pursuant to this Article X, is transferable in whole or in part and in such circumstances, and under such conditions, as specified by the Committee. In addition, except as provided above, no Award shall be assigned, negotiated, pledged 13 or hypothecated in any way (whether by operation of law or otherwise), and no Award shall be subject to execution, attachment or similar process. Upon any attempt to transfer, assign, negotiate, pledge or hypothecate any Award, or in the event of any levy upon any Award by reason of any execution, attachment or similar process contrary to the provisions hereof, such Award shall immediately terminate and become null and void. XI. Rights as a Stockholder A Participant shall have no rights as a stockholder with respect to any Shares covered by such Participant's Award until such Participant shall have become the holder of record of such Shares, and no adjustments shall be made for dividends in cash or other property or distributions or other rights in respect to any such Shares, except as otherwise specifically provided in this Plan. XII. Termination, Amendment and Modification The Plan shall terminate at the close of business on the tenth anniversary of the Effective Date (the "Termination Date"), unless terminated sooner as hereinafter provided, and no Award shall be granted under the Plan on or after that date. The termination of the Plan shall not terminate any outstanding Awards that by their terms continue beyond the Termination Date. At any time prior to the Termination Date, the Committee or Board may amend or terminate the Plan or suspend the Plan in whole or in part. The Committee or Board may at any time, and from time to time, amend in whole or in part, any or all of the provisions of the Plan (including any amendment deemed necessary to ensure that the Company complies with any regulatory requirements referred to in Article XIV), or suspend or terminate it entirely, retroactively or otherwise; provided, however, that, unless otherwise required by law or specifically provided herein, the rights of a Participant with respect to Awards granted prior to such amendment, suspension or termination, may not be materially impaired without the consent of such Participant and, provided further, without the approval of the stockholders of the Company entitled to vote, solely to the extent required by Section 16(b) of the Exchange Act, Section 162(m) of the Code, or with regard to Incentive Stock Options, Section 422 of the Code, no amendment may be made which would (i) increase the aggregate number of Shares that may be issued under this Plan (except by operation of Article V) or, with respect to Awards; (ii) increase the maximum individual Participant limitations for a calendar year under Section V(B)(2); (iii) change the classification of employees eligible to receive Awards under this Plan; (iv) decrease the minimum purchase price of any Award; (v) extend the maximum period during which an option may be exercised under Article VI(D); or (vi) effect any change that would require stockholder approval in order for the Plan to comply with the applicable provisions, if any, of Section 16(b) of the Exchange Act, Section 162(m) of the Code, or, with regard to Incentive Stock Options, Section 422 of the Code. The Committee or the Board may amend the terms of any Award granted, prospectively or retroactively, but, subject to Article VIII above or as otherwise provided herein, no such amendment or other action by the Committee or the Board shall materially impair the rights of any Participant without the Participant's consent. No modification of an Award shall adversely affect the 14 status of an Incentive Stock Option as an incentive stock option under Section 422 of the Code. Notwithstanding the foregoing and solely to the extent required by Section 16(b) of the Exchange Act or Section 162(m) of the Code, neither the Board nor the Committee may make any determination or interpretation or take any other action which would cause any member of the Committee to cease to be a non-employee director for purposes of Section 16(b) of the Exchange Act or an outside director for purposes of Section 162(m) of the Code. XIII. Use of Proceeds The proceeds of the sale of Shares subject to Awards under the Plan are to be added to the general funds of Company and used for its general corporate purposes as the Board shall determine. XIV. General Provisions A. Right to Terminate Employment or Consultancy. Neither the adoption of the Plan nor the grant of Awards shall impose any obligation on the Company, a Designated Parent or Designated Subsidiaries to continue the employment or consultancy of any Participant, nor shall it impose any obligation on the part of any Participant to remain in the employ of the Company, Designated Parent or Designated Subsidiaries. B. Trusts, etc. Nothing contained in the Plan and no action taken pursuant to the Plan (including, without limitation, the grant of any Award thereunder) shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company and any Participant or the executor, administrator or other personal representative or designated beneficiary of such Participant, or any other persons. If and to the extent that any Participant or such Participant's executor, administrator or other personal representative, as the case may be, acquires a right to receive any payment from the Company pursuant to the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. C. Notices. Any notice to the Company required by or in respect of this Plan will be addressed to Donna Karan International Inc. at 550 Seventh Avenue, New York, New York 10018, Attention: General Counsel (or such other place of business as shall become Donna Karan International Inc. principal executive offices from time to time). Each Participant shall be responsible for furnishing the Committee with the current and proper address for the mailing to such Participant of notices and the delivery to such Participant of agreements, Shares and payments. Any such notice to the Participant will, if the Company has received notice that the Participant is then deceased, be given to the Participant's personal representative if such representative has previously informed the Company of his status and address (and has provided such reasonable substantiating information as the Company may request) by written notice under this Article XIV. Any notice required by or in respect of this Plan will be deemed to have been duly given when delivered in person or when dispatched by telecopy or one business day after having been dispatched by a nationally recognized overnight courier service or three business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid. The Company assumes no responsibility 15 or obligation to deliver any item mailed to such address that is returned as undeliverable to the addressee and any further mailings will be suspended until the Participant furnishes the proper address. D. Severability of Provisions. If any provisions of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions of the Plan, and the Plan shall be construed and enforced as if such provisions had not been included. E. Payment to Minors, Etc. Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of receipt thereof shall be deemed paid when paid to such person's guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the Committee, the Company and their employees, agents and representatives with respect thereto. F. Headings and Captions. The headings and captions herein are provided for reference and convenience only. They shall not be considered part of the Plan and shall not be employed in the construction of the Plan. G. Controlling Law. The Plan shall be construed and enforced according to the laws of the State of Delaware, without giving effect to rules governing the conflicts of laws. H. Other Benefits. No payment under this Plan shall be considered compensation for purposes of computing benefits under any retirement plan of the Company, a Designated Parent or a Designated Subsidiary nor affect any benefits under any other benefit plan now or subsequently in effect under which the availability of benefits is related to the level of compensation. I. Costs. The Company shall bear all expenses included in administering this Plan, including expenses of issuing Common Stock pursuant to any Awards hereunder. J. Section 16(b) of the Exchange Act. All elections and transactions under the Plan by persons subject to Section 16 of the Exchange Act involving shares of Common Stock shall be intended to comply with any applicable condition under Rule 16b-3 as then in effect. In such event, the Committee may at any time impose any limitations upon the exercise of an Option or issuance of Shares or other conditions which, in the Committee's discretion, are necessary or desirable in order to comply with Section 16(b) and the rules and regulations thereunder and may establish and adopt written administrative guidelines, designed to facilitate compliance with Section 16(b) of the Exchange Act, as it may deem necessary or proper for the administration and operation of the Plan and the transaction of business thereunder. K. Death/Disability. The Committee may in its discretion require the transferee of a Participant to supply it with written notice of the Participant's death or Disability and to supply it with a copy of the will (in the case of the Participant's death) or such other evidence as the Committee deems necessary to establish the validity of the transfer of an Award. The Committee may also require that the agreement of the transferee to be bound by all of the terms and conditions of the Plan. 16 XV. Issuance of Stock Certificates; Legends; Payment of Expenses A. Stock Certificates. Upon any exercise of an Option and payment of the exercise price as provided in such Option or lapse of restriction on a Restricted Share, a certificate or certificates for the Shares as to which such Award has been granted shall be issued by the Company in the name of the person or persons receiving such Award and shall be delivered to or upon the order of such person or persons. B. Legends. All certificates for shares of Common Stock delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed or any national securities association system upon whose system the Stock is then quoted, any applicable federal or state securities law, and any applicable corporate law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. If the Board or the Committee determines in its sole discretion, each Participant shall, upon any exercise or conversion of an Award, execute and deliver to the Company a written statement, in form satisfactory to the Company, representing and warranting that such Participant is purchasing or accepting the Shares then acquired for such Participant's own account and not with a view to the resale or distribution thereof, that any subsequent offer for sale or sale of any such Shares shall be made either pursuant to (i) a registration statement on an appropriate form under the Securities Act, which registration statement shall have become effective and shall be current with respect to the Shares being offered and sold, or (ii) a specific exemption from the registration requirements of the Securities Act, and that in claiming such exemption the Participant will, prior to any offer for sale or sale of such Shares, obtain a favorable written opinion, satisfactory in form and substance to the Company, from counsel approved by the Company as to the availability of such exception. XVI. Listing of Shares and Related Matters If the Company determines, in its discretion, that the listing, registration, or qualification of the Award or the Shares subject to the Award upon any securities exchange or under any state or federal securities or other law or regulation, or the exemption from such listing, registration or qualification requirements, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition to or in connection with the granting of an Option, the exercisability of an Award or the issue or purchase of Shares thereunder or the vesting of Restricted Shares, no Shares shall be issued upon the exercise of the Option unless the listing, registration, qualification, exemption, consent or approval has been effected or obtained free of any conditions not acceptable to the Company. The holder of the Option or Restricted Share will supply the Company with certificates, representations, and information that the Company requests and shall otherwise cooperate with the Company in obtaining the listing, registration, qualification, exemption, consent or approval. Without limiting the foregoing, no Shares shall be issued upon the exercise of an Option or vesting of Restricted Shares if the Company or the Committee determines that the issuance of shares upon exercise or vesting does not comply with any applicable federal and state securities laws. The Committee in its sole discretion may require as a condition of exercise of any Option, an opinion of 17 counsel for the holder of the Option that shares to be issued upon exercise of the Option are exempt from registrations under the Securities Act or applicable state "blue sky" laws. If the Company or the Committee, as part of an offering of securities or otherwise, finds it desirable, because of federal or state regulatory requirements, to reduce the period during which any Options may be exercised, the Company or the Committee may, in its discretion and without the Participant's consent, reduce the exercise period on not less than 15 days' written notice to the Participant. XVII. Withholding of Taxes The Company shall have the right to deduct from any payment to be made to a Participant, or to otherwise require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash hereunder, payment by the Participant of, any Federal, state or local taxes required by law to be withheld. The Committee may permit any such withholding obligation with regard to any Participant to be satisfied by reducing the number of shares of Common Stock otherwise deliverable or by delivering shares of Common Stock already owned. Any fraction of a share of Common Stock required to satisfy such tax obligations shall be disregarded and the amount due shall be paid instead in cash by the Participant. 18 EXHIBIT A PERFORMANCE CRITERIA Performance Goals established for purposes of the grant of or vesting of performance-based Awards of Restricted Shares shall be based on one or more of the following performance criteria ("Performance Criteria"): (i) the attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax profits of the Company including, without limitation, that attributable to continuing and/or other operations of the Company (or in any case a Subsidiary, Parent, division, or other operational unit of the Company); (ii) the attainment of certain target levels of, or a specified increase in, operational cash flow of the Company (or a Subsidiary, Parent, division, or other operational unit of the Company); (iii) the achievement of a certain level of, reduction of, or other specified objectives with regard to limiting the level of increase in, all or a portion of, the Company's bank debt or other long-term or short-term public or private debt or other similar financial obligations of the Company, which may be calculated net of such cash balances and/or other offsets and adjustments as may be established by the Committee; (iv) the attainment of a specified percentage increase in earnings per share or earnings per share from continuing operations of the Company (or a Subsidiary, Parent, division or other operational unit of the Company); (v) the attainment of certain target levels of, or a specified percentage increase in, revenues, net income or earnings before income tax of the Company (or a Subsidiary, Parent, division, or other operational unit of the Company); (vi) the attainment of certain target levels of, or a specified increase in return on capital employed or return on invested capital of the Company (or any Subsidiary, Parent, division, or other operational unit of the Company); (vii) the attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax return on stockholders' equity of the Company (or any Subsidiary, Parent, division or other operational unit of the Company); (viii) the attainment of certain target levels of, or a specified increase in, economic value added targets based on cash flow return on investment formula of the Company (or any Subsidiary, Parent, division or other operational unit of the Company; (ix) the attainment of certain target levels in the Fair Market Value of the shares of Common Stock; and (x) the growth in the value of an investment in the Common Stock assuming the reinvestment of dividends. In addition, such Performance Criteria may be based upon the attainment of specified levels of Company (or Subsidiary, Parent, division or other operational unit of the Company) performance under one or more of the measures described above relative to the performance of other corporations. To the extent permitted under Section 162(m) of the Code, but only to the extent permitted under Section 162(m) of the Code (including, without limitation, compliance with any requirements for stockholder approval), the Committee may: (i) designate additional business criteria on which the Performance Goals may be based or (ii) adjust, modify or amend the aforementioned business criteria. 19 EX-10.28 8 a2038805zex-10_28.txt EXHIBIT 10.28 Exhibit 10.28 - -------------------------------------------------------------------------------- DONNA KARAN INTERNATIONAL INC. WEALTH ACCUMULATION PLAN Effective December 28, 1997 (Amended and restated through December 8, 2000) - -------------------------------------------------------------------------------- DONNA KARAN INTERNATIONAL INC. WEALTH ACCUMULATION PLAN The Plan is established in order to provide deferred compensation to a select group of management and highly compensated employees of Donna Karan International Inc. and its Affiliates. The benefits are intended to supplement the benefits payable under the Qualified Plan, a plan qualified under Section 401(a) of the Code, maintained for the employees of Donna Karan International Inc. and its Affiliates. 