<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                                 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 28, 1997
                                       OR
 
  / /    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
         SECURITIES EXCHANGE ACT OF 1934
 
        FOR THE TRANSITION PERIOD FROM ______________ TO ______________
 
                         COMMISSION FILE NUMBER 1-11805
                            ------------------------
 
                         DONNA KARAN INTERNATIONAL INC.
             (Exact name of registrant as specified in its charter)
 
                  DELAWARE                             13-3882426
        (State or other jurisdiction                (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)
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 789-1500
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
            TITLE OF EACH CLASS                   NAME OF EACH EXCHANGE
             ------------------                    ON WHICH REGISTERED
                                            ---------------------------------
                Common Stock                     New York Stock Exchange
 
        SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
                            ------------------------
 
    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/  No / /
 
    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
 
    The aggregate market value of Registrant's Common Stock held by
nonaffiliates as of March 18, 1998 was $143,273,699 based on 11,072,156 such
shares outstanding on such date and the closing sales price for the Common Stock
on such date of $12.94 as reported on the New York Stock Exchange.
 
    As of March 18, 1998, the Registrant had 21,597,834 shares of Common Stock
outstanding.*
 
    PART III incorporates information by reference from the Registrant's
definitive Proxy Statement for its 1998 Annual Meeting of Shareholders to be
filed with the Commission within 120 days of December 28, 1997.
 
------------------------
 
*   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 and DKNY brand names, respectively. The Company also selectively has
granted licenses for the manufacture and distribution of certain other products
under the DONNA KARAN NEW YORK and DKNY brand names, including beauty and
beauty-related products, jeanswear, activewear, hosiery, intimate apparel,
eyewear, and children's apparel.
 
    During the fourth quarter of 1997, the Company announced a restructuring of
its business and unveiled a new strategic plan. The Company's mission is to
build and maintain a balanced company through wholesale, licensing, and retail
operations. Although these areas are not new to the Company, historically, the
Company's business primarily had been wholesale driven. Therefore, the goal of
the Company's strategy is to establish a balance among three distinct but
interrelated businesses: wholesale, licensing, and retail, while continuing to
reduce costs and increase efficiencies.
 
    First, the Company's wholesale business consists of its core business of
selling DONNA KARAN NEW YORK and DKNY products to retailers. To increase
sell-through at retail, the Company plans to refocus and balance the merchandise
assortment, improve in-store presentations through an expansion of its in-store
(shop-in-shop) program, and initiate a new merchandise coordinator program to
enhance the retail presentation standards and train in-store selling
specialists. The Company's wholesale business will continue to be the Company's
key focus and core competency.
 
    Second, in late 1997, the Company began to expand its licensing activities
by forming strategic alliances with world-class companies to develop, market,
and sell products under the DONNA KARAN NEW YORK and DKNY brands. This strategy
consists of three key elements: leveraging the Company's brands by entering into
licenses for related product categories, increasing awareness of the Company's
brands, and generating an increased stream of royalty income that provides a
balance to the Company's wholesale and retail businesses. In the fourth quarter
of 1997, significant new licensing alliances were formed with Estee Lauder Inc.
with respect to the Company's beauty business and with Liz Claiborne, Inc. with
respect to the Company's DKNY Jeans and Active brands. In the first quarter of
1998, the Company also entered into licensing alliances with Wacoal America,
Inc. for men's and women's DKNY intimate apparel; Esprit de Corp. for DKNY
children's apparel; Phillips-Van Heusen Corp. for DKNY men's dress shirts; and
Mallory & Church for DKNY men's neckwear and hosiery.
 
    Third, under its retail strategy, the Company plans to open a limited number
of full-price, domestic free-standing retail stores, further build on its outlet
store strategy, and continue to open licensed free-standing stores
internationally. The Company currently expects to open three full-price,
free-standing retail stores in the United States by the end of 1998. As of
December 28, 1997, the Company operated 49 outlet stores and expects to have 63
outlet stores in operation by the end of 1998. Additionally, at the end of
fiscal 1997, the Company had 57 licensed free-standing stores internationally
and plans to have 70 such stores in operation at the end of 1998. The objectives
of building this retail network are to enhance the Company's sales and profit
potential, strengthen its existing wholesale business, and increase customer
awareness of the Company's brands.
 
                                       2
<PAGE>
    In connection with the Company's strategic plan, the Company plans to
implement a number of initiatives over approximately the next 12 to 18 months.
These include:
 
    - Instituting systems and processes to help ensure higher quality and timely
      delivery of product with improved margins;
 
    - Refocusing the design and merchandising mix of each brand and reducing the
      number of styles ("SKUs") the Company produces each season in order to
      increase sell-throughs at retail; and
 
    - Reducing manufacturing costs, selling, general, and administrative
      expenses, and other corporate expenditures.
 
    In fiscal 1997, the Company implemented other initiatives aimed at reducing
expenses, including:
 
    - Licensing the Company's beauty business to Estee Lauder and winding down
      this business;
 
    - Reducing the work force by approximately 15 percent;
 
    - Streamlining the number of business units from 13 to six and restructuring
      the senior management organization to foster accountability for meeting
      performance standards;
 
    - Closing the Company's Italian sourcing office; and
 
    - Consolidating real estate occupancy.
 
    The Company's principal trademarks, "DONNA KARAN," "DONNA KARAN NEW YORK,"
and "DKNY," are licensed to the Company pursuant to a license with Gabrielle
Studio, Inc., a corporation wholly-owned by Ms. Donna Karan and Mr. Stephan
Weiss and certain affiliated trusts. See "Trademarks" below in this section for
the terms on which the trademarks are licensed to the Company.
 
    Donna Karan International Inc. consummated its initial public offering (the
"Offering") in July 1996. As used in this report, references to the "Company"
mean the predecessors to Donna Karan International Inc. as of the dates and
periods prior to the consummation of the 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.
 
WHOLESALE
 
    The Company's wholesale business is grouped under three general divisions:
womenswear, menswear, and accessories. Within each division, products are
offered both under the DONNA KARAN NEW YORK and DKNY brands. The Company's total
wholesale net revenues for fiscal 1997 were $540 million (excluding net revenues
from the Company's beauty division). Included in wholesale net revenues are
sales of apparel and accessory products by the Company to department stores,
specialty stores, boutiques and to the Company's free-standing International
Retail Stores (as defined below in "Licensing").
 
                                       3
<PAGE>
    The approximate suggested retail price ranges for the wholesale products
sold by the Company set forth below are indicative of their approximate
individual item price ranges:
 
<TABLE>
<CAPTION>
                                                                                                      DRESSES
                                                                           SKIRTS AND  SHIRTS AND   (OTHER THAN
                                                              JACKETS        PANTS     BODYSUITS   EVENING WEAR)
                                                           --------------  ----------  ----------  -------------
<S>                                                        <C>             <C>         <C>         <C>
WOMENSWEAR:
DONNA KARAN NEW YORK
  Collection (black label)...............................  $  1,200-1,800  $  450-900  $  300-600   $ 650-1,400
  Signature (gold label).................................       750-1,100     300-600     200-400       500-850
DKNY Collections
  DKNY...................................................         220-525     105-225      45-175       130-225
</TABLE>
 
<TABLE>
<CAPTION>
                                                                             SUITS       SPORTSCOATS    TROUSERS
                                                                         --------------  ------------  ----------
<S>                                                                      <C>             <C>           <C>
MENSWEAR:
DONNA KARAN NEW YORK
  Collection (black label).............................................  $  1,350-1,850  $  950-1,750  $  275-400
  Signature (gold label)...............................................         795-995       595-750     225-275
DKNY...................................................................         495-895       250-450      65-200
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                            SMALL
                                                                                           LEATHER
                                                                             HANDBAGS       GOODS        SHOES
                                                                           ------------  ------------  ----------
<S>                                                                        <C>           <C>           <C>
ACCESSORIES:
DONNA KARAN NEW YORK.....................................................  $  350-1,500   $   75-300   $  250-395
DKNY.....................................................................  $     30-650   $   15-150   $   40-365
</TABLE>
 
    WOMENSWEAR
 
    The Company's womenswear divisions design, source, market, and distribute
womenswear under the DONNA KARAN NEW YORK and DKNY brands. The original DONNA
KARAN NEW YORK Collection for women was based upon Ms. Karan's concept of "seven
easy pieces," a collection of bodysuits and tights, dresses, skirts, blouses,
jackets, pants, and accessories that when layered in combinations achieved a
varied, but consistent, high fashion look. There are four annual seasonal
presentations for each DONNA KARAN NEW YORK and DKNY collection: Fall, Resort,
Spring, and Summer. The spring and fall collections generally are presented at
major fashion shows which generate extensive press coverage in the domestic and
international fashion press as well as in the general media.
 
    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." The DONNA KARAN NEW YORK brand
is a designer collection of women's apparel and the DKNY brand is targeted for
the bridge market. The Company also has begun to compete in the better segment
of the womenswear industry through its licensing of the DKNY jeans and DKNY
active brands. The Company's wholesale net revenues of its womenswear business
were $306 million in fiscal 1997.
 
    DONNA KARAN NEW YORK COLLECTIONS. The DONNA KARAN NEW YORK brand consists of
two brand segments: DONNA KARAN NEW YORK Collection and DONNA KARAN SIGNATURE.
 
    The DONNA KARAN NEW YORK Collection ("black label") is the foundation of the
Donna Karan brands. This exclusive apparel collection is a modern system of
dressing which embodies the ultimate in luxury, sensuality, comfort, and
creative expression using the finest quality fabrics, workmanship, and
technological innovation. This collection is designed for sophisticated,
international, affluent women and is distributed exclusively in key markets to a
limited number of doors. (A "door" is a single retail outlet.) The
 
                                       4
<PAGE>
DONNA KARAN NEW YORK Collection is recognized worldwide as one of the premier
women's designer collections.
 
    The Company introduced the DONNA KARAN NEW YORK SIGNATURE collection ("gold
label") for Spring 1997. The DONNA KARAN SIGNATURE collection is a complete
lifestyle collection addressing the specific needs of the modern, professional
woman. Based on the spirit of the Donna Karan design vision with proven
silhouettes and styles, the DONNA KARAN SIGNATURE collection was created to
deliver a balanced mix of fashion expression, sportswear function, and
classification items. While still a designer collection, the DONNA KARAN
SIGNATURE collection is merchandised for wider distribution than the DONNA KARAN
NEW YORK Collection.
 
    In addition to the initiatives described above in the Overview section, the
Company plans to reinstate an "Essentials" program for the DONNA KARAN NEW YORK
Collection starting for Fall 1998, which will include timeless versions of the
Company's most successful styles and newly-designed classic signature styles.
 
    DKNY COLLECTIONS. DKNY is the energy and spirit of New York. The initial
success of the DONNA KARAN NEW YORK Collection for women made possible the
launch of the DKNY bridge collection of women's apparel and accessories in 1989.
DKNY 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 designer image. The DKNY product line is designed to appeal
to a broader customer base and has wider distribution than the DONNA KARAN NEW
YORK Collection and DONNA KARAN SIGNATURE collection.
 
    For the Spring 1997 season, the DKNY women's apparel collection was
segmented into five labels; "D," "DKNY," "DKNY CLASSIC," "DKNY JEANS," and "DKNY
ACTIVE." After careful evaluation, the Company determined that it is more
efficient to sell D and DKNY CLASSIC products under the DKNY brand. Additionally
in December 1997, the Company licensed the DKNY Jeans and DKNY Active businesses
to Liz Claiborne, Inc. to better enable these brands to achieve their maximum
potential. See "Licensing" below.
 
    Accordingly, it is expected that for Spring 1999 most of the Company's
women's apparel bridge business will be consolidated under a single DKNY label.
The DKNY collections address a broad range of lifestyle needs from work to
weekend and jeans to eveningwear. The collection includes jackets, skirts,
blouses, bodysuits, dresses, pants, and outerwear.
 
    In the DKNY women's apparel business, the Company is facing a continued
difficult business environment due to general economic conditions in Asia, and
increased competition from designer-branded "better" apparel in the United
States, which is impacting the bridge business.
 
    To address these issues, the Company is refocusing its resources to maximize
the value of the DKNY women's brand, which initiatives include:
 
    - Closing unprofitable DKNY bridge department store doors;
 
    - Refocusing the merchandise mix to improve retail sell-through;
 
    - Reducing SKUs to gain greater sourcing and production efficencies;
 
    - Expanding an "Essentials" program to include timeless styles and
      silhouettes;
 
    - Opening a limited number of full-price domestic DKNY free-standing stores;
      and
 
    - Expanding the shop-in-shop program and renovating existing shop-in-shops
      in the United States.
 
    These initiatives for the DKNY women's brand are a top priority for the
Company's management.
 
                                       5
<PAGE>
    MENSWEAR
 
    The Company's menswear business is organized into a single division with
three brands: DONNA KARAN NEW YORK Collection, DONNA KARAN SIGNATURE, and DKNY.
Prior to the Company's reorganization in 1997, the Company's menswear business
was comprised of two divisions, with a total of five segments. Generally, there
are four annual seasonal presentations for each collection: Fall, Resort,
Spring, and Summer. In recognition of the DONNA KARAN NEW YORK Collection, Ms.
Karan received the Council of Fashion Designers of America's Menswear Designer
of the Year Award for 1992. The Company's wholesale net revenues of its menswear
businesses were $123 million in fiscal 1997.
 
    DONNA KARAN NEW YORK COLLECTIONS. THE DONNA KARAN NEW YORK brand consists of
two designer collections of men's apparel: DONNA KARAN NEW YORK Collection
("black label") and DONNA KARAN SIGNATURE ("gold label").
 
    THE DONNA KARAN NEW YORK Collection is designed to deliver the same
simplified system of dressing for men that originally was created for women.
This collection expresses the ultimate in style, comfort, function,
technological innovation, and quality using the finest fabrication and
workmanship. It is comprised of a balanced mix of handmade tailored clothing,
dress furnishings, and luxury sportswear. Like the DONNA KARAN NEW YORK women's
collection, the menswear collection has limited and exclusive distribution
through premier retailers.
 
    THE DONNA KARAN SIGNATURE collection was introduced in Fall 1993 and is a
full lifestyle collection created specifically for the modern professional man.
Based on proven styles, the DONNA KARAN SIGNATURE collection captures the design
vision of Donna Karan through a balanced mix of tailored clothing, dress
furnishings, better sportswear, and classification items. Like the DONNA KARAN
SIGNATURE collection for women, the DONNA KARAN SIGNATURE collection for men is
a designer collection. Targeting a broader audience and more widely distributed,
this collection is priced below the DONNA KARAN NEW YORK black label collection
but maintains a similar dedication to quality and design, while using lower cost
fabrications and more commercial production techniques.
 
    DKNY COLLECTION.  The DKNY menswear collection addresses a broad range of
lifestyle needs with a fashion forward edge. The collection includes relaxed
sportswear, suitings, and weekend wear, as well as jeanswear, activewear, and
classification items which will be produced by licensees. The DKNY menswear
collection is designed to appeal to a broader customer base than the DONNA KARAN
NEW YORK collections for men and is more widely distributed than those
collections.
 
    The Company currently plans to relaunch the DKNY mens collection for Spring
1999 to offer a more competitively priced and broadly distributed product range.
 
    ACCESSORIES
 
    The Company's accessories division includes products sold under both the
DONNA KARAN NEW YORK and DKNY brands. Prior to the Company's restructuring in
the fourth quarter of 1997, the Company's accessories business was conducted by
three separate business units. In fiscal 1997, the Company's wholesale net
revenues of accessories products were $102 million.
 
