<PAGE>
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                                 UNITED STATES
                       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 29, 1996

                                       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)

<TABLE>
<S>                                 <C>
             DELAWARE                  13-3882426
   (State or other jurisdiction     (I.R.S. Employer
of Incorporation or organization)    Identification
                                         Number)

        550 SEVENTH AVENUE                10018
        NEW YORK, NEW YORK             (Zip Code)
 (Address of principal executive
             office)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 789-1500
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

<TABLE>
<S>                                                       <C>
                                                                           NAME OF EACH EXCHANGE
                  TITLE OF EACH CLASS                                       ON WHICH REGISTERED
--------------------------------------------------------  --------------------------------------------------------
                      Common Stock                                        New York Stock Exchange
</TABLE>

        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. Yes _X_ No ____

    The aggregate market value of Registrant's Common Stock held by
nonaffiliates as of March 18, 1997 was $118,948,929 based on 10,813,539 such
shares outstanding on such date and the closing sales price for the Common Stock
on such date of $11.00 as reported on the New York Stock Exchange.

    As of March 18, 1997, the Registrant had 21,468,034 shares of Common Stock
outstanding.*

    PART III incorporates information by reference from the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders to be
filed with the Commission within 120 days of December 29, 1996.

*   Does not include 18 shares of Class A Common Stock, par value $.01 per
    share, and two shares of Class B Common Stock, par value $.01 per share,
    outstanding as of such date.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                                     PART I

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, and distributes "designer" and "bridge" collections of men's and
women's clothing, sportswear, accessories, and shoes under the DONNA KARAN NEW
YORK-Registered Trademark- and DKNY-Registered Trademark- brand names,
respectively. The Company also develops, contracts for the production of,
markets, and distributes collections of men's and women's fragrance, bath and
body, and treatment products under the DK MEN-TM- and DONNA KARAN NEW YORK-TM-
brand names, respectively. In addition, the Company selectively has granted
licenses for the manufacture and distribution of certain other products under
the Donna Karan New York-Registered Trademark- and DKNY-Registered Trademark-
brand names, including hosiery, intimate apparel, eyewear, and children's
apparel in Europe and the Middle East.

    On July 3, 1996, Donna Karan International Inc. sold 10,750,000 shares of
its common stock in an initial public offering. Simultaneous with the
consummation of the initial public offering, Donna Karan International Inc.,
which had no business prior to the initial public offering, acquired and
continued the businesses conducted by certain general partnerships and
corporations (the "DK Companies"), each of which was ultimately owned one-half
by Ms. Donna Karan, Mr. Stephan Weiss and certain trusts for the benefit of Ms.
Karan and the children of Ms. Karan and Mr. Weiss, and one-half by Mr. Tomio
Taki, Mr. Frank Mori, Takihyo Inc. and certain affiliates of Mr. Taki and Mr.
Mori (the "Reorganization"). In connection with the Reorganization, Gabrielle
Studio, Inc., a corporation wholly-owned by Ms. Karan and Mr. Weiss, and certain
affiliated trusts, granted the Company an exclusive license in perpetuity
throughout the world to use, and sublicense the right to use, the trademarks
"DONNA KARAN," "DONNA KARAN NEW YORK," "DKNY," "DK," and, in addition, all
current and future variations thereof, 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 those products and specified services
which Gabrielle Studio retained the right to use or license and which Gabrielle
Studio has licensed to Ms. Karan. See "Trademarks" below in this section. As
used in this report, references to the "Company" mean the DK Companies as of
dates and periods prior to the consummation of the initial public offering 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.

PRODUCTS

    The men's and women's apparel products sold by the Company are organized
into two broad categories: fashion-forward designer apparel sold under the DONNA
KARAN NEW YORK-Registered Trademark- brand name, and bridge apparel sold under
the DKNY-Registered Trademark- brand name. The women's ready-to-wear apparel
market in the United States is divided into five price levels, ranging from
lowest to highest, as follows: "budget," "moderate," "better," "bridge," and
"designer."

                                       2
<PAGE>
    Net revenues represented by each of the Company's major operating units for
each of the last three years are set forth below:

<TABLE>
<CAPTION>
                                                                                              1994       1995       1996
                                                                                            ---------  ---------  ---------
<S>                                                                                         <C>        <C>        <C>
                                                                                                     (IN MILLIONS)
DONNA KARAN NEW YORK-Registered Trademark-(1).............................................  $     107  $     117  $     123
DKNY-Registered Trademark-(1).............................................................        250        308        378
Beauty products...........................................................................         17         30         44
Outlet stores and licensing(2)............................................................         46         55         68
                                                                                            ---------  ---------  ---------
                                                                                            $     420  $     510  $     613
                                                                                            ---------  ---------  ---------
                                                                                            ---------  ---------  ---------
</TABLE>

------------------------

(1) Includes apparel, accessory, and shoe collections.

(2) The Company was operating 29, 31, and 37 outlet stores, respectively, at the
    end of 1994, 1995, and 1996.

    The approximate suggested retail price ranges for the Company's men's and
women's apparel products set forth below are indicative of their approximate
individual item price ranges:

<TABLE>
<CAPTION>
                                                                                                      DRESSES
                                                                           SKIRTS AND  SHIRTS AND   (OTHER THAN
                                                              JACKETS        PANTS     BODYSUITS   EVENING WEAR)
                                                           --------------  ----------  ----------  -------------
<S>                                                        <C>             <C>         <C>         <C>
WOMEN'S:
DONNA KARAN NEW YORK-Registered Trademark-
  Collection ("black label").............................  $  1,200-1,800  $  400-900  $  300-600   $ 650-1,200
  Signature ("gold label")...............................       750-1,100     300-600     200-400       500-950

DKNY-Registered Trademark- Collections
  "D"....................................................        $415-625  $  195-375  $  100-295      $225-450
  DKNY-Registered Trademark-.............................         295-425     140-225      65-175       175-225
  DKNY-Registered Trademark- CLASSIC.....................         220-365     105-175      45-130       130-175
  DKNY-Registered Trademark- ACTIVE......................          95-225      --           55-85       --
  DKNY-Registered Trademark- JEANS.......................         115-235      45-125      65-115       --
</TABLE>

<TABLE>
<CAPTION>
MEN'S:                                                        SUITS     SPORTSCOATS TROUSERS
                                                           -----------  ----------  ---------
<S>                                                        <C>          <C>         <C>
DONNA KARAN NEW YORK-Registered Trademark-
  Collection ("black label").............................  $1,350-1,850 $950-1,750  $ 300-400
  Signature ("gold label")...............................      875-995     595-750    225-275

DKNY-Registered Trademark-...............................    550-1,200     250-450     65-290
</TABLE>

    The Company sells collections of men's and women's fragrance, bath and body,
and treatment products under the DK MEN-TM- and DONNA KARAN NEW YORK-TM- brand
names, respectively. The beauty products generally have retail prices in the $15
to $375 range, although most products are priced in the $85 and under range. In
addition, the Company sells collections of women's accessories and men's and
women's shoes under both of its brand names. Accessories for women marketed
under the DONNA KARAN NEW YORK-Registered Trademark- brand name generally have
retail price ranges from $350 to $1,500 for handbags, $80 to $250 for belts,
$200 to $800 for jewelry, and $75 to $300 for small leather goods. Accessories
for women marketed under the DKNY-Registered Trademark- brand name generally
have retail price ranges from $40 to $525 for handbags, $15 to $175 for hats,
and $15 to $150 for small leather goods. Shoes marketed under the DONNA KARAN
NEW YORK-Registered Trademark- and DKNY-Registered Trademark- brand names
generally have retail price ranges from $110 to $700 and $50 to $400,
respectively, for women's shoes, and from $275 to $600 and $75 to $295,
respectively, for men's shoes.

                                       3
<PAGE>
DONNA KARAN NEW YORK-Registered Trademark- DESIGNER COLLECTIONS

    The DONNA KARAN NEW YORK-Registered Trademark- designer collections include
men's and women's apparel, men's and women's accessories, and men's and women's
shoes (the "Designer Collections").

    WOMEN'S APPAREL

    Since its inception, a primary focus of the Company has been to establish
and maintain itself as an internationally recognized fashion design house. To
this end, the Company has established a designer collection of women's apparel
under the DONNA KARAN NEW YORK-Registered Trademark- Collection name ("black
label") and recently has introduced its DONNA KARAN NEW
YORK-Registered Trademark- Signature collection ("gold label") of women's
apparel, an evolution of the Company's former DONNA KARAN NEW
YORK-Registered Trademark- Essentials collection. The original DONNA KARAN NEW
YORK-Registered Trademark- Collection for women was based upon Ms. Karan's
concept of "seven easy pieces"--a collection of bodysuits and tights, dresses,
skirts, blouses, jackets, pants, and accessories that when layered in
combinations achieved a varied, but consistent, high fashion look. The DONNA
KARAN NEW YORK-Registered Trademark- Collection for women represents high
fashion apparel, made primarily with exclusively-developed, luxury fabrics and
designed with an emphasis on comfort and fit. Today, the DONNA KARAN NEW
YORK-Registered Trademark- Collection for women is recognized worldwide as one
of the premier women's designer collections. The spring and fall collections are
introduced at major fashion shows which generate extensive press coverage in the
domestic and international fashion press, as well as in the general media.

    As a part of its growth strategy, the Company introduced the DONNA KARAN NEW
YORK-Registered Trademark- Signature collection in fall 1996 for delivery at
retail in spring 1997. The DONNA KARAN NEW YORK-Registered Trademark- Signature
collection was inspired by the Company's former DONNA KARAN NEW
YORK-Registered Trademark- Essentials collection and focuses on the lifestyle
needs of the executive woman. The DONNA KARAN NEW YORK-Registered Trademark-
Signature collection is a modern, sensual, yet classic, collection of apparel
for all aspects of a woman's life, from daywear to eveningwear to weekend wear.
This collection features classic, signature styles of Ms. Karan and her design
teams, but with a wider range of fabric selections and silhouettes (styles) than
previously offered in the DONNA KARAN NEW YORK-Registered Trademark- Essentials
collection. To appeal to a broader group of consumers, the products offered
under the DONNA KARAN NEW YORK-Registered Trademark- Signature collection are
approximately 25% lower in price than similar products in the DONNA KARAN NEW
YORK-Registered Trademark- Collection.

    The DONNA KARAN NEW YORK-Registered Trademark- Signature collection is more
widely distributed than the DONNA KARAN NEW YORK-Registered Trademark-
Collection. In connection with the introduction of the DONNA KARAN NEW
YORK-Registered Trademark- Signature collection, the Company has begun to
convert all of its DONNA KARAN NEW YORK-Registered Trademark- Essentials doors
and certain of its existing black label collection doors to DONNA KARAN NEW
YORK-Registered Trademark- Signature doors, and the Company intends to continue
to increase the number of doors in which the gold label collection is sold. A
"door" is a single retail outlet. The DONNA KARAN NEW YORK-Registered Trademark-
Collection is being distributed selectively in key markets to retailers which
the Company considers to be high-end, luxury retailers. This selective
distribution is anticipated to enable the doors which carry the black label
collection to carry a broader assortment of merchandise and achieve greater sell
through (i.e., sales by the retailer to the consumer).

    MEN'S APPAREL

    The Company has two designer collections of men's apparel: DONNA KARAN NEW
YORK-Registered Trademark- ("black label") and DONNA KARAN NEW
YORK-Registered Trademark- Signature ("gold label"). The DONNA KARAN NEW
YORK-Registered Trademark- black label collection was introduced in fall 1991 at
one specialty store in New York where it was sold on an exclusive basis through
fall 1992, at which time the Company expanded distribution to approximately 75
doors. Today, the black label collection is sold in approximately 275 doors and
the gold label collection is sold in approximately 450 doors. In recognition of
the DONNA KARAN NEW YORK-Registered Trademark- black label collection, Ms. Karan
received the Council of Fashion Designers of America's Menswear Designer of the
Year Award for 1992. In January 1997, the Company showed, to international
critical acclaim, the DONNA KARAN NEW YORK-Registered Trademark- black label
collection for fall 1997 at its new showroom in Milan, Italy.

                                       4
<PAGE>
    The DONNA KARAN NEW YORK-Registered Trademark- black label collection is
marketed in three categories: DONNA KARAN NEW YORK-Registered Trademark-
Couture, DONNA KARAN NEW YORK-Registered Trademark- Sartoriale, and DONNA KARAN
NEW YORK-Registered Trademark-. The DONNA KARAN NEW YORK-Registered Trademark-
Couture category provides hand-tailored clothing made in the United States,
using a limited range of fabrications and new silhouettes for select
distribution. The DONNA KARAN NEW YORK-Registered Trademark- Sartoriale category
provides hand-made garments made in Italy using a variety of
exclusively-developed fabrications and specially-designed silhouettes for the
European and Asian markets. The DONNA KARAN NEW YORK-Registered Trademark-
category provides a full collection of suits, sportscoats, trousers, sportswear,
and furnishings made from luxury fabrics primarily in the United States and
Italy and is more widely distributed than the other categories of the black
label collection.

    The DONNA KARAN NEW YORK-Registered Trademark- Signature collection was
introduced in fall 1993 as the Company's second designer collection of men's
apparel and includes designer suits, sportcoats, trousers, sportswear,
outerwear, and furnishings. Targeting a broader audience, this collection is
priced below the DONNA KARAN NEW YORK-Registered Trademark- black label
collection but maintains a similar dedication to quality and design, while using
lower cost fabrications and more commercial production techniques. The DONNA
KARAN NEW YORK-Registered Trademark- Signature collection is comprised of the
basic, essential pieces of a man's wardrobe for the more conservative yet modern
man, in styles similar to the styles of the Company's DONNA KARAN NEW
YORK-Registered Trademark- black label collection. By having both collections,
the Company is able to compete in two distinct market segments.

    ACCESSORIES

    The designer collection of women's accessories marketed under the DONNA
KARAN NEW YORK-Registered Trademark- brand name includes handbags, belts,
jewelry, small leather goods, hats, scarves and gloves. Consistent with its
strategy of controlling distribution, the Company designs, contracts for the
production of, and controls the distribution of its accessories.

    The Company is continuing to refocus its DONNA KARAN NEW
YORK-Registered Trademark- accessory business from a collection-coordinated
accessory line to a more expanded "main floor" accessory line which reflects the
taste and sophistication of the Designer Collections of women's apparel. The
Company also introduced a limited collection of DONNA KARAN NEW
YORK-Registered Trademark- men's accessories in the fourth quarter of 1996. This
collection consists primarily of belts retailing from $80 to $500 and small
leather goods retailing from $75 to $300.

    SHOES

    The DONNA KARAN NEW YORK-Registered Trademark- collections of men's and
women's shoes are high priced, sophisticated collections of shoes, made with
luxurious and expensive materials. The women's collection includes sport and
dress shoes, boots, and sandals, casual shoes, and evening shoes. The limited
men's collection includes sport and classic dress shoes, boots and casual shoes.
Segments of the DONNA KARAN NEW YORK-Registered Trademark- shoe collections are
designed to complement the DONNA KARAN NEW YORK-Registered Trademark- apparel
collections.

    OVERVIEW OF DESIGNER MARKET

    In the designer segment of the apparel market, competitors of the DONNA
KARAN NEW YORK-Registered Trademark- Collection for women include ARMANI
BORGONUOVO, JIL SANDER, GUCCI, and PRADA, and competitors of the DONNA KARAN NEW
YORK-Registered Trademark- Signature collections for women include ARMANI LE
COLLEZIONE, CALVIN KLEIN, RALPH LAUREN, and MICHAEL KORS. The DONNA KARAN NEW
YORK-Registered Trademark- black label and the DONNA KARAN NEW
YORK-Registered Trademark- Signature collections for men compete with GIORGIO
ARMANI, HUGO BOSS, CALVIN KLEIN, VALENTINO, VESTIMENTA, and ERMENEGILDO ZEGNA.
Competitors of the DONNA KARAN NEW YORK-Registered Trademark- women's
accessories collection include PRADA, GUCCI, BOTTEGA VENETA, and CALVIN KLEIN.
The DONNA KARAN NEW YORK-Registered Trademark- women's shoe collection competes
with GIORGIO ARMANI, GUCCI, PRADA, CALVIN KLEIN, and ROBERT CLERGERIE, and the
DONNA KARAN NEW YORK-Registered Trademark- men's shoe collection competes with
PRADA, GIORGIO ARMANI, GUCCI, FENESTRIA, and RALPH LAUREN.

                                       5
<PAGE>
DKNY-REGISTERED TRADEMARK- COLLECTIONS

    The DKNY-Registered Trademark- collections include men's and women's
apparel, women's accessories, and men's and women's shoes.

    WOMEN'S APPAREL

    The initial success of the DONNA KARAN NEW YORK-Registered Trademark-
collection for women made possible the launch of the DKNY-Registered Trademark-
bridge collection of women's apparel and accessories in 1989.
DKNY-Registered Trademark- was established as a separate brand name to create a
distinct and more casual fashion identity at lower prices, while retaining an
association with the DONNA KARAN NEW YORK-Registered Trademark- designer image.
Moreover, the Company was able to significantly leverage the depth within its
design team, as well as its sourcing capabilities and distribution strength to
successfully address the market opportunity afforded in the larger bridge
market, thereby increasing its customer base and range of products. The designs
of the DKNY-Registered Trademark- brand can be considered on the "cutting edge"
within the bridge market. Today, the women's apparel, accessory, and shoe
collections sold under the DKNY-Registered Trademark- brand name constitute the
Company's largest divisions, representing 50.7% of net revenues in 1996.

    In fall 1996, the Company further segmented its DKNY-Registered Trademark-
women's apparel collection in order to refine its price points and target a
broader consumer base. From just two labels (DKNY-Registered Trademark- and
DKNY-Registered Trademark- JEANS), the DKNY-Registered Trademark- women's
apparel collection has evolved into five different lifestyle collections: "D",
DKNY-Registered Trademark-, DKNY-Registered Trademark- CLASSIC,
DKNY-Registered Trademark- ACTIVE, and DKNY-Registered Trademark- JEANS. These
collections were introduced at retail for the spring 1997 season. The products
offered in these collections previously had been offered as part of the
Company's DKNY-Registered Trademark- and DKNY-Registered Trademark- JEANS
collections, but are now more clearly defined for the consumer through these new
labels. These collections include jackets, skirts, blouses, bodysuits, dresses,
pants, outerwear, activewear, and jeanswear that complement all aspects of a
woman's lifestyle.

    Of the five labels, "D" is the most fashion-forward collection, appealing to
the youthful, fashion-oriented consumer. "D" is the only line of the
DKNY-Registered Trademark- women's apparel collection that will be shown on the
runways during the spring and fall seasons. "D" will be sold domestically in the
"young designer" area of the Company's key doors and in the bridge area of the
Company's key department stores. Internationally, "D" will be sold in the
Company's licensed, free-standing stores and in key specialty stores.

    The DKNY-Registered Trademark- collection concentrates on a classification
business, providing fashionable pieces for many aspects of a woman's life,
including career. The DKNY-Registered Trademark- CLASSIC collection represents
the more casual side of the collection and takes a modern sportswear approach to
Ms. Karan's original concept of seven easy pieces, providing timeless styles
with an emphasis on comfort. Products under the DKNY-Registered Trademark-
CLASSIC label generally are sold at lower prices than products in the
DKNY-Registered Trademark- collection, thus allowing the Company to target a
broader consumer base. The DKNY-Registered Trademark- ACTIVE collection focuses
on the growing consumer demand for activewear and provides athletic wear that is
stylish and functional, designed for both the spectator and competitor. The
DKNY-Registered Trademark- ACTIVE label allows the Company to target new
customers, such as specialty athletic stores. The DKNY-Registered Trademark-
JEANS label of the DKNY-Registered Trademark- women's apparel collection
includes a full array of denim-related products including jeans, woven shirts,
knit shirts, sweatshirts and outerwear, made from denim and other fabrications
associated with jeanswear.

    The Company's DKNY-Registered Trademark- petite division, which was
established in 1994 as part of the Company's strategy of expanding its existing
collections, offers a selection of styles from those offered by the
DKNY-Registered Trademark- women's apparel collection, but the garments are
sized for the petite woman. Currently, petite clothing is offered under the
DKNY-Registered Trademark- and DKNY-Registered Trademark- CLASSIC labels.

    MEN'S APPAREL

    In 1992, the Company introduced a limited selection of men's apparel under
the DKNY-Registered Trademark- brand name. In 1994, the Company determined it
could expand upon its opportunities in menswear by focusing its

                                       6
<PAGE>
DKNY-Registered Trademark- men's collection on a more targeted consumer need. As
a result, the DKNY-Registered Trademark- men's collection changed from a more
casual collection of apparel to a more modern and sophisticated, yet youthful,
lifestyle collection. The DKNY-Registered Trademark- men's collection is an
innovative, but not overly designed, collection of shirts, pants, jackets,
jeans, sweaters, outerwear, activewear, and furnishings made of modern,
lightweight, tactile fabrics. Beginning with the fall 1997 season, the Company
will begin to segment its DKNY-Registered Trademark- men's apparel collection
into two distinct labels, DKNY-Registered Trademark- and
DKNY-Registered Trademark- ACTIVE for men. All of the products to be offered
under the new DKNY-Registered Trademark- ACTIVE label currently are offered
under the DKNY-Registered Trademark- men's apparel collection label and will be
segmented to meet the growing consumer demand for activewear products.
Approximately 25% of the DKNY-Registered Trademark- men's collection consists of
new, modern basic styles which are available on a reorderable basis.