1. Definitions. For purposes of the Plan, the following definitions apply: (a) "Affiliate" means such corporations and other entities (including, without limitation, partnerships and limited liability companies), presently or in the future existing, which are members of the controlled group which includes the Company or are under common control with the Company, as such terms are defined in Sections 414(b) and 414(c) of the Code, but only during such period as such corporations or entities are members of the controlled group which includes the Company or are under common control with the Company. (b) "Beneficiary" means, unless otherwise specified by the Participant in a written election filed with the Committee, the person or persons (if any) designated by the Participant under the Qualified Plan (or otherwise determined under the terms of the Qualified Plan if no such designation is made) to receive his or her benefits under the Qualified Plan in the event of the Participant's death. (c) "Board" means the Board of Directors of the Company. (d) "Cause" means with respect to a Participant's Termination of Employment, (i) in the case where there is no employment agreement between an Employer and the Participant, or where there is an employment agreement, but such agreement does not define cause (or words of like import), termination due to a Participant's dishonesty, fraud, insubordination, willful misconduct, gross negligence, refusal to perform services (for any reason other than illness or incapacity) or materially unsatisfactory performance of his or her duties for an Employer, or the Participant's conviction of a felony or other crime involving, in the sole discretion of the Committee, moral turpitude; or (2) in the case where there is an employment agreement between an Employer and the Participant, termination that is or would be deemed to be for cause (or words of like import) as defined under such agreement. The Committee shall have sole discretion in determining whether cause exists, and its determination shall be final, binding and conclusive. (e) "Code" means the Internal Revenue Code of 1986, as amended (or any successor statute). (f) "Committee" means the committee, if any, appointed by the Board from time to time to administer the Plan on behalf of the Company. To the extent that no committee is appointed, the Board shall be deemed to be the Committee. (g) "Common Stock" means the common stock of the Company, par value $0.01 per share, any common stock into which the Common Stock may be converted and any common stock resulting from any reclassification of the Common Stock. (h) "Company" means Donna Karan International Inc., a Delaware corporation, and any successor thereto. (i) "Compensation" means, for any Plan Year, the base salary and bonus paid by an Employer to an Employee while a Participant during the Plan Year including contributions by an Employer on behalf of a Participant pursuant to a salary reduction agreement between an Employer and a Participant under Code Section 401(k) or 125, if any. (j) "Detrimental Activity" means (1) in the case where there is an employment agreement between an Employer and the Participant which contains restrictive covenants, any breach of such restrictive covenants, including, without limitation, a breach of confidentiality, non-solicitation or non-disparagement or any other material breach of such employment agreement; or (2) in the case where there is no employment agreement between an Employer and the Participant, or where there is an employment or consulting agreement, but such agreement does not contain any restrictive covenants (i) the disclosure to anyone outside the Company or its Affiliates, or the use in any manner other than in the furtherance of the Company's or its Affiliate's business, without written authorization from the Company, of any confidential information or proprietary information, relating to the business of the Company or its Affiliates or their respective officers, directors, executives or employees, or of any customer, supplier or licensee of the Company or its Affiliates that is acquired by a Participant prior to a Participant's Termination of Employment; (ii) any attempt to, directly or indirectly, hire, engage or retain, or aid or assist any other person or entity to hire, engage, or retain (A) (x) any designers of the Company or its Affiliates, (y) any person who held the position of director or any equivalent or more senior position at the Company or any of its Affiliates, or (z) any person who acted as one of the Company's or its Affiliates' outside consultants or (B) any person employed by a licensee of the Company or its Affiliates who worked on the Donna Karan or DKNY brand; (iii) any attempt to, directly or indirectly, induce any person or entity that supplied piece goods or designs to, or that manufactured or sold apparel to, the Company or any of its Affiliates to terminate its relationship with the Company or its Affiliates; or (iv) a Participant's Disparagement, or inducement of others to do so, of the Company or its Affiliates or their past and present officers, directors, executives or employees or of any customer, supplier or licensee of the Company or its Affiliates. Notwithstanding the foregoing, in determining whether an act in question is within the definition of Detrimental Activity, the individuals and entities described in subparagraph (2)(ii) or (iii) above shall refer to those individuals and entities at the time of the act if the Participant is then an employee of the Company or an Affiliate or, if the act in question occurs on or after the Participant's Termination of Employment, those individuals and entities at the time of the Participant's Termination of Employment or within the six-month period prior thereto. The Committee shall have authority to provide a Participant with written authorization to engage in the activities contemplated herein and no other person shall have authority to provide a Participant with such authorization. 2 (k) "Disability" means (i) in the case where there is no employment agreement between an Employer and the Participant, or where there is an employment agreement, but such agreement does not define disability, a total and permanent disability, as defined in Section 22(e)(3) of the Code; or (2) in the case where there is an employment agreement between an Employer and the Participant, disability as defined under such employment agreement. (l) "Disparagement" means making comments or statements to the press, the Company's or its Affiliates' officers, directors, executives or employees, or any customer, supplier or licensee of the Company or its Affiliates which could reasonably be expected to adversely affect in any manner: (i) the conduct of the business of the Company or its Affiliates (including, without limitation, any products or business plans or prospects); or (ii) the business reputation of the Company or its Affiliates, or any of their products, or their past or present officers, directors, executives or employees, or of any customer, supplier or licensee of the Company or its Affiliates. (m) "Earnings" means, for any Plan Year, earnings on amounts in the Supplemental Account computed in accordance with Section 6 hereof. (n) "Eligible Employee" means an Employee who has been designated by an Employer as a Vice President or above. (o) "Employee" means any person employed by an Employer excluding any "leased employee," as defined in Section 414(n) of the Code, any independent contractor or agent. (p) "Employer" means the Company and any Affiliate. (q) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (r) "Exchange Act" means the Securities Exchange Act of 1934, as amended, and all rules and regulations promulgated thereunder. (s) "Parent" means (i) any corporation in an unbroken chain of corporations ending with the Company which owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain; or (ii) any corporation or trade or business (including, without limitation, a partnership or limited liability company) which controls fifty percent (50%) or more (whether by ownership of stock, assets or an equivalent ownership interest) of the Company. (t) "Participant" means any Eligible Employee who shall have become a Participant in the Plan. (u) "Plan" means the Donna Karan International Inc. Wealth Accumulation Plan. (v) "Plan Year" means the fiscal year of the Company. 3 (w) "Qualified Plan" means the Company's 401(k) Retirement Plan, as restated effective as of January 1, 1997 and as amended from time to time thereafter. (x) "Securities Act" means the Securities Act of 1933, as amended, and all rules and regulations promulgated thereunder. (y) "Subsidiary" means (i) any corporation in an unbroken chain of corporations beginning with the Company which owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain; (ii) any corporation or trade or business (including, without limitation, a partnership or limited liability company) which is controlled fifty percent (50%) or more (whether by ownership of stock, assets or an equivalent ownership interest) by the Company or one of its Subsidiaries; or (iii) any other entity, approved by the Board as a Subsidiary under the Plan, in which the Company or any of its Subsidiaries has an equity or other ownership interest. (z) "Supplemental Account" means the individual account established by the Company for a Participant to which a Participant's benefits under the Plan are credited. (aa) "Supplemental Benefit" means the benefit payable under the Plan, which shall be payable in accordance with Section 7 hereof. (bb) "Termination of Employment" or "Terminates Employment" means termination of employment as an Employee of the Company and all Affiliates for any reason whatsoever, including but not limited to death, retirement, resignation or firing (with or without Cause). 2. Effective Date. The Plan shall become effective as of December 28, 1997. 3. Participation. An Eligible Employee shall become a Participant in the Plan on the later of the effective date of the Plan or the date he or she becomes an Eligible Employee. 4. Contributions and Amount of Supplemental Benefits. (a) The Company shall make a book entry contribution to the Supplemental Account of each Participant who is actively employed on the last day of a Plan Year in an amount equal to five percent (5%) of the total amount of a Participant's Compensation earned while a Participant during the applicable Plan Year. With respect to each Plan Year, the Company shall credit the book entry contribution as of the last day of such Plan Year and shall make such book entry contribution as soon as administratively feasible following the end of the Plan Year, but in no event later than one hundred twenty (120) days following the end of the Plan Year. Notwithstanding any provision of the Plan to the contrary, no book entry contribution will be made for any Participant with respect to any Plan Year in which the Company has 4 not realized a net profit or would not realize a net profit if such book entry contribution were made for all Participants in such Plan Year. (b) Earnings shall be credited to a Participant's Supplemental Account as provided in Section 6 below. (c) A Participant's Supplemental Benefit shall consist of the vested balance in his or her Supplemental Account. 5. Vesting. A Participant's Supplemental Account shall become vested solely after participating as a Participant in the Plan for at least five (5) full years commencing on the date the Participant became a Participant in the Plan. Notwithstanding anything herein to the contrary, a Participant's vested Supplemental Account shall be forfeited and not paid in the event the Participant Terminates Employment for Cause, as determined by the Committee. 6. Measurement of Earnings. (a) The measuring alternative used for the measurement of Earnings on the amounts in a Participant's Supplemental Account shall be selected by each Participant in writing, on a form prescribed by the Committee, from among the various measuring alternatives offered by the Committee. Each Participant may change the selection of his or her measuring alternative as of the beginning of any calendar quarter (or at such other times and in such manner as prescribed by the Committee, in its sole discretion), subject to such notice and other administrative procedures as established by the Committee. The Committee shall credit the Earnings computed under this Section to the balance in each Participant's Supplemental Account as of the last business day of each calendar quarter, or such other dates as are selected by the Committee, in its sole discretion, at a rate equal to the performance of the measuring alternative selected by the Participant for the calendar quarter (or such other applicable period) to which such selection relates. (b) The Committee may, in its sole discretion, establish rules and procedures for the crediting of Earnings and the election of measuring alternatives pursuant to this Section 6. 7. Payment of Supplemental Benefit. (a) A Participant hereunder shall receive his or her Supplemental Benefit from the Plan in accordance with the following Schedule with the lump sum payment or first installment payment to be paid commencing on the earlier of (i) first anniversary of his or her Termination of Employment or (ii) the date he or she incurs a Disability. --------------------------------------------- Amount of Supplemental Number of Years of Benefit (Vested Interest) Annual Installments --------------------------------------------- 5 --------------------------------------------- $1,000,000 plus 10 years --------------------------------------------- $500,000 to $999,999 5 years --------------------------------------------- $100,000 to $499,999 3 years --------------------------------------------- $1 to $99,999 One lump sum --------------------------------------------- The Supplemental Account of a Participant who receives annual installment payments in accordance with the Schedule above shall continue to be credited with Earnings until the final installment is paid. Notwithstanding the foregoing, the Committee, in its sole discretion, may accelerate payment of all or a portion of the Supplemental Benefit to a Participant in any manner. (b) If a Participant dies prior to receiving his or her total Supplemental Benefit, the unpaid portion of such Supplemental Benefit shall be paid to the Participant's Beneficiary in a single lump sum, as soon as administratively feasible following the Participant's death. (c) Notwithstanding anything hereto to the contrary, no Supplemental Benefit shall be required to be paid to a Participant until the last contribution required to be made hereunder with respect to such Participant is actually made in accordance with Section 4(a) of the Plan. (d) In accordance with administrative procedures established by the Committee in its sole discretion, a Participant may request the payment of all or a portion of such Participant's vested Supplemental Account which has been credited by the Company as a book entry for at least five fiscal years as of the date payment is made to the Participant. Any request made pursuant to this Section 7(d) must be made in writing to the Committee during the fiscal year prior to the fiscal year during which such payment is to be made to a Participant. Any payment requested pursuant to this Section 7(d) shall be made in the form of a single lump sum cash payment on the first anniversary of the date the Committee receives the written request for such payment. (e) Notwithstanding anything herein to the contrary, a Participant's vested Supplemental Account shall be forfeited in its entirety and not paid to a Participant in the event he or she engages in Detrimental Activity while employed by the Company or an Affiliate or during the period commencing on the Participant's Termination of Employment and ending one (1) year thereafter, unless the Committee, in its sole discretion, determines otherwise. 8. Claims Procedure. (a) The Committee shall be responsible for determining all claims for benefits under the Plan by the Participants or their Beneficiaries. Within ninety (90) days after receiving a claim (or within up to one hundred eighty (180) days, if the claimant is notified of the need for additional time, including notification of the reason for the delay), the Committee shall notify the Participant or Beneficiary of its decision in writing, giving the reasons for its decision if adverse to the claimant. If the decision is adverse to the claimant, the Committee shall advise him or her of the Plan provisions involved, of any additional information which he or she must provide to perfect his or her claim and why, and of his or her right to request a review of the decision. 6 (b) A claimant may request a review of an adverse decision by written request to the Committee made within sixty (60) days after receipt of the decision. The claimant, or his or her duly authorized representative, may review pertinent documents and submit written issues and comments. (c) Within sixty (60) days after receiving a request for review (or up to one hundred twenty (120) days after such receipt if the Participant is notified of the delay and the reasons therefor), the Committee shall notify the claimant in writing of (i) its decision, (ii) the reasons therefore, and (iii) the Plan provisions upon which it is based. (d) The Committee may at any time alter the claims procedure set forth above, so long as the revised claims procedure complies with the ERISA, and the regulations issued thereunder. (e) The Committee shall have the full power and authority to interpret, construe and administer the Plan in its sole discretion based on the provisions of the Plan and to decide any questions and settle all controversies that may arise in connection with the Plan. The Committee's interpretations and construction thereof, and actions thereunder, made in the sole discretion of the Committee, including any valuation of the Supplemental Benefit, any determination under this Section 9, or the amount of the payment to be made hereunder, shall be final, binding and conclusive on all persons. No member of the Committee shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of the Plan. (f) The Committee shall determine, subject to the provisions of the Plan (i) the additional Employees who shall participate in the Plan from time to time and (ii) when an Employee shall cease to be a Participant. 9. Construction of Plan. (a) The Plan is "unfunded" and any Supplemental Benefit payable hereunder shall be paid by the Company out of its general assets. Participants and their designated Beneficiaries shall not have any interest in any specific asset of the Company as a result of the Plan. Nothing contained in the Plan and no action taken pursuant to the provisions of the Plan shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and the Participants, their designated Beneficiaries or any other person. Any funds which may be invested under the provisions of the Plan shall continue for all purposes to be part of the general funds of the Company and no person other than the Company shall by virtue of the provisions of the Plan have any interest in such funds. To the extent that any person acquires a right to receive payments from the Company under the Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. The Company may, in its sole discretion, establish a "rabbi trust" to pay Supplemental Benefits hereunder. (b) All expenses incurred in administering the Plan shall be paid by the Company. 10. Minors and Incompetents. If the Committee shall find that any person to whom payment is payable under the Plan is unable to care for his or her affairs because of illness or accident, or is a minor, any payment due (unless a prior claim therefore shall have been made by a duly appointed 7 guardian, committee or other legal representative) may be paid to the spouse, a child, parent, or brother or sister, or to any person deemed by the Committee to have incurred expense for such person otherwise entitled to payment, in such manner and proportions as the Committee may determine it its sole discretion. Any such payment shall be a complete discharge of the liabilities of the Company, the Committee and the Board under the Plan. 11. Limitation of Rights. Nothing contained herein shall be construed as conferring upon an Employee the right to continue in the employ of any Employer as an Employee on or above a Vice President level or in any other capacity or to interfere with the Employer's right to discharge him or her at any time for any reason whatsoever. 12. Payment Not Salary. Any Supplemental Benefit payable under the Plan shall not be deemed salary or other compensation to the Employee for the purposes of computing benefits to which he or she may be entitled under any pension plan or other arrangement of any Employer maintained for the benefit of its Employees. 13. Severability. In case any provision of the Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but the Plan shall be construed and enforced as if such illegal and invalid provision never existed. 14. Withholding. The Company shall have the right to make such provisions as it deems necessary or appropriate to satisfy any obligations it may have to withhold federal, state or local income or other taxes incurred by reason of payments or accruals pursuant to the Plan. 15. Assignment. The Plan shall be binding upon and inure to the benefit of the Company, its successors and assigns and the Participants and their heirs, executors, administrators and legal representatives. In the event that the Company sells all or substantially all of the assets of its business and the acquiror of such assets assumes the obligations hereunder, the Company shall be released from any liability imposed herein and shall have no obligation to provide any benefits payable hereunder. 