    DONNA KARAN NEW YORK COLLECTIONS. The DONNA KARAN NEW YORK collection of
accessories is a limited designer collection of luxury bags, footwear, small
leather goods, and related accessory items for women and footwear for men. These
products are designed to complement the DONNA KARAN NEW YORK apparel
collections, as well as to exist as a stand-alone collection. These collections
are sold exclusively to the Company's licensed free-standing, full-priced stores
and to a limited number of specialty stores.
 
    DKNY COLLECTIONS. The DKNY accessories collection includes bags, belts,
small leather goods, and footwear for men and women, including a balance of
fashion, function, and value items. These lifestyle collections are designed to
complement the DKNY apparel collections, as well as to exist as stand-alone
 
                                       6
<PAGE>
collections. The women's accessories and shoe collections are widely distributed
through department and specialty stores, while the men's collections have a more
limited range of distribution.
 
    Under the DKNY ACTIVE label, the Company offers an extensive athleisure and
performance athletic footwear collection. This collection is sold through
department stores and specialty athletic stores. Additionally, for the Fall 1998
season, the Company plans to launch a DKNY JEANS "better" price-point footwear
line, which is intended to be more broadly distributed than the DKNY footwear
collection. Also, for Resort 1998, the Company plans to launch a new casual bag
collection under both the DKNY ACTIVE and DKNY JEANS brand names.
 
    INTERNATIONAL BUSINESS
 
    During fiscal 1997, 60.0% of the Company's net wholesale revenues were
derived from sales within the United States and 40.0% were derived from sales
outside the United States. As a result of the Company's restructuring in the
fourth quarter of 1997, the Company's international sales force was consolidated
into each relevant business segment.
 
    The following table shows the net wholesale revenues derived by the Company
in each of the geographic areas listed below during each of the past three
years:
 
<TABLE>
<CAPTION>
                                                              1995     1996     1997
                                                              ----    -------   ----
<S>                                                           <C>     <C>       <C>
                                                              (DOLLARS IN MILLIONS)
United States (1)...........................................  $301    $   344   $336
Japan.......................................................    64(1)      74     67
Europe and Middle East......................................    57         73     97
Asia (excluding Japan)......................................    23         36     35
Other markets...............................................    10         18     24
</TABLE>
 
------------------------
 
(1) 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. On March 26, 1998, the Company sold its remaining 30%
    interest in the operations of Donna Karan Japan. See Note 7 to Notes to
    Financial Statements elsewhere herein.
 
    Starting late in the Fall 1997 season, the Company's business, primarily its
DKNY women's and men's collections, began to experience significant decreases in
sales in Asia (including Japan) due to currency fluctuations, and the general
economic conditions in the region, which trend is expected to continue
throughout fiscal 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
 
    WHOLESALE CUSTOMERS, SALES, AND SUPPORT
 
    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, DKNY, and
DONNA KARAN 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's better department and large specialty stores include
Bloomingdale's, Macy's, Saks Fifth Avenue, Neiman Marcus, Bergdorf Goodman, and
Nordstrom. Certain of the Company's customers, including some under common
ownership with each other, have accounted for significant portions of the
Company's revenues. During fiscal 1997, Federated Department Stores (including
Bloomingdales and Macys) accounted for 13.0% of the Company's revenues.
Additionally, sales to entities affiliated with HPL
 
                                       7
<PAGE>
(as herein defined), including Donna Karan Japan, the Company's affiliated
distributor in Japan, and certain free-standing International Retail Stores,
accounted for approximately 16.0% of the Company's revenues for fiscal 1997. The
Company's 10 largest customers accounted for approximately 60.7% of the
Company's revenues during 1997.
 
    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. In addition, as of the end of fiscal
1997, the Company employed eight special event coordinators to provide the
Company's customers with assistance in establishing "trunk shows" and other
marketing programs. The Company also targets its retail customer base with
various marketing programs and material, including outreach programs, trunk
shows, mailers, and catalogues. Also, in 1998, the Company plans to begin to
initiate a new merchandise coordinator program to enhance the Company's retail
presentation standards and train in-store selling specialists.
 
    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 ("shop-in-shop"), or
providing special signs, display cases, and display racks, depending on the
collection. The Company works closely with the store buyers to encourage each
store to carry a representative cross-section of the complete collection for
each season.
 
    The Company and its licensees are expanding the shop-in-shop program for the
Company's products. Under this program, participating retailers set aside
dedicated floor space to provide for a broad assortment of Donna Karan products
in a combination of wall case and free-standing fixtures. The Company believes
that shop-in-shops encourage a store to carry a representative cross-section of
the product line for each season. The Company has focused its efforts and its
licensees' efforts on increasing the number and size of shop-in-shops or
renovating existing shop-in-shops, where appropriate. The size of the
shop-in-shops typically range from 600 to 2,000 square feet for womenswear, 400
to 750 square feet for menswear, and 100 to 300 square feet for accessories. The
continued expansion of the Company's shop-in-shop and fixturing program is
dependent on market conditions, including continued demand for the Company's
products.
 
    As of December 28, 1997, the Company had a sales force of approximately 85
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.
 
LICENSING
 
    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.
 
    In late 1997, the Company began to expand its licensing activities by
forming strategic alliances with world-class companies to develop, market, and
sell products under the DONNA KARAN NEW YORK and DKNY brands. This strategy
consists of the following elements: leveraging the Company's brands by entering
into licenses for related product categories, increasing awareness for the
Company's brands, entering new distribution channels, increasing floor space in
existing distribution channels, increasing the advertising and overall promotion
of the Company's brands, and generating an increased stream of royalty income
that provides a balance to the Company's wholesale and retail business. The
Company's licensing revenues for fiscal 1997 were $10 million.
 
                                       8
<PAGE>
    PRODUCT LICENSES
 
    Product licensees are granted the right to manufacture and sell at
wholesale, and in certain cases, at retail, specified products under the DONNA
KARAN NEW YORK and DKNY brand names. In consideration for such licenses, each
licensee pays royalties to the Company based upon its net sales of licensed
products (as defined), subject, generally, to payment of a minimum royalty.
Additionally, the Company typically obtains a commitment for a minimum level of
advertising and marketing. License agreements generally have three-to five-year
terms, with renewal options if certain minimum sales threshholds are met. 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, such items are also subject to the
Company's prior approval.
 
    As of March 15, 1998, the Company had license agreements with the following
licensees providing for the manufacture and distribution of the categories of
products listed below under the trademarks and in the territories specified:
 
<TABLE>
<CAPTION>
         LICENSEE                     PRODUCTS                  LICENSED MARKS                  TERRITORY
---------------------------  ---------------------------  ---------------------------  ---------------------------
<S>                          <C>                          <C>                          <C>
 
Estee Lauder Inc.            Men's and women's beauty     DONNA KARAN NEW YORK         Worldwide
                             and beauty-related products  DKNY
 
LC Libra, LLC, a subsidiary  Mens and women's jeanswear   DKNY JEANS                   Western Hemisphere
  of Liz Claiborne, Inc.     and active lifestyle         DKNY ACTIVE
                             products
 
Hanes Hosiery, a division    Women's pantyhose, knee-     DONNA KARAN NEW YORK         Worldwide
  of Sara Lee Corp.          high stockings, tights and   DKNY
                             socks
 
Wacoal America, Inc.         Women's intimate apparel     DONNA KARAN NEW YORK         United States and Canada(1)
 
                             Women's and men's intimate   DKNY                         United States, Canada, and
                             apparel                                                   Europe
 
The Lantis Corporation       Sunglasses, optical frames,  DONNA KARAN NEW YORK         Worldwide
                             magnifiers, and eyewear      DKNY
                             accessories
 
Esprit de Corp.              Children's apparel           DKNY                         North America
                                                          DKNY KIDS
 
Albert S.A.                  Children's apparel           DKNY                         Europe and the Middle East
                                                          DKNY KIDS
 
Phillips-Van Heusen Corp.    Men's dress shirts           DKNY                         North America
 
Mallory & Church             Men's neckwear and hosiery   DKNY                         United States and Canada
 
Butterick Company, Inc.      Paper patterns and knitting  DONNA KARAN NEW YORK         Worldwide
  (Vogue Patterns)           patterns                     DKNY
 
T. Kawabi & Co.              Handkerchiefs and face       DKNY                         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.
 
    In the fourth quarter of 1997, the Company entered into two strategic
licensing alliances for its beauty products and jeans and activewear lines.
 
    BEAUTY PRODUCTS.  On November 10, 1997, the Company and Estee Lauder Inc.
("ELI") consummated a transaction whereby the Company granted to ELI the
exclusive, long-term, worldwide rights to the
 
                                       9
<PAGE>
DONNA KARAN NEW YORK and DKNY trademarks for the manufacture, marketing,
distribution and sale of beauty and beauty-related products, including
fragrances, cosmetics, skincare products, and beauty-related accessories. The
Company also granted to ELI an exclusive sublicense for the bottles designed by
Stephan Weiss, Vice Chairman of the Board of Directors of the Company and a
principal stockholder. For additional information relating to this transaction,
see "Management Discussion and Analysis of Financial Condition and Results of
Operations -- Overview --Significant Transactions." Prior to the Company's
license to ELI, the Company was engaged in the sale of men's and women's
fragrances, bath and body, and treatment products. As a result of this agreement
with ELI, the Company is completing the wind-down of its existing beauty
business. In fiscal 1997, the Company's net wholesale revenues of its beauty
division were $19 million.
 
    DKNY JEANS AND ACTIVE PRODUCTS.  On December 13, 1997, the Company and a
subsidiary of Liz Claiborne, Inc. ("LCI") entered into a strategic licensing
alliance for new lines of men's and women's jeanswear and active clothing under
the DKNY label. LCI was granted the exclusive, long-term rights to the DKNY
JEANS and DKNY ACTIVE trademarks and the rights to market, distribute, and sell
the DKNY JEANS and DKNY ACTIVE collections in the Western Hemisphere. LCI also
agreed to purchase the Spring and Summer 1998 DKNY JEANS collection, which was
introduced at retail in February 1998. The DKNY ACTIVE lines are planned to be
launched for the Spring 1999 season. LCI also was granted certain retail rights
with respect to these collections and plans to open both free-standing,
full-price retail and outlet stores under the DKNY JEANS mark. This licensing
alliance marks the Company's expansion from the designer and bridge markets into
the women's better casual sportswear market. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview
--Significant Transactions."
 
    Additionally, in the first quarter of 1998, the Company entered into the
following license agreements:
 
    DKNY INTIMATE APPAREL.  This license agreement covers men's and women's
intimate apparel under the DKNY brand name, including underwear, sleepwear, and
loungewear collections. The women's collection is expected to be launched in
Spring 1999. Wacoal America, Inc., the licensee, also is the licensee of the
Company's DONNA KARAN NEW YORK intimate apparel. The territory covered by the
license is the United States, Canada, and Europe.
 
    DKNY KIDS.  In February 1998, the Company entered into an exclusive license
agreement with Esprit de Corp. ("Esprit") for children's apparel under the DKNY
brand name in North America. This license is designed to complement the
Company's existing license with Albert, S.A. for children's apparel in Europe
and the Middle East. Albert's first collection debuted for the Fall 1996 season.
 
    Prior to the license with Esprit, the Company began offering children's
apparel for sale in the United States starting for the Fall 1997 season. Esprit
has assumed the Company's orders for the Fall 1998 season and will be launching
the girls' collection for that season. The boys' collection is planned to launch
for Spring 1999.
 
    The children's apparel collections are sold through better department
stores, specialty stores, and the Company's free-standing stores. The DKNY Kids
collection is a lifestyle collection of girls' and boys' sportswear and includes
shirts, skirts, pants, jackets, jeans, sweaters, outerwear, and activewear.
 
    DKNY MENS FURNISHINGS.  Starting for Resort 1998, the Company will be
offering DKNY men's dress shirts, neckwear, and hosiery. These collections are
targeted for department stores' main floor classification business and generally
will be available throughout the United States and Canada. The collections also
will be sold in DKNY free-standing stores. The Company's men's dress shirt
licensee is Phillips-Van Heusen Corp. and its neckwear and hosiery licensee is
Mallory & Church.
 
                                       10
<PAGE>
    DISTRIBUTION ARRANGEMENT IN JAPAN
 
    The Company sells its products in Japan through Donna Karan Japan, a
Japanese corporation. 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, Donna Karan Japan became
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 a initial term through December
31, 2000.
 
    On March 26, 1998, the Company and HPL sold all of their outstanding shares
in Donna Karan Japan to a subsidiary of Onward Kashiyama Co. Ltd., a Japanese
public company ("OKC"). At the same time, Donna Karan Japan was granted a
16-year exclusive license to import, manufacture, license, and/or distribute
DONNA KARAN NEW YORK and DKNY products in Japan, with certain exceptions. In
addition, Donna Karan Japan was granted the exclusive right to develop and
operate a total of 12 DONNA KARAN NEW YORK and DKNY retail boutiques in Japan
over the term of the agreement. The Company will receive a royalty on net sales
of licensed products and a servicing fee on net sales of Donna Karan products
imported by Donna Karan Japan. See Note 7 to Notes to Financial Statements
elsewhere herein.
 
RETAILING
 
    The Company is pursuing a strategy to expand its channels of distribution in
the retail arena by opening a limited number of full-price, domestic
free-standing retail stores, further building on its outlet store strategy, and
continuing to open licensed free-standing stores internationally.
 
    In fiscal 1997, the Company's net revenues from its retail operations were
$70 million, which represented the Company's outlet store operations. With
respect to the International Retail Stores, sales by the Company of its products
are included in the Company's wholesale net revenues and sales by the Company's
licensees of their licensed products are included in the Company's licensing
income as royalties.
 
    COMPANY-OWNED FULL PRICE STORES
 
    The Company plans to open a limited number of full-priced, domestic
free-standing retail stores in upscale regional malls and major street locations
generally in the largest urban markets in the United States. By the end of
fiscal 1998, the Company expects to have three stores open, including the first
DKNY store, which opened in Las Vegas on March 22, 1998. Also, the Company
signed a lease for a flagship DKNY store on Madison Avenue in New York City,
which is expected to open in Spring 1999.
 
    OUTLET STORES
 
    As of December 28, 1997, the Company operated 48 outlet stores in 22 states
and one store in Bicester, England. The Company established its outlet stores
primarily to dispose of excess inventory in a manner which it believes does not
adversely affect its department and specialty store customers. The outlet stores
also carry a limited amount of the Company's licensed products. In fiscal 1998,
the Company plans to implement a made-for-outlet program through which certain
core products will be produced specifically for the outlet stores. This program
is designed to enable the Company to better balance the merchandise flow in the
outlet stores in an effort to maintain consistent sales results. The Company
currently anticipates that it will have approximately 63 outlet stores in
operation by the end of 1998.
 