    ACCESSORIES

    The collection of women's accessories marketed under the
DKNY-Registered Trademark- brand name includes handbags, small leather goods,
belts, scarves, hats, umbrellas, and gloves. In furtherance of its strategy of
segmentation utilized with the DKNY-Registered Trademark- women's apparel
collection, for the spring 1997 season, the Company introduced handbags under
the "D", DKNY-Registered Trademark-, DKNY-Registered Trademark- CLASSIC, and
DKNY-Registered Trademark- ACTIVE labels. On a seasonal basis and as may be
appropriate, other accessory items may be offered under these labels. Consistent
with its operating strategy, the Company designs, contracts for the production
of, and controls the distribution of its accessories.

    The Company's DKNY-Registered Trademark- accessories collections generally
are sold together with the DKNY-Registered Trademark- women's apparel
collections and on the "main floor" of a door. To enhance its presentation at
retail to the consumer, in 1997 the Company plans to establish shop-in-shops for
the DKNY-Registered Trademark- accessories collection (primarily handbags) on
the main floors of key doors. The first of such shops is scheduled to open
during the second quarter of 1997.

    SHOES

    The collections of men's and women's shoes marketed under the
DKNY-Registered Trademark- brand name offer lower-priced, trendier, sportier,
and more casual shoes than the DONNA KARAN NEW YORK-Registered Trademark- shoe
collections, in a wider range of styles and constructions. The
DKNY-Registered Trademark- women's shoe collection includes sport and dress
shoes and boots, weather shoes and boots, sneakers (fashion and athletic), and
casual shoes. The limited men's collection includes sport and classic dress
shoes, boots, and sandals, weather boots, and sneakers (fashion and athletic).
Segments of the DKNY-Registered Trademark- shoe collections are designed to
complement the DKNY-Registered Trademark- apparel collections.

    In connection with the segmentation of the DKNY-Registered Trademark-
women's apparel collections, for fall 1997 the Company has segmented its
DKNY-Registered Trademark- shoe collection by adding the
DKNY-Registered Trademark- ACTIVE label. Products sold under this label will be
athleisure and performance athletic footwear. This segmentation has enabled the
Company to expand its customer base to include specialty athletic stores.

    OVERVIEW OF BRIDGE MARKET

    In the young designer segment of the apparel market, the "D" women's apparel
collection competes with MARK EISEN, TODD OLDHAM, and DOLCE & GABBANA. In the
bridge segment of the apparel market, the DKNY-Registered Trademark- collection
competes with CK BY CALVIN KLEIN, POLO/RALPH LAUREN, DANA BUCHMAN, ELLEN TRACY,
EMMANUEL, and ANNE KLEIN II; the DKNY-Registered Trademark- CLASSIC collection
competes with LAUREN, COMPANY BY ELLEN TRACY, LIBERTE, and DANA B. & KAREN; the
DKNY-Registered Trademark- ACTIVE collection competes with POLO SPORT, NAUTICA,
and TOMMY GIRL SPORT. The DKNY-Registered Trademark- men's collection competes
with labels such as CK BY CALVIN KLEIN, GUESS, MONDO, NAUTICA, POLO/RALPH
LAUREN, TOMMY HILFIGER, and VERSACE CLASSIC V2. Competitors of the
DKNY-Registered Trademark- women's accessories collection include COACH, DOONEY
& BOURKE, CK BY CALVIN KLEIN, RALPH LAUREN, POLO SPORT, KATE SPADE, and KENNETH
COLE, as well as certain private labels. The DKNY-Registered Trademark- women's
shoe collection

                                       7
<PAGE>
competes with ANNE KLEIN II, CK BY CALVIN KLEIN, FREELANCE, POLO/RALPH LAUREN,
and VS (VIA SPIGA), as well as certain private labels, and the
DKNY-Registered Trademark- men's shoe collection competes with COLE HAAN,
KENNETH COLE, TOMMY HILFIGER, and POLO/RALPH LAUREN.

DKNY-Registered Trademark- KIDS

    In late 1995, the Company granted a license to Albert S.A. ("Albert") for
the manufacture and distribution in Europe and the Middle East of children's
apparel under the DKNY-Registered Trademark- brand name. The first collection
under this license was introduced by Albert in Europe and the Middle East for
the fall 1996 season. Under this license, the Company retained the right to
manufacture and distribute, or license the right to manufacture and distribute,
children's apparel under the DKNY-Registered Trademark- brand name in all
markets outside of Europe and the Middle East. The Company test marketed a
children's apparel collection for the spring 1997 season in Bloomingdales. This
DKNY-Registered Trademark- Kids collection is a lifestyle collection of girls
and boys sportswear in sizes 4-6x and 7-16 for girls and 4-7 and 8-20 for boys.
The collection includes shirts, skirts, pants, jackets, jeans, sweaters,
outerwear, and activewear. Based on the success of this test market, in January
1997, the Company began offering the DKNY-Registered Trademark- Kids collection
for sale at retail in fall 1997. This collection is expected to be sold in the
United States through better department and large specialty stores.
Internationally, this collection is expected to be sold by the Company to
certain of the Company's free-standing international retail stores outside of
Europe and the Middle East. The Company is currently negotiating a design and
sourcing arrangement with Albert to support the Company's distribution of the
collection, although there can be no assurance that such arrangement will be
entered into or as to the terms of such arrangement.

BEAUTY DIVISION

    To further leverage its strong brand name and image, the Company created its
Beauty Division in 1992 to provide consumers with beauty products consistent
with the DONNA KARAN NEW YORK-Registered Trademark- "head-to-toe" philosophy.
The Beauty Division successfully launched the DONNA KARAN NEW
YORK-Registered Trademark- collection of women's fragrance products in September
1992, and in 1993 expanded its product offerings to include a variety of bath
and body and treatment products, including a cleansing lotion and body cream. In
1994, the Company launched DK MEN-TM- a collection of fragrance and grooming
products for men, and UNLEADED-TM-, a version of the DK MEN-TM- fragrance, as a
light after shower overall spray product. Most recently, in fall 1996, the
Company launched CHAOS-TM-, a new women's fragrance, as part of its DONNA KARAN
NEW YORK-Registered Trademark- collection.

    In 1992, the Company won the "Best Women's Fragrance in Exclusive
Distribution" and "Best Women's Advertising Campaign" Awards at the Fragrance
Foundation Awards for its DONNA KARAN NEW YORK-Registered Trademark- women's
fragrance. In 1994, the Company won the "Best Men's Fragrance in Exclusive
Distribution" for its DK MEN-TM- fragrance at the Fragrance Foundation Awards.

    To ensure that its beauty products are of the highest quality and to best
manage the brand, the Company currently controls all aspects of its Beauty
Division, including product development, package design, production, and
marketing. Certain of the Company's Beauty Division products are packaged in
bottles designed by Stephan Weiss, Vice Chairman of the Company and a principal
stockholder. Mr. Weiss has granted to the Company, an exclusive royalty-free
worldwide license on the use of the designs for the bottles and a non-exclusive,
royalty-free worldwide license for the use of the utility patents for the
bottles.

    The Company distributes its Beauty Division products directly in the United
States. To build its international distribution network, as of December 29,
1996, the Company had entered into 17 agreements for the distribution of its
Beauty Division products in certain countries in Europe, Asia, the Middle East,
Central America, the Caribbean, South America, and Australia. The Company's
Beauty Division products compete with products by CHANEL, CALVIN KLEIN, GIORGIO
ARMANI, BOUCHERON, ISSEY MIYAKE, and TIFFANY.

    During the fourth quarter of 1996, the Company revised its long-term
strategy for the Beauty Division and announced that the Board of Directors had
authorized management to explore strategic alternatives

                                       8
<PAGE>
for the Beauty Division, including a joint venture, license, or possible sale of
the business. Although net revenues of Beauty Division products increased 46.4%
in 1996 compared to 1995, sales growth was lower than expected and the Company
determined that more capital was required to grow the business than the Company
was willing to commit. Management concluded that the potential of the beauty
business would be better realized through a strategic alliance that would devote
greater resources to the beauty business. The Company currently is exploring
possible strategic alternatives for the Beauty Division. Furthermore, assuming
that a strategic alliance is established in 1997, it is anticipated that new
collections of women's and men's beauty products under the DKNY-TM- brand name
will be launched in 1998 and 1999, respectively, which are intended to appeal to
a broader customer base than the current DONNA KARAN NEW YORK-TM- collections of
beauty products.

LICENSED PRODUCTS

    A principal goal of the Company is to maintain the integrity of the
trademarks under which it markets its products. The Company strives to provide
the consumer with high quality products and to maintain a consistent image in
all its advertising and marketing programs. The Company, from time to time,
selectively has entered into license or joint venture agreements with third
parties. In entering into such arrangements, the Company seeks to preserve the
integrity of the brand names by controlling the design and quality of the
products manufactured by the licensees. 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, advertising, marketing, and
distribution of each licensed product and, in most cases, obtains from the
licensee or joint venture partner a commitment for a minimum level of sales and
advertising.

    To profit further from the Company's brand recognition and the quality and
design standards which it successfully has established over the past 12 years,
in addition to those product licenses which currently are in place (described
below), the Company is engaged in licensing activities as a means to grow its
brands. The Company intends to enter into other licensing or joint venture
arrangements when it believes such arrangements will allow products sold under
its brands to be manufactured with the highest quality and marketed and
distributed most effectively. In determining whether to bring a new product to
market on its own or through a joint venture or license, the Company considers
various factors, including the Company's desire to bring a product to market at
a particular time, its ability to effectively manufacture and distribute such
product, the potential profit to be earned, and the capital and management
resources available to the Company at such time.

                                       9
<PAGE>
    The Company currently has license agreements with the following licensees
providing for the manufacture and distribution of the categories of products
listed below under the trademarks and in the territories specified:

<TABLE>
<CAPTION>
         LICENSEE                    PRODUCTS                  LICENSED MARKS                  TERRITORY
--------------------------  --------------------------  -----------------------------  --------------------------
<S>                         <C>                         <C>                            <C>

Hanes Hosiery, a division   Women's pantyhose,          DONNA KARAN NEW                Worldwide
  of Sara Lee Corp.         knee-high stockings,        YORK-Registered Trademark-
                            tights and socks            DKNY-Registered Trademark-

Wacoal America, Inc.        Women's intimate apparel    DONNA KARAN NEW YORK-TM-       United States and
                                                                                       Canada(1)

The Lantis Corporation      Sunglasses, optical         DONNA KARAN NEW YORK-TM-       Worldwide
                            frames, magnifiers, and     DKNY-Registered Trademark-
                            eyewear accessories

Albert S.A.                 Children's apparel          DKNY-Registered Trademark-     Europe and the
                                                        DKNY-Registered Trademark-     Middle East
                                                        KIDS

Butterick Company, Inc.     Paper patterns and          DONNA KARAN NEW                Worldwide
  (Vogue Patterns)          knitting patterns           YORK-Registered Trademark-
                                                        DKNY-Registered Trademark-

T. Kawabi & Co.             Handkerchiefs and face      DKNY-TM-                       Japan and certain Asian
                            towels                                                     free-standing stores
</TABLE>

------------------------

(1) This license provides that the licensee may sell its products to existing
    customers of the Company outside of the United States and Canada under
    certain circumstances.

    On September 27, 1996, the Company entered into a 30-year license agreement
(the "Jeans License") with subsidiaries of Designer Holdings, Ltd., for the
exclusive production, sale, and distribution of men's, women's and, with certain
exceptions, children's jeanswear under the DKNY-Registered Trademark- JEANS
label. On March 4, 1997, the Jeans License was terminated by mutual agreement of
the Company and Designer Holdings, Ltd. due to differences in the design and
manufacturing schedules of both companies and differences regarding the extent
of the product line. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

    The Company currently is in negotiations with respect to home furnishings
licenses, although there can be no assurance that such license agreements will
be entered into or as to the terms of such license agreements.

DESIGN

    The Company was founded upon the marketing and design talents of Ms. Donna
Karan, and its success to date is attributable largely to her vision and
creative talent. 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,
strategic planning, marketing, and overall fashion direction. In addition to Ms.
Karan, as of December 29, 1996, the Company employed a design staff of 124
people, some of whom have assumed substantial design responsibilities under Ms.
Karan's supervision. The Company has 10 design teams, each with a head designer,
responsible for the creation, development, and coordination of the fabrications
and silhouettes of the Company's collections. The Company encourages originality
in its designers, and

                                       10
<PAGE>
management believes that one of the keys to the growth of the Company has been
not only Ms. Karan's individual talents, but also her willingness to delegate
design responsibility to the various design teams and the ability of such teams
to respond with creative and innovative designs.

    In recognition of the importance of maintaining a staff of highly qualified
designers, Ms. Karan and other head designers constantly review the designs of
independent young designers to find new talent. One element of the search for
qualified designers is Ms. Karan's service as a member of the Board of Governors
of the Parsons School of Design, a division of The New School.

    The Company's design teams constantly monitor fashion trends and search for
new inspiration. The Company seeks to assist its designers in developing new
ideas through various means. These include frequent meetings of the design teams
to discuss current fashion trends, review of the fashion library, which includes
over 125,000 items from the Company's past collections and antique garments and
accessories assembled by the Company, and installation of a computer-aided
design system which allows a designer to view and modify two- and three-
dimensional images of a new design on a computer screen. See "Management
Information Systems; Inventory and Credit Control" below in this section.

INTERNATIONAL BUSINESS

    During 1996, 62.7% of the Company's net revenues (excluding net revenues
generated from outlet stores and licensing) were derived from sales within the
United States and 37.3% were derived from sales outside the United States. The
Company views international distribution as a major opportunity for future sales
growth of the Company's products. The Company believes that international sales
will continue to grow as a percentage of the overall business and is continuing
to build the infrastructure necessary to support the growth of its brands
worldwide. To service its international clientele, the Company has established a
separate international division staffed by a multilingual sales and customer
service staff in its New York headquarters and in its customer service and
distribution centers in Hong Kong, Japan, The Netherlands, Canada, and the
United States.

    The following table shows the net revenues derived by the Company in each of
the geographic areas listed below during each of the past three years:

<TABLE>
<CAPTION>
                                                                                              1994       1995       1996
                                                                                            ---------  ---------  ---------
<S>                                                                                         <C>        <C>        <C>
                                                                                                 (DOLLARS IN MILLIONS)
United States (1).........................................................................  $     268  $     301  $     342
Japan.....................................................................................         51         64(2)        76
Europe and Middle East....................................................................         38         57         73
Asia (excluding Japan)....................................................................         16         23         36
Other markets.............................................................................          5         10         18
</TABLE>

------------------------

(1) Excludes in the United States $42 million, $55 million, and $68 million of
    net revenues from outlet stores and licensing for 1994, 1995, and 1996,
    respectively.

(2) As of March 31, 1995, the Company sold 70% of its interest in the operations
    of Donna Karan Japan K.K. ("Donna Karan Japan"). After the first quarter of
    1995, sales are reflected as made from the Company's divisions directly to
    Donna Karan Japan. See Note 8 to Notes to Financial Statements.

DISTRIBUTION ARRANGEMENTS

    The Company sells its products in Japan through Donna Karan Japan, a
Japanese corporation in which the Company has a 30% equity interest. In March
1995, the Company sold 52.5% of its 100% interest in the operations of Donna
Karan Japan to Hotel Properties Limited, a Singapore public company ("HPL"), and
17.5% of its interest in the operations of Donna Karan Japan to a corporation
owned by a private investor with a substantial interest in HPL. In connection
with the sale to HPL, the Company

                                       11
<PAGE>
entered into an agreement with HPL and the private investor which provides that
Donna Karan Japan will be the exclusive distributor of the Company's products in
Japan, subject to certain limited exceptions. The agreement also provides that
the Company, for a management fee based on the net sales of Donna Karan Japan,
will manage the day-to-day operations of Donna Karan Japan, for an initial term
through December 31, 2000. The term is renewed automatically for successive
five-year terms thereafter, subject to certain conditions. The Company believes
that by selling its products in Japan through Donna Karan Japan, it can provide
its Japanese customers with a higher level of customer service than that
provided by the distributors of its competitors' products and can maintain
greater control over its distribution policies and advertising. To reinforce its
exclusive image and the uniqueness and appeal of its products, the Company's
products are distributed in Japan only through better department stores and
specialty stores. In addition, the Company plans to distribute products in Japan
through four free-standing International Retail Stores (as defined herein) which
are required to be opened by HPL by 1999 in accordance with the Retail Agreement
(as defined herein). See below in this section for a description of the
Company's Retail Agreement with HPL.

FREE-STANDING INTERNATIONAL RETAIL STORES

    As part of the Company's growth strategy, 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-Registered Trademark-,
DKNY-Registered Trademark-, and DONNA KARAN-Registered Trademark- names (the
"International Retail Stores"). The free-standing International Retail Stores
operated under these names carry the corresponding product lines exclusively.
There are provisions in certain of the agreements for these International Retail
Stores granting product and/or boutique exclusivity within a defined
geographical area. As of December 29, 1996, there were 41 free-standing
International Retail Stores owned by third parties unaffiliated with the Company
(including 17 stores owned by HPL and affiliates of HPL) operating under the
following names and located in the following countries:

<TABLE>
<CAPTION>
DONNA KARAN NEW                                                                                     DONNA
YORK-REGISTERED TRADEMARK-*                        DKNY-Registered Trademark-*               KARAN-REGISTERED TRADEMARK-*
-------------------------------------  ----------------------------------------------------  --------------------
<S>                                    <C>                     <C>                           <C>
Argentina(1)                           Australia(1)            Norway(1)                     Saudi Arabia(3)**
England(1)                             Belgium(1)              The Philippines (1)
Indonesia(1)                           England(2)              Singapore (1)
Israel(1)                              Germany(1)              Switzerland(3)
Korea(1)                               Greece(2)               Taiwan (2)
Malaysia(1)                            Hong Kong(4)            Thailand (1)
Singapore(1)                           Indonesia(1)            Turkey(2)
Switzerland(2)                         Korea(1)                United Arab Emirates(1)
Taiwan(1)                              Malaysia(1)
United Arab Emirates(1)                The Netherlands(1)
</TABLE>

------------------------

*   The numbers in parentheses indicate the number of stores opened in the
    particular country. Each DONNA KARAN NEW YORK-TM- free-standing
    International Retail Store carries DONNA KARAN NEW
    YORK-Registered Trademark- brand name products exclusively and each DKNY-TM-
    free-standing International Retail Store carries DKNY-Registered Trademark-
    brand name products exclusively.

**  In Saudi Arabia there are three stores which carry the Company's products
    under both of the Company's brand names, two of which carry women's products
    and one of which carries men's products.

    The Company anticipates that 17 additional free-standing International
Retail Stores will be opened in 1997 (including one store to be opened under the
Retail Agreement with HPL). These stores are anticipated to be located in
Australia, Croatia, the Czech Republic, Germany, Greece, Hong Kong, Israel,
Italy, Lebanon, The Netherlands, Russia, Spain, Sweden, and Thailand.

                                       12
<PAGE>
    As part of the Company's strategy of opening additional free-standing
International Retail Stores, in March 1995, the Company entered into a retail
agreement (the "Retail Agreement") with HPL and a corporation owned by the Ong
family, which also has a substantial interest in HPL, providing for the
establishment by HPL of an aggregate minimum, subject to certain exceptions, of
29 free-standing International Retail Stores in Hong Kong, The People's Republic
of China, The Philippines, South Korea, Taiwan, and Japan (the "Territories") by
December 31, 2000. In 1996, six free-standing International Retail Stores under
the Retail Agreement were opened in the Territories. The Company anticipates
that approximately one additional free-standing International Retail Store will
be opened in accordance with the Retail Agreement by the end of 1997. The Retail
Agreement, which has an initial term through December 31, 2005, provides for
minimum purchases by HPL of the Company's products. HPL has the right to sell
all apparel, accessories, and shoes which are manufactured by the Company at the
time of sale in its free-standing International Retail Stores in the
Territories. If the Company enters into a license for the manufacture and sale
of any of its products or determines to distribute shoes or non-apparel
products, HPL may have certain exclusive rights in the Territories with respect
to such products. During the term of the Retail Agreement, except under limited
circumstances, the Company is not entitled to distribute or sell its products
(other than its beauty products) in the Territories (other than Japan) except
through the free-standing International Retail Stores in the Territories.

    The Company intends to enter into additional licenses or strategic alliances
with corporate partners for the opening of additional, free-standing
International Retail Stores. The Company believes that this strategy will enable
it to penetrate the international market more effectively, particularly in
Europe, where most of the retail apparel business is conducted through smaller
retail boutiques.