16. Non-Alienation of Benefits. The benefits payable under the Plan shall not be subject to alienation, transfer, assignment, garnishment, execution or levy of any kind, and any attempt to cause any benefits to be so subjected shall not be recognized. 17. Governing Law. To the extent legally required, the Code and ERISA shall govern the Plan and, if any provision hereof is in violation of any applicable requirement thereof, the Company reserves the right to retroactively amend the Plan to comply therewith. To the extent not governed by the Code and ERISA, the Plan shall be governed by the laws of the State of New York. 8 18. Amendment or Termination of Plan. The Board (or a duly authorized committee thereof) may, in its sole and absolute discretion, amend the Plan from time to time and at any time in such manner as it deems appropriate or desirable, and the Board (or a duly authorized committee thereof) may, in its sole and absolute discretion, terminate the Plan for any reason from time to time and at any time in such manner as it deems appropriate or desirable. No amendment or termination shall reduce or terminate the then vested benefit of any Participant or Beneficiary. Upon an amendment or termination, the Company shall not be required to distribute a Participant's Supplemental Benefit prior to the Participant's Termination of Employment or the date he or she incurs a Disability, but, in the event of a termination of the Plan, may do so in a lump sum at the discretion of the Company. Notwithstanding the foregoing, in no event shall any amendment made after November 30, 2000 reducing the benefits provided hereunder or any Plan termination be effective during the period commencing on the date of the Change in Control (as defined below) and ending one (1) year thereafter. 19. Non-Exclusivity. The adoption of the Plan by the Company shall not be construed as creating any limitations on the power of the Company to adopt such other supplemental retirement income arrangements as it deems desirable, and such arrangements may be either generally applicable or limited in application. 20. Non-Employment. The Plan is not an agreement of employment and it shall not grant the Employee any rights of employment. 21. Headings and Captions. The headings and captions herein are provided for reference and convenience only. They shall not be considered part of the Plan and shall not be employed in the construction of the Plan. 22. Change in Control. The following provisions shall apply in the event of a Change in Control: (a) Except as otherwise provided in this Section 22, a Participant's Supplemental Account shall become 100% vested upon the occurrence of a Change in Control and a Participant shall receive his or her Supplemental Benefit from the Plan in the form of a single lump sum cash payment as soon as administratively feasible following the occurrence of a Change in Control. (b) Notwithstanding the provisions of Section 22(a), if the Company receives written notice at least five (5) business days prior to the anticipated closing date of the transaction giving rise to the Change in Control from the successor to all or a substantial portion of the Company's business and/or assets that such successor is willing as of the closing to assume and agree to perform the Company's obligations under this Plan in the same manner and to the same extent that the Company is hereby required to perform, then, the provisions of Section 22(a) shall not apply and a Participant shall vest in his or her Supplemental Account in accordance with the provisions of Section 5 hereof and shall receive his or her Supplemental Benefit from the Plan in accordance with the provisions of Section 7 hereof; provided, however, that if a Participant is terminated without Cause during the period commencing on the date ninety (90) days prior to the effective date of a Change in Control and 9 ending on the first anniversary of such Change in Control, then, the Participant's Supplemental Account shall become 100% vested upon such termination and a Participant shall receive his or her Supplemental Benefit from the Plan in the form of a single lump sum cash payment as soon as administratively feasible following such termination. (c) For purposes of this Plan, a "Change in Control" shall be deemed to have occurred if any of the following shall have occurred: (i) the acquisition by any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) other than a person who is a stockholder of the Company on the effective date of the registration statement filed under the Securities Act relating to the first public offering (the "Initial Public Offering") of securities of the Company (an "Initial Stockholder") of 30% or more of the voting power of securities of Company or the acquisition by an Initial Stockholder, other than an affiliate of the Company that would be a Parent or a Subsidiary, of an additional 5% of the voting power of securities of the Company over and above that owned immediately after the closing date of the Initial Public Offering of the Company's Common Stock; excluding however, the following: (x) any acquisition by the Company or a Subsidiary of any of the foregoing, or (y) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or a Subsidiary; or (ii) (A) the acquisition by any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) other than a person who, on the effective date of the Initial Public Offering is a holder of any ownership interest in Donna Karan Studio (an "Initial Licensee Interest Holder") of 30% or more of the voting power of Donna Karan Studio or (B) the acquisition by an Initial Licensee Interest Holder, other than an affiliate of Gabrielle Studio, Inc. (and excluding any such acquisition resulting from a purchase, sale or transfer of Takihyo Inc. stock by and between any of the current stockholders of Takihyo Inc.) that would be a Parent or a Subsidiary (but substituting Gabrielle Studio, Inc. for the Company in such definitions) of Gabrielle Studio, Inc., of an additional 5% of the voting power of securities of the Company over and above that owned immediately after the closing date of the Initial Public Offering of the Company's Common Stock; excluding however, the following: (x) any acquisition by the Company or a Subsidiary of any of the foregoing, or (y) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or a Subsidiary; or (iii) any merger or sale of substantially all of the assets of the Company under circumstances where the holders of the Common Stock of the Company immediately prior to the transaction becoming public knowledge were not holders of 80% of the equity securities of the surviving entity resulting from such transaction; or (iv) any change in the composition of the Board not approved by (x) a majority of the Board prior to such change and (y) by not less than two directors of the Company who were directors prior to the time any person who was not an Initial Stockholder acquired 30% or more of the voting power of securities of the Company. 23. Legal Fees. To the fullest extent permitted by law, on or after the occurrence of a Change in Control, the Company shall promptly pay upon submission of statements all legal and other professional fees, costs of litigation, prejudgment interest, and other expenses incurred by a 10 Participant in connection with any dispute concerning payments, benefits or any other entitlements under this Plan; provided, however, the Company shall be reimbursed by the Participant for the fees and expenses advanced in the event the Participant's claim is, in a material manner, in bad faith or frivolous and the arbitrator or court, as applicable, determines that the reimbursement of such fees and expenses is appropriate. 11 EX-10.29 9 a2038805zex-10_29.txt EXHIBIT 10.29 Exhibit 10.29 - -------------------------------------------------------------------------------- DONNA KARAN INTERNATIONAL INC. EXECUTIVE INCENTIVE PLAN Effective December 28, 1997 (Amended and restated through December 8, 2000) - -------------------------------------------------------------------------------- DONNA KARAN INTERNATIONAL INC. EXECUTIVE INCENTIVE PLAN 1. Purpose. The purpose of the Plan is to enable Donna Karan International Inc. to attract, retain and motivate certain key employees of Donna Karan International Inc. and its Designated Parents and Designated Subsidiaries by providing cash performance awards under the Plan. 2. Definitions. For purposes of The Plan, the following definitions apply: (a) "Award" means the total annual Performance Award as determined under the Plan. (b) "Board" means the Board of Directors of the Company. (c) "Cause" means with respect to a Participant's Termination of Employment, (1) in the case where there is no employment agreement between an Employer and the Participant, or where there is an employment agreement, but such agreement does not define cause (or words of like import), termination due to a Participant's dishonesty, fraud, insubordination, willful misconduct, gross negligence, refusal to perform services (for any reason other than illness or incapacity) or materially unsatisfactory performance of his or her duties for an Employer, or the Participant's conviction of a felony or other crime involving, in the sole discretion of the Committee, moral turpitude; or (2) in the case where there is an employment agreement between an Employer and the Participant, termination that is or would be deemed to be for cause (or words of like import) as defined under such agreement. The Committee shall have sole discretion in determining whether cause exists and its determination shall be final, binding and conclusive. (d) "Change in Control" means any of the following: (i) the acquisition by any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) other than a person who is a stockholder of the Company on the effective date of the registration statement filed under the Securities Act relating to the first public offering (the "Initial Public Offering") of securities of the Company (an "Initial Stockholder") of 30% or more of the voting power of securities of Company or the acquisition by an Initial Stockholder, other than an affiliate of the Company that would be a Parent or a Subsidiary, of an additional 5% of the voting power of securities of the Company over and above that owned immediately after the closing date of the Initial Public Offering of the Company's Common Stock; excluding however, the following: (x) any acquisition by the Company or a Subsidiary of any of the foregoing, or (y) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or a Subsidiary; or (ii) (A) the acquisition by any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) other than a person who, on the effective date of the Initial Public Offering is a holder of any ownership interest in Donna Karan Studio (an "Initial Licensee Interest Holder") of 30% or more of the voting power of Donna Karan Studio or (B) the acquisition by an Initial Licensee Interest Holder, other than an affiliate of Gabrielle Studio, Inc. (and excluding any such acquisition resulting from a purchase, sale or transfer of Takihyo Inc. stock by and between any of the current stockholders of Takihyo Inc.) that would be a Parent or a Subsidiary (but substituting Gabrielle Studio, Inc. for the Company in such definition) of Gabrielle Studio, Inc., of an additional 5% of the voting power of securities of the Company over and above that owned immediately after the closing date of the Initial Public Offering of the Company's Common Stock; excluding however, the following: (x) any acquisition by the Company or a Subsidiary of any of the foregoing, or (y) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or a Subsidiary; or (iii) any merger or sale of substantially all of the assets of the Company under circumstances where the holders of the Common Stock of the Company immediately prior to the transaction becoming public knowledge were not holders of 80% of the equity securities of the surviving entity resulting from such transaction; or (iv) any change in the composition of the Board of Directors of the Company not approved by (a) a majority of the Board prior to such change and (b) by not less than two directors of the Company who were directors prior to the time any person who was not an Initial Stockholder acquired thirty percent (30%) or more of the voting power of securities of the Company. (e) "Code" means the Internal Revenue Code of 1986, as amended. (f) "Committee" means the Incentive Compensation Subcommittee of the Compensation Committee or such other committee or subcommittee of the Board appointed by the Board from time to time to administer the Plan on behalf of the Company, provided that such committee shall consist of two or more members of the Board. (g) "Common Stock" means the common stock of the Company, par value $0.01 per share, any Common Stock into which the Common Stock may be converted and any Common Stock resulting from any reclassification of the Common Stock. (h) "Company" means Donna Karan International Inc., a Delaware Corporation, and any successor thereto. (i) "Covered Employee" means an Employee who is a covered employee as defined under Section 162(m)(3) of the Code, determined as of the close of the prior fiscal year of the Company, and any other Employee designated from time to time by the Committee as a "Covered Employee" for purposes of the Plan, except that, notwithstanding anything herein to the contrary, the Committee may decide on an annual basis, in its sole discretion, prior to the beginning of each Plan Year or such later date permitted by Section 162(m) of the Code, to not treat any Employee described under this Section 1(i) as a "Covered Employee." (j) "Designated Parent" means any Parent which has been designated from time to time by the Committee to participate in the Plan. 3 (k) "Designated Subsidiary" means any Subsidiary which has been designated from time to time by the Committee to participate in the Plan. (l) "Employee" means any person employed by an Employer, excluding any "leased employee," as defined in Section 414(n) of the Code, any independent contractor or agent. (m) "Employer" means the Company, any Designated Parent and any Designated Subsidiary. (n) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (o) "Individual Target Award" means the targeted performance award for a Plan Year specified by the Committee (with regard to Covered Employees) and Management Committee (with regard to Non-Covered Employees) as provided in Section 5 hereof. (p) "Management Committee" means the committee which administers the Plan on behalf of the Company solely with respect to Non-Covered Employees, consisting of the chief executive officer of the Company, the most senior executive from the human resources department, the most senior executive from the finance department and any other individual designated by the Committee or by the Board. To the extent that no Management Committee is appointed, the Committee shall be the Management Committee. (q) "Non-Covered Employee" means a Participant who is not a Covered Employee. (r) "Parent" means, other than the Company, (i) any corporation in an unbroken chain of corporations ending with the Company which owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain or (ii) any corporation or trade or business (including, without limitation, a partnership or limited liability company) which controls fifty percent (50%) or more (whether by ownership of stock, assets or an equivalent ownership interest) of the Company. (s) "Participant" means any Employee selected, in accordance with Section 4 hereof, to be eligible to receive an Award in accordance with the Plan. (t) "Performance Award" means the amount paid or payable under Section 6 hereof. (u) "Plan" means the Donna Karan International Inc. Executive Incentive Plan. (v) "Plan Year" means the fiscal year of the Company. (w) "Securities Act" means the Securities Act of 1933, as amended. (x) "Subsidiary" means, other than the Company, (i) any corporation in an unbroken chain of corporations beginning with the Company which owns stock possessing fifty percent (50%) or 4 more of the total combined voting power of all classes of stock in one of the other corporations in such chain; (ii) any corporation or trade or business (including, without limitation, a partnership or limited liability company) which is controlled fifty percent (50%) or more (whether by ownership of stock, assets or an equivalent ownership interest) by the Company or one of its Subsidiaries; or (iii) any other entity, approved by the Board as a Subsidiary under the Plan, in which the Company or any of its Subsidiaries has an equity or other ownership interest. 3. Administration and Interpretation of the Plan. (a) The Plan shall be administered by the Committee with respect to Covered Employees and by the Management Committee with respect to Non-Covered Employees. The Committee with respect to Covered Employees and the Management Committee with respect to Non-Covered Employees shall each have the exclusive authority and responsibility to: (i) interpret the Plan; (ii) approve the designation of eligible Participants; (iii) set the performance criteria for Awards within the Plan guidelines; (iv) certify attainment of performance goals and other material terms; (v) reduce Awards as provided herein; (vi) authorize the payment of all benefits and expenses of the Plan as they become payable under the Plan; (vii) adopt, amend and rescind rules and regulations relating to the Plan; and (viii) make all other determinations and take all other actions necessary or desirable for the Plan's administration including, without limitation, correcting any defect, supplying any omission or reconciling any inconsistency in the Plan in the manner and to the extent it shall deem necessary to carry the Plan into effect. (b) Decisions made by the Committee and the Management Committee shall be made by a majority of each of its members. The Committee shall have exclusive and final authority in all determinations and decisions affecting Covered Employees. All decisions of the Committee on any question concerning the interpretation and administration of the Plan shall be final, conclusive and binding upon all Covered Employees. The Management Committee shall have exclusive and final authority in all determinations and decisions affecting Non-Covered Employees. All decisions of the Management Committee on any question concerning the interpretation and administration of the Plan shall be final, conclusive and binding upon all Non-Covered Employees. The Committee and the Management Committee may rely on information, and consider recommendations, provided by the Board or the executive officers of the Company. (c) Notwithstanding anything herein to the contrary, the Management Committee shall have no authority to act or make determinations or decisions under the Plan with respect to Covered Employees (including Non-Covered Employees who become Covered Employees). 