                                       11
<PAGE>
    FREE-STANDING INTERNATIONAL RETAIL STORES
 
    The Company has entered into license arrangements and strategic alliances
for the opening by third parties of full price, free-standing retail stores in a
number of international markets under the DONNA KARAN NEW YORK, DKNY, and DONNA
KARAN 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 certain product and/or boutique exclusivity
within a defined geographical area. As of December 28, 1997, there were 57
free-standing International Retail Stores owned by third parties unaffiliated
with the Company (including 21 stores owned by HPL and affiliates of HPL)
operating under the following names and located in the following countries:
 
<TABLE>
<CAPTION>
DONNA KARAN NEW YORK*                                 DKNY*                                   DONNA KARAN*
---------------------------  --------------------------------------------------------  ---------------------------
<S>                          <C>                          <C>                          <C>
Australia(1)                 Australia(2)                 Malaysia(2)                  Saudi Arabia(3)**
England(1)                   Belgium(1)                   The Netherlands(2)
Germany(1)                   Brazil(1)                    Norway(1)
Hong Kong(1)                 Croatia(1)                   The Philippines(1)
Indonesia(1)                 Czech Rep.(1)                Singapore(1)
Israel(1)                    England(2)                   Spain(1)
Korea(1)                     Germany(2)                   Sweden(1)
Lebanon(1)                   Greece(3)                    Switzerland(4)
Malaysia(1)                  Hong Kong(2)                 Taiwan (2)
Singapore(1)                 Indonesia(1)                 Thailand (2)
Switzerland(2)               Italy(1)                     Turkey(2)
Taiwan(1)                    Korea(1)                     United Arab Emirates(1)
United Arab                  Kuwait(1)
Emirates(1)                  Lebanon(1)
</TABLE>
 
------------------------
 
*   The numbers in parentheses indicate the number of stores opened in the
    particular country. Each DONNA KARAN NEW YORK free-standing International
    Retail Store carries DONNA KARAN NEW YORK brand name products exclusively
    and each DKNY free-standing International Retail Store carries DKNY 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 70 free-standing International Retail Stores
will be in operation by the end of 1998. Stores anticipated to be opened in 1998
will be located in Argentina, Brazil, Brunei, Chile, Israel, Portugal, Russia,
South Africa, Spain, Turkey, and Uruguay.
 
    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. As of the end of 1997, seven free-standing International Retail Stores
under the Retail Agreement were opened in the Territories. 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
 
                                       12
<PAGE>
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 in the Territories (other than Japan) except
through the free-standing International Retail Stores and shop-in-shops managed
by HPL in the Territories. In connection with the March 26, 1998 sale of Donna
Karan Japan to OKC, HPL and its affiliates transferred all of their retail
development rights for the Japan market to Donna Karan Japan, which is now
wholly-owned by a subsidiary of OKC, resulting in a four-store reduction of
HPL's aggregate retail development obligations.
 
DESIGN
 
    The Company was founded upon the marketing and design talents of Ms. Donna
Karan. The Company believes that its future success will depend in substantial
part on its ability to continue to originate and define fashion trends, as well
as to anticipate and react to changing consumer demands in a timely manner. Ms.
Karan, who has been designing high fashion apparel for over 25 years, ultimately
is responsible for the Company's creative inspiration, strategic planning,
marketing, and overall fashion direction. In addition to Ms. Karan, as of
December 28, 1997, the Company employed a design staff of approximately 100
people, some of whom have assumed substantial design responsibilities under Ms.
Karan's supervision. The Company has nine design teams, each with a head
designer, responsible for the creation, development, and coordination of the
fabrications and silhouettes of the Company's collections.
 
    In recognition of the importance of maintaining a staff of highly qualified
designers, Ms. Karan and other head designers 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 135,000 items from the Company's past collections, antique garments, and
antique accessories, 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.
 
ADVERTISING, PUBLIC RELATIONS, AND MARKETING
 
    All worldwide advertising, public relations, and marketing programs are
managed on a centralized basis through the Company's Creative Services and
Public Relations Departments to promote a consistent global image for the
Company and its products. In addition to amounts spent by the Company's product
licensees, the Company spent approximately $53.0 million in 1997 on advertising,
public relations, and marketing of DONNA KARAN NEW YORK and DKNY products.
 
    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 brand focuses on the international sophistication and urban
lifestyle of affluent customers with an appreciation for luxury products, and
the DKNY 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, catalogues, newsletters, and consumer awareness programs. For
example, the Company markets its DONNA KARAN NEW YORK brand name and image
through its WOMAN TO WOMAN bi-annual newsletter, which is a dialogue between the
Company, the designer, and consumers. The WOMAN TO WOMAN 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
 
                                       13
<PAGE>
consumers of new products in all areas of the Company; and discusses new fashion
trends, among other topics.
 
    The Company's Creative Services Department is responsible for the worldwide
consistency 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 advertising and is available to
assist each division of the Company and the Company's licensees with a variety
of projects, including the design and production of fashion shows, corporate
presentations, and related matters.
 
    PUBLIC RELATIONS AND MARKETING
 
    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.
 
    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 further strengthens consumer awareness with sponsorships and
special events. In fiscal 1997, the Company served as an official sponsor to the
United States Figure Skating Association (USFSA). In connection with its USFSA
sponsorship, DKNY served as an official outfitter for the 1997 U.S. World Figure
Skating Team and the U.S. Figure Skating Team. In February 1998, the Company
outfitted all of the indoor, on-air commentators for CBS's Olympic coverage in
Nagano, Japan. Additionally, Olympic Gold Medalist, Tara Lipinski, has agreed to
serve as the spokesperson for the DKNY KIDS product line during fiscal 1998.
 
SOURCING PRODUCT DEVELOPMENT AND QUALITY CONTROL
 
    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, 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 1997, approximately 51.0% 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 22.0% were produced in the United States; and
approximately 25.3% were produced in Europe. The production and sourcing staff
in New York oversees all aspects of fabric
 
                                       14
<PAGE>
acquisition, apparel manufacturing, quality control, and production, as well as
researching and developing new sources of supply. The Company operates product
sourcing and quality control offices in Hong Kong. Finished goods production,
quality control, and delivery for products sourced through South Korea are
monitored through an exclusive agent in Seoul, South Korea. Additionally, fabric
and finished goods production, quality control, and delivery for materials and
products sourced through Italy are monitored through exclusive agents 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 1997. 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 1997,
approximately 36.0% 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 was 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. 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.
 
    The Company monitors the quality of its fabrics prior to the production of
garments and inspects prototypes of products before production runs are
commenced. The Company also performs random in-line quality control checks
during and after production before the garments leave the contractor. Final
random inspections occur when the garments are received in the Company's
distribution centers.
 
    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 six sites. Two of the distribution centers are operated
by the Company and four are operated by independent contractors. Distribution of
the Company's apparel and accessory products in the United States primarily is
conducted in Carlstadt, New Jersey facilities operated by the Company. The
Company also operates a distribution center in Hong Kong, which services the
Pacific rim, other than Japan. The Company utilizes a warehouse operator in The
Netherlands that services the European market and a warehouse operator in
Montreal that services the Canadian market. Although the Company believes that
its current Carlstadt facility is adequate to meet its short-term needs, the
Company is continuing 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 and type of product. 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
 
                                       15
<PAGE>
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 marking 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 seek 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 its own credit and collection functions. The Company
does not factor its accounts receivable and maintains credit insurance to manage
the risk of bad debts. The Company's loss due to bad debts was immaterial during
fiscal 1997.
 
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, 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. The Company competes primarily on the basis
of fashion, quality, and service. The Company's business depends on its ability
to shape and stimulate consumer tastes and demands by producing innovative,
attractive, and exciting fashion products, as well as on its ability to remain
competitive in the areas of quality and price.
 
BACKLOG
 
    The Company generally receives wholesale orders for 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 24, 1998, backlog was $276.7 million, as compared to $300.7
million at March 24, 1997. 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 and DKNY brands, during which a significant percentage of the Company's
orders is received, and the timing of shipments. As a consequence, a comparison
of backlog from period to period is not necessarily meaningful and may not be
indicative of eventual shipments. 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 and DKNY. Under these brands the Company also uses the
following trademarks: DK, DONNA KARAN, DK MEN, DKNY ACTIVE, a logo consisting of
the block letters DKNY and the words Donna Karan New York
 
                                       16
<PAGE>
(with dots below each word), DKNY JEANS AND DESIGN GRAPHICS, and DKNY COVERINGS
AND DESIGN GRAPHICS. 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 certain products and specified services for which Gabrielle
Studio retained the right to use or license such trademarks. Gabrielle Studio
has licensed such specified products and services to Ms. Karan. The Gabrielle
License provides, however, that at such time as Ms. Karan is no longer the
Chairman of the Board of Directors and Chief Designer of the Company, the
licensed marks may only be used by the Company in the market segments in which
such licensed marks previously were used.
 
    The Gabrielle License may be terminated by Gabrielle Studio upon the failure
of the Company to pay any amount due within 60 days of receipt of notice of such
failure, or if the Company violates the quality control provisions of the
Gabrielle License and fails to initiate and thereafter pursue appropriate
corrective action within 60 days after a final unappealable determination by an
arbitration tribunal or court of competent jurisdiction that such violation has
occurred. The Gabrielle License also may be terminated by Gabrielle Studio upon
the occurrence of, among other events, a "change of control" of the Company,
including certain changes in ownership of voting securities, an acquisition by a
third party of 30% of the voting securities of the Company, mergers, sales of
assets, and certain changes in the composition of the Board of Directors.
 
    Gabrielle Studio and its shareholders have agreed that Gabrielle Studio will
not engage in any activities other than those related to the Gabrielle License
and 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 1998 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. The Company also has an enforcement
program to control the sale of counterfeit products in the United States and in
major markets abroad.
 
EMPLOYEES
 
    As of December 28, 1997, the Company had approximately 1,540 employees,
including 1,300 in the United States and 240 in foreign countries. Of the total,
approximately 310 employees held executive and administrative positions, 100
were engaged in design, 180 were engaged in production, 500 were engaged in
sales (including the equivalent of 370 full-time sales personnel at the various
retail outlet stores), 320 were engaged in distribution, 80 were engaged in
merchandising activities, and 50 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.
 
                                       17
<PAGE>
GOVERNMENT REGULATIONS
 
    The Company and its products are subject to regulation by the Federal Trade
Commission in the United States. Such regulations relate principally to the
labeling of the Company's products. The Company believes that it is in
substantial compliance with such regulations, as well as applicable federal,
state, local, and foreign rules and regulations governing the discharge of
materials hazardous to the environment. There are no significant capital
expenditures for environmental control matters either estimated in the current
year or expected in the near future. The Company's licensed products and
licensees also are subject to additional legislation. The Company's license
agreements require that its licensees operate in compliance with all applicable
laws and regulations.
 
BUSINESS CONSIDERATIONS
 
    Certain statements contained herein are forward looking statements that have
been made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The words or phrases, "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project,"
"believe," "plan," or similar expressions identify "forward looking statements."
There are numerous risks and uncertainties which may cause the Company's actual
results in 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 of 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 timing and expense associated with,
and effects of, cost-cutting measures and the strategic initiatives being
implemented by the Company; (v) 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 the launch of 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; (vi) retailer and consumer acceptance of new products and
collections and the actual costs incurred in connection therewith; (vii) changes
in retailer and consumer acceptance of the Company's existing products; (viii)
the Company's ability to enter into licenses, joint ventures, or otherwise
dispose of any product lines on favorable terms; (ix) infringements of the
Company's trademarks and other proprietary rights and imitations or diversions
of the Company's products; (x) acceptance of the Company's products, and the
Company's 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 or economic 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 thereby
causing the Company to miss the delivery date requirements of its customers,
which in turn could result in the cancellation of orders, refusal to accept
deliveries, or a reduction in the selling price; (xv) the inability of the
Company's licensees to obtain capital, manage their labor relations, or maintain
operational or financial control over their businesses; (xvi) the violation of
labor or other laws by any independent manufacturer or any licensee; and (xvii)
general competitive risks, as well as certain other risks described herein.
 
                                       18
<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;         80,000
New York, New York                                 Designer Collections design facilities, sales
                                                   offices, showrooms, and division offices
218, 240 and 250 West 40th Street..............  DKNY-Registered Trademark- executive and               155,000
New York, New York                               administrative offices, including its design
                                                   facilities, sales offices, production
                                                   offices, showrooms, and division offices
Carlstadt, New Jersey..........................  Distribution and warehouse facility; management        386,000
                                                   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
</TABLE>
 
    The leases for the above facilities expire between 1999 and 2009. The
Company anticipates that it will be able to extend those leases which expire in
the near future on terms satisfactory to the Company or, if necessary, locate
substitute facilities on acceptable terms. Although the Company believes that
its current Carlstadt facility is adequate to meet its short-term needs, the
Company is continuing to explore its alternatives with respect to the
consolidation of its New Jersey warehouse.
 
    As of December 28, 1997, the Company operated 49 retail outlet stores in
leased premises. Additionally, the Company had entered into a lease for a
free-standing store in Las Vegas, Nevada. The outlet stores range in size from
approximately 2,100 square feet to 7,600 square feet and the Las Vegas store is
approximately 7,800 square feet. The leases for these stores expire between 1999
and 2007. The Company expects to renew, for the applicable option renewal
period, those leases which expire in 1999. Subsequent to year-end, the Company
entered into a 15-year lease for a 16,700-square foot DKNY flagship store on
Madison Avenue in New York City, which is scheduled to open in Spring 1999.
 
    The Company believes that its existing facilities are well maintained and in
good operating condition and are adequate for their intended use and the
Company's present level of operations.
 
ITEM 3. LEGAL PROCEEDINGS
 
    In 1997, the Company and certain directors and officers of the Company (the
"DK Defendants") were named as defendants in four separate class actions filed
in the United States District Court for the Eastern District of New York. Each
of the actions seeks unspecified damages and purports to be a class action on
behalf of all purchasers of common stock during certain specified periods
between June 1996 and May 1997. In September 1997, these actions were
consolidated by court order. The complaints allege that the DK Defendants
violated certain provisions of the Securities Exchange Act of 1934, as amended,
and the Securities Act of 1933, as amended, and the rules thereunder as well as
New York common law by (i) making public statements and filing with the
Securities and Exchange Commission documents allegedly containing materially
false and misleading statements relating to the Company's license agreement with
Designer Holdings, Inc., which agreement was terminated on or about March 5,
1997 and (ii) including in the Company's prospectus for its initial public
offering allegedly untrue statements and omissions of
 
                                       19
<PAGE>
material facts with respect to the business, management, and financial condition
of the Company. In addition to the DK Defendants, certain underwriters (the
"Underwriters") of the Company's initial public offering were named as
defendants in the actions relating to such public offering. In January 1998, the
DK Defendants filed a motion to dismiss the complaint in its entirety, with
prejudice. The Underwriters have also filed a motion to dismiss. It is expected
that the court hearing on the motions will occur in the Spring of 1998. Based on
the information available to date, management does not believe that the outcome
of this action will have a material adverse effect on the results of operations
and financial condition of the Company.
 
    Additionally, 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.
 
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
ages and positions with the Company are as follows:
 
<TABLE>
<CAPTION>
NAME                                                       AGE                            POSITION
-----------------------------------------------------      ---      -----------------------------------------------------
<S>                                                    <C>          <C>
Donna Karan..........................................          49   Chairman of the Board and Chief Designer
Stephan Weiss........................................          59   Vice Chairman and Director
John D. Idol.........................................          39   Chief Executive Officer and Director
M. William Benedetto.................................          56   Director
Andrea Jung..........................................          39   Director
Ann McLaughlin.......................................          56   Director
Lee Goldenberg.......................................          47   Executive Vice President-Worldwide Operations
Joseph B. Parsons....................................          44   Executive Vice President-Chief Financial Officer and
                                                                    Treasurer
David L. Bressman....................................          46   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 of the Company
from the date of its formation and Chief Executive Officer from the date of the
Company's formation until August 1997. Ms. Karan has served on the Board of
Directors of the Company since April 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.
 