FREE-STANDING DOMESTIC RETAIL STORES

    The Company currently does not have any free-standing domestic retail stores
(other than outlet stores--see "Outlet Stores" below in this section). The
Company is considering a strategy for the opening of full-price, free-standing
retail stores in select locations in the United States under a license or
franchise program, joint venture, or other arrangement. The Company believes
that free-standing retail stores will provide a retail environment, fully
coordinated with the Company's brand image and apparel collections.

CUSTOMERS

    The Company's customers consist of a limited number of better department and
large specialty stores, including Bloomingdale's, Macy's, Saks Fifth Avenue,
Neiman Marcus, Bergdorf Goodman, and Nordstrom, Donna Karan Japan, the Company's
30%-owned distributor in Japan, free-standing International Retail Stores, and
boutiques.

    Certain of the Company's customers, including some under common ownership
with each other, have accounted for significant portions of the Company's gross
revenues. During 1996, Bloomingdale's, Macy's, and affiliated stores, owned by
Federated Department Stores, together accounted for 12.8% of the Company's gross
revenues; Saks Fifth Avenue stores accounted for approximately 9.1% of the
Company's gross revenues; Nordstrom stores accounted for approximately 7.0% of
the Company's gross revenues; and Neiman Marcus stores and Bergdorf Goodman
stores, owned by The Neiman Marcus Group, Inc., together accounted for
approximately 6.8% of the Company's gross revenues. Sales to entities affiliated
with HPL, including Donna Karan Japan, the Company's 30%-owned distributor in
Japan, and certain free-standing International Retail Stores, accounted for
approximately 16.6% of the Company's gross revenues for 1996. The Company's 10
largest customers accounted for approximately 62.6% of the Company's gross
revenues during 1996.

                                       13
<PAGE>
OUTLET STORES

    As of December 29, 1996, the Company operated 37 outlet stores in 22 states;
seven in California; four in Florida; three in New York; two each in Maine, New
Jersey, Pennsylvania and South Carolina; and one each in Arizona, Colorado,
Connecticut, Georgia, Hawaii, Indiana, Massachusetts, New Hampshire, New Mexico,
Ohio, Texas, Vermont, Virginia, Washington, and Wisconsin. The Company
established its outlet stores primarily to dispose of excess inventory in a
manner which it believes does not adversely impact upon its department and
specialty store customers. The outlet stores also carry a limited amount of the
Company's licensed products. The Company's policy has been to make a style
available in its outlet stores after its customers have taken their first
markdown on that style. Sales in the Company's outlet stores accounted for
approximately 9.9% of the Company's net revenues for 1996. The Company currently
anticipates that it will have approximately 48 outlet stores in operation by the
end of 1997, including the Company's first outlet store in Europe. This outlet
store, which was opened in Bicester, England in January 1997, was established
primarily to dispose of excess inventory from the Company's distribution center
in The Netherlands.

SALES

    As of December 29, 1996, the Company had a sales force of 120 people, all of
whom were based in the Company's New York showrooms. Each division employs a
separate sales force, managed by a vice president of sales. All sales personnel
are salaried, other than Beauty Division sales personnel who receive
commissions. Each spring and fall season men's and women's Designer Collections
and DKNY-Registered Trademark- collections are introduced first to the press and
retailers at fashion shows which generally are held three to six months in
advance of shipping of the spring and fall merchandise.

    As of December 29, 1996, the Company had a staff of 16 apparel merchandise
coordinators and 27 Beauty Division account executives who service the stores
carrying its collections, as well as three Beauty Division regional managers who
supervise the Beauty Division account executives. Merchandise coordinators visit
each of the stores carrying the Company's products several times a year,
depending on the store's volume, to provide assistance in displaying the
products, as well as conducting training seminars.

DISTRIBUTION

    The Company has sought to maintain the uniqueness of, and consumer demand
for, its products by distributing its products through better department and
specialty stores and boutiques, and more recently through the free-standing
International Retail Stores operated under the DONNA KARAN NEW
YORK-Registered Trademark-, DKNY-Registered Trademark-, and DONNA
KARAN-Registered Trademark- brand names, all of which cater to fashion-conscious
consumers, and by being attuned to its consumers' desires through an
interactive, consumer-responsive approach to the design and quality of its
products. The Company seeks to assist its retail customers to achieve high
sell-through of products at full price by limiting the number of stores that
carry its products and working closely with its retail accounts to determine the
mix and quantity of products in its orders, and by providing retailers with the
services of the Company's account executives, who interact with the stores'
staffs and assist the retailers' customers. The Company also targets its retail
customer base with various marketing programs and material, including outreach
programs, "trunk shows," mailers, and catalogues. In addition, the Company
believes that its strategies of creating different brands positioned to appeal
to different segments of the market and creating new products within existing
brands support its marketing efforts, attract new customers and generate
additional sales.

    The retail customers that carry one or more of the Company's collections
were selected on the basis of their ability to display and promote those
collections effectively. Retailers carrying the Company's collections stock and
display the merchandise in accordance with the Company's standards, which may
include creating an in-store shop within the store, or providing special signs,
display cases, and display racks, depending on the collection. The Company works
closely with the store buyers to encourage each

                                       14
<PAGE>
store to carry a representative cross-section of the complete collection for
each season. As part of the Company's strategy to further support its retail
presence, increase dedicated selling space, and improve the productivity of its
existing in-store shops ("shop-in-shops") and International Retail Stores, the
Company created a Retail Development Group in late 1996. Responsibilities of the
Retail Development Group include working directly with the Company's department
store and specialty shop customers to maximize the productivity of the existing
shop-in-shops by assisting in the merchandising, planning, fixturing, and
refurbishing of each shop-in-shop. In addition, the Retail Development Group is
responsible for the design, development, and construction of new shop-in-shops
which are opened by the Company's retail and specialty customers. The Retail
Development Group also works directly with the licensees of the Company's
International Retail Stores to ensure consistency worldwide of the design,
presentation, merchandising, and construction of the free-standing stores.

    When the Company launches a new collection, it typically does so at either a
single retail store or at a limited group of retail stores. For example, the
DKNY-Registered Trademark- Kids collection distributed by the Company is being
sold exclusively at Bloomingdale's stores for the launch of the spring 1997
collection. The Company's experience is that limiting the initial distribution
of a collection encourages active promotional participation by the retailers
involved in the launch and increases consumer demand for the product.

ADVERTISING, PUBLIC RELATIONS, AND MARKETING

    All worldwide advertising, public relations programs, and marketing programs
are managed on a centralized basis through the Company's Creative Services and
Public Relations Departments located in New York. Centralization of the
Company's advertising, public relations, and marketing programs enables the
Company to promote a consistent global image for the Company and its products.
In addition to expenditures by its product licensees, expenditures by the
Company on advertising, public relations, and marketing totaled $53.2 million in
1996.

    ADVERTISING

    The Company supports the marketing of its products with extensive image
advertising designed to appeal to a specific target group of customers. THE
DONNA KARAN NEW YORK-Registered Trademark- brand focuses on the international
sophistication and urban lifestyle of affluent customers with an appreciation
for luxury products, and the DKNY-Registered Trademark- brand focuses on
customers who have a more casual, relaxed, and active lifestyle. The Company
advertises principally in print and outdoor advertising media, but also makes
extensive use of video for point-of-purchase displays, as well as mailers and
catalogues. The Company's advertising efforts, as well as the efforts of its
licensees, are coordinated through the Company's Creative Services Department
which was established in 1993. The Company believes that having its own Creative
Services Department enables it to better control advertising, media placement,
and advertising production costs.

    The Company's Creative Services Department is responsible for the worldwide
consistency of and the creation of the advertising campaigns, mailers, and
catalogues for the Company and its licensees. The Creative Services Department
also is responsible for the media placement of domestic advertising, and is
available to assist each division of the Company with a variety of projects,
including the design and production of fashion shows, corporate presentations,
and archival maintenance. Additionally, the Creative Services Department assists
the other divisions of the Company with the marketing, graphic design, and
production of collateral materials, such as point-of-purchase displays, mailers,
catalogues and in-store video displays. The Company has provided its Creative
Services Department with a state-of-the-art computer-aided design system in its
New York headquarters which can be used to create two-dimensional graphics and
three-dimensional images for use in creating advertising and marketing
materials. The system is also used by the Company's designers in the development
of new products. Additionally, when appropriate, the Creative Services
Department utilizes specialized computer-aided design systems, such as

                                       15
<PAGE>
stereo lithography. As of December 29, 1996, the Company's Creative Services
Department consisted of 21 full-time personnel.

    PUBLIC RELATIONS

    The Company's Public Relations Department is responsible for the worldwide
coordination and communication for each of the Company's divisions with the
industry and general press and media and offers up-to-date information on the
Company's products and activities. The Public Relations Department consisted of
21 full-time employees as of December 29, 1996.

    MARKETING

    Ms. Karan, the Company's Chief Designer, is an integral part of the
marketing process. As a result of her professional accomplishments, she enjoys
celebrity status and garners international recognition. Furthermore, she has
been the subject of numerous newspaper and magazine articles and has appeared
frequently on broadcast media. Ms. Karan's personal appearances, done for key
store launches, "trunk shows," and major events, and her in-store videos in
which she communicates with the consumer about the Company's seasonal fashion
point of view, and her other appearances in public and the media, serve to
support and institutionalize all of the Company's brands.

    The Company utilizes various means of advertising and marketing, such as
corporate mailers, videos, catalogues, newsletters, and consumer awareness
programs. For example, the Company markets its DONNA KARAN NEW
YORK-Registered Trademark- brand name and image through its WOMAN TO WOMAN-TM-
newsletter which is a dialogue between the Company, the designer, and consumers.
The WOMAN TO WOMAN-TM- newsletter offers a toll-free number to answer consumer
questions and open dialogue with consumers and to improve and focus the
Company's marketing programs; informs consumers of new products in all areas of
the Company; and discusses new fashion trends, among other topics.

    The Company further strengthens consumer awareness by sponsoring special
events, and through the House of Donna Karan which can be accessed through the
Company's Internet site on the World Wide Web. As part of its 1997 special
events sponsorships, the Company will serve as an official sponsor to both the
United States Figure Skating Association (USFSA) and the American Motorcycle
Association (AMA) Race Team. In connection with its USFSA sponsorship, DKNY-TM-
will serve as an official outfitter for more than 250 skaters, coaches and
officials from the 1997 US World Figure Skating Team and the US Figure Skating
Team. In addition, as part of its AMA sponsorship, DKNY MEN-TM- will serve as
primary associate sponsor for Team Fast by Ferraci Ducati USA.

SOURCING AND PRODUCT DEVELOPMENT

    The Company sources products through its established relationships with
leading contractors. The Company seeks to achieve the most efficient means for
the timely delivery of its high quality products. The Company continues to
rebalance its sourcing by region in response to increasing demand within each
region.

    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, Italy, 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 acquisition for a
substantial portion of the Company's apparel products takes 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,

                                       16
<PAGE>
manufacture, and trim) generally begins after the Company has received customer
orders, approximately 90 to 120 days prior to delivery of finished goods to
customers.

    The Company engages both domestic and foreign contractors for the production
of its products. During 1996, approximately 46.0% of direct purchases of raw
materials, labor, and finished goods in its apparel, accessories, shoes, and
beauty products were produced in Hong Kong, Taiwan, South Korea, and other Asian
countries; approximately 26.7% were produced in the United States; approximately
25.1% were produced in Europe, and approximately 2.2% were produced elsewhere.
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 and Prato, Italy. As of
December 29, 1996, approximately 135 people were employed in Hong Kong and
approximately 27 people were employed in Milan, and Prato, Italy. Finished goods
production, quality control, and delivery are monitored through an exclusive
agent in Seoul, South Korea and fabric production, quality control, and delivery
are monitored through an exclusive agent in Prato, Italy.

    The Company does not own any production facilities. The Company's apparel
products are produced for the Company by approximately 500 different
contractors. None of the contractors engaged by the Company accounted for more
than 10% of the Company's total production during 1996. Although the Company has
a written agreement with only one of its contractors, it has had long-term
relationships with many of them. The Company uses a variety of raw materials,
principally consisting of woven and knitted fabrics and yarns. During 1996,
approximately 42.0% 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.
The rest of the raw materials used in the Company's products were purchased by
contractors from mills designated by the Company. In some cases, the Company
must commit to purchase fabric from a mill before it will begin production.
Although the Company must make commitments for a portion of its fabric purchases
well in advance of sales, the Company's risk is not material, because the
Company cuts the majority of its garments only to fill actual customer orders.
If the Company overestimates the demand for a particular fabric or yarn, it
frequently can utilize the excess in garments made for subsequent seasons or
made into past seasons' silhouettes for distribution in its outlet stores. See
"Outlet Stores" above in this section.

QUALITY CONTROL

    The Company monitors the quality of its fabrics prior to the production of
garments and inspects prototypes of each product before production runs are
commenced. The Company also performs random in-line quality control checks
during and after production before the garments leave the contractor. Final
random inspections occur when the garments are received in the Company's
distribution centers. As of December 29, 1996, the Company had 21 full-time
personnel engaged in quality control located in its Hong Kong office and 17
located in New Jersey/New York. The Company believes that its policy of
inspecting its products at its distribution centers and at the contractors'
facilities is important in maintaining the quality and reputation that its
garments enjoy.

    The Company permits defective garments to be authorized for return for
credit by the purchasers. Less than one percent of the garments shipped by the
Company during each of the last three years has been returned under this policy.

WAREHOUSE AND DISTRIBUTION CENTERS

    To facilitate the distribution of its apparel products, the Company utilizes
distribution centers at five strategically located sites. Two of the
distribution centers are operated by the Company and three are operated by
independent contractors. Distribution of the Company's apparel and accessory
products in the United States is centralized in a Carlstadt, New Jersey facility
operated by the Company. The Company also operates a distribution center in Hong
Kong, which services the Pacific rim, other than Japan. The

                                       17
<PAGE>
Company utilizes a warehouse operator in The Netherlands that services the
European market and a warehouse operator in Toronto that services the Canadian
market. Donna Karan Japan utilizes an independent warehouse operator in Tokyo,
Japan that services the Japanese market.

    To facilitate the distribution of the Beauty Division products, the Company
utilizes the services of a public warehouse located in New Jersey. This facility
is used to distribute the Company's products throughout the United States, and
to consolidate and ship its products internationally. All administrative
functions associated with distribution are performed at the Company's Carlstadt
warehouse facility.

    The Company had intended to close most of its operations at the buildings
comprising its Carlstadt facility and to relocate its apparel and shoe
operations to a single facility in another location. However, after negotiations
for a prospective location ended because the terms of the proposed lease became
financially unattractive, the Company reevaluated this proposal and determined
instead at this time to make certain improvements to its current warehouse
facility. The Company believes that its current location, as improved, will be
adequate to meet its short-term needs. The Company will continue to explore its
alternatives with respect to the consolidation of its New Jersey warehouse
facilities.

    To try to ensure that each of its retail customers receives the merchandise
ordered in satisfactory condition, substantially all apparel and accessories
produced for the Company are processed through one of the Company's distribution
centers before delivery to the retail customer. In general, merchandise is not
drop shipped directly from the contractor to the customer. Each customer is
assigned to one of the Company's distribution centers, depending on the
customer's geographical location. Products are shipped to the customer from the
assigned distribution center on hangers or in cartons. The Company's
distribution centers are linked by computer to the Company's executive offices,
enabling the Company to maintain up-to-date information on the availability of
merchandise at all locations.

MANAGEMENT INFORMATION SYSTEMS; INVENTORY AND CREDIT CONTROL

    The Company believes that advanced information processing is important to
maintain its competitive position. Consequently, the Company has invested in
computer mainframe and network systems and software (i) to enhance the speed and
efficiency of certain aspects of its business, such as product design, order
entry, distribution, product control, and financial reporting, (ii) to improve
the efficiency and integration of its international operations, and (iii) to
provide timely inventory information. All the Company's international and
domestic operations are networked to provide the Company with worldwide customer
service, production and inventory control, and electronic mail, data and fax
capabilities. The Company's worldwide information processing system operates 24
hours a day.

    The Company's Creative Services Department has an advanced computer-aided
design system. The Company also has invested in a computerized marker and
grading system which can be used by its personnel in New York to print patterns
and markers locally and to transmit them electronically to its international
offices for delivery to contractors to improve the Company's fabric utilization
ratio and maintain the quality of its garments.

    The Company has a retail management software system which is used in all of
its outlet stores. The system is used for point-of-sale transactions and
information, as well as office management, including inventory control. The
Company also has both a financial information software management system and an
apparel company management software system. The Company's inventory is reviewed
on an ongoing basis, and the division presidents review their divisions'
inventory positions, production, receiving, and shipping schedules to ensure
that all orders are filled timely. To date, it has been the Company's policy to
dispose of all seasonal items, either through sale through its outlet stores or,
if necessary, off-price retailers, once its major department store customers
have marked down such items.

    The Company manages all its own credit and collection functions. In general,
the Company does not factor its accounts receivable and maintains credit
insurance to manage the risk of bad debts. In

                                       18
<PAGE>
January 1996, Barney's commenced bankruptcy proceedings under Chapter 11 of the
United States Bankruptcy Code. During 1996, the Company sold its claims to its
receivables from Barneys, the loss on which had been fully reserved as of
December 31, 1995. The Company's bad debt expense was immaterial during 1996.

COMPETITION

    Competition is strong in the segments of the fashion industry in which the
Company operates. The Company competes with numerous designers and
manufacturers, domestic and foreign, none of which accounts for a significant
percentage of total industry sales, but some 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. See "Products" above in this section
for the Company's competitors.

    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. The Company believes that retailer and consumer acceptance
and support of its products depends to a great extent on its well-recognized
designer name and proprietary labels.

BACKLOG

    The Company generally receives orders for apparel, accessory, and shoe
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 10, 1997, backlog was $247.6 million, as compared to $148.5
million at March 4, 1996. The Company's backlog depends upon a number of
factors, including the timing of the market weeks for each of the DONNA KARAN
NEW YORK-Registered Trademark- and DKNY-Registered Trademark- brand seasons,
during which a significant percentage of the Company's orders are received. As a
consequence, a comparison of backlog from period to period is not necessarily
meaningful and may not be indicative of eventual shipments. The 1997 backlog
included significant fall orders compared to 1996 due to such timing
differences. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

TRADEMARKS

    The principal trademarks used by the Company to distinguish its brands are
DONNA KARAN NEW YORK-Registered Trademark- and DKNY-Registered Trademark-. Under
these brands the Company also uses the following trademarks:
DK-Registered Trademark-, DONNA KARAN-Registered Trademark-, DK MEN-TM-, D BY
DKNY-TM-, DKNY-Registered Trademark- CLASSIC, DKNY-Registered Trademark- ACTIVE,
a logo consisting of the block letters DKNY and the words Donna Karan New York
(with dots below each word), DKNY JEANS AND DESIGN
GRAPHICS-Registered Trademark-, and DKNY COVERINGS AND DESIGN
GRAPHICS-REGISTERED TRADEMARK-. Upon consummation of the Company's initial
public offering, Gabrielle Studio, Inc. ("Gabrielle Studio"), a corporation
owned by Ms. Donna Karan, Mr. Stephan Weiss, and certain affiliated trusts,
granted to the Company an exclusive worldwide license (the "Gabrielle License")
in perpetuity to use and sublicense the right to use the licensed marks
including the principal trademarks of the Company, and to use and sublicense the
right to use the name and likeness of Ms. Karan, in connection with the sale of
all products and store services, other than those products and specified
services for which Gabrielle Studio retained the right to use or license such
trademarks. Gabrielle Studio has licensed such specified products and services
to Ms. Karan. The Gabrielle License provides, however, that at such time as Ms.
Karan is no longer the Chief Executive Officer and Chief Designer or Chairman of
the Board of Directors and Chief Designer of the Company, the licensed marks may
only be used by the Company in the market segments in which such licensed marks
previously were used.

    The Gabrielle License may be terminated by Gabrielle Studio upon the failure
of the Company to pay any amount due within 60 days of receipt of notice of such
failure, or if the Company violates the quality control provisions of the
Gabrielle License and fails to initiate and thereafter pursue appropriate

                                       19
<PAGE>
corrective action within 60 days after a final unappealable determination by an
arbitration tribunal or court of competent jurisdiction that such violation has
occurred. The Gabrielle License also may be terminated by Gabrielle Studio upon
the occurrence of, among other events, a "change of control" of the Company,
including certain changes in ownership of voting securities, an acquisition by a
third party of 30% of the voting securities of the Company, mergers, sales of
assets, and certain changes in the composition of the Board of Directors.

    Gabrielle Studio and its shareholders have agreed that Gabrielle Studio will
not engage in any activities other than those related to the Gabrielle License
and the license agreement with Ms. Karan. However, there is no restriction on
the transferability of shares of Gabrielle Studio. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included herein
and "Certain Relationships and Related Transactions--License Agreement for
Principal Trademarks" included in the 1997 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
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, vigorously
seeks to protect them against infringement.