4. Eligibility and Participation. (a) For each Plan Year, any Covered Employee and any Employee who has been designated by an Employer as a Vice President level or above shall be designated Participants in the Plan, other than the Chairman of the Board, Vice Chairman and the Chief Executive Officer of the Company as of the effective date of the Plan. 5 (b) Except with regard to Employees described under Section 4(a), the Committee and the Management Committee may designate additional Employees as Participants and may add to or delete such Employees from the list of designated Participants at any time and from time to time, in each of their sole discretion. (c) Notwithstanding any other provision to the contrary, no Employee hired during a Plan Year may become a Participant in the Plan under Section 4(a), unless and until the Employee has been actively employed by an Employer for at least six (6) consecutive months following the date he or she first became an Employee. (d) Except with regard to Employees described under Section 4(a), no person shall be entitled to any Award under the Plan for any Plan Year unless he or she is so designated as a Participant for that Plan Year. 5. Individual Target Award. A targeted performance award may be specified for each Participant for each Plan Year. The Committee specifies a targeted performance award for the Covered Employees and the Management Committee specifies a targeted performance award for the Non-Covered Employees. The Individual Target Award may be expressed, at either of the two committee's discretion, as may be applicable, as a fixed dollar amount, a percentage of base pay, or an amount determined pursuant to an objective formula or standard. Establishment of an Individual Target Award for any Employee for a Plan Year shall not imply or require that the same level Individual Target Award (if any such award is established by either of the two committees for the relevant Employee) be set for any subsequent Plan Year. At the time the Performance Goals are established (as provided in subsection 6.2 below), the Committee or Management Committee, as applicable, shall prescribe a formula to determine the percentages (which may be greater than one-hundred percent (100%)) of the Individual Target Award which may be payable based upon the degree of attainment of the Performance Goals during the Plan Year. 6. Performance Award Program. 6.1 Performance Awards. Subject to Section 7 herein, each Participant is eligible to receive up to the achieved percentage of their Individual Target Award for such Plan Year (or, subject to the last sentence of Section 5, such lesser amount as determined by the Committee or the Management Committee, as applicable, in its sole discretion) based upon the attainment of the objective Performance Goals established pursuant to subsection 6.2 and the formula established pursuant to Section 5. Except as specifically provided in Section 7, no Performance Award shall be made to a Participant for a Plan Year unless the minimum Performance Goals for such Plan Year are attained. 6.2 Objective Performance Goals, Formulae or Standards (the "Performance Goals"). (a) The Committee shall establish for the Covered Employees and the Management Committee shall establish for the Non-Covered Employees the objective performance goals, formulae 6 or standards and the Individual Target Award (if any) applicable to such Participants for a Plan Year in writing prior to the beginning of such Plan Year or at such later date decided by the Management Committee in its sole discretion with regard to Non-Covered Employees or at such later date decided by the Committee in its sole discretion. The Committee and the Management Committee, as applicable, reserve the right to amend any and all established Performance Goals for a Plan Year at any time while the outcome of the Performance Goals are substantially uncertain. Such Performance Goals may incorporate provisions for disregarding (or adjusting for) changes in accounting methods, corporate transactions (including, without limitation, dispositions and acquisitions) and other similar type events or circumstances. (b) These Performance Goals shall be based on one or more of the following criteria: (i) the attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax profits of the Company including, without limitation, that attributable to continuing and/or other operations of the Company (or in any case a Designated Subsidiary, Designated Parent, division, or other operational unit of the Company); (ii) the attainment of certain target levels of, or a specified increase in, operational cash flow of the Company (or a Designated Subsidiary, Designated Parent, division, or other operational unit of the Company); (iii) the achievement of a certain level of, reduction of, or other specified objectives with regard to limiting the level of or increase in, all or a portion of, the Company's bank debt or other long-term or short-term public or private debt or other similar financial obligations of the Company, which may be calculated net of such cash balances and/or other offsets and adjustments as may be established by the Committee or the Management Committee, as applicable; (iv) the achievement of a certain level of, reduction of, or other specified objectives with regard to limiting the level of, or increase in, all or a portion of controllable expenses or other expenses of the Company (or a Designated Subsidiary, Designated Parent, division or other operational unit of the Company); (v) the attainment of a specified percentage increase in earnings per share or earnings per share from continuing operations of the Company (or a Designated Subsidiary, Designated Parent, division or other operational unit of the Company); (vi) the attainment of certain target levels of, or a specified percentage increase in, revenues, net income or earnings before income tax of the Company (or a Designated Subsidiary, Designated Parent, division, or other operational unit of the Company); (vii) the attainment of certain target levels of, or a specified increase in return on capital employed or return on invested capital of the Company (or any Designated Subsidiary, Designated Parent, division, or other operational unit of the Company); (viii) the attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax return on stockholders' equity of the Company (or any Designated Subsidiary, Designated Parent, division or other operational unit of the Company); (ix) the attainment of certain target levels of, or a specified increase in, economic value added targets based on cash flow return on investment formula of the Company (any Designated Subsidiary, Designated Parent, division or other operational unit of the Company; (x) the attainment of certain target levels in the fair market value of the shares of Common Stock; and (xi) the growth in the value of an investment in the Common Stock assuming the reinvestment of dividends. In addition, such Performance Goals may be based upon the attainment of specified levels of Company (or Designated Subsidiary, Designated Parent, division or other operational unit of the Company) performance under one or more of the measures described above relative to the performance of other corporations. The Management Committee and the Committee may: (i) 7 designate additional business criteria on which the Performance Goals may be based or (ii) adjust, modify or amend the aforementioned business criteria. 6.3 Maximum Nondiscretionary Award. The maximum Performance Award payable to a Participant for any Plan Year is $1,500,000. 6.4 Payment Date; Committee Certification. The Performance Award will be paid as soon as administratively feasible after the Plan Year in which it is earned, but not before the Committee or Management Committee, as applicable, certifies in writing that the Performance Goals specified (except as provided in Section 7 with regard to death, disability or Change in Control of the Company or certain other termination situations) pursuant to subsection 6.2 were, in fact, satisfied, except as may otherwise be agreed by a Participant and the Company in a written agreement executed prior to the beginning of the fiscal year to which the Performance Award relates in accordance with any deferred compensation program in effect applicable to such Participant. The Company's independent accountants shall examine as of the close of the Plan Year and communicate the results of such examination to the Committee and the Management Committee as to the appropriateness of the payment of Performance Awards under the Plan for the Plan Year. The Committee and the Management Committee, as applicable, shall use their best efforts to make a determination with regard to satisfaction of the Performance Goals within one hundred twenty (120) days after the end of each Plan Year. The Participant shall have no right to receive payment of any deferred amount until he or she has a right to receive such amount under the terms of the applicable deferred compensation program. 7. Employment at Year End Generally Required for Award. (a) No Award shall be made to any Participant who is not an active Employee of the Company, a Designated Parent or Designated Subsidiary at the end of the Plan Year; provided, however, that the Committee or the Management Committee, as applicable, in its sole and absolute discretion, may make Awards to Participants for a Plan Year in circumstances that the Committee or Management Committee, as applicable, deems appropriate including, but not limited to, a Participant's death, disability, retirement or other termination of employment during such Plan Year and the Committee or Management Committee, as applicable, shall be required to make at least a pro-rata Award through the date of a Change in Control of the Company to each Participant who is a Participant at the time of such Change in Control of the Company. All such Awards shall be based on achievement of the Performance Goals for the Plan Year, except that, in the case of death, disability or Change in Control of the Company during the Plan Year, an amount equal to or less than the Individual Target Awards may be made by the Committee or the Management Committee, as applicable, either during or after the Plan Year without regard to actual achievement of the Performance Goals. Furthermore, upon a Change in Control of the Company, the Committee or the Management Committee, as applicable, may in its sole discretion make an award (payable immediately) equal to a pro-rata portion (through the date of the Change in Control of the Company) of the Individual Target Award payable upon achieving, but not surpassing, the Performance Goals for the relevant Plan Year. Any such immediate pro-rata payment shall reduce any other Award made for such Plan Year under the Plan by the amount of the pro-rata payment. 8 (b) The Management Committee, as applicable, may, in its sole and absolute discretion, make a pro-rata Award to any Participant who has been designated as and automatically becomes a Participant who is a Non-Covered Employee during such Plan Year under Section 4(a) of the Plan. Such pro-rata Award shall be a proportionate amount of the amount of Award the Participant would have received, pursuant to Section 6 above, had the Employee been a Participant for the entire Plan Year, which shall be calculated by multiplying the actual Performance Award which would have been payable had the Employee remained a Participant for the entire Plan Year by a fraction, the numerator of which is the number of months during the Plan Year the Employee was a Participant under Section 4(a) and the denominator of which is 12. All pro-rata Awards shall be payable in the same manner and at the same time as Performance Awards. This Section 7(b) shall not apply to Covered Employees. 8. Forfeiture of Award. Notwithstanding anything else contained herein to the contrary, a Participant's right to receive any unpaid Award otherwise payable hereunder shall be automatically forfeited and shall not be paid in the event the Participant's employment is terminated for Cause. 9. Non-Alienation of Benefits. The Awards payable under the Plan shall not be subject to alienation, transfer, assignment, garnishment, execution or levy of any kind, and any attempt to cause any benefits to be so subjected shall not be recognized or given effect by the Company. 10. Limitation of Rights. Nothing contained herein shall be construed as conferring upon an Employee the right to continue in the employ of any Employer as a Covered Employee or as an Employee or in any other capacity or to interfere with the Employer's right to discharge him or her at any time for any reason whatsoever. 11. Amendment or Termination. The Board (or a duly authorized committee thereof) may, in its sole and absolute discretion, amend, suspend or terminate the Plan or adopt a new plan in place of the Plan from time to time and at any time in such manner as it deems appropriate or desirable. Furthermore, no amendment, suspension or termination shall, without the consent of the Participant, alter or impair a Participant's right to receive payment of an Award for a Plan Year otherwise payable hereunder. 12. Severability. In case any provision of the Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but the Plan shall be construed and enforced as if such illegal and invalid provision never existed. 9 13. Withholding. The Company shall have the right to make such provisions as it deems necessary or appropriate to satisfy any obligations it may have to withhold federal, state or local income or other taxes incurred by reason of the payment of an Award pursuant to the Plan. 14. Governing Law. To the extent legally required, the Code and ERISA shall govern the Plan and, if any provision hereof is in violation of any applicable requirement thereof, the Company reserves the right to retroactively amend the Plan to comply therewith. To the extent not governed by the Code and ERISA, the Plan shall be governed by the laws of the State of Delaware. 15. Non-Exclusivity. The adoption of the Plan by the Company shall not be construed as creating any limitations on the power of the Company to adopt such other supplemental retirement income arrangements as it deems desirable, and such arrangements may be either generally applicable or limited in application. 16. Non-Employment. The Plan is not an agreement of employment and it shall not grant the Employee any rights of employment. 17. Headings and Captions. The headings and captions herein are provided for reference and convenience only. They shall not be considered part of the Plan and shall not be employed in the construction of the Plan. 10 EX-10.30 10 a2038805zex-10_30.txt EXHIBIT 10.30 Exhibit 10.30 - -------------------------------------------------------------------------------- DONNA KARAN INTERNATIONAL INC. 1998 NON-EMPLOYEE DIRECTOR RESTRICTED STOCK PLAN (As amended and restated through December 8, 2000) - -------------------------------------------------------------------------------- Table of Contents Page I. Purposes of the Plan..................................................1 II. Definitions...........................................................1 III. Effective Date........................................................4 IV. Administration........................................................4 A. Duties of the Committee..........................................4 B. Advisors.........................................................4 C. Determinations...................................................4 V. Shares; Adjustment Upon Certain Events................................5 A. Shares to be Delivered; Fractional Shares........................5 B. Adjustments; Recapitalization, etc...............................5 VI. Restricted Stock......................................................5 A. Restricted Stock.................................................5 B. Awards and Certificates..........................................6 VII. Acceleration Events...................................................7 VIII. Termination of Directorship...........................................7 A. General..........................................................7 B. Forfeiture.......................................................7 IX. Nontransferability of Awards..........................................7 X. Termination, Amendment and Modification...............................8 XI. General Provisions....................................................8 A. Right to Terminate Directorship..................................8 B. Trusts, etc......................................................8 C. Notices..........................................................9 D. Severability of Provisions.......................................9 E. Payment to Minors, Etc...........................................9 F. Headings and Captions............................................9 G. Controlling Law..................................................9 H. Costs............................................................9 I. Section 16(b) of the Exchange Act................................9 XII. Issuance of Stock Certificates; Legends; Payment of Expenses.........10 A. Stock Certificates..............................................10 i Page ---- B. Legends.........................................................10 XIII. Listing of Shares and Related Matters................................10 XIV. Withholding of Taxes.................................................11 ii Donna Karan International Inc. 1998 Non-Employee Director Restricted Stock Plan I. Purposes of the Plan The purposes of this 1998 Non-Employee Director Restricted Stock Plan (the "Plan") are to enable Donna Karan International Inc. (the "Company") to attract, retain and motivate the directors who are important to the success and growth of the business of the Company and to create a long-term mutuality of interest between such individuals and the stockholders of the Company by granting the directors Restricted Stock (as defined herein). II. Definitions In addition to the terms defined elsewhere herein, for purposes of this Plan, the following terms will have the following meanings when used herein with initial capital letters: A. "Award" means any Restricted Stock granted pursuant to the Plan. B. "Board" means the Board of Directors of the Company. C. "Cause" means with respect to an Eligible Director's Termination of Directorship, an act or failure to act that constitutes "cause" for removal of a director under applicable Delaware law. D. "Change In Control" means any of the following: (a) the acquisition by any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) other than a person who is a stockholder of the Company on the effective date of the registration statement filed under the Securities Act relating to the first public offering (the "Initial Public Offering") of securities of the Company (an "Initial Stockholder") of 30% or more of the voting power of securities of Company or the acquisition by an Initial Stockholder, other than an affiliate of the Company that would be a Related Person, of an additional 5% of the voting power of securities of the Company over and above that owned immediately after the closing date of the Initial Public Offering of the Company's Common Stock; excluding however, the following: (x) any acquisition by the Company or a Related Person of any of the foregoing, or (y) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or a Related Person; or (b) (i) the acquisition by any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) other than a person who, on the effective date of the Initial Public Offering is a holder of any ownership interest in Donna Karan Studio (an "Initial Licensee Interest Holder") of 30% or more of the voting power of Donna Karan Studio or (ii) the acquisition by an Initial Licensee Interest Holder, other than an affiliate of Gabrielle Studio, Inc. (and excluding any such acquisition resulting from a purchase, sale or transfer of Takihyo Inc. stock by and between any of the current stockholders of Takihyo Inc.) that would be a Related Person (but substituting Gabrielle Studio, Inc. for the Company in such definition) of Gabrielle Studio, Inc., of an additional 5% of the voting power of securities of the Company over and above that owned immediately after the closing date of the Initial Public Offering of the Company's Common Stock; excluding however, the following: (x) any acquisition by the Company or a Related Person of any of the foregoing, or (y) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or a Related Person; or (c) any merger or sale of substantially all of the assets of the Company under circumstances where the holders of the Common Stock of the Company immediately prior to the transaction becoming public knowledge were not holders of 80% of the equity securities of the surviving entity resulting from such transaction; or (d) any change in the composition of the Board of Directors of the Company not approved by (i) a majority of the Board prior to such change and (ii) by not less than two directors of the Company who were directors prior to the time any person who was not an Initial Stockholder acquired 30% or more of the voting power of securities of the Company. E. "Code" means the Internal Revenue Code of 1986, as amended and all rules and regulations promulgated thereunder. F. "Committee" means the Board or a committee appointed by the Board from time to time to administer the Plan, consisting of two or more members of the Board, each of whom shall be a non-employee director as defined in Rule 16b-3 promulgated under Section 16(b) of the Exchange Act. If for any reason the appointed Committee does not meet the requirements of Rule 16b-3 promulgated under Section 16(b) of the Exchange Act, such noncompliance shall not affect the validity of the Awards, grants, interpretations or other actions of the Committee. G. "Common Stock" means the common stock of the Company, par value $0.01 per share, any common stock into which the common stock may be converted and any Common Stock resulting from any reclassification of the Common Stock. H. "Company" means Donna Karan International Inc., a Delaware corporation, and any successor thereto. I. "Effective Date" has the meaning set forth in Article III. J. "Eligible Director" means a director of the Company who is not an active employee of the Company or Related Person and who is not an officer, director or employee of (i) any entity which, directly or indirectly, beneficially owns or controls 5% or more of the combined voting power of the then outstanding voting securities of the Company (or any Related Person) entitled to vote generally in the election of directors or (ii) any entity controlling, controlled by or under common control (within the meaning of Rule 405 of the Securities Act) with any such entity. 