    STEPHAN WEISS has served on the Board of Directors of the Company since
April 15, 1996, and as Vice Chairman since July 1996. From 1985 to 1992, Mr.
Weiss served as the Operating Principal of the Company and from 1993 through
1995 as the Co-Chief Executive Officer. During this time, Mr. Weiss has served
the Company in various capacities, including having direct supervisory
responsibility for the legal department, licensing, new business ventures, and
developing the Creative Services Department.
 
                                       20
<PAGE>
    JOHN D. IDOL joined the Company in July 1997 and has served as Chief
Executive Officer and a director of the Company since August 11, 1997. Prior to
joining the Company, Mr. Idol was employed by Polo Ralph Lauren Corporation, a
publicly-traded apparel company, from 1984 through July 1997, most recently as
group President, Product Licensing and the Home Collection.
 
    M. WILLIAM BENEDETTO, a founder and principal of Benedetto, Gartland & Co.,
Inc., a New York-based private placement and investment banking firm, has served
as a director of the Company since July 1996. Before founding this 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, and, in January 1998, was named President of Avon Products
Inc. and elected to its Board of Directors. From 1991 to 1993, Ms. Jung was
Executive Vice President at Neiman Marcus Group. 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, an international
non-profit, educational organization founded in 1950, 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., Fannie Mae, General Motors Corporation, Host Marriott
Corporation, Kellogg Company, Nordstrom, Sedgwick Group plc., Union Camp
Corporation, Vulcan Materials Company, Harman International Industries, Inc.,
and Potomac Electric Power Company.
 
    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.
 
    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.
 
    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 April 1994, Mr. Bressman was a member of
the New York law firm Phillips, Nizer, Benjamin, Krim & Ballon.
 
    Donna Karan and Stephan Weiss are married to each other. There are no other
family relationships among the directors and executive officers.
 
                                       21
<PAGE>
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
  SHAREHOLDER MATTERS
 
    The Company's Common Stock has traded 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 1997
and 1996.
 
<TABLE>
<CAPTION>
                                                           FISCAL 1996 (1)         FISCAL 1997
                                                         --------------------  --------------------
<S>                                                      <C>        <C>        <C>        <C>
QUARTER                                                    HIGH        LOW       HIGH        LOW
-------------------------------------------------------  ---------  ---------  ---------  ---------
First..................................................     --         --      $   15.25  $    8.88
Second.................................................     --         --      $   12.88  $    9.13
Third..................................................  $   27.63  $   19.88  $   15.50  $   10.13
Fourth.................................................  $   22.88  $   13.50  $   17.75  $   10.94
</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 20, 1998, the number of holders of record of the Company's
Common Stock was approximately 1,372. As of March 20, 1998, 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.
 
                                       22
<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 1,   DECEMBER 31,  DECEMBER 29,   DECEMBER 28,
                                              1994          1995          1995          1996           1997
                                          ------------  ------------  ------------  -------------  -------------
 
<CAPTION>
                                                            (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                       <C>           <C>           <C>           <C>            <C>
STATEMENT OF INCOME DATA:
Net revenues(1).........................  $    364,705  $    420,164   $  510,126   $     612,840  $     638,725
Gross profit(1).........................       130,475       148,992      179,437         200,776        121,407
Selling, general, and administrative
  expenses(1)(2)........................       102,748       119,995      136,906         187,474        204,088
Restructuring charges(1)................       --            --            --            --                8,635
                                          ------------  ------------  ------------  -------------  -------------
Operating income(loss)..................        27,727        28,997       42,531          13,302        (91,316)
Equity in earnings of affiliate(3)......       --            --             2,519           3,089          1,435
Interest expense, net...................        (4,063)       (8,862)      (7,650)         (8,534)        (2,515)
Other expense(4)........................        (2,980)       (2,651)      --            --             --
Gain on sale of interests in
  affiliate(3)..........................       --            --            18,673        --             --
                                          ------------  ------------  ------------  -------------  -------------
Income(loss) before provision for
  certain state, local, and foreign
  income taxes..........................        20,684        17,484       56,073           7,857        (92,396)
Provision (benefit) for income
  taxes(5)..............................         1,312         1,139        2,398         (17,179)       (11,034)
                                          ------------  ------------  ------------  -------------  -------------
Net income(loss)........................  $     19,372  $     16,345   $   53,675   $      25,036  $     (81,362)
                                          ------------  ------------  ------------  -------------  -------------
                                          ------------  ------------  ------------  -------------  -------------
Earnings(loss) per common shares (6)....                               $     0.91   $        0.02  $       (3.78)
                                                                      ------------  -------------  -------------
                                                                      ------------  -------------  -------------
Weighted average shares outstanding
  (6)...................................                               16,017,032      18,742,533     21,512,050
                                                                      ------------  -------------  -------------
                                                                      ------------  -------------  -------------
BALANCE SHEET DATA:
Working capital.........................  $     11,592  $     52,289   $   92,635   $     146,805  $      79,989
Total assets............................       137,129       157,004      203,975         311,695        287,488
Total long-term debt, including current
  portion...............................         1,044        51,426       53,538             318             36
Stockholders' equity and partners'
  capital...............................        42,329        47,837       80,846         203,791        122,464
</TABLE>
 
------------------------
 
(1) Included in the financial statements for the fiscal year ended December 28,
    1997 are restructuring charges, other charges, primarily nonrecurring, and
    operating losses aggregating $61.5 million as follows: restructuring charges
    of $8.6 million; $21.1 million related to the wind-down of the Company's
    beauty business (net of a $2.2 million gain in connection with the
    consummation of this transaction) of which $11.7 million is recorded as cost
    of sales, $10.9 million is recorded as sales returns and $0.7 million is
    recorded as selling, general, and administrative expenses; $2.3 million of
    operating losses of the beauty business subsequent to the consummation of
    this transaction; $12.5 million related to the wind-down of the Company's
    DKNY jeans business as a result of the license of the business classified as
    $9.4 million of cost of sales and $3.1 million of selling, general and
    administrative expenses; and, $17.0 million of other charges related to the
    realignment of a retail and
 
                                         (FOOTNOTES CONTINUED ON FOLLOWING PAGE)
 
                                       23
<PAGE>
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)
 
    distribution arrangement, additional severance costs, and other costs
    related to strategic initiatives and cost containment, which have been
    classified as $15.4 million of selling, general and administrative expenses
    and $1.6 million of cost of sales.
 
(2) Included in selling, general and administrative expenses for the fiscal year
    ended December 29, 1996 are one-time charges for bonuses relating to the
    Offering of $5.3 million, the award of 105,100 shares of common stock to
    certain employees pursuant to the Company's 1996 Stock Incentive Plan which
    amounted to $2.5 million, and $3.2 million related to the purchase of all
    sales and marketing plans, patterns, samples, fabrics and other materials
    developed by Designer Holdings, Ltd. in connection with the termination of
    the DH License (as hereafter defined).
 
(3) 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, $3.1 million and
    $1.4 million for the years ended December 31, 1995, December 29, 1996, and
    December 28, 1997, 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 7 to Notes to Financial
    Statements elsewhere herein.
 
(4) 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.
 
(5) The benefit for income taxes for the fiscal year ended December 28, 1997 is
    net of a $24.0 million valuation allowance which was recorded due to the
    inherent uncertainties in estimating future taxable income. The provision
    for income taxes for the fiscal year ended December 29, 1996 includes a
    $19.0 million tax benefit which was recorded by the Company concurrent with
    becoming subject to Federal and additional state income taxes. See Note 15
    to Notes to Financial Statements elsewhere herein.
 
(6) Options outstanding during 1997 were not included in the calculation of
    earnings per share because the effect would be antidilutive. Earnings per
    share data for 1995 and 1996 are presented on a pro forma basis. 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 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. Basic and diluted pro forma earnings per share
    are the same since there were no options outstanding in 1995 and there was
    no dilutive effect of options in 1996.
 
                                         (FOOTNOTES CONTINUED ON FOLLOWING PAGE)
 
                                       24
<PAGE>
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)
 
    Pro forma net income is as follows:
 
<TABLE>
<CAPTION>
                                                                      YEAR ENDED
                                                         ------------------------------------
<S>                                                      <C>                <C>
                                                           DECEMBER 31,       DECEMBER 29,
                                                               1995               1996
                                                         -----------------  -----------------
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
                                                               -------             ------
                                                               -------             ------
</TABLE>
 
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 fiscal years ended December 31, 1995, December 29,
1996, and December 28, 1997 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.
 
    1997 OVERVIEW
 
    The operating loss in 1997 was $91.3 million. The results in 1997 were
negatively impacted by significant transactions and strategic decisions. The
financial statements include restructuring charges of $8.6 million, charges of
$23.4 million related to the wind-down of the Company's beauty business, $12.5
million related to the wind-down of the DKNY jeans and active business and $17.0
million of other charges, primarily nonrecurring, related to strategic
initiatives. Without the aforementioned charges, the operating loss would have
been $29.8 million. The Company's financial performance in 1997 was negatively
impacted by lower gross margins and a strategy to liquidate prior seasons
merchandise for the Company's outlet stores, among other items, as discussed in
greater detail below.
 
    RESTRUCTURINGS AND STRATEGIC PLAN
 
    On December 16, 1997, the Company announced a restructuring and strategic
plan to reduce expenses and streamline operations. The major strategic
initiatives are aimed at strengthening financial performance by reducing costs,
increasing efficiencies, increasing licensing royalties, and focusing on key
business areas. See "Business--Overview" for a discussion of the Company's
restructuring and strategic plan. The Company currently analyzes its business
based on wholesale, licensing and retail business units.
 
    As a result of the aforementioned restructuring and strategic plan and the
May 28, 1997 plan aimed at containing costs and restructuring certain of its
operations, the Company recognized restructuring charges of $8.6 million, which
include $7.1 million related to severance, $0.8 million related to abandoning
leased space, and $0.7 million to close the Company's Prato, Italy office, and
other charges, primarily nonrecurring, amounting to $17.0 million, including
$5.9 million for the realignment of a retail and distribution arrangement in
Europe, $3.6 million relating to additional severance costs and other costs
recorded during the cost containment review process, which have been classified
as $15.4 million of selling, general and administrative expenses and
approximately $1.6 million of cost of sales.
 
    During 1997, the Company completed strategic alliances with ELI for beauty
and beauty-related products and LCI for DKNY jeans and activewear products.
Consistent with the Company's strategic plan to grow its licensing
relationships, the Company continues to investigate licensing opportunities and
has entered into additional strategic alliances in 1998. See
"Business--Licensing."
 
                                       25
<PAGE>
    SIGNIFICANT TRANSACTIONS
 
    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, 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% for 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.
 
    On September 27, 1996, the Company entered into a license (the "DH 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 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 JEANS label. Under the license agreement,
the Company was also entitled to receive additional payments and annual
royalties and administrative fees on sales. On March 4, 1997, the DH 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 $6.0 million payment, and a $1.3 million advance royalty payment.
Additionally, in order to assure a smooth transition of the DKNY 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.
 
    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.
On November 10, 1997, the Company and ELI consummated the transaction previously
announced on September 30, 1997, whereby the Company granted to ELI exclusive
worldwide rights to the DONNA KARAN NEW YORK and DKNY trademarks for the
manufacture, marketing, distribution and sale of beauty and beauty-related
products, including fragrances, cosmetics, skincare products, and beauty-related
accessories. In connection therewith and with the sale to ELI of certain assets
relating to the existing business, the Company received $25.0 million and will
receive additional royalties from ELI based on sales of such beauty and
beauty-related products. Under certain circumstances, the Company is obligated
to repay to ELI a portion of these payments plus a penalty amount if certain
products are not launched in accordance with an agreed-upon schedule. The
Company recorded a loss of $21.1 million related to the wind-down of the
Company's beauty business (net of a $2.2 million gain in connection with the
consummation of this transaction).
 
    On January 8, 1998, the Company and LCI consummated the transaction
previously announced on December 15, 1997, whereby the Company granted to LCI
the exclusive, long-term rights to the DKNY
 
                                       26
<PAGE>
JEANS and DKNY ACTIVE trademarks for apparel products and to source, market,
distribute and sell both collections in the Western Hemisphere. In connection
therewith and with the sale to LCI of certain usable inventory and other assets
relating to the existing business, the Company received $30.0 million and will
receive additional royalties from LCI based on sales of such jeans and
activewear products. In connection with the transaction with LCI, the Company
recorded a loss of $12.5 million, which represents the write-down of inventory
to net realizable value, as well as other costs necessary to exit its existing
jeans business.
 
    The Company sells its products in Japan through Donna Karan Japan, a
Japanese corporation. In March 1995, the Company sold 52.5% of its 100% interest
in the operations of Donna Karan Japan to 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, Donna
Karan Japan became the exclusive distributor of the Company's products in Japan,
subject to certain limited exceptions.
 
    On March 26, 1998, the Company and HPL sold all of their outstanding shares
in Donna Karan Japan to OKC. At the same time, Donna Karan Japan was granted a
16-year exclusive license to import, manufacture, license and/or distribute
DONNA KARAN NEW YORK and DKNY products in Japan, with certain exceptions. In
addition, Donna Karan Japan was granted the exclusive right to develop and
operate a total of 12 DONNA KARAN NEW YORK and DKNY retail boutiques in Japan
over the term of the agreement. Upon consummation of this transaction, the
Company received $15.9 million. The Company will receive a royalty on net sales
of licensed products and a servicing fee on net sales of Donna Karan products
imported by Donna Karan Japan. See Note 7 to Notes to Financial Statements
elsewhere herein.
 
    OUTLOOK--SALES TO ASIA
 
    In 1997, revenue from sales to Asia represented approximately 18.2% of the
Company's wholesale net revenues including approximately 11.9% to Japan and
approximately 6.3% to other areas in Asia. The Company has experienced a
declining sales trend in Japan in 1997 over the prior year which the Company
believes was due, in part, to currency fluctuations and the general economic
conditions in the region. Additionally, in the fourth quarter of 1997, the
Company experienced requests for cancellations of orders and various other
concessions from its primary customers in Asia (excluding Japan). The Company
accepted certain cancellations relating to its Spring shipments that would have
been shipped in the first quarter of 1998 and granted certain concessions. The
Company believes that this situation is due primarily to currency fluctuations
and the economic conditions in the region. The Company is also experiencing a
decrease in orders for its Summer and Fall 1998 seasons which are shipped in the
second and third quarter, respectively, of 1998 and expects that this trend will
continue in the fourth quarter of 1998.
 
    REVENUES
 
    The following table sets forth net revenues generated by the Company's
wholesale, licensing, retail, and beauty products.
 
<TABLE>
<CAPTION>
                                                                                         1995       1996       1997
                                                                                       ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
Wholesale............................................................................  $   425.6  $   500.7  $   539.9
Retail...............................................................................       48.9       60.9       70.5
Licensing............................................................................        5.7        7.5        9.6
Beauty Products(1)...................................................................       29.9       43.7       18.7
                                                                                       ---------  ---------  ---------
                                                                                       $   510.1  $   612.8  $   638.7
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
------------------------
 
(1) The Company is winding down its beauty products business as a result of the
    transaction with ELI whereby the Company granted to ELI exclusive worldwide
    rights for the sale of beauty and beauty-related products.
 
    The Company's wholesale business consists of its core business of selling
DONNA KARAN NEW YORK and DKNY apparel and accessories products to department
stores, specialty stores, boutiques, and to the Company's free-standing
International Retail Stores.
 