EMPLOYEES

    As of December 29, 1996, the Company had approximately 1,580 employees,
including 1,410 in the United States and 170 in foreign countries. Of the total,
approximately 330 employees held executive and administrative positions, 125
were engaged in design, 230 were engaged in production, 460 were engaged in
sales (including the equivalent of 305 full-time sales personnel at the various
retail outlet stores), 270 were engaged in distribution, 100 were engaged in
merchandising activities, and 65 were engaged in creative services, media,
public relations, and retail development. Approximately 245 of the Company's
United States production, design, and distribution employees are members of
three locals of the Union of Needletrades, Industrial & Textile Employees, which
operates under a collective bargaining agreement. The Company considers its
relations with its employees to be satisfactory and has not experienced any job
actions or labor stoppages since its inception.

GOVERNMENT REGULATIONS

    The Company and its products are subject to regulation by the Federal Trade
Commission in the United States, and its Beauty Division products also are
subject to regulation by the Food and Drug Administration, as well as various
other federal, state, local, and foreign regulatory authorities. Such
regulations relate principally to the labeling of the Company's products and the
ingredients, labeling, packaging, and marketing of the Company's Beauty Division
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.

BUSINESS CONSIDERATIONS

    Certain statements contained in this Annual Report on Form 10-K are forward
looking statements that have been made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. There are numerous risks
and uncertainties which may cause the Company's actual results in

                                       20
<PAGE>
future periods or plans for future periods to differ materially from the
forward-looking statements contained herein. Those risks include, among others,
(i) the failure of certain key members of the Company's design teams or
management, including Ms. Karan, to continue to be active in the business of the
Company; (ii) the possibility of a termination the Gabrielle License, a
bankruptcy of Gabrielle Studio or a transfer of the stock of Gabrielle Studio;
(iii) the overall financial condition of the apparel industry, the retail
industry and the general economy; (iv) 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 and promotions, the timing of launching new products and
collections and of opening of new doors, fashion trends, and the timing, terms
and consummation of any joint ventures, licenses or other dispositions of
product lines; (v) retailer and consumer acceptance of new products and
collections and the actual costs incurred in connection therewith; (vi) changes
in retailer and consumer acceptance of the Company's existing products; (vii)
the Company's ability to enter into licenses, joint ventures or otherwise
dispose of any product lines on favorable terms, including the timing, terms and
consummation of a joint venture, sale or licensing of the Company's Beauty
Division; (viii) the possible termination of the patent license with Stephan
Weiss regarding the bottles used in the Company's Beauty Division; (ix)
infringements of the Company's trademarks and other proprietary rights and
imitations or diversions of the Company's products; (x) acceptance and ability
to manage operations in foreign markets; (xi) receipt, pricing and timing of
customer orders; (xii) timing of and costs associated with new store openings;
(xiii) political instability resulting in the disruption of trade from the
countries in which the Company's contractors, suppliers, 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; (xiv) the inability of a contractor to
deliver the Company's products in a timely manner which could cause it to miss
the delivery date requirements of its customers, which could result in
cancellation of orders, refusal to accept deliveries, or a reduction in the
selling price; and (xv) general competitive risks, as well as certain other
risks described herein.

                                       21
<PAGE>
ITEM 2. PROPERTIES

    Certain information concerning the Company's principal facilities, all of
which are leased, is set forth below:

<TABLE>
<CAPTION>
                                                                                                  APPROXIMATE AREA
                   LOCATION                                            USE                         IN SQUARE FEET
-----------------------------------------------  -----------------------------------------------  ----------------
<S>                                              <C>                                              <C>
550 Seventh Avenue.............................  Principal executive and administrative offices;         77,000
  New York, New York                             Designer Collections design facilities, sales
                                                 offices, showrooms, and women's wear, menswear,
                                                 accessories, and beauty division offices
218, 240 and 250 West 40th Street..............  DKNY-Registered Trademark- executive and               209,000
  New York, New York                             administrative offices, including its design
                                                 facilities, sales offices, production offices,
                                                 showrooms, division offices, and the Company's
                                                 library of design items
Carlstadt, New Jersey..........................  Distribution and warehouse facility; management        351,000
                                                 information systems and credit, and finance
                                                 operations
Kowloon, Hong Kong.............................  Distribution and warehouse facility; production         63,000
                                                 control, sourcing, and quality control
Milan, Italy...................................  Showrooms and public relations; shoe and                14,000
                                                 accessories offices
Prato, Italy...................................  Production control, sourcing and quality                 9,000
                                                 control; administrative offices
</TABLE>

    The leases for these offices expire between 1997 and 2009. The leases for
the Company's New York offices provide for aggregate annual rentals of
approximately $5.9 million in 1997. The leases for the Company's other
facilities provide for aggregate annual rentals of $3.2 million in 1997. 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. In addition, the Company had intended
to close most of its operations at the seven buildings comprising its Carlstadt,
New Jersey facility and to relocate its apparel and shoe operations to a single
facility in another location. However, after negotiations for a prospective
location ended because the terms of the proposed lease became financially
unattractive, the Company reevaluated this proposal and determined instead at
this time to make certain improvements to its current warehouse facility. The
Company believes that its current facility, as improved, will be adequate to
meet its short-term needs. The Company will continue to explore its alternatives
with respect to the consolidation of its New Jersey warehouse.

    As of December 29, 1996, the Company operated 37 retail outlet stores in
leased premises. See "Outlet Stores" above in this section. The outlet stores
range in size from approximately 2,100 square feet to 7,600 square feet. The
leases for these stores expire between 1997 and 2006 and provide for aggregate
minimum-guaranteed annual rentals of approximately $3.0 million in 1997, as well
as an additional amount based upon the aggregate annual sales of such stores.
The Company expects to renew, for the applicable renewal option period, those
leases which expire in 1997.

    The Company believes that its existing facilities are well maintained and in
good operating condition and are adequate for its present level of operations.

                                       22
<PAGE>
ITEM 3. LEGAL PROCEEDINGS

    The Company is involved from time to time in routine legal matters
incidental to its business. In the opinion of the Company's management, the
resolution of such matters will not have a material effect on its financial
position or results of operations. The Company is currently subject to a New
York State sales tax audit, and an Internal Revenue Service audit relating to
the reclassification of workers as independent contractors or employees. The
Company believes that neither of these audits will have a material adverse
effect on the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    None.

               DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The names of the directors and executive officers of the Company and their
respective ages and positions are as follows:

<TABLE>
<CAPTION>
                 NAME                      AGE                                 POSITION
--------------------------------------     ---     -----------------------------------------------------------------
<S>                                     <C>        <C>

Donna Karan...........................         47  Chairman of the Board, Chief Designer, and Chief Executive
                                                   Officer

Stephan Weiss.........................         57  Vice Chairman and Director

M. William Benedetto..................         55  Director

Andrea Jung...........................         39  Director

Ann McLaughlin........................         55  Director

Stephen L. Ruzow......................         53  President, Chief Operating Officer, and Director

Dewey K. Shay.........................         38  Senior Executive Vice President, Chief Administrative Officer,
                                                   and Director

Lee Goldenberg........................         46  Executive Vice President--Worldwide Operations

Joseph B. Parsons.....................         43  Executive Vice President--Chief Financial Officer and Treasurer

Louis Praino..........................         53  Executive Vice President--Worldwide Production

Julius Stern..........................         72  Executive Vice President

David L. Bressman.....................         45  Senior Vice President, General Counsel, and Secretary
</TABLE>

    DONNA KARAN founded the Company along with Stephan Weiss, Tomio Taki, Frank
Mori, and Takihyo Inc. in 1984 and has served as Chief Designer and Chief
Executive Officer of the Company from the date of its formation. Ms. Karan has
served on the Board of Directors of the Company since April 15, 1996, and has
served as Chairman of the Board since July 1996. Immediately prior to the
formation of the Company, 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.

                                       23
<PAGE>
    STEPHAN WEISS served as the Operating Principal of the Company from 1985 to
1992. Mr. Weiss has served the Company in various capacities, including having
direct supervisory responsibility at various times for the legal department,
licensing, new business ventures, such as the Beauty Division and the Shoe
Division, and developing the Creative Services Department. Mr. Weiss has been
receiving compensation for his services with the Company since 1989. Mr. Weiss
served as Co-Chief Executive Officer of the Company from 1993 to December 31,
1995. Mr. Weiss has served on the Board of Directors since April 15, 1996, and
as Vice Chairman since July 1996. Mr. Weiss consults with the Chief Executive
Officer on strategic planning and is currently responsible for the Company's
Beauty Division. Mr. Weiss' office is not a full-time position, but he spends a
substantial amount of time as Vice Chairman.

    M. WILLIAM BENEDETTO, a founder and principal of Benedetto, Gartland &
Greene, Inc., a New York-based private placement and investment advisory firm,
has served as a director of the Company since July 1996. Before founding his own
firm in 1988, Mr. Benedetto was a senior executive in the investment banking
industry.

    ANDREA JUNG has served as a director of the Company since October 1996.
Since 1994, Ms. Jung has been employed by Avon Products Inc., a multinational
cosmetics company, most recently as Corporate Executive Vice President and
President, Global Marketing and New Business. From 1991 to 1993, Ms. Jung was
Executive Vice President at Neiman Marcus Group and from 1987 to 1991 she was
Senior Vice President, General Merchandising Manager for I. Magnin in San
Francisco. Ms. Jung is a director of Zales Corporation and was named the 1996
Marketer of the Year by Brandweek Magazine.

    ANN MCLAUGHLIN has served as a director of the Company since January 1997.
Ms. McLaughlin has been Chairman of The Aspen Institute, a non-profit
policy-making organization, since August 1996 and served as Vice Chairman of
this institute since August 1993. From May 1990 to September 1995, Ms McLaughlin
served as President of the Federal City Council, Washington D.C., a non-profit,
non-partisan organization. From 1987 to 1989, Ms. McLaughlin was the United
States Secretary of Labor. She also served as Chairman of the President's
Commission on Aviation Security and Terrorism from 1989 to 1990 and as Under
Secretary of the Department of the Interior from 1984 to 1987. Ms. McLaughlin is
a director of AMR Corporation and its subsidiary, American Airlines Inc.,
Federal National Mortgage Association (Fannie Mae), General Motors Corporation,
Host Marriot Corporation, Kellogg Company, Nordstrom, Sedgwick Group plc., Union
Camp Corporation, Vulcan Materials Company, Harman International Industries, and
Potomac Electric Power Company.

    STEPHEN L. RUZOW has served as President and Chief Operating Officer of the
Company since April 1989, and has served on the Board of Directors of the
Company since April 15, 1996. Prior to joining the Company, Mr. Ruzow was
employed by Warnaco Inc., a publicly-traded apparel company, as the President
and Chief Executive Officer of its Activewear Division from November 1987 to
July 1988 and as President and Chief Executive Officer of its Activewear and
Women's Wear Divisions from July 1988 to April 1989.

    DEWEY K. SHAY has served as Senior Executive Vice President and Chief
Administrative Officer and a director of the Company since December 1996. Prior
to joining the Company, Mr. Shay was employed by Morgan Stanley & Co.
Incorporated since 1986, most recently as a Principal in its Corporate Finance
Department.

    LEE GOLDENBERG has been employed by the Company since April 1993 and has
been Executive Vice President--Worldwide Operations of the Company since
November 1995. From April 1993 to November 1995, Mr. Goldenberg held
increasingly responsible positions with the Company, including Senior Vice
President and Chief Information and Logistics Officer. From 1985 to April 1993,
Mr. Goldenberg was employed in various management positions at Bernard Chaus
Inc., most recently as Vice President-- Management Information Systems.

                                       24
<PAGE>
    JOSEPH B. PARSONS has served as Executive Vice President and Chief Financial
Officer of the Company since February 1996 and as Treasurer of the Company since
June 1996. From January 1993 to February 1996, Mr. Parsons held various
financial positions with the Company, most recently as Vice President-- Finance.
From January 1990 through December 1992, Mr. Parsons was Assistant Controller at
Crystal Brands, Inc., an apparel manufacturer.

    LOUIS PRAINO has been Executive Vice President--Worldwide Production of the
Company since November 1995. Since joining the Company in October 1990 and until
November 1995, Mr. Praino was Senior Vice President--Worldwide Productions.

    JULIUS STERN has been Executive Vice President of the Company since October
1992. From 1985 to October 1992 he served as President of the Donna Karan New
York-Registered Trademark- designer collection division.

    DAVID L. BRESSMAN has served as Senior Vice President and General Counsel to
the Company since July 1996 and as Secretary of the Company since June 1996.
From April 1994 to July 1996, Mr. Bressman was Vice President and General
Counsel of the Company. From 1984 to July 1994, Mr. Bressman was a member of the
New York law firm Phillips, Nizer, Benjamin, Krim & Ballon.

    Donna Karan and Stephan Weiss are married. There are no other family
relationships among the directors and executive officers.

                                       25
<PAGE>
                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
      SHAREHOLDER MATTERS

    The Company's Common Stock has been included on the New York Stock Exchange
under the symbol "DK" since the Company's initial public offering. The following
table reflects the high and low sales prices of the Company's Common Stock, as
reported by the New York Stock Exchange, for each quarter of fiscal year 1996.

<TABLE>
<CAPTION>
                                                                               FISCAL 1996 (1)
                                                                             --------------------
<S>                                                                          <C>        <C>
QUARTER                                                                        HIGH        LOW
---------------------------------------------------------------------------  ---------  ---------
Third......................................................................  $   27.63  $   19.88
Fourth.....................................................................  $   22.88  $   13.50
</TABLE>

------------------------

(1) The Company's Common Stock commenced trading on the New York Stock Exchange
    on June 28, 1996, the last trading day of the Company's second quarter of
    fiscal 1996. The closing sales price per share on such date was $28.00.

    As of March 18, 1997, the closing sales price for the Company's Common
Stock, as reported on the New York Stock Exchange, was $11.00.

    As of March 26, 1997, the number of holders of record of the Company's
Common Stock was approximately 1,324. As of March 26, 1997, 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.

                                       26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

    The following selected financial data should be read in conjunction with the
Company's Financial Statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
<TABLE>
<CAPTION>
                                                                               FISCAL YEAR ENDED
                                                         --------------------------------------------------------------
<S>                                                      <C>         <C>         <C>         <C>           <C>
                                                         JANUARY 2,  JANUARY 2,  JANUARY 1,  DECEMBER 31,  DECEMBER 29,
                                                            1993        1994        1995         1995          1996
                                                         ----------  ----------  ----------  ------------  ------------

<CAPTION>
                                                                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                      <C>         <C>         <C>         <C>           <C>
STATEMENT OF INCOME DATA:
Net revenues...........................................  $  259,947  $  364,705  $  420,164   $  510,126    $  612,840
Gross profit...........................................      92,309     130,475     148,992      179,437       200,776
Selling, general, and administrative expenses..........      63,933     102,748     119,995      136,906       187,474(3)
                                                         ----------  ----------  ----------  ------------  ------------
Operating income.......................................      28,376      27,727      28,997       42,531        13,302
Equity in earnings of affiliate(1).....................          --          --          --        2,519         3,089
Interest expense, net..................................        (892)     (4,063)     (8,862)      (7,650)       (8,534)
Other expense(2).......................................          --      (2,980)     (2,651)          --            --
Gain on sale of interests in affiliate(1)..............          --          --          --       18,673            --
                                                         ----------  ----------  ----------  ------------  ------------
Income before provision for certain state, local, and
  foreign income taxes.................................      27,484      20,684      17,484       56,073         7,857
Provision (benefit) for income taxes...................       3,522       1,312       1,139        2,398       (17,179)(4)
                                                         ----------  ----------  ----------  ------------  ------------
Net income.............................................  $   23,962  $   19,372  $   16,345   $   53,675    $   25,036
                                                         ----------  ----------  ----------  ------------  ------------
                                                         ----------  ----------  ----------  ------------  ------------
Net income per common shares outstanding (5)...........                                       $     2.50    $     1.17
                                                                                             ------------  ------------
                                                                                             ------------  ------------
Number of common shares outstanding (5)................                                       21,468,034    21,468,034
                                                                                             ------------  ------------
                                                                                             ------------  ------------

BALANCE SHEET DATA:
Working capital........................................  $   25,521  $   11,592  $   52,289   $   92,635    $  146,805
Total assets...........................................      89,035     137,129     157,004      203,975       311,695
Total long-term debt, including current portion........      17,450       1,044      51,426       53,538           318
Stockholders' equity and partners' capital.............      30,809      42,329      47,837       80,846       203,791
</TABLE>

------------------------

(1) On March 31, 1995, the Company sold 70% of its interest in the operations of
    Donna Karan Japan to a nonaffiliated party. The Company recognized a gain on
    this transaction, net of transaction costs, of $18.7 million. Subsequent to
    the sale, the Company has accounted for its remaining 30% interest in the
    operations of Donna Karan Japan using the equity method of accounting.
    Equity in earnings of affiliate amounted to $2.5 million and $3.1 million
    for the years ended December 31, 1995 and December 29, 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.
    See Note 8 to Notes to Financial Statements.

(2) Other expenses represent charges, primarily legal and other professional
    fees, related to a proposed initial public offering in 1993 amounting to
    $3.0 million and a proposed debt offering in 1994 amounting to $2.7 million.

(3) Included in selling, general and administrative expenses for the 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 for certain employees pursuant to the
    Company's 1996 Stock Incentive Plan which amounted to $2.5 million, and $3.2
    million related to the

                                       27
<PAGE>
    purchase of all sales and marketing plans, patterns, samples, fabrics and
    other materials developed by Designer Holdings, Ltd. in connection with the
    termination of the Jeans License.

(4) The provision for income taxes for the 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. See Note
    15 to Notes to Financial Statements.

(5) For purposes of comparison, the Company calculated earnings per share based
    on the number of shares outstanding after the Offering. The Company
    determined that this presentation is more meaningful due to the changes in
    the capital structure of the Company due to the Offering.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

    The following discussion provides information and analysis of the Company's
results of operations for the years ended January 1, 1995, December 31, 1995,
and December 29, 1996, and its liquidity and capital resources, and should be
read in conjunction with the audited Financial Statements and the notes thereto.
The Company utilizes a 52- or 53-week fiscal year ending on the Sunday nearest
December 31. As used in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the DONNA KARAN NEW
YORK-Registered Trademark- collections and the DKNY-Registered Trademark-
collections each include apparel, accessories, and shoes.

    As part of its strategy of introducing new products and collections, during
the past five years, the Company has expanded its product offerings to include
the DONNA KARAN NEW YORK-Registered Trademark- Essentials and
DKNY-Registered Trademark- Essentials collections for women, the
DKNY-Registered Trademark- collection for men, the DKNY-Registered Trademark-
petite collection for women, DK MEN-TM- and DONNA KARAN NEW YORK-TM- men's and
women's beauty products, respectively, DKNY-Registered Trademark- men's and
women's shoes, and most recently, the DONNA KARAN NEW YORK-Registered Trademark-
Signature, "D," DKNY-REGISTERED TRADEMARK- CLASSIC, and
DKNY-REGISTERED TRADEMARK- ACTIVE collections for women. The introduction of new
products and collections requires significant investments, such as costs related
to advertising, infrastructure, and design, as well as additional inventory
requirements. As a result, new products and collections have an adverse impact
on the Company's overall operating profit margins until such products and
collections achieve a sufficient sales level to offset such costs. For example,
the Company's DONNA KARAN NEW YORK-Registered Trademark- men's division, which
was established in 1991, did not provide a positive contribution to the
Company's operating profit until 1994, and in 1996, this division continued the
trend of increased net revenue and operating profitability. From 1992 to 1994,
the DONNA KARAN NEW YORK-Registered Trademark- and DKNY-Registered Trademark-
men's divisions incurred cumulative losses of $16.1 million. The Company expects
that future products and collections may similarly impact the Company's overall
operating profitability. In addition, the Beauty Division, which has experienced
an increase in net revenues each year since its introduction in 1992, did not
provide a positive contribution prior to allocation of corporate expenses in
1996. From 1992 through 1996, the Beauty Division incurred cumulative losses of
$28.1 million, excluding the royalty paid to Gabrielle Studio on net sales of
the division.

    In addition, the Company's strategy of broadening its product offerings has
affected and will continue to affect its overall gross margin. For example, the
Company's mens' collections have slightly lower gross margins than its womens'
collections. The Company's beauty products have significantly higher gross
margins than its apparel collections and significantly higher selling and
advertising expenditures.

                                       28
<PAGE>
    The following table sets forth net revenues generated by the Company's
collections, beauty products, and outlet stores and licensing for 1994, 1995,
and 1996.

<TABLE>
<CAPTION>
                                                                          1994       1995       1996
                                                                        ---------  ---------  ---------
<S>                                                                     <C>        <C>        <C>
DONNA KARAN NEW YORK-Registered Trademark- collections for women
  (1).................................................................  $      79  $      77  $      72
DKNY-Registered Trademark- collections for women (1)..................        232        271        311
DONNA KARAN NEW YORK-Registered Trademark- collections for men (1)....         28         40         51
DKNY-Registered Trademark- collections for men (1)....................         18         37         67
Beauty products.......................................................         17         30         44
Outlet stores and licensing (2).......................................         46         55         68
                                                                        ---------  ---------  ---------
                                                                        $     420  $     510  $     613
                                                                        ---------  ---------  ---------
                                                                        ---------  ---------  ---------
</TABLE>

------------------------

(1) Includes apparel, accessory, and shoe collections.