2 K. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and all rules and regulations promulgated thereunder. L. "Fair Market Value" of a share of Common Stock means, for purposes of this Plan, unless otherwise required by any applicable provision of the Code or any regulations issued thereunder, as of any date, the last sales prices reported for the Common Stock on the applicable date, (i) as reported by the principal national securities exchange in the United States on which it is then traded, or (ii) if not traded on any such national securities exchange, as quoted on an automated quotation system sponsored by the Nasdaq Stock Market, Inc., or if the sale of the Common Stock shall not have been reported or quoted on such date, on the first day prior thereto on which the Common Stock was reported or quoted. M. "Participant" means an Eligible Director who is granted an Award under the Plan, which Award has not expired. N. "Related Person" means, other than the Company (a) any corporation that is defined as a subsidiary corporation in Section 424(f) of the Code; (b) any corporation or trade or business (including, without limitation, a partnership or limited liability company) which is controlled 50% or more by the Company or one of its subsidiaries (whether by ownership of stock, assets or an equivalent ownership interest); (c) any corporation that is defined as a parent corporation in Section 424(e) of the Code; or (d) any corporation or trade or business (including, without limitation, a partnership or limited liability company) which controls 50% or more of the Company (whether by ownership of stock, assets or an equivalent ownership interest). O. "Restricted Stock" means shares of Common Stock or the right to receive shares of Common Stock, as the case may be, granted to an Eligible Director of the Company pursuant to Article VI. P. "Restricted Stock Agreement" means an agreement evidencing the grant of an Award. Q. "Securities Act" means the Securities Act of 1933, as amended, and all rules and regulations promulgated thereunder. R. "Share" means a share of Common Stock. S. "Termination of Directorship" with respect to an individual means that individual is no longer acting as a director (whether a non-employee director or employee director) of the Company. 3 III. Effective Date The Plan shall become effective on May 1, 1998 (the "Effective Date"). IV. Administration A. Duties of the Committee. The Plan shall be administered and interpreted by the Committee. The Committee shall have full authority to interpret the Plan and to decide any questions and settle all controversies and disputes that may arise in connection with the Plan; to establish, amend and rescind rules for carrying out the Plan; to administer the Plan, subject to its provisions; to prescribe the form or forms of instruments evidencing Awards and any other instruments required under the Plan and to change such forms from time to time; and to make all other determinations and to take all such steps in connection with the Plan and the Awards as the Committee, in its sole discretion, deems necessary or desirable. B. Advisors. The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan, and may rely upon any advice or opinion received from any such counsel or consultant and any computation received from any such consultant or agent. Expenses incurred by the Committee in the engagement of such counsel, consultant or agent shall be paid by the Company. C. Determinations. Each determination, interpretation or other action made or taken pursuant to the provisions of this Plan by the Committee shall be final, conclusive and binding for all purposes and upon all persons, including, without limitation, the Participants, the Company, directors, officers and other employees of the Company, and the respective heirs, executors, administrators, personal representatives and other successors in interest of each of the foregoing. V. Shares; Adjustment Upon Certain Events A. Shares to be Delivered; Fractional Shares. Shares to be issued under the Plan shall be made available only from issued Shares reacquired by the Company and held in treasury. No fractional Shares will be issued or transferred in connection with the vesting of Restricted Stock. With respect to any remaining fractional Share, no payment will be paid to the Participant and such remaining fractional Share shall be cancelled. B. Adjustments; Recapitalization, etc. 1. The existence of the Plan and the Restricted Stock granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting Common Stock, the dissolution or liquidation of the Company or any sale or transfer of all or part of its assets or business, or any other corporate act or proceeding. The Committee may make or provide for such adjustments in the number of Shares covered by outstanding Awards granted hereunder to recognize the effect that otherwise 4 would result from any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, merger, consolidation, spin-off, reorganization, partial or complete liquidation, issuance of rights or warrants to purchase securities or any other corporate transaction or event having an effect similar to any of the foregoing. 2. Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor or upon conversion of shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number and class of shares and/or other securities or property subject to Awards theretofore granted or the purchase price (as hereinafter defined). VI. Restricted Stock Restricted Stock granted pursuant to this Article VI shall be evidenced by a Restricted Stock Agreement in such form as the Committee shall from time to time approve and the terms and conditions of such grants shall be set forth therein. A. Restricted Stock. Without further action by the Board or the Committee (except as provided in Article X) of the Company, each year, as of the first day of the month following the annual meeting of the stockholders of the Company, each Eligible Director shall be automatically granted 500 shares of Restricted Stock, subject to the terms of the Plan, provided that no such Award shall be granted if on the date of grant the Company has liquidated, dissolved or merged or consolidated with another entity in such a manner that it is not the surviving entity (unless the Plan has been assumed by such surviving entity with regard to future grants). B. Awards and Certificates. An Eligible Director shall not have any rights with respect to a future award of Restricted Stock, unless and until such Eligible Director has delivered a fully executed copy of the Restricted Stock Agreement to the Company and has otherwise com plied with the applicable terms and conditions of such Restricted Stock Agreement. Further, such Restricted Stock shall be subject to the following conditions: 1. Purchase Price. The purchase price for Restricted Stock shall be their par value or, to the extent permitted by applicable law, zero. 2. Acceptance. Awards of Restricted Stock must be accepted within a period of sixty (60) days after the grant date, by executing a Restricted Stock Agreement and by paying the purchase price, if any. 3. Vesting. Shares of Restricted Stock granted to a Participant shall be fully vested as of the one (1) year anniversary of the date the Award is granted (the "Restriction Period"). 5 4. Certificates. Upon a grant of Restricted Stock, the Committee may, in its sole discretion, decide to either have the Company or other agent appointed by the Committee hold the share certificates representing such Restricted Stock in escrow or issue share certificates to the Participant, unless the Committee elects to use another system, such as book entries by the transfer agent, as evidencing ownership of a grant of Restricted Stock. If a certificate is issued, such certificate shall be registered in the name of such Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, substantially in the following form. "The anticipation, alienation, attachment sale, transfer, assignment, pledge, encumbrance or charge of the shares of Common Stock represented hereby are subject to the terms and conditions (including forfeiture) of the Donna Karan International Inc. (the "Company") 1998 Non-Employee Director Restricted Stock Plan and the Restricted Stock Agreement entered into between the registered owner and the Company dated _______________. Copies of such Plan and Restricted Stock Agreement are on file at the principal office of the Company." If a stock certificate is held in custody by the Company, the Committee may require, as it determines in its sole discretion, to have the Participant deliver a duly signed stock power, endorsed in blank, relating to the Restricted Stock. 5. Ownership. Except to the extent otherwise set forth in the Restricted Stock Agreement, the Participant shall possess all incidents of ownership of such Shares, subject to this Article VI, including the right to receive dividends with respect to such Shares, the right to vote such Shares, and, subject to and conditioned upon the full vesting of Restricted Stock, the right to tender such Shares. Any stock dividend that is issued on Restricted Stock or if Restricted Stock is split or any other shares, securities, moneys or property representing a dividend is issued on Restricted Stock (other than regular cash dividends) or represents a distribution or return of capital upon or in respect of Restricted Stock or any part thereof, or results from a split-up, reclassification or other like changes of Restricted Stock, or otherwise is issued in exchange therefor, and any warrants, rights or options issued in respect of Restricted Stock shall be subject to the same restrictions, including that of this Article VI, as Restricted Stock with regard to which they are issued and shall herein be encompassed within the term "Restricted Stock." VII. Acceleration Events Unless otherwise provided in the applicable Restricted Stock Agreement, the restrictions to which Restricted Stock granted prior to the Change In Control are subject shall lapse as if the applicable Restriction Period had ended upon such Change In Control. 6 VIII. Termination of Directorship A. General. If a Participant incurs a Termination of Directorship for any reason including, without limitation, death, disability, resignation, failure to stand for reelection or for Cause during the relevant Restriction Period, all rights to all Restricted Stock shall be forfeited immediately. B. Forfeiture. A Participant shall be entitled to no compensation upon the forfeiture of rights to Restricted Stock, other than repayment of par value paid for such Restricted Stock, if any. IX. Nontransferability of Awards No Award shall be transferable by the Participant otherwise than by will or under applicable laws of descent and distribution, and during the lifetime of the Participant may be exercised only by the Participant or his or her guardian or legal representative. In addition, except as provided above, no Award shall be assigned, negotiated, pledged or hypothecated in any way (whether by operation of law or otherwise), and no Award shall be subject to execution, attachment or similar process. Upon any attempt to transfer, assign, negotiate, pledge or hypothecate any Award, or in the event of any levy upon any Award by reason of any execution, attachment or similar process contrary to the provisions hereof, such Award shall immediately terminate and become null and void. X. Termination, Amendment and Modification The Plan shall terminate at the close of business on the tenth anniversary of the Effective Date (the "Termination Date"), unless terminated sooner as hereinafter provided, and no Award shall be granted under the Plan on or after that date. The termination of the Plan shall not terminate any outstanding Awards that by their terms continue beyond the Termination Date. At any time prior to the Termination Date, the Committee or Board may amend or terminate the Plan or suspend the Plan in whole or in part. The Committee or Board may at any time, and from time to time, amend in whole or in part, any or all of the provisions of the Plan (including any amendment deemed necessary to ensure that the Company complies with any regulatory requirements referred to in Article XII), or suspend or terminate it entirely, retroactively or otherwise; provided, however, that, unless otherwise required by law or specifically provided herein, the rights of a Participant with respect to Awards granted prior to such amendment, suspension or termination, may not be materially impaired without the consent of such Participant. The Committee or the Board may amend the terms of any Award granted, prospectively or retroactively, but, subject to Article VII above or as otherwise provided herein, no such amendment or other action by the Committee or the Board shall materially impair the rights of any Participant without the Participant's consent. Notwithstanding the foregoing and solely to the extent required by Section 16(b) of the Exchange Act, neither the Board nor the Committee may make any determination or interpretation or take any other action which would cause any member of the Committee to cease to be a non-employee director for purposes of Section 16(b) of the Exchange Act. 7 XI. General Provisions A. Right to Terminate Directorship. Neither the adoption of the Plan nor the grant of Restricted Stock hereunder shall impose any obligation on the Company to retain any Participant as a director nor shall it impose any obligation on the part of any Participant to remain as a director of the Company. B. Trusts, etc. Nothing contained in the Plan and no action taken pursuant to the Plan shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company and any Participant or the executor, administrator or other personal representative or designated beneficiary of such Participant, or any other persons. If and to the extent that any Participant or such Participant's executor, administrator or other personal representative, as the case may be, acquires a right to receive any payment from the Company pursuant to the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. C. Notices. Any notice to the Company required by or in respect of this Plan will be addressed to Donna Karan International Inc. at 550 Seventh Avenue, New York, New York 10018, Attention: General Counsel (or such other place of business as shall become Donna Karan International Inc. principal executive offices from time to time). Each Participant shall be responsible for furnishing the Committee with the current and proper address for the mailing to such Participant of notices and the delivery to such Participant of agreements, Shares and payments. Any such notice to the Participant will, if the Company has received notice that the Participant is then deceased, be given to the Participant's personal representative if such representative has previously informed the Company of his status and address (and has provided such reasonable substantiating information as the Company may request) by written notice under this Article XII. Any notice required by or in respect of this Plan will be deemed to have been duly given when delivered in person or when dispatched by telecopy or one business day after having been dispatched by a nationally recognized overnight courier service or three business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid. The Company assumes no responsibility or obligation to deliver any item mailed to such address that is returned as undeliverable to the addressee and any further mailings will be suspended until the Participant furnishes the proper address. D. Severability of Provisions. If any provisions of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions of the Plan, and the Plan shall be construed and enforced as if such provisions had not been included. E. Payment to Minors, Etc. Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of receipt thereof shall be deemed paid when paid to such person's guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the Committee, the Company and their employees, agents and representatives with respect thereto. 