                                       27
<PAGE>
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 Offering and 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
                                                                             --------------------------------------------
<S>                                                                          <C>          <C>               <C>
                                                                                             PRO FORMA
                                                                             HISTORICAL     ADJUSTMENTS       PRO FORMA
                                                                             ----------   ---------------   -------------
 
<CAPTION>
                                                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                          <C>          <C>               <C>
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) 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>
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 29, 1996
                                                                                  ---------------------------------------
<S>                                                                               <C>          <C>              <C>
                                                                                                 PRO FORMA
                                                                                  HISTORICAL    ADJUSTMENTS     PRO FORMA
                                                                                  ----------   --------------   ---------
 
<CAPTION>
                                                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                               <C>          <C>              <C>
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.
 
                                         (FOOTNOTES CONTINUED ON FOLLOWING PAGE)
 
                                       28
<PAGE>
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)
 
(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.
 
(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 7 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.
 
                                       29
<PAGE>
RESULTS OF OPERATIONS
 
COMPARISON OF 1997 TO 1996
 
<TABLE>
<CAPTION>
                                                             HISTORICAL                       PRO FORMA          WITHOUT CHARGES
                                             ------------------------------------------  --------------------  --------------------
                                                     1996                  1997                  1996                1997(1)
                                             --------------------  --------------------  --------------------  --------------------
<S>                                          <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Net revenues...............................  $   612.8      100.0% $   638.7      100.0% $   612.8      100.0% $   642.8      100.0%
Gross profit...............................      200.8       32.8      121.4       19.0      198.2       32.3      151.6       23.6
Selling, general, and administrative
  expenses.................................      187.5       30.6      204.1       32.0      178.1       29.1      181.4       28.2
Operating income(loss).....................       13.3        2.2      (91.3)     (14.3)      20.1        3.3      (29.8)      (4.6)
Equity in earnings of affiliate............        3.1         .5        1.4         .2        3.1         .5        1.4         .2
Net income(loss)...........................       25.0        4.1      (81.4)     (12.7)      12.6        2.1        N/A        N/A
</TABLE>
 
------------------------
 
(1) Excludes restructuring charges, other charges, primarily nonrecurring, and
    operating losses aggregating $61.5 million incurred in 1997 as follows:
    restructuring charges of $8.6 million; $21.1 million related to the
    wind-down of the Company's beauty business (net of a $2.2 million gain in
    connection the consummation of this transaction), of which $11.7 million was
    recorded as cost of sales, $10.9 million was recorded as sales returns and
    $0.7 million was recorded as selling, general and administrative expenses;
    $2.3 million of operating losses of the beauty business subsequent to the
    consummation of this transaction; $12.5 million related to the wind-down of
    the DKNY jeans business as a result of the license of the business
    classified as $9.4 million of cost of sales and $3.1 million of selling,
    general and administrative expenses; and $17.0 million of other charges
    related to the realignment of a retail and distribution arrangement,
    additional severance costs, and other costs related to strategic initiatives
    and cost containment, which have been classified as, $15.4 million of
    selling, general and administrative expenses and $1.6 million of cost of
    sales.
 
    NET REVENUES were $638.7 million in 1997, an increase of 4.2% from the net
revenues of $612.8 million recorded in 1996. The increase was due to a 28.0%
increase in licensing revenues from $7.5 million in 1996 to $9.6 million in
1997, a 15.8% increase in retail revenues from $60.9 million in 1996 to $70.5
million in 1997 and a 7.8% increase in wholesale revenues from $500.7 million in
1996 to $539.9 million in 1997, somewhat offset by a 57.2% decrease in beauty
products revenues from $43.7 million in 1996 to $18.7 million in 1997.
 
    The increase in licensing revenues was due primarily to the DKNY Kids
license in Europe and the Middle East, which had its first full year in 1997, as
well as growth in sales of other licensed products. The increase in the retail
revenues was due to an increase in the number of outlet stores from 37 at the
end of 1996 to 49 at the end of 1997, somewhat offset by a decrease in
comparable store sales of 5.4%. The increase in the wholesale revenues was due
to: a 20.8 % increase in the revenues of the accessories business primarily due
to an increase in the shoe business; a 5.7% increase in the revenues of the
menswear business primarily due to in increase in the DKNY business; and, a 2.0%
increase in the revenues of the womenswear business due to an increase in the
DONNA KARAN NEW YORK Collection business somewhat offset by a decrease in the
DKNY business. The decrease in the revenues of the beauty products business is
primarily due to the wind-down of the business in anticipation of the previously
announced licensing transaction.
 
    GROSS PROFIT as a percentage of net revenues was 19.0% and 32.8% (32.3% on a
pro forma basis) in 1997 and 1996, respectively. The 1997 gross profit was
impacted by the wind down of the Company's beauty and DKNY jeans businesses and
other charges, primarily nonrecurring, related to strategic initiatives. In
conjunction with these transactions, the Company recorded charges, primarily
nonrecurring,
 
                                       30
<PAGE>
included in cost of sales of $11.7 million related to the beauty business, $9.4
million related to the DKNY jeans business and $1.6 million related to strategic
initiatives. Without these charges, gross profit would have been $151.6 million,
or 23.6% of net sales. The decrease in the gross margin (excluding the charges)
was primarily attributed to a 9 point decrease in the gross profit margin of the
wholesale group (excluding beauty) from 1996 to 1997 due to: an increase in
dilution; planned reductions in initial margins; a greater mix of lower margin
off price goods; and an increase in certain manufacturing costs. The gross
profit was also impacted by a 14 point decrease in the retail business' margin
from 1996 to 1997 primarily due to a strategy to liquidate prior seasons'
merchandise in anticipation of changing the merchandising strategy for the
Company's outlet stores.
 
    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased to 32.0% of net
revenues in 1997 from 30.6% (29.1% on a pro forma basis) in 1996. The 1997
selling, general, and administrative expenses increased as a percent of sales
due to charges, primarily nonrecurring, totaling $22.7 million which included:
charges related to strategic initiatives of $15.4 million; $4.2 million relating
to the wind-down of the Company's beauty business, net of a gain of
approximately $2.2 million representing the portion of proceeds recognized as
income reduced by the cost of exiting the beauty business; and, $3.1 million
relating to the wind-down of the Company's DKNY jeans business. The 1996
selling, general, and administrative expenses included a nonrecurring 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 DH License.
Without the nonrecurring expenses, selling, general, and administrative expenses
would have been 28.2% in 1997 and 30.1% (28.5% on a pro forma basis) in 1996.
 
    RESTRUCTURING CHARGES were $8.6 million in 1997 primarily relating to
severance costs and related benefits.
 
    OPERATING INCOME (LOSS) decreased to a loss of $91.3 million in 1997 from
income of $13.3 million ($20.1 million on a pro forma basis) in 1996. Without
the restructuring and other charges, primarily nonrecurring, the operating loss
would have been $29.8 million in 1997, a $49.9 million decrease from the 1996
pro forma operating income primarily due to the decrease in the gross margin in
1997 compared to 1996.
 
    EQUITY IN EARNINGS OF AFFILIATE was $1.4 million in 1997 compared to $3.1
million in 1996, a decrease of $1.7 million, due to a decrease in the earnings
of the operations of Donna Karan Japan.
 
    INTEREST EXPENSE net of interest income decreased to $2.5 million in 1997
from $6.6 million in 1996. On a pro forma basis, the Company recorded $0.2
million of interest income in 1996. The decrease in interest expense on a
historic basis was primarily due to the Company having the benefit for the full
year of the proceeds of the Offering. The increase in interest expense in 1997
compared to 1996 on a pro forma basis was primarily due to higher borrowing
requirements to fund working capital, operating losses, other losses, and
nonrecurring charges, as well as for other general corporate purposes.
 
    PROVISION (BENEFIT) FOR INCOME TAXES was a benefit of $11.0 million in 1997
compared to a benefit of $17.2 million in 1996. On a pro forma basis, the
provision for income taxes was $10.7 million in 1996. In years prior to 1997,
the Company had significant taxable income. However, until July 2, 1996, the
date of the Offering, the various entities were partnerships or corporations
that had elected to be taxed as S corporations pursuant to the Internal Revenue
Code, and the taxes were paid by the partners and the shareholders of the S
corporations. Accordingly, tax loss carrybacks are limited to the period
subsequent to July 2, 1996. Therefore, realization of the future tax benefits
related to any deferred tax assets is dependent primarily on the Company's
ability to generate sufficient taxable income within the net operating loss
carryforward period. Due to the inherent uncertainties in estimating future
taxable income, the Company has recorded a valuation allowance of $24.0 million.
 
                                       31
<PAGE>
    NET INCOME (LOSS) was a loss of $81.4 million in 1997 compared to net income
of $25.0 million in 1996 ($12.6 million on a pro forma basis). The loss was due
to the reduced margin in 1997 compared to 1996 as well as the restructuring and
nonrecurring charges incurred in 1997 as described above.
 
COMPARISON OF 1996 TO 1995
<TABLE>
<CAPTION>
                                                                  HISTORICAL                             PRO FORMA
                                                  ------------------------------------------  -------------------------------
<S>                                               <C>        <C>        <C>        <C>        <C>        <C>        <C>
                                                          1995                  1996                  1995            1996
                                                  --------------------  --------------------  --------------------  ---------
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        0.5        3.1        0.5        2.9        0.6        3.1
Net income......................................       53.7       10.5       25.0        4.1       18.4        3.7       12.6
 
<CAPTION>
 
<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.................        0.5
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 to a 46.2% increase in revenues of the beauty products business
from $29.9 million in 1995 to $43.7 million in 1996, a 31.6% increase in
licensing revenues from $5.7 million in 1995 to $7.5 million in 1996, a 24.5%
increase in retail revenues from $48.9 million in 1995 to $60.9 million in 1996
and a 17.6% increase in wholesale revenues from $425.6 million in 1995 to $500.7
million in 1996.
 
    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 in the fourth
quarter of 1996. The increase in licensing revenues was due to growth in sales
of licensed products and the launch of the DKNY Kids licensed product in Europe
and the Middle East. The increase in the retail revenues was due to an increase
in the number of outlet stores and an increase in comparable store sales. The
increase in the wholesale revenues was primarily due to: a 54.5% increase in the
revenues of the menswear business primarily due to an increase in the DKNY
business; a 27.4% increase in the revenues of the accessories business primarily
due to an increase in the shoe and DKNY accessories business; and a 7.7%
increase in the revenues of the womenswear business due to an increase in the
DKNY business somewhat offset by a decrease in the DONNA KARAN NEW YORK
business.
 
    GROSS PROFIT as a percentage of net revenues 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 11 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 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)
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 DH
 
                                       32
<PAGE>
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 wholesale 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, 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 sales force and increased 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).
 
    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 13.2%, 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 a 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.
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 a 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.
 
                                       33
<PAGE>
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.
 
    The Company has supplemented its cash flow from operations and bank lines of
credit with proceeds of the Offering and its license and strategic alliances. On
November 10, 1997, the Company received from ELI $25.0 million relating to the
grant of worldwide rights for the manufacturing, marketing, distribution, and
sale of beauty and beauty-related products and the sale of certain assets
relating to the existing business. Under certain circumstances, the Company is
obligated to repay to ELI a portion of these payments plus a penalty amount if
certain products are not launched in accordance with an agreed-upon schedule. On
January 8, 1998, the Company received from LCI $30.0 million relating to the
grant of rights for the manufacturing, marketing, distribution and sale of DKNY
jeans and activewear products in the Western Hemisphere.
 
    At December 28, 1997, the Company had working capital of $80.0 million
compared to working capital of $146.8 million at December 29, 1996. Changes in
working capital included: a decrease in cash of $36.0 million primarily due to
funding operating and other losses net of the increase in the Company's
revolving credit facility, other payments received (including the aforementioned
payment from ELI) and working capital changes; a decrease in accounts receivable
of $4.8 million, an increase in inventory of $11.7 million, and an increase in
accounts payable, accrued expenses and other current liabilities of $28.3
million, in each case as a result of revenue growth, timing effects and the
impact of recording restructuring charges, nonrecurring charges relating to the
beauty and DKNY jeans businesses and charges for strategic initiatives.
 
    In September 1996, the Company entered into a $150.0 million revolving
credit facility (the "Facility"), which was amended and restated during 1997 and
in January 1998. The Facility expires on January 30, 2001. The Facility includes
a $70.0 million subfacility for letters of credit and a $30.0 million
subfacility for loans in certain foreign currencies. Borrowings under the
Facility bear interest at a fixed spread over the lead bank's prime rate or, at
the option of the Company, at a fixed spread over the LIBOR and are limited to a
borrowing base calculated on eligible accounts receivable, inventory, and
letters of credit except during certain periods when the borrowings may exceed
the borrowing base by certain amounts. The Facility is secured by accounts
receivable and inventory of the Company and a pledge of all the equity interests
of the subsidiaries of the Company. The Facility includes financial and other
restrictive covenants, including a limitation on additional debt which can be
incurred and on the amount of dividends which the Company can pay. The Facility
is used for working capital needs and general corporate purposes. The Company
also recorded a $6.7 million note payable to a principal stockholder as of
December 28, 1997 which was repaid by the Company during the first quarter of
1998.
 
    Capital expenditures, primarily for equipment, machinery, computers, office
furniture, leasehold improvements, and outlet stores, were approximately $9.8
million and $16.3 million for the years ended December 28, 1997 and December 29,
1996, respectively. As of March 24, 1998, the Company had committed to
additional capital expenditures during 1998 of approximately $0.9 million.
 
    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.
 
                                       34
<PAGE>
    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 Facility and, from time to
time, amounts received in connection with strategic transactions, including
licensing arrangements.
 
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 industry.
 
    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.
 
IMPACT OF YEAR 2000
 
    Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
similar normal business activities.
 
    The Company utilizes software vendors for its major computer program
applications. The company has completed an assessment and has contacted its
software vendors, and will have to modify and replace portions of its software
so that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. The total Year 2000 project cost is estimated at
approximately $0.5 million, which includes $0.3 million for the purchase of new
software that will be capitalized and $0.2 million that will be expensed as
incurred. To date, the Company has incurred negligible expenses, primarily for
assessment of the Year 2000 issue and the development of a modification plan.
 
    The project is estimated to be completed not later than December 31, 1998,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and a conversion to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.
 
    The Company has had formal communications with its large customers regarding
standardizing systems for Year 2000 compliance. There is no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted and would not have an adverse effect on the Company's systems.
 
    The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not
 
                                       35
<PAGE>
limited to, the availability and costs of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
 
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
 
    In June, 1997, the Financial Accounting Standard Board (the "FASB") issued
Statement No. 130, REPORTING COMPREHENSIVE INCOME ("Statement 130"). Statement
130 establish standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
Statement 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Statement 130 is effective for fiscal years beginning
after December 15, 1997. The Company does not expect to be significantly
impacted by the adoption of Statement 130.
 
    In June, 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
("Statement 131"). Statement 131 established standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
established standards for related disclosures about products and services,
geographic areas, and major customers. Statement 131 is effective for financial
statements for fiscal years beginning after December 15, 1997 and, therefore,
the Company will adopt the new requirements retroactively in 1998. Management
has not completed its review of Statement 131, but the adoption of this
Statement may increase the number of the Company's reported segments.
 
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
1998 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A (the
"Company's 1998 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 1998 Proxy Statement.
 
                                       36
<PAGE>
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 1998
Proxy Statement.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
 
    Information called for by this Item 13 is incorporated by reference to the
information set forth under the headings "Election of Directors," "Employment
Arrangements," and "Certain Relationships and Related Transactions" in the
Company's 1998 Proxy Statement.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
 
    (a) The following documents are filed as part of this report:
 
        1. Financial Statements--See "Index to Financial Statements"
 
        2. Financial Statement Schedule--Schedule II Valuation and Qualifying
    Accounts and Reserves.
 
        All other schedules for which provision is made in the applicable
    accounting regulations of the Securities and Exchange Commission are not
    required under the related instructions or are inapplicable and therefore
    have been omitted.
 