(2) The Company was operating 29, 31, and 37 outlet stores at the end of 1994,
    1995, and 1996, respectively.

    On July 3, 1996, the Company sold 10,750,000 shares of its common stock in
the Offering. Net proceeds of the Offering, after deducting underwriting
discounts and commissions and professional fees, aggregated $236.0 million.
Proceeds of the Offering were used to retire distribution notes and accrued
interest thereon totaling approximately $116.4 million, to repay the Company's
term loans and the revolving line of credit which totaled approximately $76.8
million, to pay a certain one-time bonus under an employment agreement which
amounted to approximately $5.0 million (which is included in selling, general,
and administrative expenses) and to pay a one-time fee under the Gabrielle
License which amounted to $4.6 million (which is included in cost of sales). The
remaining $33.2 million was used for other general corporate purposes. The
distribution notes were issued in April 1996 to the principals (and certain of
their affiliates) of the Company prior to the Reorganization, and represented an
estimate of the cumulative undistributed taxable income (on which taxes
previously had been paid) of the Company since its inception through the
anticipated closing date of the Offering.

    Upon the consummation of the Offering, the Company entered into the
Gabrielle License with Gabrielle Studio. The Gabrielle License provides that the
Company will pay to Gabrielle Studio an annual royalty equal to 1.75% of the
first $250 million net sales (as defined in the Gabrielle License, which
includes products and store services) for such year, plus 2.5% of the next $500
million of net sales for such year, plus 3% of the next $750 million of net
sales for such year, plus 3.5% of all net sales for such year in excess of $1.5
billion. For purposes of computing the annual royalty, "net sales" includes
sales by the Company, its affiliates, its subsidiaries, and its sublicensees of
products bearing any of the licensed trademarks or Ms. Karan's name or likeness.

    During the fourth quarter of 1996, the Company revised its long-term
strategy for the Beauty Division and announced that the Board of Directors had
authorized management to explore strategic alternatives for the Beauty Division,
including a joint venture, license, or possible sale of the business. While
revenues for the Beauty Division grew 46.4% in 1996 compared to 1995, sales
growth for the division was lower than expected, and management has concluded
that the potential of the business would be better realized through a strategic
alliance that would devote greater resources to the beauty business. The Company
currently is exploring possible strategic alternatives for the Beauty Division.

    On September 27, 1996, the Company entered into the Jeans License with
Designer Holdings, Ltd. ("Designer Holdings"), for the exclusive production,
sale, and distribution of men's, women's and, with certain exceptions,
children's jeanswear under the DKNY-Registered Trademark- JEANS label. Under the
terms of the agreement, the Company received an initial payment of $6.0 million
from Designer Holdings to reimburse the Company for certain costs related to the
start-up and development of the DKNY-Registered Trademark- Jeans label. Under
the

                                       29
<PAGE>
license agreement, the Company was also entitled to receive additional payments
and annual royalties and administrative fees on sales. On March 4, 1997, the
Jeans License was terminated by mutual agreement of the Company and Designer
Holdings. Pursuant to the termination of the agreement, the Company returned to
Designer Holdings the initial $6 million payment, and a $1.26 million advance
royalty payment. Additionally, in order to assure a smooth transition for the
DKNY-Registered Trademark- jeanswear business, the Company purchased, for $3.2
million, all sales and marketing plans, patterns, samples, fabrics and other
materials developed by Designer Holdings in connection with the jeanswear
business, which amount was included in selling, general, and administrative
expenses in the fourth quarter of fiscal 1996.

PRO FORMA STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 29, 1996 AND
  DECEMBER 31, 1995 -- (UNAUDITED)

    The following table sets forth for the years ended December 31, 1995 and
December 29, 1996: (a) historical statements of income data; (b) pro forma
adjustments to reflect the Reorganization, the Offering, certain other
adjustments as if they had occurred on January 1, 1996 and January 2, 1995, and
adjustments arising from the sale of the Company's 70% interest in the
operations of Donna Karan Japan as if it had occurred on January 2, 1995; and
(c) pro forma statements of income data.

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 29, 1996
                                                    -----------------------------------------------
                                                                   PRO FORMA
                                                    HISTORICAL    ADJUSTMENTS           PRO FORMA
                                                    ---------   ---------------       -------------
<S>                                                 <C>         <C>                   <C>
                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues......................................  $ 612,840                         $612,840
                                                    ---------                         -------------
Gross profit......................................    200,776      (7,248)(i)         198,163
                                                                    4,635(ii)
Selling, general, and administrative expenses.....    187,474      (1,500)(iii)       178,105
                                                    ---------                         -------------
                                                                   (5,347)(iv)
                                                                   (2,522)(v)

Operating income..................................     13,302                          20,058
Equity in earnings of affiliate...................      3,089                           3,089
Interest (expense) income, net....................    (6,577)       3,475(vi)             155
                                                                      837(vii)
                                                                    2,420(ix)
Interest (expense) income on distribution notes...    (1,957)       1,957(viii)         --
                                                    ---------                         -------------
Income before income taxes........................      7,857                          23,302
Provision (benefit) for income taxes..............   (17,179)      27,898(x)           10,719
                                                    ---------                         -------------
Net income........................................  $  25,036                         $12,583
                                                    ---------                         -------------
                                                    ---------                         -------------
Pro forma earnings per share......................                                    $  0.59(xii)
                                                                                      -------------
                                                                                      -------------
</TABLE>

                                       30
<PAGE>

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31, 1995
                                                    -----------------------------------------------
                                                                   PRO FORMA
                                                    HISTORICAL    ADJUSTMENTS           PRO FORMA
                                                    ---------   ---------------       -------------
<S>                                                 <C>         <C>                   <C>
                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues......................................  $ 510,126      (5,521)(xi)        $504,605
                                                    ---------                         -------------
Gross profit......................................    179,437      (6,814)(xi)        159,817
                                                                  (12,806)(i)
Selling, general and administrative expenses......    136,906      (4,828)(xi)        129,761
                                                    ---------                         -------------
                                                                   (2,317)(iii)

Operating income..................................     42,531                          30,056
Equity in earnings of affiliate...................      2,519         394(xi)           2,913
Interest expense, net.............................    (7,650)       6,237(vi)           (839)
                                                                      574(vii)
Gain on sale of interest in affiliates............     18,673     (18,673)(xi)
                                                    ---------                         -------------
Income before income taxes........................     56,073                          32,130
Provision for income taxes........................      2,398      11,307(x)           13,705
                                                    ---------                         -------------
Net income........................................  $  53,675                         $18,425
                                                    ---------                         -------------
                                                    ---------                         -------------
Pro forma earnings per share......................                                    $  0.86(xii)
                                                                                      -------------
                                                                                      -------------
</TABLE>

------------------------

(i) Royalties of $12.8 million and $7.2 million in 1995 and 1996, respectively,
    to be paid to a corporation owned by two of the Company's principal
    stockholders and their affiliated trusts pursuant to a licensing agreement.

(ii) One-time fee of $4.6 million paid to a corporation owned by two of the
    Company's principal stockholders and their affiliated trusts pursuant to a
    licensing agreement.

(iii) Decrease in aggregate compensation from $4.3 million to $2.0 million in
    1995, and from $2.5 million to $1.0 million in 1996 for two of the Company's
    executives pursuant to their employment agreements.

(iv) One-time bonus under an employment agreement which amounted to $5.0 million
    and additional one-time bonuses of $0.3 million paid to key executives
    relating to the Offering.

(v) One-time charge of $2.5 million representing the award of 105,100 shares of
    common stock to certain employees pursuant to the Company's 1996 Stock
    Incentive Plan.

(vi) Reduction in interest costs of $6.2 million and $3.5 million in 1995 and
    1996, respectively, assuming the application of up to $75.7 million and
    $90.4 million in 1995 and 1996, respectively (which amounts represent the
    maximum amount outstanding during the periods) of the proceeds from the
    Offering to reduce the actual outstanding indebtedness under the Company's
    credit agreement.

(vii) Reduction of $0.6 million and $0.8 million in 1995 and 1996, respectively,
    in amortization of deferred financing costs, which would have been written
    off in connection with repayment of outstanding indebtedness under the
    Company's credit agreement.

(viii)Reduction in interest expense on distribution notes of $2.0 million in
    1996, assuming the distribution notes would not have been outstanding during
    the period.

(ix) Reduction in expense of $2.4 million related to the write-off of deferred
    financing costs in connection with the refinancing of outstanding
    indebtedness under the Company's credit agreement.

(x) Increase of $11.3 million and $27.9 million (including $19.0 million of
    deferred income tax assets recognized) in 1995 and 1996, respectively, for
    income taxes based upon pro forma pre-tax income as if the Company had been
    subject to Federal and additional state income taxes for the entire period.

                                       31
<PAGE>
(xi) Adjustments to reflect the Company's sale of its 70% interest in the
    operations of Donna Karan Japan, as if it had occurred on January 2, 1995.
    The gain of $18.7 million has been excluded, and, as a result of this sale,
    the Company's combined statement of income has been adjusted to reflect the
    accounting for the Company's interest in Donna Karan Japan using the equity
    method of accounting for the period from January 2, 1995 until March 31,
    1995, the date of the sale. Accordingly, net revenues have been decreased by
    $5.5 million, which reflects the difference between net revenues generated
    by sales from Donna Karan Japan to its customers and those net revenues of
    the Company derived from sales to Donna Karan Japan (as if Donna Karan Japan
    were a customer of the Company); gross profit has been decreased by $6.8
    million; and selling, general and administrative expenses have been
    decreased by $4.8 million, which included management fee income of $0.3
    million from an agreement with Donna Karan Japan. In addition, under the
    equity method of accounting, $0.4 million of equity in earnings of affiliate
    has been recorded to reflect the Company's portion of Donna Karan Japan's
    net income (See Note 8 of Notes to Financial Statements).

(xii) Pro forma earnings per share have been calculated using 21,468,034 shares,
    which assumes the number of shares outstanding after the Offering were
    outstanding for the entire period.

RESULTS OF OPERATIONS

    COMPARISON OF 1996 TO 1995
<TABLE>
<CAPTION>
                                                                  HISTORICAL                             PRO FORMA
                                                  ------------------------------------------  -------------------------------
<S>                                               <C>        <C>        <C>        <C>        <C>        <C>        <C>
                                                          1995                  1996                  1995            1996
                                                  --------------------  --------------------  --------------------  ---------

<CAPTION>
                                                                             (DOLLARS IN MILLIONS)
<S>                                               <C>        <C>        <C>        <C>        <C>        <C>        <C>
Net revenues....................................  $   510.1      100.0% $   612.8      100.0% $   504.6      100.0% $   612.8
Gross profit....................................      179.4       35.2      200.8       32.8      159.8       31.7      198.2
Selling, general, and administrative expenses...      136.9       26.8      187.5       30.6      129.8       25.7      178.1
Operating income................................       42.5        8.3       13.3        2.2       30.1        6.4       20.1
Equity in earnings of affiliate.................        2.5         .5        3.1         .5        2.9         .6        3.1
Net income......................................       53.7       10.5       25.0        4.1       18.4        3.7       12.6

<CAPTION>

<S>                                               <C>

<S>                                               <C>
Net revenues....................................      100.0%
Gross profit....................................       32.3
Selling, general, and administrative expenses...       29.1
Operating income................................        3.3
Equity in earnings of affiliate.................         .5
Net income......................................        2.1
</TABLE>

    NET REVENUES were $612.8 million in 1996, an increase of 20.1% (21.4% on a
pro forma basis) from the net revenues of $510.1 million recorded in 1995. The
increase was due primarily to: a $40.5 million, or 15.0%, increase in the
DKNY-Registered Trademark- women's collections; a $30.6 million, or 83.6%,
increase in the DKNY-Registered Trademark- men's collections; a $13.9 million,
or 46.4%, increase in the Beauty Division; a $12.6 million, or 22.5%, increase
in outlet stores and licensing; and a $10.9 million, or 27.3%, increase in DONNA
KARAN NEW YORK-Registered Trademark- collections for men. The increase was
offset somewhat in 1996 by a decrease of $5.7 million, or 7.4%, in the DONNA
KARAN NEW YORK-Registered Trademark- collections for women from 1995.

    The increase in net revenues for the DKNY-Registered Trademark- women's
collections was primarily the result of significant international growth, as
well as domestic growth. The increase in net revenues in the
DKNY-Registered Trademark- men's collections and DONNA KARAN NEW
YORK-Registered Trademark- collections for men resulted from significant growth
in international sales, as well as domestic growth. The increase in outlet store
and licensing was due primarily to an increase in the number of outlet stores
and an increase in same store sales. The increase in the Beauty Division was due
to the continued growth of the women's signature fragrance and bath and body
line and to expanded product offerings in 1996 compared to 1995, including the
launch of CHAOS-TM- in the fourth quarter of 1996. The decrease in net revenue
in the DONNA KARAN NEW YORK-Registered Trademark- collections for women resulted
primarily from a decrease in domestic sales in the DONNA KARAN NEW
YORK-Registered Trademark- accessories business as it was refocused from a
collection-coordinated line to a "main floor" line. Overall revenue from
international sales increased by 32.5% in 1996 and comprised 37.3% and 33.6% of
the Company's net revenues (excluding outlet stores and licensing) in 1996 and
1995, respectively.

                                       32
<PAGE>
    GROSS PROFIT as a percentage of sales was 32.8% and 35.2% (32.3% and 31.7%
on a pro forma basis) in 1996 and 1995, respectively. The decrease in the
historical gross margin was primarily attributable to $13.9 million in royalty
fees expensed in 1996 in connection with the Gabrielle License (see Note 10 to
Notes to Financial Statements) as well as the impact on gross profit in 1995
from the sale of 70% of the operations of Donna Karan Japan as described in note
(xi) in the above Pro Forma Statements of Income. These royalty fees are
included in cost of sales. Included in the royalty fees was a $4.6 million
one-time payment made by the Company in connection with entering into the
Gabrielle License. The slight improvement in the gross margin percentage on a
pro forma basis was attributable to the relative increase in sales of Beauty
Division products, which have gross margins that are higher than the average
gross margin, in the Company's sales mix.

    SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES increased to 30.6% (29.1% on a
pro forma basis) of net revenues in 1996 from 26.8% (25.7% on a pro forma basis)
of net revenues in 1995. The 1996 selling, general and administrative expense
included a non-recurring expense of $3.2 million for the purchase of sales and
marketing plans, fabrics, patterns and other materials in connection with the
termination of the Jeans license. Selling, general and administrative expense
grew in part due to the growth of the Company's Beauty Division, for which
selling, general and administrative expenses as a percentage of sales is higher
than for the Company's apparel, accessory and shoe products. The Company's
selling, general and administrative expense grew due to both the increase in
sales of Beauty Division products compared to non-beauty sales and increase in
the Beauty Division's selling, general and administrative expense as a
percentage of sales in 1996 compared to 1995. The increase of the Beauty
Division was due to ongoing growth of core beauty products and the launch in
1996 of CHAOS-TM-, a new designer fragrance. Other than the above factors, on a
pro forma basis, selling, general and administrative expense increased in 1996
compared to 1995 due to amortization of shop-in-shop expenditures and other
domestic co-op merchandising and advertising expenditures; expenditures to
support the growth of international sales, including an increased salesforce and
co-op advertising spending; increased domestic advertising expenditures;
additional costs associated with being a public company; and, additional
infrastructure spending to support the Company's growth.

    On a historical basis, 1996 selling, general and administrative expense was
additionally negatively impacted by $7.6 million in non-recurring expenses
incurred in connection with the Offering, somewhat offset by a decrease in
selling, general and administrative expense subsequent to the sale of the
Company's 70% interest in Donna Karan Japan. (See notes (iii), (iv), (v) and
(xi) in the above Pro Forma Statements of Income.)

    The Company is focused on reducing the growth of selling, general and
administrative expense as a percentage of sales. This growth trend is continuing
through the first quarter of 1997 and any impact of actions taken to slow this
growth will not impact financial results until later in 1997.

    OPERATING INCOME decreased to $13.3 million in 1996 from $42.5 million in
1995, a 68.7% decrease. On a pro forma basis, operating income decreased to
$20.1 million in 1996 from $30.1 million in 1995, or a 33.3% decrease.

    INTEREST EXPENSE decreased to $6.6 million in 1996, or 14.0%, from $7.6
million in the same period in 1995 primarily due to a reduction in outstanding
borrowings in 1996, offset by the write-off of $2.4 million of deferred
financing charges in 1996.

    INTEREST EXPENSE ON DISTRIBUTION NOTES was incurred on the distribution
notes that were issued to the former principals of the Company and their
affiliates, which were paid on July 3, 1996 with the proceeds of the Offering.

    PROVISION FOR INCOME TAXES on an historical basis reflects the recognition
in 1996 of a $19.0 million deferred tax asset in connection with the Company
becoming subject to Federal and additional state income taxes, as well as an
additional benefit for income taxes in the second half of 1996 of $1.3 million.

                                       33
<PAGE>
During the same period in 1995 and for the first half of 1996, the Company was
not subject to Federal and certain state income taxes. On a pro forma basis,
income taxes were recorded as if the Company had been subject to Federal and
additional state income taxes for the entire 1996 and 1995 periods.

    NET INCOME decreased, on an historical basis, to $25.0 million in 1996 from
$53.7 million in 1995. This decrease was primarily due to the factors described
above and the gain of $18.7 million on the sale of Donna Karan Japan in March of
1995. On a pro forma basis, net income decreased to $12.6 million in 1996 from
$18.4 million in 1995.

    COMPARISON OF 1995 TO 1994

<TABLE>
<CAPTION>
                                                                                       1994                  1995
                                                                               --------------------  --------------------
<S>                                                                            <C>        <C>        <C>        <C>
                                                                                         (DOLLARS IN MILLIONS)
Net revenues.................................................................  $   420.2      100.0% $   510.1      100.0%
Gross profit.................................................................      149.0       35.5      179.4       35.2
Selling, general, and administrative expenses................................      120.0       28.6      136.9       26.8
Operating income.............................................................       29.0        6.9       42.5        8.3
Equity in earnings of affiliate..............................................     --         --            2.5        0.5
Net income...................................................................       16.3        3.9       53.7       10.5
</TABLE>

    NET REVENUES were $510.1 million in 1995, an increase of 21.4% from the
$420.2 million of net revenues recorded in 1994. The increase was due primarily
to a $38.1 million, or 16.4%, increase in the DKNY-Registered Trademark- women's
collections; a $19.0 million, or 107.8% increase in the
DKNY-Registered Trademark- men's collections; a $12.0 million, or 43.1% increase
in the DONNA KARAN NEW YORK-Registered Trademark- collections for men; and a
$13.1 million, or 78.3%, increase in beauty products. These increases were
offset in part by a decrease of $2.3 million, or 2.9% in the DONNA KARAN NEW
YORK-Registered Trademark- Collection for women. Subsequent to the sale of 70%
of the Company's interest in the operations of Donna Karan Japan in March 1995,
the Company no longer consolidates Donna Karan Japan, but rather has accounted
for its interest in Donna Karan Japan using the equity method of accounting. As
a result, product sales to Donna Karan Japan are reflected as revenues by the
Company's divisions. If the interest in the operations of Donna Karan Japan had
been sold at the beginning of 1995, pro forma net revenues would have been
$504.6 million.

    The increase in the DKNY-Registered Trademark- women's collections resulted
from increased penetration of existing domestic doors, and, to a lesser extent,
an increase in the number of international doors. Net revenues of
DKNY-Registered Trademark- women's collections through free-standing
International Retail Stores increased 73.0% to $18.2 million in 1995. The
increase in the DKNY-Registered Trademark- men's collections resulted from
significant growth in international sales, as the collections were able to
leverage the success of the DKNY-Registered Trademark- women's collections'
international penetration, as well as to continue its domestic growth. The
increase in the DONNA KARAN NEW YORK-Registered Trademark- collections for men
primarily resulted from a significant increase in doors domestically, as well as
continued growth internationally. The increase in the Beauty Division resulted
from continued expansion of the Company's product offerings, primarily a
collection of fragrance and grooming products for men which was launched in
October 1994, and continued growth of its women's fragrance collection.

    GROSS PROFIT as a percentage of sales was 35.2% and 35.5% in 1995 and 1994,
respectively. Although gross margin on individual collections may change over
time, in the aggregate, consolidated gross margins have remained relatively
constant.

    SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES decreased to 26.8% of net
revenues in 1995 from 28.6% of net revenues in 1994. The decrease in selling,
general, and administrative expenses as a percent of net revenues in 1995
compared to 1994 is due primarily to the leverage obtained from the increased
net revenue base and the $1.1 million of management fees received from Donna
Karan Japan. The decrease was offset in part by a $2.0 million increase in bad
debt expense relating to bankruptcy proceedings of a significant customer.

                                       34
<PAGE>
    OPERATING INCOME increased 46.7% to $42.5 million (8.3% of net revenues) in
1995 from $29.0 million (6.9% of net revenues) in 1994. The increase in
operating income as a percentage of net revenues is attributable to leveraging
costs over higher sales.