8 F. Headings and Captions. The headings and captions herein are provided for reference and convenience only. They shall not be considered part of the Plan and shall not be employed in the construction of the Plan. G. Controlling Law. The Plan shall be construed and enforced according to the laws of the State of Delaware, without giving effect to rules governing the conflicts of laws. H. Costs. The Company shall bear all expenses included in administering this Plan, including expenses of issuing Common Stock pursuant to any Restricted Stock granted hereunder. I. Section 16(b) of the Exchange Act. All elections and transactions under the Plan by persons subject to Section 16 of the Exchange Act involving Shares shall be intended to comply with any applicable condition under Rule 16b-3 as then in effect. In such event, the Committee may at any time impose any limitations upon the issuance of Shares or other conditions which, in the Committee's discretion, are necessary or desirable in order to comply with Section 16(b) and the rules and regulations thereunder and may establish and adopt written administrative guidelines, designed to facilitate compliance with Section 16(b) of the Exchange Act, as it may deem necessary or proper for the administration and operation of the Plan and the transaction of business thereunder. XII. Issuance of Stock Certificates; Legends; Payment of Expenses A. Stock Certificates. Upon the lapse of restriction on Restricted Stock, a certificate or certificates for the Shares as to which such Restricted Stock has been granted shall be issued by the Company in the name of the person or persons receiving such Restricted Stock and shall be delivered to or upon the order of such person or persons. B. Legends. All certificates for Shares delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed or any national securities association system upon whose system the Common Stock is then quoted, any applicable federal or state securities law, and any applicable corporate law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. If the Board or the Committee determines in its sole discretion, each Participant shall, upon any exercise or conversion of an Award, execute and deliver to the Company a written statement, in form satisfactory to the Company, representing and warranting that such Participant is purchasing or accepting the Shares then acquired for such Participant's own account and not with a view to the resale or distribution thereof, that any subsequent offer for sale or sale of any such Shares shall be made either pursuant to (i) a registration statement on an appropriate form under the Securities Act, which registration statement shall have become effective and shall be current with respect to the Shares being offered and sold, or (ii) a specific exemption from the registration requirements of the Securities Act, and that in claiming such exemption the Participant will, prior to any offer for sale or 9 sale of such Shares, obtain a favorable written opinion, satisfactory in form and substance to the Company, from counsel approved by the Company as to the availability of such exception. XIII. Listing of Shares and Related Matters If the Board determines, in its discretion, that the listing, registration, or qualification of the Award or the Shares subject to the Award upon any securities exchange or under any state or federal securities or other law or regulation, or the exemption from such listing, registration or qualification requirements, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition to or in connection with the vesting of Restricted Stock, no Shares shall be issued upon the lapse of restrictions on any Restricted Stock unless the listing, registration, qualification, exemption, consent or approval has been effected or obtained free of any conditions not acceptable to the Board. The holder of Restricted Stock will supply the Company with certificates, representations, and information that the Company requests and shall otherwise cooperate with the Company in obtaining the listing, registration, qualification, exemption, consent or approval. Without limiting the foregoing, no Shares shall be issued upon lapse of restrictions on any Restricted Stock if the Company or the Committee determines that the issuance of Shares upon vesting does not comply with any applicable Federal and state securities laws. XIV. Withholding of Taxes The Company shall have the right to deduct from any payment to be made to a Participant, or to otherwise require, prior to the issuance or delivery of any Shares or the payment of any cash hereunder, payment by the Participant of, any Federal, state or local taxes required by law to be withheld. 10 EX-10.31 11 a2038805zex-10_31.txt EXHIBIT 10.31 Exhibit 10.31 - -------------------------------------------------------------------------------- DONNA KARAN INTERNATIONAL INC. DEFERRED BONUS PLAN Effective as of February 1, 1999 (Amended and restated through December 8, 2000) - -------------------------------------------------------------------------------- DONNA KARAN INTERNATIONAL INC. DEFERRED BONUS PLAN The Plan is established in order to provide a select group of management and highly compensated employees of Donna Karan International Inc., its Subsidiaries and any Parent with the opportunity to defer the receipt of all or a portion of their annual performance awards under the Executive Incentive Plan and certain other designated bonus payments in accordance with the terms and conditions set forth herein. 1. Definitions. For purposes of the Plan, the following definitions apply: (a) "Award" means the annual performance award payable to an Eligible Employee under the Executive Incentive Plan or, subject to the approval of the Committee, the bonus payable under a plan, agreement or arrangement between an Eligible Employee and the Employer. (b) "Beneficiary" means, unless otherwise specified by the Participant in a written election filed with the Committee, the person or persons (if any) designated by the Participant under the Qualified Plan (or otherwise determined under the terms of the Qualified Plan if no such designation is made) to receive his or her benefits under the Qualified Plan in the event of the Participant's death. (c) "Board" means the Board of Directors of the Company. (d) "Cause" means, with respect to a Participant's Termination of Employment, a Participant's fraud, embezzlement or commission of a crime with regard to the Company , its Subsidiaries, any Parent or their respective assets. The Committee shall have sole discretion in determining whether cause exists, and its determination shall be final, binding and conclusive. (e) "Change in Control" means any of the following: (i) the acquisition by any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than a person who is a stockholder of the Company on the effective date of the registration statement filed under the Securities Act of 1933, as amended, relating to the first public offering (the "Initial Public Offering") of securities of the Company (an "Initial Stockholder") of 30% or more of the voting power of securities of Company or the acquisition by an Initial Stockholder, other than an affiliate of the Company that would be a Parent or a Subsidiary, of an additional 5% of the voting power of securities of the Company over and above that owned immediately after the closing date of the Initial Public Offering of the Company's Common Stock; excluding however, the following: (x) any acquisition by the Company or a Subsidiary of any of the foregoing, or (y) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or a Subsidiary; or (ii) (A) the acquisition by any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) other than a person who, on the effective date of the Initial Public Offering is a holder of any ownership interest in Donna Karan Studio (an "Initial Licensee Interest Holder") of 30% or more of the voting power of Donna Karan Studio or (B) the acquisition by an Initial Licensee Interest Holder, other than an affiliate of Gabrielle Studio, Inc. (and excluding any such acquisition resulting from a purchase, sale or transfer of Takihyo Inc. stock by and between any of the current stockholders of Takihyo Inc.) that would be a Parent or a Subsidiary (but substituting Gabrielle Studio, Inc. for the Company in such definition) of Gabrielle Studio, Inc., of an additional 5% of the voting power of securities of the Company over and above that owned immediately after the closing date of the Initial Public Offering of the Company's Common Stock; excluding however, the following: (x) any acquisition by the Company or a Subsidiary of any of the foregoing, or (y) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or a Subsidiary; or (iii) any merger or sale of substantially all of the assets of the Company under circumstances where the holders of the Common Stock of the Company immediately prior to the transaction becoming public knowledge were not holders of 80% of the equity securities of the surviving entity resulting from such transaction; or (iv) any change in the composition of the Board not approved by (a) a majority of the Board prior to such change and (b) by not less than two (2) directors of the Company who were directors prior to the time any person who was not an Initial Stockholder acquired thirty percent (30%) or more of the voting power of securities of the Company. (f) "Code" means the Internal Revenue Code of 1986, as amended. (g) "Committee" means the committee which administers the Plan on behalf of the Company which: (i) solely with respect to Non-Covered Employees, consists of the chief executive officer of the Company, the most senior executive from the human resources department, the most senior executive from the finance department and any other individual designated by the by the Board; and (ii) solely with respect to Covered Employees who receive Awards that are intended to qualify as performance-based compensation within the meaning of Section 162(m), consists of the Incentive Compensation Subcommittee of the Compensation Committee or such other committee or subcommittee of the Board appointed by the Board, provided that such committee shall consist of two (2) or more members of the Board. To the extent that no committee exists, the Board shall be deemed to be the Committee. (h) "Common Stock" means the common stock of the Company, par value $0.01 per share, any Common Stock into which the Common Stock may be converted and any Common Stock resulting from any reclassification of the Common Stock. (i) "Company" means Donna Karan International Inc., a Delaware corporation, and any successor thereto. (j) "Covered Employee" means an Employee who is, or may become, a "covered employee" as defined under Section 162(m)(3) of the Code of the Company and is designated as such by the Committee for purposes of the Plan from time to time. (k) "Deferral Period" means, with regard to each Deferred Bonus, the earlier of: (i) the period of deferral selected by the Participant for the period described in Section 4(a); or (ii) the 2 period beginning on the effective date of a deferral election and ending on a Participant's Termination of Employment. (l) "Deferred Bonus" means the Awards deferred under Section 4(a) hereof by a Participant. (m) "Deferred Benefit" means the benefits payable under the Plan which shall be payable in accordance with Sections 6, 7 and 8 hereof. (n) "Deferred Compensation Account" means the individual account established pursuant to Section 5 hereof, to which a Participant's Deferred Awards are credited. (o) "Earnings" means, for any Plan Year, earnings and losses on amounts in the Deferred Compensation Account computed in accordance with Section 6 hereof. (p) "Eligible Employee" means an Employee who has been designated by an Employer as a Vice President or above and any other Employee who is a member of a select group of management or highly compensated employees and who is designated by the Committee, in its sole discretion, as an Eligible Employee. (q) "Employee" means any person employed by an Employer excluding any "leased employee," as defined in Section 414(n) of the Code, any independent contractor or agent. (r) "Employer" means the Company, any Parent and any Subsidiary. (s) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (t) "Executive Incentive Plan" means the Donna Karan International Inc. Executive Incentive Plan, as amended from time to time. (u) "Non-Covered Employee" means a Participant who is not a Covered Employee. (v) "Parent" means, other than the Company, (i) any corporation in an unbroken chain of corporations ending with the Company which owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain; or (ii) any corporation or trade or business (including, without limitation, a partnership or limited liability company) which controls fifty percent (50%) or more (whether by ownership of stock, assets or an equivalent ownership interest) of the Company. (w) "Participant" means any Eligible Employee who: (i) elects to defer his or her Award in accordance with the terms hereunder or, subject to the approval of the Committee, elects to defer a bonus payable under a plan, agreement or arrangement between the Employer and the Eligible Employee; and (ii) has a balance in his or her Deferred Compensation Account under the Plan. (x) "Plan" means the Donna Karan International Inc. Deferred Bonus Plan. 3 (y) "Plan Year" means the fiscal year of the Company. (z) "Qualified Plan" means the Donna Karan New York 401(k) Retirement Plan, as restated effective as of January 1, 1997 and as amended from time to time thereafter. (aa) "Subsidiary" means, other than the Company, (i) any corporation in an unbroken chain of corporations beginning with the Company which owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain; (ii) any corporation or trade or business (including, without limitation, a partnership or limited liability company) which is controlled fifty percent (50%) or more (whether by ownership of stock, assets or an equivalent ownership interest) by the Company or one of its Subsidiaries; or (iii) any other entity, approved by the Board as a Subsidiary under the Plan, in which the Company or any of its Subsidiaries has an equity or other ownership interest. (bb) "Termination of Employment" or "Terminates Employment" means termination of employment as an Employee of the Company, all Subsidiaries and all Parents (if any), for any reason whatsoever, including but not limited to death, retirement, resignation or firing (with or without Cause). 2. Effective Date. The Plan shall become effective as of February 1, 1999. 3. Administration and Interpretation of the Plan. The Plan shall be administered by the Committee. The Committee shall have the exclusive authority and responsibility to: (i) interpret the Plan; (ii) approve the designation of Eligible Employees; (iii) determine when an individual shall cease to be eligible to make deferrals hereunder; (iv) authorize the payment of all benefits and expenses of the Plan as they become payable under the Plan; (v) adopt, amend and rescind rules and regulations relating to the Plan; and (viii) make all other determinations and take all other actions necessary or desirable for the Plan's administration including, without limitation, correcting any defect, supplying any omission or reconciling any inconsistency in the Plan in the manner and to the extent it shall deem necessary to carry the Plan into effect. Decisions made by the Committee shall be made by a majority of its members. The Committee shall have exclusive and final authority in all determinations and decisions affecting Employees. All decisions of the Committee on any question concerning the interpretation and administration of the Plan shall be final, conclusive and binding on all persons. The Committee may rely on information, and consider recommendations, provided by the Board or the executive officers of the Company. 4. Election to Defer. (a) An Eligible Employee may elect in writing, on a form prescribed by the Company, to defer receipt of all or a specified portion (in increments of ten (10%) percent, unless specified otherwise by the Company) of his or her Award payable with respect to a Plan Year. At the time of the deferral election, a Participant shall also elect a Deferral Period of either three (3) or five (5) years, which Deferral Period shall begin on day on which the Award to which the deferral relates 4 would otherwise have been paid. 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). A Participant must make a separate election with respect to each Award he or she chooses to defer. Each election to defer an Award shall be irrevocable. (b) Notwithstanding subparagraph (a) above, a Participant may on one (1) occasion elect to extend any Deferral Period on a form prescribed by the Company for either three (3) or five (5) additional years, provided that any such election is made at least one (1) year prior to the expiration of the applicable Deferred Period. Each election to extend a Deferral Period shall be irrevocable. (c) An election made pursuant to this Section 4 by a Participant who ceases to be an Eligible Employee but who does not incur a Termination of Employment shall remain in effect and such Participant shall not be entitled to receive a distribution from the Plan solely as a result of such change in status. 5. Establishment of Deferred Compensation Account. At the time the Participant's initial Award becomes payable, the Company shall establish a Deferred Compensation Account for such Participant. The Deferred Bonus shall be credited to the Participant's Deferred Compensation Account as of the day on which the Award to which the deferral relates would otherwise have been paid to the Participant. 6. Additions to Deferred Compensation Account. (a) The measuring alternatives used for the measurement of Earnings on the amounts in a Participant's Deferred Compensation Account shall be selected by each Participant in writing, on a form prescribed by the Committee, from among the various measuring alternatives offered by the Committee. Each Participant may change the selection of his or her measuring alternative as of the beginning of any calendar quarter (or at such other times and in such manner as prescribed by the Committee, in its sole discretion), subject to such notice and other administrative procedures as established by the Committee. The Committee shall credit the Earnings computed under this Section to the balance in each Participant's Deferred Compensation Account as of the last business day of each calendar quarter, or such other dates as are selected by the Committee, in its sole discretion, at a rate equal to the performance of the measuring alternative selected by the Participant for the calendar quarter (or such other applicable period) to which such selection relates. (b) Notwithstanding subsection (a) above, the measuring alternatives used for the measurement of Earnings on the amounts in a Covered Employee's Deferred Compensation Account shall be selected in advance by the Committee, in its sole discretion, from among the various measuring alternatives, provided, however, that any such measuring alternatives shall be based on 5 actual predetermined investments (whether or not assets are actually invested therein) in accordance with Section 162(m) of the Code and the applicable regulations thereunder. The Company shall provide written notice to each Covered Employee of the predetermined measuring alternatives actually selected by the Committee for the measurement of Earnings on amounts in his or her Deferred Compensation Account. 7. Commencement of Benefits. (a) Except as otherwise provided in subparagraphs (b), (c) and (d) below, a Participant's Deferred Bonus and the Earnings attributable thereto shall be paid from such Participant's Deferred Compensation Account to the Participant (or, in the case of the Participant's death, his or her Beneficiary) as soon as administratively practicable after the end of the applicable Deferral Period in the form set forth in Section 8. (b) Notwithstanding subparagraph (a), to the extent that the Committee determines that the Company would not be entitled to a tax deduction pursuant to Section 162(m) of the Code with respect to the payment of any portion of a Participant's Deferred Compensation Account, the Committee shall have the authority to defer payment of all or a portion of such Participant's Deferred Compensation Account until such time as the Committee determines, in its sole discretion, that such deduction may be taken. (c) Notwithstanding subparagraph (a), the Committee may, in its sole discretion, accelerate payment of all or a portion of the Participant's Deferred Compensation Account to a Participant in any manner (including, without limitation, upon his or her Termination of Employment). (d) Notwithstanding anything herein to the contrary, including, without limitation, the Deferral Period, in the event of a Change in Control, each Participant hereunder shall receive his or her entire Deferred Benefit, from the Plan, equal to the Participant's entire Deferred Compensation Account, payable in the form of one (1) lump sum, as soon as administratively practicable following such Change in Control, but in no event later than five (5) days after the date of such Change in Control. 