        3. Exhibits--see "Exhibit Index"
 
    (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K,
        dated November 10, 1997, relating to the Company's sale of its beauty
        business to ELI. Included in such report were pro forma financial
        statements giving effect to such transaction.
 
                                       37
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                         INDEX TO FINANCIAL STATEMENTS
 
     YEARS ENDED DECEMBER 31, 1995, DECEMBER 29, 1996 AND DECEMBER 28, 1997
 
<TABLE>
<CAPTION>
                                                                                                                PAGE
                                                                                                                -----
<S>                                                                                                          <C>
Report of Independent Auditors.............................................................................         F-2
Statements of Operations for the years ended December 31, 1995, December 29, 1996 and December 28, 1997....         F-3
Balance Sheets as of December 29, 1996 and December 28, 1997...............................................         F-4
Statements of Stockholders' Equity and Partners' Capital for the years ended December 31, 1995, December
  29, 1996 and December 28, 1997...........................................................................         F-5
Statements of Cash Flows for the years ended December 31, 1995, December 29, 1996 and December 28, 1997....         F-6
Notes to Financial Statements..............................................................................         F-7
</TABLE>
 
                                      F-1
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors of
Donna Karan International Inc.
 
    We have audited the consolidated balance sheet of Donna Karan International
Inc. (the "Company") as of December 28, 1997 and December 29, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years 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 operations, stockholders' equity and partners'
capital and cash flows for the year then ended. 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 28, 1997 and December 29, 1996, and the
consolidated results of their operations and their cash flows for the years then
ended, and the combined results of operations and cash flows of The Donna Karan
Company and affiliates for the year 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 respects the
information set forth therein.
 
                                          ERNST & YOUNG LLP
 
New York, New York
March 26, 1998
 
                                      F-2
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                       STATEMENTS OF OPERATIONS (NOTE 1)
<TABLE>
<CAPTION>
                                                                                      YEAR ENDED
                                                                      -------------------------------------------
<S>                                                                   <C>            <C>            <C>
                                                                      DECEMBER 31,   DECEMBER 29,   DECEMBER 28,
                                                                          1995           1996           1997
                                                                      -------------  -------------  -------------
 
<CAPTION>
                                                                           (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                                                   <C>            <C>            <C>
Net revenues........................................................  $     510,126  $     612,840  $     638,725
Cost of sales.......................................................        330,689        412,064        517,318
                                                                      -------------  -------------  -------------
Gross profit........................................................        179,437        200,776        121,407
Selling, general, and administrative expenses.......................        136,906        187,474        204,088
Restructuring charges...............................................             --             --          8,635
                                                                      -------------  -------------  -------------
Operating income (loss).............................................         42,531         13,302        (91,316)
Other income (expense):
    Equity in earnings of affiliate.................................          2,519          3,089          1,435
    Interest income.................................................             --            548            560
    Interest expense................................................         (7,650)        (7,125)        (3,075)
    Interest expense on distribution notes..........................             --         (1,957)            --
    Gain on sale of interests in affiliates.........................         18,673             --             --
                                                                      -------------  -------------  -------------
Income (loss) before income taxes...................................         56,073          7,857        (92,396)
Provision (benefit) for income taxes................................          2,398        (17,179)       (11,034)
                                                                      -------------  -------------  -------------
Net income (loss)...................................................  $      53,675  $      25,036  $     (81,362)
                                                                      -------------  -------------  -------------
                                                                      -------------  -------------  -------------
Loss per common share...............................................                                $       (3.78)
                                                                                                    -------------
                                                                                                    -------------
Weighted average shares outstanding.................................                                   21,512,050
                                                                                                    -------------
                                                                                                    -------------
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 29,  DECEMBER 28,
                                                                                           1996          1997
                                                                                       ------------  ------------
<S>                                                                                    <C>           <C>
                                                                                             (IN THOUSANDS)
                                                     ASSETS
Current assets:
  Cash and cash equivalents..........................................................   $   40,550    $    4,537
  Accounts receivable, net of allowances of $26,757 at December 29, 1996 $52,035 at
    December 28, 1997................................................................       73,770        68,138
  Inventories........................................................................      100,680       112,366
  Deferred income taxes..............................................................       25,207        33,474
  Prepaid expenses and other current assets..........................................       14,466        12,248
                                                                                       ------------  ------------
      Total current assets...........................................................      254,673       230,763
Property and equipment, at cost--net.................................................       32,402        31,005
Deferred income taxes................................................................        6,106         7,278
Deposits and other noncurrent assets.................................................       18,514        18,442
                                                                                       ------------  ------------
                                                                                        $  311,695    $  287,488
                                                                                       ------------  ------------
                                                                                       ------------  ------------
 
                                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable...................................................................   $   73,394    $   61,013
  Accrued expenses and other current liabilities.....................................       34,192        60,711
  Current portion of capital lease obligations.......................................          282            36
  Note payable to principal stockholder..............................................       --             6,700
  Borrowing under revolving line of credit...........................................       --            22,314
                                                                                       ------------  ------------
      Total current liabilities......................................................      107,868       150,774
Capital lease obligations............................................................           36        --
Deferred income......................................................................       --            14,250
Commitments and contingencies
Stockholders' equity:
  Common stock, $0.01 par value, 35,000,000 shares authorized, 21,468,034 shares at
    December 29, 1996 and 21,618,034 shares at December 28, 1997 issued and
    outstanding......................................................................          215           216
  Common stock class A, $0.01 par value, 18 shares authorized, issued and
    outstanding......................................................................       --            --
  Common stock class B, $0.01 par value, 2 shares authorized, issued and
    outstanding......................................................................       --            --
  Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued and
    outstanding......................................................................       --            --
  Additional paid-in capital.........................................................      186,899       188,491
  Retained earnings (deficit)........................................................       17,487       (63,875)
  Cumulative translation adjustment..................................................         (331)         (455)
                                                                                       ------------  ------------
                                                                                           204,270       124,377
  Less: Treasury stock, at cost (20,200 shares)......................................         (479)         (479)
       Unearned compensation.........................................................       --            (1,434)
                                                                                       ------------  ------------
      Total stockholders' equity.....................................................      203,791       122,464
                                                                                       ------------  ------------
                                                                                        $  311,695    $  287,488
                                                                                       ------------  ------------
                                                                                       ------------  ------------
</TABLE>
 
                       See notes to financial statements.
 
                                      F-4
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
            STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
                                                                         RETAINED
                                                                         EARNINGS
                        COMMON           COMMON STOCK       ADDITIONAL      AND      CUMULATIVE
                       STOCK OF     ----------------------    PAID-IN    PARTNERS'   TRANSLATION    TREASURY       UNEARNED
                      PREDECESSOR    SHARES      AMOUNT       CAPITAL     CAPITAL    ADJUSTMENT       STOCK      COMPENSATION
                     -------------  ---------  -----------  -----------  ---------  -------------  -----------  ---------------
<S>                  <C>            <C>        <C>          <C>          <C>        <C>            <C>          <C>
                                                         (IN THOUSANDS, EXCEPT SHARE DATA)
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)        --
Net loss...........       --           --          --           --         (81,362)      --            --             --
Translation
  adjustment.......       --           --          --           --          --             (124)       --             --
Stock award........       --          150,000           1        1,592      --           --            --             (1,434)
                     -------------  ---------       -----   -----------  ---------        -----         -----        -------
Balance at December
  28, 1997.........       --        21,618,034  $     216    $ 188,491   $ (63,875)   $    (455)    $    (479)     $  (1,434)
                     -------------  ---------       -----   -----------  ---------        -----         -----        -------
                     -------------  ---------       -----   -----------  ---------        -----         -----        -------
 
<CAPTION>
 
                       TOTAL
                     ---------
<S>                  <C>
 
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
Net loss...........    (81,362)
Translation
  adjustment.......       (124)
Stock award........        159
                     ---------
Balance at December
  28, 1997.........  $ 122,464
                     ---------
                     ---------
</TABLE>
 
                       See notes to financial statements.
 
                                      F-5
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED
                                                                        ----------------------------------------
                                                                        DECEMBER 31,  DECEMBER 29,  DECEMBER 28,
                                                                            1995          1996          1997
                                                                        ------------  ------------  ------------
<S>                                                                     <C>           <C>           <C>
                                                                                     (IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss).....................................................   $   53,675    $   25,036    $  (81,362)
Adjustments to reconcile net income (loss) to net cash (used in)
  provided by operating activities, as adjusted for effect of sale of
  Donna Karan Japan:
    Depreciation and amortization.....................................        6,742        11,309        13,115
    Provision for bad debts...........................................        3,122            62           843
    Equity in earnings of affiliate, net of cash received.............       (2,519)       (1,734)        1,244
    Deferred taxes....................................................       --           (29,631)       (9,439)
    Stock award grant.................................................       --             2,522        --
    Provision for restricted stock compensation.......................       --            --               159
    Gain on sale of interests in affiliates...........................      (18,673)       --            --
    Write-off of property, plant and equipment........................           32        --             3,301
    Changes in operating assets and liabilities:
      Decrease (increase) in accounts receivable......................      (14,392)      (11,601)        4,789
      Increase in inventories.........................................      (29,611)      (15,308)      (11,686)
      Decrease (increase) in prepaid expenses and other current
        assets........................................................       (2,876)       (5,822)        2,218
      Increase in deposits and other noncurrent assets................       (4,956)      (10,619)       (6,368)
      Increase in accounts payable, accrued expenses, and other
        current liabilities...........................................       27,905        37,995        28,264
                                                                        ------------  ------------  ------------
Net cash (used in) provided by operating activities...................       18,449         2,209       (54,922)
                                                                        ------------  ------------  ------------
INVESTING ACTIVITIES
Purchase of property and equipment....................................       (4,289)      (16,262)       (9,823)
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...................       19,279       (16,262)       (9,823)
                                                                        ------------  ------------  ------------
FINANCING ACTIVITIES
Proceeds (payment) of revolving credit facility, net..................       (3,253)       (7,961)       22,314
Proceeds of long-term debt............................................       10,000        --            --
Proceeds of note payable to principal.................................       --            --             6,700
Payments under capital leases.........................................         (237)         (259)         (282)
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.............................................      (20,813)      (25,387)       --
                                                                        ------------  ------------  ------------
Net cash (used in) provided by financing activities...................      (29,303)       42,450        28,732
                                                                        ------------  ------------  ------------
Increase (decrease) in cash...........................................        8,425        28,397       (36,013)
Cash at beginning of year.............................................        3,728        12,153        40,550
                                                                        ------------  ------------  ------------
Cash at end of year...................................................   $   12,153    $   40,550    $    4,537
                                                                        ------------  ------------  ------------
                                                                        ------------  ------------  ------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.........................................................   $    6,410    $    6,594    $    2,369
                                                                        ------------  ------------  ------------
                                                                        ------------  ------------  ------------
Taxes paid............................................................   $    2,444    $    5,884    $    5,606
                                                                        ------------  ------------  ------------
                                                                        ------------  ------------  ------------
</TABLE>
 
                       See notes to financial statements.
 
                                      F-6
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
                               DECEMBER 28, 1997
 
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
    BUSINESS
 
    Donna Karan International Inc. and subsidiaries ("DKI" or the "Company"),
which operate in one business segment, design, contract for the manufacture of,
market, and distribute fashion apparel and accessories products. Its sales are
principally to department and specialty stores located principally in North and
South America, Asia, Europe and the Middle East and through Company owned outlet
stores located principally throughout the United States. A significant amount of
the Company's products is sold in Asia. Additionally, 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 instability or other conditions which disrupts trade from
the countries in which these contractors are located, or by the imposition of
additional duties or regulations relating to imports or exports or general
economic condition in the region.
 
    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 than in the second
half of the fiscal year.
 
    The Company had one customer which accounted for approximately 12.3%, 12.8%,
and 13.0% of revenues for the years ended December 31, 1995, December 29, 1996
and December 28, 1997, respectively. The Company does not factor its accounts
receivable and maintains credit insurance to minimize the risk of bad debts,
subject to certain limitations.
 
    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's common stock under the
Company's 1996 Stock Incentive Plan to certain employees of the Company and
Donna Karan Japan, K.K. ("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 personal income taxes on this award. As part of
 
                                      F-7
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
this arrangement, the Company purchased 20,200 shares of common stock, 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 year ended 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 7),
Donna Karan Japan, a Japanese joint stock company (together, the "Predecessor
Company").
 
    For the period from July 3, 1996 through December 29, 1996 and for the
fiscal year ended December 28, 1997, the accompanying financial statements
include the results of operations of DKI, 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. 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.
 
    STATEMENT OF OPERATIONS PRESENTATION
 
    The statement of operations of the Company for the year ended December 29,
1996 reflects the results of operations of the Predecessor Company for the
period from January 1, 1996 through July 2, 1996 and the results of operations
of the Company from July 3, 1996 (the date of the consummation of the Offering)
through December 29, 1996.
 
                                      F-8
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    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>
                                            JANUARY 1         JULY 1           YEAR ENDED
                                               TO               TO          DECEMBER 29, 1996
                                          JUNE 30, 1996  DECEMBER 29, 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 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 7).
 
    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 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
 
                                      F-9
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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,
the reduction in amortization of deferred financing costs of $0.8 million and
$0.6 million in 1996 and 1995, respectively, and the related tax effect of $1.8
million and $2.9 million in 1996 and 1995, respectively. Basic and diluted pro
forma earnings per share are the same, since there were no options outstanding
in 1995 and there was no dilutive effect of outstanding options in 1996.
 
    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 1996 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 29, 1996 and December 28, 1997, the
unamortized balance of these costs of $10.8 million and $11.5 million,
respectively, was included in "Deposits and other noncurrent assets" in the
accompanying balance sheets. Amortization expense of these costs for the years
ended December 29, 1996 and December 28, 1997 amounted to
 
                                      F-10
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
approximately $1.4 million and $4.2 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 29, 1996 and December 28,
1997, advertising costs totaling $1.3 million and $0.9 million, 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
December 31, 1995, December 29, 1996 and December 28, 1997 were $33.8 million,
$53.2 million and $53.0 million, respectively.
 
    INTERCOMPANY BALANCES
 
    All significant intercompany balances and transactions have been eliminated.
The equity method of accounting is used for Donna Karan Japan since the date the
Company sold 70% to a nonaffiliated partner (see Note 7).
 
    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.
 
    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.
 
                                      F-11
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN EXCHANGE CONTRACTS
 
    The Company enters into forward exchange contracts and option 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 December 31, 1995,
December 29, 1996 and December 28, 1997, gains and losses on foreign exchange
contracts were not material.
 
    At December 28, 1997, the Company had approximately $27.5 million of
outstanding forward exchange contracts and $2.3 million of outstanding
Euro-options, maturing at various dates in 1998, denominated in Italian Lire,
Spanish Pesetas, Dutch Guilders and Thai Bahts. 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
defaults.
 
    Fair values for the Company's off-balance-sheet instruments (forwards and
options) are based on quoted market prices of comparable instruments (foreign
currency exchange forward contracts); or, if there are no relevant comparable,
on pricing models or formulas using current assumptions (options). The fair
values of the forward exchange contracts and Euro-option contracts were $26.8
million and $2.3 million, respectively, at December 28, 1997.
 