    INTEREST EXPENSE decreased to $7.7 million in 1995 from $8.9 million in
1994, primarily due to lower financing fees.

    OTHER EXPENSE was $2.7 million in 1994, consisting primarily of legal and
other professional fees related to a proposed debt offering in 1994.

    EQUITY IN EARNINGS of affiliate/gain on sale of interests in affiliate. The
gain on sale of interests in affiliate, net of transaction costs, amounted to
$18.7 million in 1995, resulting from the Company's sale of 70% of its interest
in the operations of Donna Karan Japan. Subsequent to the sale, the Company has
accounted for its remaining 30% interest in the operations of Donna Karan Japan
using the equity method of accounting resulting in earnings of $2.5 million in
1995.

    PROVISION FOR certain state, local, and foreign income taxes increased to
$2.4 million in 1995 from $1.1 million in 1994, primarily due to higher pre-tax
income in 1995 compared to 1994.

    NET INCOME increased 228.4% to $53.7 million in 1995 from $16.3 million in
1994. This increase was primarily due to higher operating income and the gain on
sale of interests in an affiliate.

LIQUIDITY AND CAPITAL RESOURCES

    Historically, the Company's principal need for funds was to finance working
capital (principally inventory and receivables), capital expenditures, and
investments in the start up of new collections and the extension of existing
collections. The Company has relied on cash flow from operations, bank lines of
credit, and term loans for its capital requirements.

    Subsequent to the consummation of the Offering, the Company's cash flow
needs have changed as a result of (i) reduced interest costs associated with the
application of the net proceeds of the Offering to reduce outstanding
indebtedness under the Company's credit agreement, (ii) decreased compensation
for two of the Company's executives pursuant to their new employment agreements,
and (iii) the absence of distributions, primarily for payment of taxes, paid by
the Company to the former principals and stockholders of the DK Companies.
Offsetting such changes will be the need to apply funds to the payment of
Federal and additional state and local income taxes and royalties pursuant to
the Gabrielle License. Any net use of cash for such changes is expected to be
funded through operations or through utilization of the Company's revolving
credit facility.

    At December 29, 1996, the Company had working capital of $146.8 million,
compared to working capital of $92.6 million at December 31, 1995. Changes in
working capital included an increase in cash of $28.4 million primarily due to
the Offering and $7.3 million received from Designer Holdings in connection with
the Jeans License, which amount was returned to Designer Holdings subsequent to
year end in connection with the termination of the license agreement; an
increase in accounts receivable of $11.5 million, an increase in inventories of
$15.0 million, and an increase in accounts payable of $19.6 million (including
$9.2 million paid to Designer Holdings in connection with the termination of the
Jeans License), in each case as a result of revenue growth and timing effects;
an increase of $23.9 million of deferred income taxes recorded in part as a
result of the Company becoming subject to Federal and additional state income
taxes; an increase in accrued expenses of $18.4 million primarily due to
accruals for income taxes, royalties due under the Gabrielle License and other
operating expense accruals; and a decrease in the current portion of long-term
debt of $7.5 million in connection with the repayment of debt with the proceeds
from the Offering.

    In September 1996, the Company entered into a new $150.0 million, three-year
revolving credit facility (the "New Credit Facility"), which was amended in
March 1997. This facility includes a $60.0

                                       35
<PAGE>
million subfacility for letters of credit and a $30.0 million subfacility for
loans in certain foreign currencies. Borrowings under the New Credit Facility
bear interest at the lead bank's prime rate or, at the option of the Company, at
a fixed margin (ranging from 0.5% to 0.75%) over LIBOR and are limited to a
borrowing base calculated on eligible accounts receivable, inventory, and
letters of credit. The outstanding balance under the New Credit Facility will be
required to be paid down below a specified level for 45 days each year. The New
Credit Facility is secured by accounts receivable, inventory, and certain
intangibles of the Company and a pledge of all the equity interests of the
subsidiaries of the Company. The New Credit 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 New
Credit Facility will be used for working capital needs and general corporate
purposes.

    Capital expenditures, primarily for equipment, machinery, computers, office
furniture, leasehold improvements, and outlet stores, were approximately $16.3
million and $4.3 million for the years ended December 29, 1996 and December 31,
1995, respectively. As of March 21, 1997, the Company had committed to
additional capital expenditures during 1997 of approximately $6.5 million. The
Company is continuing to evaluate its alternatives with respect to the proposed
consolidation of its New Jersey warehouse facilities. As a result, the Company
has not at this time accrued the charge with respect to such consolidation that
it had previously anticipated to incur. See "Properties."

    The Company extends credit to its customers including those which 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 the New Credit Facility.

SEASONALITY OF BUSINESS

    The Company's business varies with general seasonal trends that are
characteristic of the apparel and beauty 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, historically, have been
lower on or about its fiscal year end. On a quarter to quarter basis, the
Company's operations may vary with production and shipping schedules, the
introduction of new products, and variations in the timing of certain holidays
from year to year. To the extent the Company continues to expand its business,
the Company's operating performance may not reflect the typical seasonality of
the apparel and beauty industries.

    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. To the extent the Company retains the Beauty
Division and sales of the Company's beauty products increase relative to sales
of its other products, the Company's net revenues and operating income will be
increasingly influenced by the seasonality of the beauty industry. In general,
the fragrance portion of the beauty industry experiences lower net revenues and
operating income in the first three quarters and has substantially higher net
revenues and operating income in the fourth quarter. Fragrance products are the
primary component of the Company's beauty business. The Company is in the
process of exploring strategic alternatives for the Beauty Division, which may
reduce or eliminate the impact of the seasonality of the beauty business to the
Company.

                                       36
<PAGE>
ITEM 8. FINANCIAL STATEMENT 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.

                                    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
1997 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A (the
"Company's 1997 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 1997 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 1997
Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 1997 Proxy Statement.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT 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) Reports on Form 8-K. No report on Form 8-K was filed during the last quarter
    of the fiscal year ended December 29, 1996.

                                       37
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                         INDEX TO FINANCIAL STATEMENTS

      YEARS ENDED JANUARY 1, 1995, DECEMBER 31, 1995 AND DECEMBER 29, 1996

<TABLE>
<CAPTION>
                                                                                                                PAGE
                                                                                                                -----
<S>                                                                                                          <C>
Report of Independent Auditors.............................................................................         F-2
Statements of Income for the years ended January 1, 1995, December 31, 1995 and
  December 29, 1996........................................................................................         F-3
Balance Sheets as of December 31, 1995 and December 29, 1996...............................................         F-4
Statements of Stockholders' Equity and Partners' Capital for the years ended January 1, 1995, December 31,
  1995 and December 29, 1996...............................................................................         F-5
Statements of Cash Flows for the years ended January 1, 1995, December 31, 1995 and December 29, 1996......         F-6
Notes to Financial Statements..............................................................................         F-7
</TABLE>

                                      F-1
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors of
Donna Karan International Inc.

    We have audited the consolidated balance sheet of Donna Karan International
Inc. (the "Company") as of December 29, 1996, and the related consolidated
statements of income, stockholders' equity and partners' capital and cash flows
for the year then ended. We have also audited the combined balance sheet of The
Donna Karan Company and affiliates as of December 31, 1995, and the related
combined statements of income and cash flows for each of the two years in the
period ended December 31, 1995. 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 generally accepted auditing
standards. 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. as of December 29, 1996, and the consolidated results of
their operations and their cash flows for the year then ended, and the combined
financial position of The Donna Karan Company and affiliates as of December 31,
1995, and the combined results of their operations and their cash flows for each
of the two years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material aspects the
information set forth therein.

                                             ERNST & YOUNG LLP

New York, New York
March 25, 1997

                                      F-2
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
                         STATEMENTS OF INCOME (NOTE 1)
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED
                                                                       ------------------------------------------
<S>                                                                    <C>           <C>            <C>
                                                                        JANUARY 1,   DECEMBER 31,   DECEMBER 29,
                                                                           1995          1995           1996
                                                                       ------------  -------------  -------------

<CAPTION>
                                                                        (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                                    <C>           <C>            <C>
Net revenues.........................................................  $    420,164  $     510,126  $     612,840
Cost of sales........................................................       271,172        330,689        412,064
                                                                       ------------  -------------  -------------
Gross profit.........................................................       148,992        179,437        200,776
Selling, general, and administrative expenses........................       119,995        136,906        187,474
                                                                       ------------  -------------  -------------
Operating income.....................................................        28,997         42,531         13,302
Other income (expense):
    Equity in earnings of affiliate..................................            --          2,519          3,089
    Interest income..................................................            --             --            548
    Interest expense.................................................        (8,862)        (7,650)        (7,125)
    Interest expense on distribution notes...........................            --             --         (1,957)
    Other expense....................................................        (2,651)            --             --
    Gain on sale of interests in affiliates..........................            --         18,673             --
                                                                       ------------  -------------  -------------
Income before income taxes...........................................        17,484         56,073          7,857
Provision (benefit) for income taxes.................................         1,139          2,398        (17,179)
                                                                       ------------  -------------  -------------
Net income...........................................................  $     16,345  $      53,675  $      25,036
                                                                       ------------  -------------  -------------
                                                                       ------------  -------------  -------------
PRO FORMA--UNAUDITED
Historical income before income taxes................................                $      56,073  $       7,857
Pro forma adjustments other than income taxes........................                       23,943          1,436
                                                                                     -------------  -------------
Pro forma income before income taxes.................................                       32,130          6,421
Pro forma provision for income taxes.................................                       13,705          3,537
                                                                                     -------------  -------------
Pro forma net income.................................................                $      18,425  $       2,884
                                                                                     -------------  -------------
                                                                                     -------------  -------------
Pro forma net income per share.......................................                $        0.91  $        0.02
                                                                                     -------------  -------------
                                                                                     -------------  -------------
Pro forma weighted average common shares outstanding.................                   16,017,032     18,742,533
                                                                                     -------------  -------------
                                                                                     -------------  -------------
</TABLE>

                       See notes to financial statements.

                                      F-3
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                       DECEMBER 31,  DECEMBER 29,
                                                                                           1995          1996
                                                                                       ------------  ------------
<S>                                                                                    <C>           <C>
                                                                                             (IN THOUSANDS)
                                                     ASSETS
Current assets:
    Cash and cash equivalents........................................................   $   12,153    $   40,550
    Accounts receivable, net of allowances of $26,757 at December 29, 1996 and
      $22,507 at December 31, 1995...................................................       62,231        73,770
    Inventories......................................................................       85,655       100,680
    Deferred income taxes............................................................        1,302        25,207
    Prepaid expenses and other current assets........................................        8,644        14,466
                                                                                       ------------  ------------
        Total current assets.........................................................      169,985       254,673
Property and equipment, at cost--net.................................................       22,505        32,402
Deferred income taxes................................................................          380         6,106
Deposits and other noncurrent assets.................................................       11,105        18,514
                                                                                       ------------  ------------
                                                                                        $  203,975    $  311,695
                                                                                       ------------  ------------
                                                                                       ------------  ------------
                           LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
Current liabilities:
    Accounts payable.................................................................   $   53,825    $   73,394
    Accrued expenses and other current liabilities...................................       15,766        34,192
    Current portion of long-term debt................................................        7,759           282
                                                                                       ------------  ------------
        Total current liabilities....................................................       77,350       107,868
Long-term debt.......................................................................       45,779            36
Commitments and contingencies
Shareholders' equity and partners' capital:
    Common stock of Predecessor......................................................        1,146            --
    Common stock, $0.01 par value, 35,000,000 shares authorized, 21,468,034 shares
      issued and outstanding.........................................................           --           215
    Common stock class A, $0.01 par value, 18 shares authorized, issued and
      outstanding....................................................................           --            --
    Common stock class B, $0.01 par value, 2 shares authorized, issued and
      outstanding....................................................................           --            --
    Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued
      and outstanding................................................................           --            --
    Additional paid-in capital.......................................................           --       186,899
    Retained earnings and partners' capital..........................................       79,748        17,487
    Cumulative translation adjustment................................................          (48)         (331)
                                                                                       ------------  ------------
                                                                                            80,846       204,270
    Less treasury stock, at cost (19,958 shares).....................................           --          (479)
                                                                                       ------------  ------------
        Total stockholders' equity and partners' capital.............................       80,846       203,791
                                                                                       ------------  ------------
                                                                                        $  203,975    $  311,695
                                                                                       ------------  ------------
                                                                                       ------------  ------------
</TABLE>

                       See notes to financial statements.

                                      F-4
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

            STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
                                                                                     RETAINED
                                 COMMON           COMMON STOCK         ADDITIONAL  EARNINGS AND   CUMULATIVE
                                STOCK OF    -------------------------   PAID-IN     PARTNERS'     TRANSLATION    TREASURY
                               PREDECESSOR     SHARES       AMOUNT      CAPITAL      CAPITAL      ADJUSTMENT       STOCK
                               -----------  ------------  -----------  ----------  ------------  -------------  -----------
<S>                            <C>          <C>           <C>          <C>         <C>           <C>            <C>
                                                                      (IN THOUSANDS)
Balance at January 2, 1994...   $   1,146             --   $      --   $       --   $   41,311     $    (128)    $      --
Net income...................          --             --          --           --       16,345            --            --
Translation adjustment.......          --             --          --           --           --           (67)           --
Distributions to partners....          --             --          --           --      (10,770)           --            --
                               -----------  ------------       -----   ----------  ------------        -----         -----
Balance at January 1, 1995...       1,146             --          --           --       46,886          (195)           --
Net income...................          --             --          --           --       53,675            --            --
Translation adjustment.......          --             --          --           --           --           147            --
Distributions to partners....          --             --          --           --      (20,813)           --            --
                               -----------  ------------       -----   ----------  ------------        -----         -----
Balance at December 31,
  1995.......................       1,146             --          --           --       79,748           (48)           --
Net income...................          --             --          --           --       25,036            --            --
Translation adjustment.......          --             --          --           --           --          (283)           --
Reorganization...............      (1,146)    10,612,934         106      (51,534)      52,574            --            --
Issuance of common stock.....          --     10,750,000         108      235,912           --            --            --
Stock bonus award............          --        105,100           1        2,521           --            --          (479)
Payment of distribution
  notes......................          --             --          --           --     (114,484)           --            --
Distributions to partners....          --             --          --           --      (25,387)           --            --
                               -----------  ------------       -----   ----------  ------------        -----         -----
Balance at December 29,
  1996.......................   $      --     21,468,034   $     215   $  186,899   $   17,487     $    (331)    $    (479)
                               -----------  ------------       -----   ----------  ------------        -----         -----
                               -----------  ------------       -----   ----------  ------------        -----         -----

<CAPTION>

                                  TOTAL
                               -----------
<S>                            <C>

Balance at January 2, 1994...  $    42,329
Net income...................       16,345
Translation adjustment.......          (67)
Distributions to partners....      (10,770)
                               -----------
Balance at January 1, 1995...       47,837
Net income...................       53,675
Translation adjustment.......          147
Distributions to partners....      (20,813)
                               -----------
Balance at December 31,
  1995.......................       80,846
Net income...................       25,036
Translation adjustment.......         (283)
Reorganization...............           --
Issuance of common stock.....      236,020
Stock bonus award............        2,043
Payment of distribution
  notes......................     (114,484)
Distributions to partners....      (25,387)
                               -----------
Balance at December 29,
  1996.......................  $   203,791
                               -----------
                               -----------
</TABLE>

                       See notes to financial statements.

                                      F-5
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                            STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
                                                                                         YEAR ENDED
                                                                           ---------------------------------------
<S>                                                                        <C>          <C>           <C>
                                                                           JANUARY 1,   DECEMBER 31,  DECEMBER 29,
                                                                              1995          1995          1996
                                                                           -----------  ------------  ------------

<CAPTION>
                                                                                       (IN THOUSANDS)
<S>                                                                        <C>          <C>           <C>
OPERATING ACTIVITIES
Net income...............................................................   $  16,345    $   53,675    $   25,036
Adjustments to reconcile net income to net cash (used in) provided by
  operating activities, as adjusted for effect of sale of Donna Karan
  Japan:
    Depreciation and amortization........................................       7,590         6,742        11,309
    Provision for bad debts..............................................         773         3,122            62
    Equity in earnings of affiliate, net of cash received................          --        (2,519)       (1,734)
    Deferred taxes.......................................................          --            --       (29,631)
    Stock bonus award....................................................          --            --         2,522
    Gain on sale of interests in affiliates..............................          --       (18,673)           --
    Loss on sale of property and equipment...............................          --            32            --
    Changes in operating assets and liabilities:
        Increase in accounts receivable..................................      (9,658)      (14,392)      (11,601)
        Increase in inventories..........................................      (6,410)      (29,611)      (15,308)
        Increase in prepaid expenses and other current assets............      (2,253)       (2,876)       (5,822)
        Increase in deposits and other noncurrent assets.................      (3,543)       (4,956)      (10,619)
        Increase in accounts payable, accrued expenses, and other current
          liabilities....................................................       4,887        27,905        37,995
                                                                           -----------  ------------  ------------
Net cash provided by operating activities................................       7,731        18,449         2,209
                                                                           -----------  ------------  ------------
INVESTING ACTIVITIES
Purchase of property and equipment.......................................      (3,445)       (4,289)      (16,262)
Net cash from sales of interests in affiliates...........................          --        23,526            --
Proceeds from sale of property and equipment.............................          --            42            --
                                                                           -----------  ------------  ------------
Net cash (used in) provided by investing activities......................      (3,445)       19,279       (16,262)
                                                                           -----------  ------------  ------------
FINANCING ACTIVITIES
Payment of revolving credit facility, net................................     (40,903)       (3,253)       (7,961)
Proceeds of long-term debt...............................................      50,000        10,000            --
Payments under capital leases............................................        (230)         (237)         (259)
Payments of long-term debt...............................................          --       (15,000)      (45,000)
Payment of distribution notes............................................          --            --      (114,484)
Issuance of common stock.................................................          --            --       236,020
Purchase of treasury stock...............................................          --            --          (479)
Distributions to partners................................................     (10,770)      (20,813)      (25,387)
                                                                           -----------  ------------  ------------
Net cash (used in) provided by financing activities......................      (1,903)      (29,303)       42,450
                                                                           -----------  ------------  ------------
Increase in cash.........................................................       2,383         8,425        28,397
Cash at beginning of year................................................       1,345         3,728        12,153
                                                                           -----------  ------------  ------------
Cash at end of year......................................................   $   3,728    $   12,153    $   40,550
                                                                           -----------  ------------  ------------
                                                                           -----------  ------------  ------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................................   $   8,420    $    6,410    $    6,594
                                                                           -----------  ------------  ------------
                                                                           -----------  ------------  ------------
Taxes paid...............................................................   $     942    $    2,444    $    5,884
                                                                           -----------  ------------  ------------
                                                                           -----------  ------------  ------------
</TABLE>

                       See notes to financial statements.

                                      F-6
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                         NOTES TO FINANCIAL STATEMENTS

                               DECEMBER 29, 1996

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

    Donna Karan International Inc. ("DKI") and subsidiaries (together with DKI,
the "Company"), which operate in one business segment, design, contract for the
manufacture of, and markets and distribute fashion apparel, accessories, and
beauty products. Its sales are principally to department and specialty stores
located throughout the United States, Asia and Europe and through Company owned
outlet stores located throughout the United States. A significant amount of the
Company's products are produced in Asia, through arrangements with independent
contractors. As a result, the Company's operations could be adversely affected
by political instability resulting in the disruption of trade from the countries
in which these contractors are located, or by the imposition of additional
duties or regulations relating to imports.

    The Company's business is impacted by the general seasonal trends that are
characteristic of the apparel industry, and it generally experiences lower net
revenues and net income in the first half of each fiscal year as compared to the
second half of the fiscal year.

    Several of the Company's customers have engaged in leveraged buyouts or
transactions in which they incurred significant amounts of debt, and certain
customers have operated or are currently operating under the protection of the
Federal bankruptcy laws. The Company does not factor its accounts receivable and
maintains credit insurance to minimize the risk of bad debts.

    The Company had one customer which accounted for approximately 12.4%, 12.3%,
and 12.8% of sales for the years ended January 1, 1995, December 31, 1995 and
December 29, 1996, respectively. During the year ended December 31, 1995,
another customer accounted for 11.1% of sales.

INITIAL PUBLIC OFFERING

    Effective July 3, 1996, the Company sold 10,750,000 shares of its common
stock in an initial public offering ("the Offering"). Net proceeds of the
Offering, after deducting underwriting discounts and commissions, and
professional fees aggregated $236.0 million. Proceeds of the Offering were used
to retire distribution notes and accrued interest thereon totaling approximately
$116.4 million, to repay the Predecessor Company's (as defined below) term loans
and the revolving line of credit which totaled approximately $76.8 million, to
pay a certain one-time bonus under an employment agreement which amounted to
$5.0 million (which is included in selling, general and administrative expenses)
and to pay a one-time fee under a license agreement which amounted to $4.6
million (which is included in cost of sales). The remaining $33.2 million was
used for other general corporate purposes. The distribution notes were issued in
April 1996 to the principals, and certain of their affiliates, of the
Predecessor Company, and represented an estimate of the cumulative undistributed
taxable income (on which taxes previously had been paid) of the Predecessor
Company since its inception through the anticipated closing date of the
Offering.