8. Form of Payment of Benefits. (a) Unless the Participant elects in writing, on a form prescribed by the Company, to receive payment of his or her Deferred Bonus and the Earnings attributable thereto in annual installment payments (not to exceed five (5) years), a Participant's Deferred Bonus and the Earnings attributable thereto shall be paid to him or her (or, in the event of death, his or her Beneficiary) in a lump sum. A Participant's election to receive annual installment payments must be made at such time as the Company shall prescribe but in any event no later than one (1) year prior to the expiration of the applicable Deferral Period. An election by a Participant pursuant to this subparagraph (a) will apply to all then current and future amounts in such Participant's Deferred Compensation Account. Notwithstanding the foregoing, a Participant may change the foregoing election in the same manner as provided above, provided that no such change shall be applicable to any Deferred Benefit which 6 becomes payable within the one (1) year period prior to the expiration of the Deferral Period. The Deferred Compensation Account of a Participant who elects to receive annual installment payments shall continue to be credited with Earnings until the final installment is paid. (b) If a Participant dies prior to receiving his or her total Deferred Compensation Account, the unpaid portion of such Deferred Compensation Account shall be paid to the Participant's Beneficiary in a single lump sum, as soon as administratively practicable following the Participant's death. 9. Forfeiture. Notwithstanding any provision to the contrary hereunder, in the event that a Participant is terminated by an Employer for Cause, such Participant forfeits his or her entire Deferred Compensation Account, effective immediately upon such termination. 10. Claims Procedure. (a) The Committee shall be responsible for determining all claims for benefits under the Plan by the Participants or their Beneficiaries. Within ninety (90) days after receiving a claim (or within up to one hundred eighty (180) days, if the claimant is notified of the need for additional time, including notification of the reason for the delay), the Committee shall notify the Participant or Beneficiary of its decision in writing, giving the reasons for its decision if adverse to the claimant. If the decision is adverse to the claimant, the Committee shall advise him or her of the Plan provisions involved, of any additional information which he or she must provide to perfect his or her claim and why, and of his or her right to request a review of the decision. (b) A claimant may request a review of an adverse decision by written request to the Committee made within sixty (60) days after receipt of the decision. The claimant, or his or her duly authorized representative, may review pertinent documents and submit written issues and comments. (c) Within sixty (60) days after receiving a request for review (or up to one hundred twenty (120) days after such receipt if the Participant is notified of the delay and the reasons therefor), the Committee shall notify the claimant in writing of (i) its decision, (ii) the reasons therefore, and (iii) the Plan provisions upon which it is based. (d) The Committee may at any time alter the claims procedure set forth above, so long as the revised claims procedure complies with the ERISA, and the regulations issued thereunder. (e) The Committee shall have the full power and authority to interpret, construe and administer the Plan in its sole discretion based on the provisions of the Plan and to decide any questions and settle all controversies that may arise in connection with the Plan. The Committee's interpretations and construction thereof, and actions thereunder, made in the sole discretion of the Committee, including any valuation of the Deferred Benefit, any determination under this Section 10, or the amount of the payment to be made hereunder, shall be final, binding and conclusive on all persons. No member of the Committee shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of the Plan. 7 (f) The Committee shall determine, subject to the provisions of the Plan (i) the additional Employees who shall participate in the Plan from time to time and (ii) when an Employee shall cease to be a Participant. 11. Construction of Plan. (a) The Plan is "unfunded" and any Deferred Benefit payable hereunder shall be paid by the Company out of its general assets. Participants and their designated Beneficiaries shall not have any interest in any specific asset of the Company as a result of the Plan. Nothing contained in the Plan and no action taken pursuant to the provisions of the Plan shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and the Participants, their designated Beneficiaries or any other person. Any funds which may be invested under the provisions of the Plan shall continue for all purposes to be part of the general funds of the Company and no person other than the Company shall by virtue of the provisions of the Plan have any interest in such funds. To the extent that any person acquires a right to receive payments from the Company under the Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. The Company, in its sole discretion, may establish a "rabbi trust" or invest in group annuities or other investment products to pay Deferred Benefits hereunder. (b) All expenses incurred in administering the Plan shall be paid by the Company. 12. Minors and Incompetents. If the Committee shall find that any person to whom payment is payable under the Plan is unable to care for his or her affairs because of illness or accident, or is a minor, any payment due (unless a prior claim therefore shall have been made by a duly appointed guardian, committee or other legal representative) may be paid to the spouse, a child, parent, or brother or sister, or to any person deemed by the Committee to have incurred expense for such person otherwise entitled to payment, in such manner and proportions as the Committee may determine it its sole discretion. Any such payment shall be a complete discharge of the liabilities of the Company, the Committee and the Board under the Plan. 13. Limitation of Rights. This Plan is not an agreement of employment. Nothing contained herein shall be construed as conferring upon an Employee the right to continue in the employ of any Employer as an Employee on or above a Vice President level or in any other capacity or to interfere with the Employer's right to discharge him or her at any time for any reason whatsoever. 14. Payment Not Salary. Any Deferred Benefit payable under the Plan shall not be deemed salary or other compensation to the Employee for the purposes of computing benefits to which he or she may be entitled under any pension plan or other arrangement of any Employer maintained for the benefit of its Employees. 8 15. Severability. In case any provision of the Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but the Plan shall be construed and enforced as if such illegal and invalid provision never existed. 16. Withholding. The Company shall have the right to make such provisions as it deems necessary or appropriate to satisfy any obligations it may have to withhold federal, state or local income or other taxes incurred by reason of payments or accruals pursuant to the Plan. 17. Assignment. The Plan shall be binding upon and inure to the benefit of the Company, its successors and assigns and the Participants and their heirs, executors, administrators and legal representatives. In the event that the Company sells all or substantially all of the assets of its business and the acquiror of such assets assumes the obligations hereunder, the Company shall be released from any liability imposed herein and shall have no obligation to provide any benefits payable hereunder. 18. Non-Alienation of Benefits. The benefits payable under the Plan shall not be subject to alienation, transfer, assignment, garnishment, execution or levy of any kind, and any attempt to cause any benefits to be so subjected shall not be recognized. 19. Governing Law. To the extent legally required, the Code and ERISA shall govern the Plan and, if any provision hereof is in violation of any applicable requirement thereof, the Company reserves the right to retroactively amend the Plan to comply therewith. To the extent not governed by the Code and ERISA, the Plan shall be governed by the laws of the State of New York. 20. Amendment or Termination of Plan. The Board (or a duly authorized committee thereof) may, in its sole and absolute discretion, amend the Plan from time to time and at any time in such manner as it deems appropriate or desirable, and the Board (or a duly authorized committee thereof) may, in its sole and absolute discretion, terminate the Plan for any reason from time to time and at any time in such manner as it deems appropriate or desirable. No amendment or termination shall reduce or terminate the then vested benefit of any Participant or Beneficiary. Upon an amendment or termination, the Company shall not be required to distribute a Participant's Deferred Benefit prior to the Participant's Termination of Employment, but, in the event of a termination of the Plan, may do so in a lump sum at the discretion of the Company. 21. Non-Exclusivity. The adoption of the Plan by the Company shall not be construed as creating any limitations on the power of the Company to adopt such other supplemental retirement income arrangements as it deems desirable, and such arrangements may be either generally applicable or limited in application. 9 22. Headings and Captions. The headings and captions herein are provided for reference and convenience only. They shall not be considered part of the Plan and shall not be employed in the construction of the Plan. 23. Gender and Number. Whenever used in the Plan, the masculine shall be deemed to include the feminine and the singular shall be deemed to include the plural, unless the context clearly indicates otherwise. 10 EX-10.32 12 a2038805zex-10_32.txt EXHIBIT 10.32 Exhibit 10.32 - -------------------------------------------------------------------------------- DONNA KARAN INTERNATIONAL INC. EXECUTIVE SEVERANCE PLAN Effective as of November 30, 2000 (As amended through December 8, 2000) - -------------------------------------------------------------------------------- DONNA KARAN INTERNATIONAL INC. EXECUTIVE SEVERANCE PLAN INTRODUCTION The purpose of this Plan is to enable the Company to offer certain protections to executive officers and key executives if their employment with the Employer terminates due to a Change in Control. Accordingly, to accomplish this purpose, the Company's Board has adopted this Plan, effective as of November 30, 2000. Capitalized terms and phrases used herein shall have the meanings ascribed thereto in Article I. ARTICLE I Definitions 1.1 "Base Salary" shall mean a Participant's annual base compensation rate for services paid by the Employer to the Participant at the time immediately prior to his or her termination of employment, as reflected in the Employer's payroll records. Base Salary shall not include commissions, bonuses, overtime pay, incentive compensation, benefits paid under any qualified plan, any group medical, dental or other welfare benefit plan, noncash compensation or any other additional compensation but shall include amounts reduced pursuant to a Participant's salary reduction agreement under Section 125 or 401(k) of the Code, if any, or a nonqualified elective deferred compensation arrangement, if any, to the extent that in each such case the reduction is to base salary. 1.2 "Board" shall mean the Board of Directors of the Company. 1.3 "Cause" shall mean (with regard to a Participant's termination of employment) (a) in the case where there is no employment or consulting agreement between an Employer and the Participant, or where there is an employment or consulting agreement, but such agreement does not define cause (or words of like import), termination due to a Participant's: (i) continuous or substantial dereliction of duties which continues after written notice by the Employer; (ii) failure to promptly follow the written direction of the Chief Executive Officer of the Employer or the Board; (iii) dishonesty, fraud or breach of fiduciary duty with respect to the Employer or Participant's duties; (iv) gross negligence in the performance of the Participant's duties; (v) willful misconduct with regard to the Employer, its business, assets or employees which in the good faith, sole discretion of the Chief Executive Officer of the Employer is material; (vi) conviction of, or pleading nolo contendre to, a felony or any other crime involving fraud, dishonesty or moral turpitude; or (vii) any other material breach of the Employer's policy manuals as in effect from time to time, which breach continues more than 30 days after written notice from the Employer to the Participant setting forth the conduct constituting the breach and the policies alleged to have been breached; or (b) in the case where there is an employment or consulting agreement between an Employer and the Participant, termination that is or would be deemed to be for cause (or words of like import) as defined under such agreement. The Committee shall have sole discretion in determining whether cause exists, and its determination shall be final, binding and conclusive. 1.4 "Change in Control" shall have the meaning set forth in Appendix A hereto. 1.5 "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. 1.6 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.7 "Committee" shall mean the Compensation Committee of the Board (or a sub-committee thereof) or such other committee or sub-committee appointed by the Board. If no Compensation Committee exists, the Committee shall be the Board. 1.8 "Common Stock" shall mean the common stock of the Company, par value $0.01 per share, any common stock into which the Common Stock may be converted and any common stock resulting from any reclassification of the Common Stock. 1.9 "Company" shall mean Donna Karan International Inc., a Delaware corporation, and any successor as provided in Article VI hereof. 1.10 "Disability" shall mean (a) in the case where there is no employment agreement between an Employer and the Participant, or where there is an employment agreement, but such agreement does not define disability, total and permanent disability, as defined in Section 22(e)(3) of the Code; or (b) in the case where there is an employment agreement between an Employer and the Participant, disability as defined under such employment agreement. 1.11 "Effective Date" shall mean November 30, 2000. 1.12 "Employer" shall mean the Company and any Subsidiary. 1.13 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.14 "Parent" shall mean (i) any corporation in an unbroken chain of corporations ending with the Company which owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain; or (ii) any corporation or trade or business (including, without limitation, a partnership or limited liability company) which controls fifty percent (50%) or more (whether by ownership of stock, assets or an equivalent ownership interest) of the Company. 1.15 "Participant" shall mean any employee of the Employer who has been designated by the Committee as a Participant by written resolution. 1.16 "Plan" shall mean the Donna Karan International Inc. Executive Severance Plan. -2- 1.17 "Severance Benefit" shall mean a severance benefit calculated in accordance with Section 2.1 below. 1.18 "Subsidiary" shall mean, other than the Company, (a) any corporation in an unbroken chain of corporations beginning with the Company which owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain; (b) any corporation or trade or business (including, without limitation, a partnership or limited liability company) which is controlled fifty percent (50%) or more (whether by ownership of stock, assets or an equivalent ownership interest) by the Company or one of its Subsidiaries; or (c) any other entity, approved by the Board as a Subsidiary under the Plan, in which the Company or any of its Subsidiaries has an equity or other ownership interest. ARTICLE II Benefits 2.1 Eligibility for Benefits. (a) Upon (i) the Participant's termination of employment (x) by the Employer without Cause during the period commencing on the date of the Change in Control and ending one year thereafter or (y) by the Employer without Cause within ninety (90) days prior to the effective date of a Change in Control or (ii) the failure of the Company to receive written notice at least five (5) business days prior to the anticipated closing date of the transaction giving rise to the Change in Control from the successor to all or a substantial portion of the Company's business and/or assets that such successor is willing as of the closing to assume and agree to perform the Company's obligations under this Plan in the same manner and to the same extent that the Company is hereby required to perform, then, subject to Section 2.5 below, the Participant shall be entitled to a Severance Benefit equal to one (1) times the Participant's Base Salary. (b) A Participant shall not be entitled to a Severance Benefit if the Participant's employment is terminated (i) by the Employer for Cause, (ii) by the Participant for any reason, or (iii) on account of the Participant's retirement, death or Disability. 2.2 Form of Benefit. Any Participant described in Section 2.1 above shall receive his or her Severance Benefit in the form of a lump sum cash payment within ten (10) business days (or at such earlier time as required by law) following the later of: (a) his or her termination of employment; or (b) the effective date of the Change in Control. 2.3 Excise Tax. In the event that the Participant becomes entitled to payments and/or benefits which would constitute "parachute payments" within the meaning of Section 280G(b)(2) of the Code (a) in the case where there is no employment or consulting agreement between an Employer and the Participant, or where there is an employment or consulting agreement, but such agreement does not contain any provision addressing the excise tax under Section 4999 of the Code, the provisions of Appendix B shall apply or (b) in the case where there is an employment or consulting agreement between an Employer and the Participant which addresses the excise tax under Section 4999 of the Code, as provided therein. -3- 2.4 No Duty to Mitigate/Set-off. No Participant entitled to receive a Severance Benefit hereunder shall be required to seek other employment and there shall be no offset against any amounts due the Participant under this Plan on account of any remuneration attributable to any subsequent employment that the Participant may obtain. The amounts payable hereunder shall not be subject to setoff, counterclaim, recoupment, defense or other right which the Employer may have against the Participant or others. Notwithstanding the foregoing, if any termination payments made to a Participant by the Employer are related to an actual or potential liability under the Worker Adjustment and Retraining Notification Act (WARN) or similar law, such amounts shall reduce (offset) the Participant's Severance Benefit under this Plan. In the event of the Participant's breach of any provision hereunder, including without limitation, Section 2.5, the Company shall be entitled to recover any payments or benefits previously made to the Participant hereunder. 