    EARNINGS PER SHARE
 
    In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 128, EARNINGS PER SHARE ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share are calculated on a basis similar to
fully diluted earnings per share. All applicable earnings per share amounts have
been presented to conform to the Statement 128 requirements. Options to purchase
1,741,500 shares of common stock at various prices were outstanding during 1997
but were not included in the calculation of earnings per share because the
effect would be antidilutive.
 
    IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
 
    In June, 1997, the FASB issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME ("Statement 130"). Statement 130 established standards for the reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. Statement 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Statement 130 is effective
for fiscal years beginning after December 15, 1997. The Company does not expect
to be significantly impacted by the adoption of Statement 130.
 
    In June, 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
("Statement 131"). Statement 131 established
 
                                      F-12
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. It also established standards for related disclosures about
products and services, geographic areas, and major customers. Statement 131 is
effective for financial statements for fiscal years beginning after December 15,
1997 and, therefore, the Company will adopt the new requirements retroactively
in 1998. Management has not completed its review of Statement 131, but the
adoption of this Statement may increase the number of the Company's reported
segments.
 
2. INVENTORIES
 
    Inventories consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                           DECEMBER 29,1996  DECEMBER 28,1997
                                                           ----------------  ----------------
<S>                                                        <C>               <C>
Raw materials............................................     $   16,780        $   10,306
Work in process..........................................         11,030            11,316
Finished goods...........................................         72,870            90,744
                                                                --------          --------
                                                              $  100,680        $  112,366
                                                                --------          --------
                                                                --------          --------
</TABLE>
 
3. PROPERTY AND EQUIPMENT
 
    Major classes of property and equipment consist of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                           DECEMBER 29,1996  DECEMBER 28,1997
                                                           ----------------  ----------------
<S>                                                        <C>               <C>
Machinery, equipment and fixtures........................     $   21,330        $   20,314
Property and equipment under capital leases..............          1,207             1,207
Leasehold improvements...................................         39,092            40,688
                                                                 -------           -------
                                                                  61,629            62,209
Less accumulated depreciation and amortization...........        (29,227)          (31,204)
                                                                 -------           -------
                                                              $   32,402        $   31,005
                                                                 -------           -------
                                                                 -------           -------
</TABLE>
 
    Depreciation and amortization of property and equipment amounted to $5.6
million, $6.4 million and $7.9 million for the years ended December 31, 1995,
December 29, 1996 and December 28, 1997, respectively.
 
4. BORROWINGS
 
    With the proceeds of the Offering, the Company repaid all amounts due under
its then existing credit facility, and in September 1996, the Company entered
into a new $150 million, revolving Credit Facility as amended during 1997 and in
January 1998 (the "Facility"). The Facility expires on January 30, 2001. Direct
borrowings under the Facility bear interest at a fixed spread over the lead
bank's prime rate or, at the option of the Company, at a fixed spread over the
LIBOR and are limited to a borrowing base calculated on eligible accounts
receivable, inventory, and letters of credit except during certain periods when
the
 
                                      F-13
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
4. BORROWINGS (CONTINUED)
borrowings may exceed the borrowing base by certain amounts. At December 28,
1997, the weighted average interest rate on the outstanding balance was 9.16%.
The Facility is secured by accounts receivable and inventory of the Company, as
well as a pledge of all equity interests of the subsidiaries of the Company. The
Facility also contains certain restrictive covenants which, among other things,
require the Company to maintain certain financial ratios and restrict
investments, additional indebtedness, and payment of dividends.
 
    In connection with the Facility, the Company incurred certain financing
costs which were deferred and are being amortized over the remaining term of the
Facility. At December 29, 1996 and December 28, 1997, unamortized financing
costs of approximately $1.0 million and $1.5 million, respectively, were
included in "Deposits and other noncurrent assets" in the accompanying balance
sheets. Amortization of deferred financing costs of approximately $0.8 million,
$3.5 million and $0.6 million in 1995, 1996 and 1997, respectively, were
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.
 
    Letters of credit and acceptances outstanding were approximately $43.6
million at December 29, 1996 and $48.8 million at December 28, 1997.
 
5. EMPLOYEE BENEFIT PLANS
 
    The Company is required to make contributions to a multi-employer union
pension and health and welfare plan. These payments are based on wages paid to
the Company's union employees and amounts paid to contractors utilized by the
Company. The Company does not participate in the management of the plans and has
not been furnished with any information with respect to the type of benefits
provided, vested and nonvested benefits or plan assets. Health and welfare plan
expense approximated $1.9 million, $2.1 million and $2.4 million for the fiscal
years ended December 31, 1995, December 29, 1996 and December 28, 1997,
respectively. Pension expense approximated $0.9 million, $0.9 million and $1.1
million for the fiscal years ended December 31, 1995, December 29, 1996 and
December 28, 1997, respectively. Separate actuarial calculations regarding the
Company's share of plan benefits and net assets available for plan benefits have
not been determined.
 
    Under the Employee Retirement Income Security Act of 1974, as amended, an
employer, upon withdrawal from or termination of a multi-employer plan, is
required to continue funding its proportionate share of the plan's unfunded
vested benefits. As of December 28, 1997, 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 $0.8 million, $0.8 million and
$1.0 million for the fiscal years ended December 31, 1995, December 29, 1996 and
December 28, 1997, respectively.
 
                                      F-14
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
    During 1997, the Company adopted a bonus plan covering executives and
certain members of management. Individual bonus payments are based on management
and compensation levels, performance goals and the Company's overall
performance. The Company also adopted a deferred compensation plan covering
certain senior executives, which is based on compensation, is dependent upon the
Company achieving profitability, and vests over a five year period. The plans
are effective starting in fiscal 1998.
 
6. LEASES
 
    Future minimum annual rental commitments under noncancellable operating
leases for office, warehouse and retail facilities, and equipment as of December
28, 1997 are as follows (in thousands):
 
<TABLE>
<S>                                                                  <C>
1998...............................................................  $  17,050
1999...............................................................     15,901
2000...............................................................     13,792
2001...............................................................     12,116
2002...............................................................      8,121
Thereafter.........................................................     30,361
                                                                     ---------
                                                                     $  97,341
                                                                     ---------
                                                                     ---------
</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 $14.1 million, $15.0 million and
$18.2 million for the fiscal years ended December 31, 1995, December 29, 1996
and December 28, 1997, respectively.
 
    Subsequent to year end, the Company entered into certain sub-lease
arrangements. Future annual sublease commitments related to operating leases for
office facilities as of December 28, 1997 are as follows:
 
<TABLE>
<S>                                                                   <C>
1998................................................................  $     870
1999................................................................        943
2000................................................................        943
2001................................................................        942
2002................................................................        640
Thereafter..........................................................      3,840
                                                                      ---------
                                                                      $   8,178
                                                                      ---------
                                                                      ---------
</TABLE>
 
7. 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 28, 1997
 
7. SALE OF INTERESTS IN AFFILIATES (CONTINUED)
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 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 fiscal
years ended December 31, 1995, December 29, 1996 and December 28, 1997 amounted
to approximately $2.5 million, $3.1 million and $1.4 million, 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, recorded as an offset of selling, general,
and administrative expenses, amounted to approximately $1.1 million, $1.8
million and $1.5 million during the years ended December 31, 1995, December 29,
1996 and December 28, 1997, respectively. The equity investment in Donna Karan
Japan of $3.1 million and $1.8 million at December 29, 1996 and December 28,
1997, respectively, was included in "Deposits and other noncurrent assets" in
the accompanying balance sheets.
 
    At December 28, 1997, the Company has guaranteed up to $2.3 million of a
bank line of Donna Karan Japan.
 
    On March 26, 1998, the Company and the nonaffiliated party sold all of their
outstanding shares in Donna Karan Japan to a subsidiary of Onward Kashiyama Co.
Ltd., a Japanese public company ("OKC"). At the same time, Donna Karan Japan was
granted a 16-year exclusive license to import, manufacture, license and/or
distribute DONNA KARAN NEW YORK and DKNY products in Japan, with certain
exceptions. In addition, Donna Karan Japan was granted the exclusive right to
develop and operate a total of 12 DONNA KARAN NEW YORK and DKNY retail boutiques
in Japan over the term of the agreement. On consummation of the transaction, the
Company received $15.9 million. The Company will receive a royalty on net sales
of licensed products and a servicing fee on net sales of Donna Karan products
imported by Donna Karan Japan.
 
8. DKNY JEANS LICENSING AGREEMENT
 
    On September 27, 1996, the Company entered into a 30-year licensing
agreement with subsidiaries of Designer Holdings Ltd. ("DH") for the exclusive
production, sale, and distribution of men's, women's, and, with certain
exceptions, children's jeanswear under the DKNY JEANS label (the "DH License").
Under the terms of the agreement, the Company received an initial payment of
$6.0 million from DH to reimburse the Company for certain costs related to the
start-up and development of the DKNY 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 December 29, 1996, the Company and DH 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 Jeanswear business, the Company purchased for $3.2
million all sales and marketing plans, patterns, samples, fabrics and other
materials developed by DH in connection with the jeanswear business, the cost of
which had been accrued at December 29, 1996 and was included in selling,
general, and administrative expenses in the accompanying financial statements.
 
                                      F-16
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
8. DKNY JEANS LICENSING AGREEMENT (CONTINUED)
    On January 8, 1998, the Company and Liz Claiborne Inc. ("LCI") consummated a
transaction whereby the Company granted to LCI exclusive, long-term rights to
the DKNY JEANS and DKNY ACTIVE trademarks for apparel products and to market,
distribute and sell both collections in the Western Hemisphere. Under the
agreement, LCI is obligated to pay the Company a royalty equal to a percentage
of net sales of the DKNY JEANS and ACTIVE products. The initial term of the
license agreement is for 15 years through December 31, 2012, with an option to
renew for an additional 15-year period if certain sales thresholds are met,
which would continue the license through December 31, 2027. Upon consummation of
the transaction, the Company received from LCI $30 million which will be
amortized in accordance with the terms of the agreement. Aggregate minimum
royalties for the initial 15-year term are $152 million. In connection with the
transaction with LCI, the Company recorded a loss of $12.5 million, which
represents the write down of inventory to net realizable value, as well as other
costs necessary to exit its existing jeans business. Of this amount, $9.4
million was classified as cost of sales and $3.1 million was classified as
selling, general and administrative expenses.
 
9. BEAUTY LICENSING AGREEMENT
 
    On November 10, 1997, the Company and Estee Lauder Inc. ("ELI") consummated
the transaction whereby the Company granted to ELI exclusive worldwide rights to
the DONNA KARAN NEW YORK and DKNY trademarks for the manufacture, marketing,
distribution, and sale of beauty and beauty-related products, including
fragrances, cosmetics, skincare products, and beauty-related accessories. In
connection therewith and with the sale to ELI of certain other assets relating
to the existing business, the Company received $25.0 million and will receive
additional royalties from ELI based on sales of such beauty and beauty-related
products. Under certain circumstances, the Company is obligated to repay to ELI
a portion of these payments plus a penalty amount if certain products are not
launched in accordance with an agreed-upon schedule. At December 28, 1997, $15
million of the proceeds received has been recorded as deferred income. As a
result of the closing of the transaction with ELI, the Company recorded a loss
of approximately $21.1 million (net of a $2.2 million gain in connection with
the consummation of this transaction), of which $11.7 million was recorded as
cost of sales, $10.9 million was recorded as sales returns and $0.7 million was
recorded as selling, general and administrative expenses. This loss represents
reserves recorded, primarily related to inventories, receivables and severance
to cover the write-down of its existing beauty business, and is net of a gain of
approximately $2.2 million, included in selling, general and administrative
expenses, representing the portion of the proceeds recognized as income reduced
by the cost of exiting the beauty business. Subsequent to closing the
transaction, the Company recorded an operating loss of approximately $2.3
million related to the beauty business.
 
                                      F-17
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
9. BEAUTY LICENSING AGREEMENT (CONTINUED)
    The following table presents certain pro forma condensed financial
information for the fiscal years ended December 29, 1996 and December 28, 1997
for the Company as if the beauty business had been shut down prior to those
years, including the aforementioned loss of approximately $21.1 million:
 
<TABLE>
<CAPTION>
                                                              DECEMBER 29, 1996                  DECEMBER 28, 1997
                                                      ---------------------------------  ---------------------------------
<S>                                                   <C>         <C>        <C>         <C>         <C>        <C>
                                                          AS                    PRO          AS                    PRO
                                                       REPORTED    BEAUTY      FORMA      REPORTED    BEAUTY      FORMA
                                                      ----------  ---------  ----------  ----------  ---------  ----------
Net sales...........................................  $  612,840  $  43,769  $  569,071  $  638,725  $  18,682  $  620,043
Operating income (loss).............................      13,302     (6,748)     20,050     (91,316)   (33,722)    (57,594)
Net income (loss)...................................     4,243(1)    (3,644)      7,887     (81,362)   (30,046)    (51,316)
Current assets......................................     254,673     26,032     228,641     230,763      1,677     229,086
Total assets........................................     311,695     27,601     284,094     287,488      1,677     285,811
</TABLE>
 
------------------------
 
(1) For the year ended December 28, 1996, the Company's net income included the
    recognition of a deferred tax asset of approximately $19.0 million,
    concurrent with the Company becoming subject to Federal and additional state
    income taxes. For purposes of comparison, the Company has presented pro
    forma net income for this period which excludes the recognition of this
    asset, and also assumes that the Company was subject to Federal and
    additional state taxes for the entire period.
 
10. RESTRUCTURING AND OTHER CHARGES
 
    As a result of the restructuring and strategic plan announced on December
16, 1997 and the May 28, 1997 plan aimed at containing costs and restructuring
certain of its operations, the Company recognized restructuring charges of $8.6
million, which include $7.1 million related to severance, $0.8 million related
to abandoning leased space, and $0.7 million to close the Company's Prato, Italy
office, and other charges, primarily nonrecurring, amounting to $17.0 million,
including, $5.9 million for the realignment of a retail and distribution
arrangement in Europe, $3.6 million relating to additional severance costs and
other costs recorded during the cost containment review process which have been
classified as $15.4 million of selling, general and administrative expense and
approximately $1.6 million of cost of sales. The charges relating to the May 28,
1997 plan include restructuring charges of $1.6 million and other charges of
$3.6 million. At December 28, 1997, approximately $3.1 million of the
restructuring charges have been utilized.
 
    Initiatives included in the restructuring and strategic plan are: licensing
businesses that the Company believes can be more efficiently performed by other
companies; reducing the workforce by 15%; restructuring to focus on wholesale,
licensing, and retail operations; streamlining the number of business units from
13 to six; restructuring the senior management organization to foster
accountability for meeting performance standards; closing the Company's Italian
sourcing office; and reducing occupancy expenses.
 
                                      F-18
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
11. 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 and the year ended December 28, 1997,
the Company incurred $9.3 million and $17.6 million in royalty expense,
respectively, which was included in cost of sales. Included in accrued expenses
at December 29, 1996 and December 28, 1997 was royalties payable of $5.1 million
and $4.2 million, respectively. 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.
 
    The note payable to a principal stockholder of $6.7 million at December 28,
1997 bears interest at 8% per annum and was repaid subsequent to year-end.
 
    Sales to Donna Karan Japan (see Note 7) amounted to 10.5%, 11.5% and 9.8% of
the Company's revenues for the fiscal years ended December 31, 1995, December
29, 1996 and December 28, 1997, respectively.
 