    In connection with the Offering, the Board of Directors of the Company
granted awards of an aggregate of 105,100 shares of DKI stock under the 1996
Stock Incentive Plan to certain employees of the Company and Donna Karan Japan.
This award, which was treated as compensation expense, amounted to $2.5 million.
In connection with this award, the Company offered to purchase back from these
employees the approximate number of shares, at the initial offering price of $24
per share, needed to be sold to satisfy

                                      F-7
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 29, 1996

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
personal income taxes on this award. As part of this arrangement, the Company
purchased 19,958 shares, which are being held in treasury, at cost.

BASIS OF PRESENTATION

    DKI was incorporated in Delaware in April 1996. In connection with the
Offering, the former principals of the Predecessor Company and certain of their
affiliates simultaneously contributed to DKI all of the outstanding stock and
partnership interests in the Predecessor Company, in exchange for common stock
of DKI (the "Reorganization"). The accompanying financial statements include the
results of operations for the fiscal years ended January 1, 1995 and December
31, 1995 and for the period from January 1, 1996 to July 2, 1996 of The Donna
Karan Company, Donna Karan Studio, The Donna Karan Company Store G.P., DK
Footwear Partners, Takihyo Fashion Company, L.P., Takihyo Design Company, L.P.,
TFT Store Company, L.P., TFT Shoe Company, L.P., TFT Japan Company, L.P., and
DSTF Japan Company, which are affiliated general and limited partnerships; Gabby
Apparel, Inc., Tolara Tetragon Inc., Full Requirements Merchandising, Inc., The
Donna Karan Store Corporation, Tomio Tangents, Inc., Formal Reserve Management,
Inc., DK Shoe Corp., Tangents Two, Inc., First Run Management, Inc., Gabrielle
Japan, Inc., TT DK Japan, Inc., and FM DK Japan, Inc., which are affiliated
United States corporations; Donna Karan Canada Inc., Donna Karan (H.K.) Limited,
Donna Karan Italy, S.R.L., and Donna Karan Italy Shoe Company, S.R.L., which are
foreign corporations; and, for the period it was a wholly-owned subsidiary (see
Note 8), Donna Karan Japan, K.K. ("Donna Karan Japan"), a Japanese joint stock
company (together, the "Predecessor Company").

    For the period from July 3, 1996 through December 29, 1996, the accompanying
financial statements include the results of operations of Donna Karan
International Inc., as well as all entities that were included in the
Predecessor Company, except for Takihyo Fashion Company, L.P., Takhiyo Design
Company, L.P., TFT Store Company, L.P., TFT Shoe Company, L.P. and TFT Japan
Company L.P., all of which were dissolved in connection with the Reorganization
(the "Company"). All companies other than The Donna Karan Company, Donna Karan
Studio, The Donna Karan Company Store, G.P., DK Footwear Partners, Donna Karan
Canada Inc., Donna Karan (H.K.) Limited, Donna Karan Italy, S.R.L., Donna Karan
Italy Shoe Company, S.R.L., and Donna Karan Japan are intermediate United States
holding companies.

    The financial statements of the Predecessor Company are being presented on a
combined basis because of their common ownership. The combined financial
statements have been prepared as if the entities had operated as a single
consolidated group since their respective dates of organization. Because DKI
conducted no business prior to the Reorganization, it was not included in the
results of operations of the Predecessor Company.

    Amounts included for common stock on the accompanying balance sheet of the
Predecessor Company represent the combined par or stated value of the
outstanding shares of the various corporations included in the Predecessor
Company.

STATEMENT OF INCOME PRESENTATION

    The statement of income of the Company for the year ended December 29, 1996
reflects the results of operations of the Predecessor Company for the period
January 1, 1996 through July 2, 1996 and the results

                                      F-8
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 29, 1996

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of operations of the Company from July 3, 1996 (the date of the consummation of
the Offering) through December 29, 1996.

    Selected statement of income data for the year ended December 29, 1996 are
as follows (the date of the Offering has been deemed to be July 1, 1996):

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED
                                                      JANUARY 1     JULY 1 TO    DECEMBER 29,
                                                         TO        DECEMBER 29,      1996
                                                    JUNE 30, 1996      1996      CONSOLIDATED
                                                    -------------  ------------  ------------
<S>                                                 <C>            <C>           <C>
                                                                 (IN THOUSANDS)
Net revenues......................................   $   277,226    $  335,614    $  612,840
Gross profit......................................        90,006       110,770       200,776
Operating income..................................        12,563           739        13,302
Other income (expense)............................        (4,569)         (876)       (5,445)
                                                    -------------  ------------  ------------
Income (loss) before income taxes.................         7,994          (137)        7,857
Provision (benefit) for income taxes..............           445       (17,624)      (17,179)
                                                    -------------  ------------  ------------
Net income........................................   $     7,549    $   17,487    $   25,036
                                                    -------------  ------------  ------------
                                                    -------------  ------------  ------------
</TABLE>

PRO FORMA ADJUSTMENTS (UNAUDITED)

    The pro forma financial information on the income statement presents the
effects on the historical financial statements of certain transactions as if
they had occurred in 1995. These adjustments are: (i) increased royalty expense
to be paid to a corporation owned by two of the Company's principal stockholders
and their affiliated trusts pursuant to a licensing agreement of $12.8 million
and $7.2 million in 1995 and 1996, respectively, (ii) reduced levels of
compensation for two of the Company's executives pursuant to their employment
agreements of $2.3 million and $1.5 million in 1995 and 1996, respectively,
(iii) reduction in interest costs assuming the application of the proceeds from
the Offering to reduce the actual outstanding indebtedness under the Company's
credit agreement of $6.2 million and $3.5 million in 1995 and 1996,
respectively, (iv) reduction in amortization of deferred financing costs which
would have been written off in connection with repayment of outstanding
indebtedness under the Company's credit agreement of $0.6 million and $0.8
million in 1995 and 1996, respectively, (v) increase in income taxes of $11.3
million and $20.7 million in 1995 and 1996, respectively, as if the Company had
been subject to Federal and additional state income taxes for the entire period
(see Note 15), and (vi) adjustments of $20.3 million in 1995 to reflect the sale
of the 70% interest in the operations of Donna Karan Japan as if it had occurred
on January 2, 1995. The gain on the sale has been excluded, and as a result of
this sale, the Company's statement of income has been adjusted to reflect the
Company's accounting for their interest in Donna Karan Japan using the equity
method of accounting for the period from January 2, 1995 until March 31, 1995,
the date of the sale (see Note 8).

PRO FORMA PER SHARE INFORMATION

    Pro forma net income per share for the year ended December 31, 1995 is based
upon (a) 10,612,934 shares of common stock outstanding during the period, (b)
the number of shares of common stock (5,298,998) sold by the Company, at an
offering price of $24.00 ($21.96 net of expenses) per share, the

                                      F-9
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 29, 1996

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 stock incentive plan. Pro forma
net income per share for the year ended December 29, 1996 is based on the
weighted average of the above shares outstanding for the period prior to the
Offering, and 21,468,034 shares for the period subsequent to the Offering. The
net income used in the calculation of pro forma per share information excludes
the reduction of interest costs of $3.5 million and $6.2 million in 1996 and
1995, respectively and the reduction in amortization of deferred financing costs
of $0.8 million and $0.6 million in 1996 and 1995, respectively, and the related
tax effect of $1.8 million and $2.9 million in 1996 and 1995, respectively.

    Supplementary pro forma earnings per share for the year ended December 29,
1996 and December 31, 1995 were $0.14 and $0.95, respectively. Supplementary pro
forma per share information for the year ended December 31, 1995 is based upon
10,612,934 shares of common stock outstanding prior to the Offering increased by
(a) the sale of 5,298,998 shares of common stock at an offering price of $24.00
per share ($21.96, net of expenses), the proceeds of which would be necessary to
pay approximately $116.4 in satisfaction of the distribution notes, (b) the sale
of 3,279,827 shares of common stock, at an offering price of $24.00 per share,
($21.96, net of expenses), the proceeds of which would be necessary to repay
approximately $72.0 million to the Company's lenders for the term loans under
the Company's credit facility and to reduce the amount outstanding under the
Company's revolving line of credit, and (c) 105,100 shares of common stock which
the Company awarded to certain employees pursuant to the Company's stock
incentive plan. Supplemental pro forma net income per share for the year ended
December 29, 1996 is based on the weighted average of the above shares
outstanding for the period prior to the Offering, and 21,468,034 shares for the
period subsequent to the Offering.

FISCAL YEAR

    The Company's fiscal year consists of the 52- or 53-week period ending on
the Sunday nearest December 31.

INVENTORIES

    Inventories are stated at the lower of cost (first-in, first-out method) or
market.

DEPRECIATION AND AMORTIZATION

    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 five
to seven years. Leasehold improvements are amortized using the straight-line
method based on the lease term, and 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 four years. The Company's share of the cost of
constructing full-price free-standing retail stores under license agreements is
capitalized and amortized using the straight-line method over their estimated
useful lives of eight years. At December 31, 1995 and December 29, 1996, the
unamortized balance of these costs of $2,034,000 and $10,848,000, respectively,
is included in "Deposits and other noncurrent assets" in the accompanying
balance sheets. Amortization

                                      F-10
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 29, 1996

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
expense of these costs for the years ended December 31, 1995 and December 29,
1996 amounted to approximately $0.4 million and $1.4 million, respectively.
Major additions and betterments are capitalized and repairs and maintenance are
charged to operations in the period incurred.

ADVERTISING

    The Company expenses the production costs of advertising upon the first
showing of the related advertisement which is generally less than six months
after the production costs are incurred. At December 31, 1995 and December 29,
1996, advertising costs totaling $1,334,000 and $1,288,000, respectively, were
included in "Prepaid expenses and other current assets" in the accompanying
balance sheets. Advertising, marketing, and public relations expenses, including
costs related to the Company's Creative Services Department, for the years ended
January 1, 1995, December 31, 1995 and December 29, 1996 were $35,409,000,
$33,831,000 and $53,191,000, respectively.

RECLASSIFICATIONS

    For comparative purposes, certain prior period amounts have been
reclassified to conform to current period presentation.

INTERCOMPANY BALANCES

    All significant intercompany balances and transactions have been eliminated.
The equity method of accounting is used for Donna Karan Japan during the period
when it is 70% owned by a nonaffiliated partner (see Note 8).

REVENUE RECOGNITION

    Sales are recognized upon shipment of products or, in the case of sales by
Company-owned outlet stores, when payment is received. The Company provides for
estimated returns at the time of sales. Income from licensing agreements is
recognized when earned and is included in net revenues.

STATEMENTS OF CASH FLOWS

    For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents.

USE OF ESTIMATES

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

                                      F-11
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 29, 1996

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION

    For foreign operations, local currencies are considered the functional
currency. Assets and liabilities are translated using the exchange rates in
effect at the balance sheet date. Results of operations are translated using the
average exchange rates prevailing throughout the period. Translation effects are
accumulated as part of cumulative translation adjustment in stockholders' equity
and partners' capital. Gains and losses from foreign currency transactions are
included in operating results.

FOREIGN EXCHANGE CONTRACTS

    The Company enters into forward exchange contracts as hedges relating to
identifiable currency positions. 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 January 1, 1995, December 31, 1995 and December 29,
1996, gains and losses on foreign exchange contracts were not material.

    At December 29, 1996, the Company had approximately $2,136,000 of
outstanding forward exchange contracts, maturing at various dates in 1997,
denominated in Italian Lire and Spanish Pesetas. The Company's risk that
counterparties to these contracts may be unable to perform is minimized by
limiting the counterparties to major international banks and financial
institutions. The Company does not expect any losses as a result of counterparty
default.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

    In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of ("Statement No. 121"), which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Statement No. 121
also addresses the accounting for long-lived assets that are expected to be
disposed of. The Company adopted Statement No. 121 in the first quarter of 1996
and the effect on the accompanying financial statements was not material.

2. INVENTORIES

    Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,  DECEMBER 29,
                                                                       1995          1996
                                                                   ------------  ------------
<S>                                                                <C>           <C>
Raw materials....................................................   $   16,369    $   16,780
Work in process..................................................       11,697        11,030
Finished goods...................................................       57,589        72,870
                                                                   ------------  ------------
                                                                    $   85,655    $  100,680
                                                                   ------------  ------------
                                                                   ------------  ------------
</TABLE>

                                      F-12
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 29, 1996

3. PROPERTY AND EQUIPMENT

    Major classes of property and equipment consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,  DECEMBER 29,
                                                                       1995          1996
                                                                   ------------  ------------
<S>                                                                <C>           <C>
Machinery, equipment, and fixtures...............................   $   18,592    $   21,330
Property and equipment under capital leases......................        1,207         1,207
Leasehold improvements...........................................       25,568        39,092
                                                                   ------------  ------------
                                                                        45,367        61,629
Less accumulated depreciation and amortization...................      (22,862)      (29,227)
                                                                   ------------  ------------
                                                                    $   22,505    $   32,402
                                                                   ------------  ------------
                                                                   ------------  ------------
</TABLE>

    Deprecation and amortization of property and equipment amounted to
$5,796,000, $5,624,000 and $6,365,000 for the years ended January 1, 1995,
December 31, 1995 and December 29, 1996, respectively.

4. BORROWINGS

    Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,  DECEMBER 29,
                                                                       1995          1996
                                                                   ------------  -------------
<S>                                                                <C>           <C>
Revolving credit facility........................................   $    7,961     $      --
Term Loan A......................................................       15,000            --
Term Loan B......................................................       20,000            --
Term Loan C......................................................       10,000            --
Capital lease obligations........................................          577           318
                                                                   ------------        -----
                                                                        53,538           318
Less current portion.............................................       (7,759)         (282)
                                                                   ------------        -----
                                                                    $   45,779     $      36
                                                                   ------------        -----
                                                                   ------------        -----
</TABLE>

    At December 31, 1995, the Company had a credit facility, as amended, which
consisted of a $60,000,000 term loan (term loans A,B & C) and a revolving line
of credit available for the issuance of letters of credit, acceptances, or
direct borrowings up to $105,000,000. Direct borrowings under the revolving line
of credit bore interest at 1.5% over the lead bank's prime rate and were limited
to a borrowing base calculated on eligible accounts receivable, inventory, and
letters of credit.

    The credit agreement provided for various borrowing rate options including
borrowing rates based on a fixed spread over the London Interbank Offered Rate
("LIBOR").

    With the proceeds of the Offering, the Company repaid all amounts due under
its existing credit facility, and in September 1996, the Company entered into a
new $150 million, three-year revolving Credit Facility as amended in March 1997
(the "New Facility"). Direct borrowings under the New Facility bear interest at
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 New Facility is
secured by accounts receivable, inventory and certain intangibles of the

                                      F-13
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 29, 1996

4. BORROWINGS (CONTINUED)
Company, as well as a pledge of all equity interests of the subsidiaries of the
Company. The New Facility also contains certain restrictive covenants which,
among other things, require the Company to maintain certain financial ratios and
restrict investments, additional indebtedness, and payment of dividends. No
amounts were outstanding under the New Facility at December 29, 1996.

    In connection with these facilities, the Company incurred certain financing
costs which were deferred and are being amortized over the remaining term of the
New Facility. At December 29, 1996, unamortized financing costs of approximately
$952,000 are included in "Deposits and other noncurrent assets" in the
accompanying balance sheet. Amortization of deferred financing costs of
approximately $0.8 million and $3.5 million in 1995 and 1996, respectively, are
included in interest expense.

    The Company leases certain property and equipment under long-term
noncancellable lease agreements which are accounted for as capital leases. These
leases expire at various dates through 1998. Future minimum lease payments as of
December 29, 1996 are as follows (in thousands):

<TABLE>
<S>                                                                    <C>
1997.................................................................  $     299
1998.................................................................         37
                                                                       ---------
                                                                             336
Amount representing interest.........................................         18
                                                                       ---------
Present value of total future minimum lease payments.................        318
Less current portion.................................................        282
                                                                       ---------
Long-term portion of capital obligation..............................  $      36
                                                                       ---------
                                                                       ---------
</TABLE>

    Letters of credit and acceptances outstanding were approximately $33,934,000
at December 31, 1995 and $43,594,000 at December 29, 1996.

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

    Accrued expenses and other current liabilities are comprised of the
following (in thousands):

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,  DECEMBER 29,
                                                                       1995          1996
                                                                   ------------  ------------
<S>                                                                <C>           <C>
Accrued operating expenses.......................................   $    8,590    $   12,779
Accrued income taxes.............................................        2,351         8,010
Accrued compensation.............................................          885         6,260
Accrued royalty..................................................           --         5,133
Accrued taxes other than income taxes............................        2,244           948
Other............................................................        1,696         1,062
                                                                   ------------  ------------
                                                                    $   15,766    $   34,192
                                                                   ------------  ------------
                                                                   ------------  ------------
</TABLE>

6. 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

                                      F-14
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 29, 1996

6. EMPLOYEE BENEFIT PLANS (CONTINUED)
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 $1,811,000, $1,947,000 and
$2,090,000 for the years ended January 1, 1995, December 31, 1995 and December
29, 1996, respectively. Pension expense approximated $890,000, $908,000 and
$924,000 for the years ended January 1, 1995, December 31, 1995 and December 29,
1996, 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 29, 1996, 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 approximated $441,000, $802,000 and $770,000
for the years ended January 1, 1995, December 31, 1995 and December 29, 1996,
respectively.

7. LEASES

    Future minimum annual rental commitments under noncancellable operating
leases for office, warehouse and retail facilities, and equipment as of December
29, 1996 are as follows (in thousands):

<TABLE>
<S>                                                                  <C>
1997...............................................................  $  14,531
1998...............................................................     13,942
1999...............................................................     12,491
2000...............................................................     10,490
2001...............................................................      9,455
Thereafter.........................................................     30,139
                                                                     ---------
                                                                     $  91,048
                                                                     ---------
                                                                     ---------
</TABLE>

    In addition, certain of the leases contain options to renew for periods up
to 10 years and others include contingent payments based on sales.

    Rent expense amounted to approximately $12,498,000, $14,105,000 and
$15,037,000 for the years ended January 1, 1995, December 31, 1995 and December
29, 1996, respectively.

8. SALE OF INTERESTS IN AFFILIATES

    The Company conducts operations in Japan through Donna Karan Japan. DSTF
Japan Company has a profit sharing agreement (the "DSTF Agreement") with Donna
Karan Japan whereby 90% of the income before taxes of Donna Karan Japan is
allocated to DSTF Japan Company. On March 31, 1995, the Company sold 70% of its
interest in the DSTF Agreement and 70% of the stock of Donna Karan Japan to

                                      F-15
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 29, 1996

8. SALE OF INTERESTS IN AFFILIATES (CONTINUED)
a nonaffiliated party. The Company recognized a gain on this transaction, net of
transaction costs, of $18,673,000. Subsequent to the sale, the Company records a
27% interest in the operations of Donna Karan Japan through its 30% interest in
the DSTF Agreement and a 3% interest in the operations of Donna Karan Japan
through its remaining interest in Donna Karan Japan. As a result, the Company
has accounted for its combined 30% interest in the operations of Donna Karan
Japan using the equity method of accounting. Equity earnings for the years ended
December 31, 1995 and December 29, 1996 amounted to approximately $2,519,000 and
$3,089,000, respectively. Simultaneously with the sales transaction, the Company
entered into an agreement with Donna Karan Japan which provides for a fee based
upon net sales of Donna Karan Japan. Management fee income, as an offset of
selling, general, and administrative expenses, amounted to approximately
$1,130,000 and $1,790,000 during the years ended December 31, 1995 and December
29, 1996, respectively. The equity investment in Donna Karan Japan of $2,531,000
and $3,076,000 at December 31, 1995 and December 29, 1996, respectively, is
included in "Deposits and other noncurrent assets" in the accompanying balance
sheet.

9. DKNY-REGISTERED TRADEMARK- JEANS LICENSING AGREEMENT

    On September 27, 1996, the Company entered into a 30-year licensing
agreement with subsidiaries of Designer Holdings Ltd. (the "Licensee") for the
exclusive production, sale and distribution of men's, women's, and, with certain
exceptions, children's jeanswear under the DKNY-REGISTERED TRADEMARK- JEANS
label (the "Jeans License"). Under the terms of the agreement, the Company
received an initial payment of $6.0 million from the Licensee to reimburse the
Company for certain costs related to the start-up and development of the
DKNY-REGISTERED TRADEMARK- JEANS label. The Company was also entitled to receive
additional payments aggregating $54.0 million over a four-year period, through
the year 2000, and annual royalties, as well as administrative fees on net
sales.