2.5 Release Required. Any amounts payable pursuant to this Plan shall only be payable if the Participant delivers to the Company a release of all claims of any kind whatsoever that the Participant has or may have against the Employer and its affiliates and their officers, directors and employees known or unknown as of the date of his or her termination of employment (other than claims to payments specifically payable hereunder, claims under COBRA or claims to vested accrued benefits under the Employer's employee benefit plans) occurring up to the release date in such form as reasonably requested by the Company. ARTICLE III Funding 3.1 Funding. The Plan shall be funded out of the general assets of the Company as and when benefits are payable under the Plan. All Participants shall be solely general creditors of the Company. If the Company decides in its sole discretion to establish any advance accrued reserve on its books against the future expense of benefits payable hereunder, or if the Company decides in its sole discretion to fund a trust under this Plan, such reserve or trust shall not under any circumstances be deemed to be an asset of the Plan. ARTICLE IV Administration of the Plan 4.1 Plan Administrator. The general administration of the Plan on behalf of the Company (as plan administrator under Section 3(16)(A) of ERISA) shall be placed with the Committee. 4.2 Reimbursement of Expenses of Plan Committee. The Company may, in its sole discretion, pay or reimburse the members of the Committee for all reasonable expenses incurred in connection with their duties hereunder. 4.3 Action by the Plan Committee. Decisions of the Committee shall be made by a majority of its members attending a meeting at which a quorum is present (which meeting may be -4- held telephonically), or by written action in accordance with applicable law. Subject to the terms of this Plan and provided that the Committee acts in good faith, the Committee shall have complete authority to determine a Participant's participation and benefits under the Plan, to interpret and construe, in its sole discretion, the provisions of the Plan, and to make decisions in all disputes involving the rights of any person interested in the Plan. 4.4 Delegation of Authority. The Committee may delegate any and all of its powers and responsibilities hereunder to other persons by formal resolution filed with and accepted by the Board. Any such delegation shall not be effective until it is accepted by the Board and the persons designated and may be rescinded at any time by written notice from the Committee to the person to whom the delegation is made. 4.5 Retention of Professional Assistance. The Committee may employ such legal counsel, accountants and other persons as may be required in carrying out its work in connection with the Plan. 4.6 Accounts and Records. The Committee shall maintain such accounts and records regarding the fiscal and other transactions of the Plan and such other data as may be required to carry out its functions under the Plan and to comply with all applicable laws. 4.7 Claims Procedure. (a) The Committee shall be responsible for determining all claims for benefits under the Plan by the Participants. Within ninety (90) days after receiving a claim (or within up to one hundred eighty (180) days, if the claimant is notified of the need for additional time, including notification of the reason for the delay), the Committee shall notify the Participant of its decision in writing, giving the reasons for its decision if adverse to the claimant. If the decision is adverse to the claimant, the Committee shall advise him or her of the Plan provisions involved, of any additional information which he or she must provide to perfect his or her claim and why, and of his or her right to request a review of the decision. (b) A claimant may request a review of an adverse decision by written request to the Committee made within sixty (60) days after receipt of the decision. The claimant, or his or her duly authorized representative, may review pertinent documents and submit written issues and comments. (c) Within sixty (60) days after receiving a request for review (or up to one hundred twenty (120) days after such receipt if the Participant is notified of the delay and the reasons therefor), the Committee shall notify the claimant in writing of (i) its decision, (ii) the reasons therefore, and (iii) the Plan provisions upon which it is based. (d) The Committee may at any time alter the claims procedure set forth above, so long as the revised claims procedure complies with the ERISA, and the regulations issued thereunder. -5- 4.8 Indemnification. The Committee, its members and any person designated pursuant to Section 4.4 above shall not be liable for any action or determination made in good faith with respect to the Plan. The Company shall, to the extent permitted by law, by the purchase of insurance or otherwise, indemnify and hold harmless each member of the Committee and each director, officer and employee of the Company for liabilities or expenses they and each of them incur in carrying out their respective duties under this Plan, other than for any liabilities or expenses arising out of such individual's willful misconduct or fraud. ARTICLE V Amendment and Termination 5.1 Amendment and Termination. The Company reserves the right to amend or terminate, in whole or in part, any or all of the provisions of this Plan by action of the Board (or a duly authorized committee thereof) at any time, provided that in no event shall any amendment reducing the benefits provided hereunder or any Plan termination be effective prior to the earlier of (a) the second anniversary of the Effective Date or (b) the second anniversary of the effective date of a Change in Control; provided, however, that if a Change in Control occurs at any time on or prior to the second anniversary of the Effective Date, no such amendment or termination may be effective prior to the first anniversary of the Change in Control, if later than the second anniversary of the Effective Date. ARTICLE VI Successors 6.1 Successors. For purposes of this Plan, the Company shall include any and all successors or assignees, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Company and such successors and assignees shall perform the Company's obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. In such event, the term "Company", as used in this Plan, shall mean the Company, as hereinbefore defined and any successor or assignee to the business or assets which by reason hereof becomes bound by the terms and provisions of this Plan. -6- ARTICLE VII Miscellaneous 7.1 Legal Fees. To the fullest extent permitted by law, the Company shall promptly pay upon submission of statements all legal and other professional fees, costs of litigation, prejudgment interest, and other expenses incurred by a Participant in connection with any dispute concerning payments, benefits or any other entitlements under this Plan; provided, however, the Company shall be reimbursed by the Participant for the fees and expenses advanced in the event the Participant's claim is, in a material manner, in bad faith or frivolous and the arbitrator or court, as applicable, determines that the reimbursement of such fees and expenses is appropriate. 7.2 Minors and Incompetents. If the Committee shall find that any person to whom payment is payable under the Plan is unable to care for his or her affairs because of illness or accident, or is a minor, any payment due (unless a prior claim therefore shall have been made by a duly appointed guardian, committee or other legal representative) may be paid to the spouse, a child, parent, or brother or sister, or to any person deemed by the Committee to have incurred expense for such person otherwise entitled to payment, in such manner and proportions as the Committee may determine it its sole discretion. Any such payment shall be a complete discharge of the liabilities of the Company, the Committee and the Board under the Plan. 7.3 Limitation of Rights. Nothing contained herein shall be construed as conferring upon a Participant the right to continue in the employ of the Employer as an employee in any other capacity or to interfere with the Employer's right to discharge him or her at any time for any reason whatsoever. 7.4 Payment Not Salary. Any Severance Benefit payable under the Plan shall not be deemed salary or other compensation to the Participant for the purposes of computing benefits to which he or she may be entitled under any pension plan or other arrangement of the Employer maintained for the benefit of its employees, unless such plan or arrangement provides otherwise. 7.5 Severability. In case any provision of the Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but the Plan shall be construed and enforced as if such illegal and invalid provision never existed. 7.6 Withholding. The Employer shall have the right to make such provisions as it deems necessary or appropriate to satisfy any obligations it may have to withhold federal, state or local income or other taxes incurred by reason of payments pursuant to this Plan. 7.7 Non-Alienation of Benefits. The benefits payable under the Plan shall not be subject to alienation, transfer, assignment, garnishment, execution or levy of any kind, and any attempt to cause any benefits to be so subjected shall not be recognized. 7.8 Governing Law. To the extent legally required, the Code and ERISA shall govern the Plan and, if any provision hereof is in violation of any applicable requirement thereof, the -7- Company reserves the right to retroactively amend the Plan to comply therewith. To the extent not governed by the Code and ERISA, the Plan shall be governed by the laws of the State of New York. 7.9 Non-Exclusivity. The adoption of the Plan by the Company shall not be construed as creating any limitations on the power of the Company to adopt such other supplemental retirement income arrangements as it deems desirable, and such arrangements may be either generally applicable or limited in application. 7.10 Non-Employment. The Plan is not an agreement of employment and it shall not grant the Participant any rights of employment. 7.11 Headings and Captions. The headings and captions herein are provided for reference and convenience only. They shall not be considered part of the Plan and shall not be employed in the construction of the Plan. 7.12 Gender and Number. Whenever used in the Plan, the masculine shall be deemed to include the feminine and the singular shall be deemed to include the plural, unless the context clearly indicates otherwise. 7.13 ERISA Plan. This Plan is intended to be a "top hat" welfare benefit plan within the meaning of U.S. Department of Labor Section 2520.104-24. 7.14 Communications. All announcements, notices and other communications regarding this Plan will be made by the Company in writing. -8- Appendix A Change in Control A Change in Control shall be deemed to have occurred if any of the following shall have occurred: (a) the acquisition by any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than a person who is a stockholder of the Company on the effective date of the registration statement filed under the Securities Act of 1933, as amended, relating to the first public offering (the "Initial Public Offering") of securities of the Company (an "Initial Stockholder") of 30% or more of the voting power of securities of Company or the acquisition by an Initial Stockholder, other than an affiliate of the Company that would be a Parent or a Subsidiary, of an additional 5% of the voting power of securities of the Company over and above that owned immediately after the closing date of the Initial Public Offering of the Company's Common Stock; excluding however, the following: (x) any acquisition by the Company or a Subsidiary of any of the foregoing, or (y) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or a Subsidiary; or (b) (i) the acquisition by any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) other than a person who, on the effective date of the Initial Public Offering is a holder of any ownership interest in Donna Karan Studio (an "Initial Licensee Interest Holder") of 30% or more of the voting power of Donna Karan Studio or (ii) the acquisition by an Initial Licensee Interest Holder, other than an affiliate of Gabrielle Studio, Inc. (and excluding any such acquisition resulting from a purchase, sale or transfer of Takihyo Inc. stock by and between any of the current stockholders of Takihyo Inc.) that would be a Parent or a Subsidiary (but substituting Gabrielle Studio, Inc. for the Company in such definitions) of Gabrielle Studio, Inc., of an additional 5% of the voting power of securities of the Company over and above that owned immediately after the closing date of the Initial Public Offering of the Company's Common Stock; excluding however, the following: (x) any acquisition by the Company or a Subsidiary of any of the foregoing, or (y) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or a Subsidiary; or (c) any merger or sale of substantially all of the assets of the Company under circumstances where the holders of the Common Stock of the Company immediately prior to the transaction becoming public knowledge were not holders of 80% of the equity securities of the surviving entity resulting from such transaction; or (d) any change in the composition of the Board not approved by (i) a majority of the Board prior to such change and (ii) by not less than two directors of the Company who were directors prior to the time any person who was not an Initial Stockholder acquired 30% or more of the voting power of securities of the Company. Only one Change in Control may occur under this Plan. Appendix B Golden Parachutes (a) In the event any payment that is either received by the Participant or paid by the Employer on his or her behalf or any property or any other benefit provided to him or her under this Plan or under any other plan, arrangement or agreement with the Employer or any other person whose payments or benefits are treated as contingent on a change of ownership or control of the Company (or in the ownership of a substantial portion of the assets of the Company) or any person affiliated with the Company or such person (but only if such payment or other benefit is in connection with the Participant's employment by the Company) (collectively the "Company Payments"), will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (and any similar tax that may hereafter be imposed by any taxing authority), the amounts of any Company Payments shall be automatically reduced to an amount one dollar less than an amount that would subject the Participant to the Excise Tax. (b) For purposes of determining whether any of the Company Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) the Company Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Code Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the opinion of the Company's independent certified public accountants appointed prior to any Change in Control or tax counsel selected by such accountants or the Company (the "Accountants") such Company Payments (in whole or in part) either do not constitute "parachute payments," represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the "base amount" or are otherwise not subject to the Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. In the event that the Accountants are serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Participant may appoint another nationally recognized accounting firm to make the determinations hereunder (which accounting firm shall then be referred to as the "Accountants" hereunder). All determinations hereunder shall be made by the Accountants which shall provide detailed supporting calculations both to the Company and the Participant at such time as it is requested by the Company or the Participant. The determination of the Accountants shall be binding upon the Company and the Participant. (c) The Company shall be responsible for all charges of the Accountant. EX-10.33 13 a2038805zex-10_33.txt EXHIBIT 10.33 EXHIBIT 10.33 AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT, effective as of the 30th day of March, 2001 to the Employment Agreement dated as of July 25, 1997 and amended as of December 8, 2000 among Donna Karan International Inc. (the "Company"), a Delaware corporation, The Donna Karan Company ("DKCo."), a New York partnership and John D. Idol ("Executive"). W I T N E S S E T H: WHEREAS, the Company, DKCo. and the Executive have previously entered into the Employment Agreement; and WHEREAS, the Company, DKCo. and the Executive desire to further amend the Employment Agreement. NOW, THEREFORE, in consideration of the foregoing, the parties hereto agree as follows: 1. Section 10(b) of the Employment Agreement is hereby clarified, effective as of March 30, 2001, by adding the following language at the end thereof: "For purposes of Section 10(b)(ii), a vote cast by the Executive in his capacity as a member of the Board (whether in favor of or against a proposal put before the Board for a vote) shall not constitute a corporate action initiated or recommended by the Executive." 2. Agreement Otherwise Unchanged. The Employment Agreement, as so amended, shall remain in full force and effect. 3. Counterparts. This Amendment may be executed in counterparts, each of which shall be deemed an original, but both of which together shall constitute the same agreement. [remainder of page intentionally left blank] Page 1 IN WITNESS WHEREOF, the parties have duly executed this Amendment as of the date first written above. DONNA KARAN INTERNATIONAL INC. By:___________________________ Name: Title: THE DONNA KARAN COMPANY By: DONNA KARAN INTERNATIONAL INC., GENERAL PARTNER By:___________________________ Name: Title: EXECUTIVE ------------------------------ John D. Idol Page 2 EX-21.1 14 a2038805zex-21_1.txt EXHIBIT 21.1 Exhibit 21.1 Exhibit 21.1 - List of Subsidiaries DK Footwear Partners, a New York general partnership (d/b/a Donna Karan Shoe Company) DK Shoe Corp., a New York corporation Donna Karan (H.K.) Limited, a Hong Kong corporation Donna Karan (Italy) S.R.L., an Italian corporation Donna Karan (Italy) Shoe Company S.R.L., an Italian corporation Donna Karan Studio, a New York general partnership Donna Karan Studio Holdings Inc., a Delaware corporation Formal Reserve Management, Inc., a New York corporation Full Requirements Merchandising, Inc., a New York corporation Gabby Apparel, Inc., a New York corporation The Donna Karan Company, a New York general partnership The Donna Karan Company Store, G.P., a New York general partnership The Donna Karan Store Corporation, a New York corporation Tomio Tangents, Inc., a New York corporation Donna Karan Company Store (UK) Limited, a U.K. corporation Donna Karan Company Stores UK Retail Limited, a U.K. corporation Donna Karan Company Stores UK Holding Limited, a U.K. corporation Donna Karan UK (Holding) L.L.C., a Delaware limited liability company Donna Karan Management Company UK Limited, a U.K. corporation Donna Karan Canada Inc., a Canadian corporation Donna Karan Overseas Holding Corp., a Delaware corporation DK Company Holdings L.L.C., a Delaware limited liability company EX-23.1 15 a2038805zex-23_1.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-8 No. 333-34074 pertaining to the Deferred Bonus Plan (the "Plan") for the registration of $1,500,000 of its deferred compensation obligation pursuant to the Plan, Form S-8 No. 333-09729 pertaining to the 1996 Stock Incentive Plan and Form S-8 No. 333-58171 pertaining to the 1996 Non-Employee Director Stock Option Plan of Donna Karan International Inc. of our report dated March 13, 2001, except for Note 18 as to which the date is April 2, 2001, with respect to the consolidated financial statements and schedule of Donna Karan International included in its Annual Report (Form 10-K) for the year ended December 31, 2000. /s/ Ernst & Young LLP New York, New York March 29, 2001
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