    Subsequent to year-end, the Company and the Licensee agreed to terminate
this agreement. In connection with this termination, the Company repaid the
initial $6.0 million payment and a $1.3 million advance royalty payment
previously received. Additionally, in order to assure a smooth transition for
the DKNY-REGISTERED TRADEMARK- Jeanswear business, the Company purchased for
$3.2 million all sales and marketing plans, patterns, samples, fabrics and other
materials developed by the Licensee in connection with the jeanswear business,
the cost of which has been accrued at December 29, 1996 and is included in
selling, general and administrative expenses in the accompanying financial
statements.

10. RELATED PARTY TRANSACTIONS

    As of July 3, 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. During the
six month period ended December 29, 1996, the Company incurred $9.3 million in
royalty expense, which is included in cost of sales. In addition, the Company
made a one-time payment of $4.6 million to Gabrielle Studio in connection with
entering into the Gabrielle License, which is also included in cost of sales.

                                      F-16
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 29, 1996

11. STOCK OPTIONS

    During 1996, the Company adopted two option plans which reserve shares of
common stock for issuance. One plan is for employees, officers, advisors and
independent consultants of the Company (the "Stock Incentive Plan"), and the
other is for non-employee directors (the "Non-Employee Director Stock Option
Plan"). The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the stock option plans been
determined based on the fair value at the grant date for awards in 1996
consistent with the provisions of SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts indicated
below:

<TABLE>
<S>                                                                  <C>
Net earnings--as reported..........................................  $  25,036
                                                                     ---------
                                                                     ---------
Net earnings--pro forma............................................  $  23,713
                                                                     ---------
                                                                     ---------
</TABLE>

    The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996: expected dividend yield of 0.0%; expected
volatility of 0.486%; risk free interest rate of 6.2%; and expected lives of 6
years. The weighted average grant fair value of options granted during 1996 was
$13.01 per share.

    Under the Stock Incentive Plan, options to purchase shares of common stock
and awards of restricted shares of common stock of up to a combined 1,600,000
shares may be granted (includes award of 105,100 shares). The exercise price of
the options may not be less than 100% of the fair market value of a share of
common stock at the time of grant. An option may not be exercised within one
year of the date of grant, and no options may be granted after ten years from
the effective date of the plan. The options previously granted vest on a yearly
basis in 25% increments beginning on the first anniversary of the date of grant.

    Under the Non-Employee Director Stock Option Plan, options to purchase up to
100,000 shares of common stock may be granted. Each eligible director, on the
initial grant date, will be 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 500 options. Upon the exercise of an option, the purchase
price paid will be 100% of the fair market value of such share at the time of
the grant of the option. Options granted will be exercisable on or after the
first anniversary of the date of grant, and will expire on the tenth anniversary
of the date of grant.

    The Company intends, upon stockholders' and directors' approval, to increase
the number of options that may be granted to employees. The Company has
committed to issue approximately 600,000 additional options.

                                      F-17
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 29, 1996

11. STOCK OPTIONS (CONTINUED)
    A summary of the Stock Incentive Plan and the Non-Employee Director Stock
Option Plan as of December 29, 1996, and changes during the year then ended is
presented below:

<TABLE>
<CAPTION>
                                                                                           NON-EMPLOYEE DIRECTOR
                                                                 STOCK INCENTIVE PLAN        STOCK OPTION PLAN
                                                               -------------------------  ------------------------
                                                                             WEIGHTED                  WEIGHTED
                                                                              AVERAGE                   AVERAGE
                                                                             EXERCISE                  EXERCISE
                                                                 SHARES        PRICE       SHARES        PRICE
                                                               ----------  -------------  ---------  -------------
<S>                                                            <C>         <C>            <C>        <C>
Outstanding at beginning of year.............................          --                        --
Granted......................................................   1,419,500    $   23.85       15,000    $   20.81
Forfeited....................................................     (50,500)       24.00           --
                                                               ----------                 ---------
Outstanding at end of year...................................   1,369,000        23.84       15,000        20.81
                                                               ----------                 ---------
                                                               ----------                 ---------
</TABLE>

    The following table summarizes information about options outstanding at
December 29, 1996:

<TABLE>
<CAPTION>
                                                                                NON-EMPLOYEE
                                                                    STOCK         DIRECTOR
                                                                  INCENTIVE         STOCK
                                                                     PLAN        OPTION PLAN
                                                                --------------  -------------
<S>                                                             <C>             <C>
Exercise Price:
      $24.00..................................................      1,339,000            --
       21.13..................................................             --         7,500
       20.50..................................................             --         7,500
       16.88..................................................         30,000            --
                                                                --------------       ------
                                                                    1,369,000        15,000
                                                                --------------       ------
                                                                --------------       ------
</TABLE>

12. OTHER EXPENSE

    During 1994, the Company incurred certain costs, primarily legal and other
professional fees, related to a proposed debt offering. Ultimately, the Company
decided to obtain additional private financing, and as a result, recorded a
charge of $2,651,000 for these costs.

13. GEOGRAPHIC DATA

    Export sales by geographic location are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                          JANUARY 1,  DECEMBER 31,  DECEMBER 29,
                                                                             1995         1995          1996
                                                                          ----------  ------------  ------------
<S>                                                                       <C>         <C>           <C>
Japan...................................................................  $   51,078   $   64,162    $   75,893
Europe and Middle East..................................................      37,986       56,704        73,394
Asia (excluding Japan)..................................................      15,830       23,230        35,785
Other...................................................................       5,728       10,111        18,053
                                                                          ----------  ------------  ------------
                                                                          $  110,622   $  154,207    $  203,125
                                                                          ----------  ------------  ------------
                                                                          ----------  ------------  ------------
</TABLE>

    Sales to Japan are to a 30% owned subsidiary (see Note 8).

                                      F-18
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 29, 1996

14. 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 contained a provision whereby the executive earned
a $5,000,000 bonus in connection with the Offering.

    The Company is involved from time to time in routine legal matters
incidental to its business. In the opinion of the Company's management, the
resolution of such matters will not have a material effect on its financial
position or results of operations.

15. INCOME TAXES

    The entities in the Predecessor Company were partnerships or corporations
that had elected to be taxed as S corporations pursuant to the Internal Revenue
Code. Therefore, for the years ended January 1, 1995 and December 31, 1995, and
for the six-month period ended July 2, 1996 (the day prior to the Offering), no
provision has been made in the accompanying financial statements for such
periods for Federal income taxes, since such taxes were the liability of the
partners. In connection with the Offering, the Company became subject to Federal
and additional state income tax.

    The Company accounts for income taxes under Statement of Financial
Accounting Standards ("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 bases of existing assets and liabilities.

    Concurrent with becoming subject to Federal and additional state income
taxes, the Company recorded a deferred tax asset and a corresponding tax benefit
in the statement of income in accordance with the provisions of SFAS No. 109.
The actual amount, which was determined upon completion of the final tax returns
of the Predecessor Company, was approximately $19.0 million, and, as of the date
of the Offering, resulted in a total deferred tax asset of approximately $20.7
million which includes certain state and local tax assets recorded on a
historical basis.

    The income tax provision consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                      YEAR ENDED
                                                       ----------------------------------------
<S>                                                    <C>          <C>            <C>
                                                       JANUARY 1,   DECEMBER 31,   DECEMBER 29,
                                                          1995          1995           1996
                                                       -----------  -------------  ------------
Current income taxes:
    Federal taxes....................................   $      --     $      --     $    8,605
    State and local taxes............................       1,113         2,242          2,717
    Foreign taxes....................................         386           278          1,130
                                                       -----------       ------    ------------
                                                            1,499         2,520         12,452
    Deferred income taxes............................        (360)         (122)       (29,631)
                                                       -----------       ------    ------------
                                                        $   1,139     $   2,398     $  (17,179)
                                                       -----------       ------    ------------
                                                       -----------       ------    ------------
</TABLE>

                                      F-19
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 29, 1996

15. INCOME TAXES (CONTINUED)
    Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant items
comprising the Company's net deferred tax asset are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,   DECEMBER 29,
                                                                       1995           1996
                                                                   -------------  ------------
<S>                                                                <C>            <C>
Current :
    Uniform inventory capitalization.............................    $      70     $    1,046
    Allowance for doubtful accounts and other receivable related
      reserves...................................................          270         14,430
    Inventory reserves...........................................           --          2,990
    Other book accruals..........................................          962          6,741
                                                                        ------    ------------
                                                                         1,302         25,207
Non-Current:
    Depreciation.................................................          380          6,106
                                                                        ------    ------------
                                                                     $   1,682     $   31,313
                                                                        ------    ------------
                                                                        ------    ------------
</TABLE>

    The pro forma provision for income taxes represents the income tax
provisions that would have been reported had the Company been subject to Federal
and additional state income taxes for the entire period. The pro forma income
tax provision has been prepared according to SFAS No. 109.

    The foreign and domestic components of pro forma income before pro forma
income taxes were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                           YEAR ENDED
                                                                 ------------------------------
<S>                                                              <C>            <C>
                                                                 DECEMBER 31,    DECEMBER 29,
                                                                     1995            1996
                                                                 -------------  ---------------
Domestic.......................................................    $  26,676       $   1,565
Foreign........................................................        5,454           4,856
                                                                 -------------        ------
                                                                   $  32,130       $   6,421
                                                                 -------------        ------
                                                                 -------------        ------
</TABLE>

    The pro forma income tax provision consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                          YEAR ENDED
                                                                 ----------------------------
<S>                                                              <C>            <C>
                                                                 DECEMBER 31,   DECEMBER 29,
                                                                     1995           1996
                                                                 -------------  -------------
Current income taxes:
    Federal taxes..............................................    $  12,215     $    11,642
    State and local taxes......................................        4,936           4,777
    Foreign taxes..............................................          643           1,130
                                                                 -------------  -------------
                                                                      17,794          17,549
    Deferred income taxes......................................       (4,089)        (14,012)
                                                                 -------------  -------------
                                                                   $  13,705     $     3,537
                                                                 -------------  -------------
                                                                 -------------  -------------
</TABLE>

                                      F-20
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 29, 1996

15. INCOME TAXES (CONTINUED)
    A reconciliation setting forth the differences between the pro forma
effective tax rate of the Company and the U.S. Federal statutory tax rate is as
follows:

<TABLE>
<CAPTION>
                                                                              YEAR ENDED
                                                                   --------------------------------
<S>                                                                <C>              <C>
                                                                    DECEMBER 31,     DECEMBER 29,
                                                                        1995             1996
                                                                   ---------------  ---------------
Federal statutory rate...........................................          35.0%            35.0%
State and local taxes, net of federal tax benefits...............           7.6              7.0
Taxes related to foreign income, net of credits..................           1.9             14.0
Other items, net, none of which individually exceeds 5% of
  Federal taxes at statutory rate................................          (1.8)            (0.9)
                                                                            ---              ---
                                                                           42.7%            55.1%
                                                                            ---              ---
                                                                            ---              ---
</TABLE>

16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

    The following is a summary of the unaudited quarterly results of operations
for 1996 and 1995 (dollars in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                               QUARTER ENDED
                                                           ------------------------------------------------------
<S>                                                        <C>           <C>           <C>           <C>
1996                                                         MARCH 31      JUNE 30     SEPTEMBER 29  DECEMBER 29
                                                           ------------  ------------  ------------  ------------
Net sales................................................      $159,585      $117,641      $173,415      $162,199
Gross profit.............................................        52,861        37,145        55,506        55,264
Net income (loss)........................................        11,701        (4,152)       16,444         1,043
Per share data:
Net income (loss)........................................      $   0.73      $  (0.26)     $   0.77      $   0.05
Weighted average or pro forma weighted average number of
  common shares outstanding..............................    16,017,032    16,017,032    21,468,034    21,468,034
</TABLE>

<TABLE>
<CAPTION>
                                                                              QUARTER ENDED
                                                         --------------------------------------------------------
<S>                                                      <C>           <C>           <C>            <C>
1995                                                       APRIL 2        JULY 2       OCTOBER 1     DECEMBER 31
                                                         ------------  ------------  -------------  -------------
Net sales..............................................      $120,693      $102,731       $152,389       $134,313
Gross profit...........................................        44,203        31,112         56,162         47,960
Net income (loss)......................................        26,726        (1,325)        20,022          8,252
Per share data:
Net income (loss)......................................      $   1.67      $  (0.08)      $   1.25       $   0.52
Pro forma weighted average number of common shares
  outstanding..........................................    16,017,032    16,017,032     16,017,032     16,017,032
</TABLE>

                                      F-21
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized.

Dated: March 28, 1997

                                DONNA KARAN INTERNATIONAL INC.

                                By:  /s/ DONNA KARAN
                                     -----------------------------------------
                                     Donna Karan
                                     CHAIRMAN OF THE BOARD,
                                     CHIEF EXECUTIVE OFFICER, AND CHIEF
                                     DESIGNER

    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
------------------------------  --------------------------  -------------------
                                Chairman of the Board,
       /s/ DONNA KARAN            Chief Executive Officer,
------------------------------    and Chief Designer          March 28, 1997
         Donna Karan              (Principal Executive
                                  Officer)

      /s/ STEPHAN WEISS
------------------------------  Vice Chairman of the Board    March 28, 1997
        Stephan Weiss

   /s/ M. WILLIAM BENEDETTO
------------------------------  Director                      March 28, 1997
     M. William Benedetto

       /s/ ANDREA JUNG
------------------------------  Director                      March 28, 1997
         Andrea Jung

      /s/ ANN MCLAUGHLIN
------------------------------  Director                      March 28, 1997
        Ann McLaughlin

     /s/ STEPHEN L. RUZOW
------------------------------  President, Chief Operating    March 28, 1997
       Stephen L. Ruzow           Officer, and Director

                                Senior Executive Vice
      /s/ DEWEY K. SHAY           President, Chief
------------------------------    Administrative Officer,     March 28, 1997
        Dewey K. Shay             and Director

                                Executive Vice President
                                  and Chief Financial
    /s/ JOSEPH B. PARSONS         Officer (Principal
------------------------------    Financial Officer and       March 28, 1997
      Joseph B. Parsons           Principal Accounting
                                  Officer)
<PAGE>
                                                                     SCHEDULE II

                         DONNA KARAN INTERNATIONAL INC.
                   VALUATION & QULAIFYING ACCOUNTS & RESERVES
<TABLE>
<CAPTION>
                                                                               ADDITIONS
                                                    ----------------------------------------------------------------
<S>                                                 <C>           <C>          <C>          <C>          <C>
                                                     BALANCE AT   CHARGED TO   CHARGED TO                BALANCE AT
                                                    BEGINNING OF   COSTS AND      OTHER                    END OF
DESCRIPTION                                            PERIOD      EXPENSES     ACCOUNTS    DEDUCTIONS     PERIOD
--------------------------------------------------  ------------  -----------  -----------  -----------  -----------

<CAPTION>
                                                                             (IN THOUSANDS)
<S>                                                 <C>           <C>          <C>          <C>          <C>
Year ended January 1, 1995
    Allowance for doubtful accounts...............   $    1,989    $     773    $  --        $     158    $   2,604
    Allowance for chargebacks.....................        5,181        7,075       --            4,456        7,800
    Allowance for cash discounts..................        1,013       17,034       --           16,668        1,379
    Allowance for sales returns...................        1,014       21,942       --           19,726        3,230
                                                    ------------  -----------  -----------  -----------  -----------
                                                     $    9,197    $  46,824    $  --        $  41,008    $  15,013
                                                    ------------  -----------  -----------  -----------  -----------
                                                    ------------  -----------  -----------  -----------  -----------
Year ended December 31, 1995
    Allowance for doubtful accounts...............   $    2,604    $   3,122    $  --        $      73    $   5,653
    Allowance for chargebacks.....................        7,800       13,172       --            8,067       12,905
    Allowance for cash discounts..................        1,379       17,493       --           17,184        1,688
    Allowance for sales returns...................        3,230       19,000       --           19,969        2,261
                                                    ------------  -----------  -----------  -----------  -----------
                                                     $   15,013    $  52,787    $  --        $  45,293    $  22,507
                                                    ------------  -----------  -----------  -----------  -----------
                                                    ------------  -----------  -----------  -----------  -----------
Year ended December 29, 1996
    Allowance for doubtful accounts...............   $    5,653    $      62    $  --        $   4,054    $   1,661
    Allowance for chargebacks.....................       12,905       22,810       --           16,868       18,847
    Allowance for cash discounts..................        1,688       18,960       --           17,450        3,198
    Allowance for sales returns...................        2,261       18,429       --           17,639        3,051
                                                    ------------  -----------  -----------  -----------  -----------
                                                     $   22,507    $  60,261    $  --        $  56,011    $  26,757
                                                    ------------  -----------  -----------  -----------  -----------
                                                    ------------  -----------  -----------  -----------  -----------
</TABLE>

    The above reserves are deducted from accounts receivable in the predecessor
combined sheets.
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.                                           DESCRIPTION OF EXHIBITS
-------------  -----------------------------------------------------------------------------------------------------
<C>            <S>

        2.1    Agreement and Plan of Contribution, dated as of June 10, 1996, among the Company, Takihyo Inc., Donna
               Karan, Stephan Weiss, Stephan Weiss, as trustee under Trust Agreement for the benefit of Lisa Weiss
               Keyes, Corey Weiss, and Gabrielle Karan, Stephan Weiss, as trustee under Trust Agreement for the
               benefit of Donna Karan, Gabrielle Studio, Inc., Tomio Taki, Frank 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)

       10.1    Credit Agreement, dated as of September 18, 1996, 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-Q for the quarter ended September 29, 1996)

       10.2    1996 Stock Incentive Plan of the Company (Incorporated by reference from Exhibit 10.2 to the
               Company's Registration Statement on Form S-1, dated June 27, 1996)

       10.3    1996 Non-Employee Director Stock Option Plan (Incorporated by reference from Exhibit 10.3 to the
               Company's Registration Statement on Form S-1, dated June 27, 1996)

       10.4    Registration Rights Agreement, dated as of June 10, 1996, among the Company, Donna Karan, Stephan
               Weiss, Stephan Weiss, as trustee under Trust under trust agreement for the benefit of Lisa Weiss
               Keyes, Corey Weiss, and Gabrielle Karan, Stephan Weiss, as trustee under Trust Agreement for the
               benefit of Donna Karan, Gabrielle Studio, Inc., Takihyo Inc., Tomio Taki, Frank Mori, Christopher
               Mori, and Heather Mori (Incorporated by reference from Exhibit 10.4 to the Company's Registration
               Statement on Form S-1, dated June 27, 1996)

       10.5    License Agreement, dated as of July 3, 1996, between Gabrielle Studio, Inc. and Donna Karan Studio
               (Incorporated by reference from Exhibit 10.5 to the Company's Registration Statement on Form S-1,
               dated June 27, 1996)

       10.6    Guaranty of License, dated as of July 3, 1996, from the Company to Gabrielle Studio, Inc.
               (Incorporated by reference from Exhibit 10.6 to the Company's Registration Statement on Form S-1,
               dated June 27, 1996)

       10.7    License Agreement, dated as of July 3, 1996, between Donna Karan Studio and Stephan Weiss
               (Incorporated by reference from Exhibit 10.7 to the Company's Registration Statement on Form S-1,
               dated June 27, 1996)

       10.8    Employment Agreement, dated as of July 3, 1996, between the Company and Donna Karan (Incorporated by
               reference from Exhibit 10.8 to the Company's Registration Statement on Form S-1, dated June 27, 1996)

       10.9    Employment Agreement, dated as of July 3, 1996, between the Company and Stephan Weiss (Incorporated
               by reference from Exhibit 10.9 to the Company's Registration Statement on Form S-1, dated June 27,
               1996)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.                                           DESCRIPTION OF EXHIBITS
-------------  -----------------------------------------------------------------------------------------------------
<C>            <S>
      10.10    Stockholders Agreement, dated as of June 10, 1996, among Donna Karan, Stephan Weiss, Stephan Weiss as
               trustee under Trust Agreement for the benefit of Lisa Weiss Keyes, Corey Weiss, and Gabrielle Karan,
               Stephan Weiss as trustee under Trust Agreement for the benefit of Donna Karan, Gabriel Studio, Inc.,
               Takihyo Inc., Tomio Taki, Frank Mori, Christopher Mori, and Heather Mori (Incorporated by reference
               from Exhibit 10.10 to the Company's Registration Statement on Form S-1, dated June 27, 1996)

      10.11    Incentive Compensation Plan (Incorporated by reference from Exhibit 10.11 to the Company's
               Registration Statement on Form S-1, dated June 27, 1996)

      10.12    Employment Agreement, dated as of December 12, 1995, between The Donna Karan Company and Stephen L.
               Ruzow (Incorporated by reference from Exhibit 10.12 to the Company's Registration Statement on Form
               S-1, dated June 27, 1996)

      10.13    Employment Agreement, dated as of December 2, 1996, between the Company and Dewey K. Shay

      10.14    Employment Agreement, dated as of October 15, 1996, between The Donna Karan Company and Joseph B.
               Parsons

      10.15    Amendment No. 1 to Credit Agreement, dated as of September 18, 1996, 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.

       21.1    Subsidiaries of the Company (Incorporated by reference from Exhibit 21.1 to the Company's
               Registration Statement on Form S-1, dated June 27, 1996)

       23.1    Consent of Ernst & Young LLP

       27.1    Financial Data Schedule
</TABLE>