12. 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. If compensation cost for the stock option plans had been
determined based on the fair value at the grant date for awards in 1996 and 1997
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>
<CAPTION>
                                                         DECEMBER 29, 1996  DECEMBER 28, 1997
                                                         -----------------  -----------------
<S>                                                      <C>                <C>
Net earnings (loss)--as reported.......................      $  25,036         $   (81,362)
                                                               -------            --------
                                                               -------            --------
Net earnings (loss)--pro forma.........................      $  23,713         $   (83,359)
                                                               -------            --------
                                                               -------            --------
Loss per common share--pro forma.......................                        $     (3.87)
                                                                                  --------
                                                                                  --------
</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 and 1997, respectively: expected dividend
yield of 0.0% and 0.0%; expected volatility of 0.486 and 0.513; risk free
interest rate of 6.2% and 5.7%; and expected lives of 6 years. The weighted
average grant fair value of options granted during 1996 and 1997 was $13.01 and
$6.36 per share, respectively.
 
    Under the Stock Incentive Plan, which was amended in 1997, options to
purchase shares of common stock and awards of restricted shares of common stock
of up to a combined 2,600,000 shares may be granted (includes an award of
105,100 shares granted at the Offering and 150,000 shares of restricted
 
                                      F-19
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
12. STOCK OPTIONS (CONTINUED)
common stock (see Note 14)). The exercise price of the options may not be less
than 100% of the fair market value of a share of common stock at the time of
grant. An incentive stock option may not be exercised within one year of the
date of grant, and no options may be granted after ten years from the effective
date of the plan. The options granted in 1996 vest on a yearly basis in 25%
increments beginning on the first anniversary of the date of grant. Options
granted in 1997 vest on a yearly basis in 33 1/3% increments beginning on the
first anniversary of the date of the 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, is granted options to purchase 7,500 shares of common stock.
Each year, other than with respect to the year in which an eligible director
receives an initial grant of options, each eligible director will receive an
additional option to purchase 500 shares of common stock. Upon the exercise of
an option, the purchase price paid will be 100% of the fair market value of such
share at the time of the grant of the option. Options granted will be
exercisable on or after the first anniversary of the date of grant, and will
expire on the tenth anniversary of the date of grant.
 
    A summary of the Stock Incentive Plan and the Non-Employee Director Stock
Option Plan as of December 29, 1996 and changes during the year then ended are
presented below:
 
<TABLE>
<CAPTION>
                                                                                            NON-EMPLOYEE DIRECTOR
                                                                 STOCK INCENTIVE PLAN         STOCK OPTION PLAN
                                                              ---------------------------  ------------------------
<S>                                                           <C>           <C>            <C>        <C>
                                                                              WEIGHTED                  WEIGHTED
                                                                               AVERAGE                   AVERAGE
                                                                              EXERCISE                  EXERCISE
                                                                 SHARES         PRICE       SHARES        PRICE
                                                              ------------  -------------  ---------  -------------
Outstanding at December 31, 1995                                        --                        --
Granted.....................................................     1,419,500    $   23.85       15,000    $   20.81
Forfeited...................................................       (50,500)       24.00           --
                                                              ------------                 ---------
Outstanding at December 29, 1996............................     1,369,000        23.84       15,000        20.81
Granted.....................................................       733,000        11.41        8,500        12.98
Forfeited...................................................      (360,500)       23.22           --
                                                              ------------                 ---------
Outstanding at December 28, 1997............................     1,741,500        18.74       23,500        17.98
                                                              ------------                 ---------
                                                              ------------                 ---------
</TABLE>
 
                                      F-20
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
12. STOCK OPTIONS (CONTINUED)
    For various price ranges, weighted average characteristics of outstanding
stock options at December 28, 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                                    OUTSTANDING OPTIONS          EXERCISABLE OPTIONS
                                                               ------------------------------  ------------------------
                    RANGE OF                                      REMAINING       WEIGHTED                  WEIGHTED
                 EXERCISE PRICES                     SHARES     LIFE (YEARS)    AVERAGE PRICE   SHARES    AVERAGE PRICE
             -----------------------               ----------  ---------------  -------------  ---------  -------------
<S>                                                <C>         <C>              <C>            <C>        <C>
STOCK INCENTIVE PLAN
  $10.44 to $12.38...............................     703,000           9.7           11.28
  $16.88 to $24.00...............................   1,038,500           8.5           23.79      331,625        23.84
                                                   ----------
                                                    1,741,500
                                                   ----------
                                                   ----------
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
  $10.94 to $13.25...............................       8,500           9.0           12.98
  $20.50 to $21.13...............................      15,000           8.5           20.81       15,000        20.81
                                                   ----------
                                                       23,500
                                                   ----------
                                                   ----------
</TABLE>
 
13. GEOGRAPHIC DATA
 
    Export sales by geographic location are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                        DECEMBER 31,  DECEMBER 29,  DECEMBER 28,
                                                                            1995          1996          1997
                                                                        ------------  ------------  ------------
<S>                                                                     <C>           <C>           <C>
Japan.................................................................   $   64,162    $   74,488    $   66,839
Europe and Middle East................................................       56,704        72,698        97,081
Asia (excluding Japan)................................................       23,230        35,778        34,999
Other.................................................................       10,111        17,972        24,293
                                                                        ------------  ------------  ------------
                                                                         $  154,207    $  200,936    $  223,212
                                                                        ------------  ------------  ------------
                                                                        ------------  ------------  ------------
</TABLE>
 
    Sales to Japan are made to a 30% owned subsidiary (see Note 7).
 
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 contains a provision
whereby the Company has granted 150,000 shares of restricted common stock to a
key employee. These shares are subject to certain restrictions on
transferability and a risk of forfeiture. The forfeiture provisions expire at
the earlier of five years from the date of grant or upon the attainment of
certain market value goals for the common stock. As of December 28, 1997, all
150,000 shares were subject to the forfeiture provisions. These shares have been
recorded as unearned stock grant compensation and are presented as a separate
component of stockholders' equity. The unearned compensation is being charged to
selling, general and administrative expenses over the five-year vesting period,
until such time as the market value goals are attained, in which case the
expense will be accelerated to match the amounts earned. Total expense for the
year ended December 28, 1997 amounted to approximately $159,000.
 
                                      F-21
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
    The Company is a defendant in a consolidated purported class action, which
alleges violations of certain sections of the federal securities laws. The
Company believes the allegations are without merit and intends to defend the
litigation vigorously.
 
    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 year ended 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 or the
shareholders of the S corporations. 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>
                                                                        DECEMBER 31,   DECEMBER 29,  DECEMBER 28,
                                                                            1995           1996          1997
                                                                        -------------  ------------  ------------
Current income taxes:
    Federal taxes.....................................................    $      --     $    8,605    $   (2,903)
    State and local taxes.............................................        2,242          2,717           787
    Foreign taxes.....................................................          278          1,130           521
                                                                             ------    ------------  ------------
                                                                              2,520         12,452        (1,595)
    Deferred income taxes.............................................         (122)       (29,631)       (9,439)
                                                                             ------    ------------  ------------
                                                                          $   2,398     $  (17,179)   $  (11,034)
                                                                             ------    ------------  ------------
                                                                             ------    ------------  ------------
</TABLE>
 
                                      F-22
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
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 29,  DECEMBER 28,
                                                                                           1996          1997
                                                                                       ------------  ------------
<S>                                                                                    <C>           <C>
Current :
    Uniform inventory capitalization.................................................   $    1,046    $    2,679
    Allowance for doubtful accounts and other receivable related reserves............       14,430        18,854
    Inventory reserves...............................................................        2,990        15,518
    Other book accruals..............................................................        6,741        20,423
                                                                                       ------------  ------------
                                                                                            25,207        57,474
Non-Current:
    Depreciation.....................................................................        6,106         7,278
                                                                                       ------------  ------------
                                                                                            31,313        64,752
Valuation Allowance..................................................................           --       (24,000)
                                                                                       ------------  ------------
                                                                                        $   31,313    $   40,752
                                                                                       ------------  ------------
                                                                                       ------------  ------------
</TABLE>
 
    Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors including the Company's ability to generate sufficient
taxable income within the net operating loss carry forward period. Due to the
inherent uncertainties in estimating future taxable income, the Company has
recorded a valuation allowance.
 
    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 income (loss) before income taxes
were foreign income of $2.6 million and domestic loss of $95.0 million in 1997.
 
    The foreign and domestic components of pro forma income before pro forma
income taxes were as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                           YEAR ENDED
                                                                   ---------------------------
                                                                   DECEMBER 31,  DECEMBER 29,
                                                                       1995          1996
                                                                   ------------  -------------
<S>                                                                <C>           <C>
Domestic.........................................................   $   26,676     $   1,565
Foreign..........................................................        5,454         4,856
                                                                   ------------       ------
                                                                    $   32,130     $   6,421
                                                                   ------------       ------
                                                                   ------------       ------
</TABLE>
 
                                      F-23
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
15. INCOME TAXES (CONTINUED)
    The pro forma income tax provision consists of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                           YEAR ENDED
                                                                   --------------------------
                                                                   DECEMBER 31,  DECEMBER 29,
                                                                       1995          1996
                                                                   ------------  ------------
<S>                                                                <C>           <C>
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>
 
    A reconciliation setting forth the differences between the effective tax
rate (pro forma for 1996 and 1995) of the Company and the U.S. Federal statutory
tax rate is as follows:
 
<TABLE>
<CAPTION>
                                                                                           YEAR ENDED
                                                                        -------------------------------------------------
                                                                         DECEMBER 31,     DECEMBER 29,     DECEMBER 28,
                                                                             1995             1996             1997
                                                                        ---------------  ---------------  ---------------
<S>                                                                     <C>              <C>              <C>
Federal statutory rate................................................         35.0%             35.0%           (35.0)%
State and local taxes, net of federal tax benefits....................           7.6              7.0             (5.0)
Taxes related to foreign income, net of credits.......................           1.9             14.0              0.8
Valuation allowance...................................................            --               --             26.0
Other items, net, none of which individually exceeds 5% of Federal
  taxes at statutory rate.............................................          (1.8)            (0.9)             1.3
                                                                                 ---              ---            -----
                                                                               42.7%             55.1%           (11.9)%
                                                                                 ---              ---            -----
                                                                                 ---              ---            -----
</TABLE>
 
                                      F-24
<PAGE>
                         DONNA KARAN INTERNATIONAL INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 28, 1997
 
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
 
    The following is a summary of the unaudited quarterly results of operations
for 1996 and 1997 (dollars in thousands, except per share amounts):
 
<TABLE>
<CAPTION>
                                                                                   QUARTER ENDED
                                                                   ----------------------------------------------
<S>                                                                <C>         <C>         <C>         <C>
1996                                                                MAR. 31     JUNE 30     SEPT. 29    DEC. 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:
Earnings (loss) per common share.................................        0.73       (0.26)       0.77        0.05
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                   QUARTER ENDED
                                                                   ----------------------------------------------
<S>                                                                <C>         <C>         <C>         <C>
1997                                                                MAR. 30    JUNE 29(1)   SEPT. 28   DEC. 28(2)
-----------------------------------------------------------------  ----------  ----------  ----------  ----------
Net sales........................................................  $  158,776  $  111,045  $  214,870  $  154,034
Gross profit (loss)..............................................      45,038      22,611      56,801      (3,043)
Net income (loss)................................................         806     (14,682)        923     (68,409)
Per share data:
Earnings (loss) per common share.................................        0.04       (0.68)       0.04       (3.17)
</TABLE>
 
------------------------
 
(1) Includes a restructuring charge of $1.6 million and other charges of $3.6
    million, relating primarily to additional severance costs, the estimated
    economic impairment of DONNA KARAN NEW YORK accessories inventory and
    receivables and certain other charges recorded during the cost containment
    process.
 
(2) Includes a charge of $21.1 million related to the wind-down of the Company's
    beauty business (net of a $2.2 million gain in connection with entering the
    agreement), a charge of $12.5 million in connection with the wind-down of
    the DKNY jeans business as a result of the license of the business,
    restructuring charges of $7.1 million, $13.2 million of other charges and a
    $24.0 million valuation allowance against the deferred income tax benefit.
 
                                      F-25
<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 17, 1998
 
                                DONNA KARAN INTERNATIONAL INC.
 
                                BY:               /S/ JOHN D. IDOL
                                     -----------------------------------------
                                                    John D. Idol
                                              CHIEF EXECUTIVE OFFICER
 
    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
 
          SIGNATURE                        TITLE                    DATE
------------------------------  ---------------------------  -------------------
       /s/ DONNA KARAN          Chairman of the Board and
------------------------------    Chief Designer               March 26, 1998
         Donna Karan
 
      /s/ STEPHAN WEISS         Vice Chairman of the Board
------------------------------                                 March 26, 1998
        Stephan Weiss
 
       /s/ JOHN D. IDOL         Chief Executive Officer and
------------------------------    Director                     March 17, 1998
         John D. Idol
 
   /s/ M. WILLIAM BENEDETTO     Director
------------------------------                                 March 26, 1998
     M. William Benedetto
 
       /s/ ANDREA JUNG          Director
------------------------------                                 March 19, 1998
         Andrea Jung
 
      /s/ ANN MCLAUGHLIN        Director
------------------------------                                 March 26, 1998
        Ann Mclaughlin
 
                                Executive Vice President
                                  and Chief Financial
    /s/ JOSEPH B. PARSONS         Officer (Principal
------------------------------    Financial Officer and        March 26, 1998
      Joseph B. Parsons           Principal Accounting
                                  Officer)
<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)
 
       3.3     Amendment No.1 to By-laws of the Company (Incorporated by reference from Exhibit 3.1 to the Company's
                 Form 10-Q for the quarter ended September 28, 1997.)
 
      10.1     Second Amended and Restated Credit Agreement, dated as of January 29, 1998 among The Donna Karan
                 Company, The Donna Karan Company Store, G.P., Donna Karan Studio, DK Footwear Partners, the
                 institutions time to time parties thereto, and Citibank, N.A., as administrative agent
 
      10.2     1996 Stock Incentive Plan of the Company (Incorporated by reference from Exhibit A to the Company's
                 Proxy Statement, dated May 8, 1997)
 
      10.3     1996 Non-Employee Director Stock Option Plan (Incorporated by reference from Exhibit 10.3 to the
                 Company's Registration Statement on Form S-1, dated June 27, 1996)
 
      10.4     Registration Rights Agreement, dated as of June 10, 1996, among the Company, Donna Karan, Stephan
                 Weiss, Stephan Weiss, as trustee under Trust under trust agreement for the benefit of Lisa Weiss
                 Keyes, Corey Weiss, and Gabrielle Karan, Stephan Weiss, as trustee under Trust Agreement for the
                 benefit of Donna Karan, Gabrielle Studio, Inc., Takihyo Inc., Tomio Taki, Frank Mori, Christopher
                 Mori, and Heather Mori (Incorporated by reference from Exhibit 10.4 to the Company's Registration
                 Statement on Form S-1, dated June 27, 1996)
 
      10.5     License Agreement, dated as of July 3, 1996, between Gabrielle Studio, Inc. and Donna Karan Studio
                 (Incorporated by reference from Exhibit 10.5 to the Company's Registration Statement on Form S-1,
                 dated June 27, 1996)
 
      10.6     Guaranty of License, dated as of July 3, 1996, from the Company to Gabrielle Studio, Inc.
                 (Incorporated by reference from Exhibit 10.6 to the Company's Registration Statement on Form S-1,
                 dated June 27, 1996)
 
      10.7     License Agreement, dated as of July 3, 1996, between Donna Karan Studio and Stephan Weiss
                 (Incorporated by reference from Exhibit 10.7 to the Company's Registration Statement on Form S-1,
                 dated June 27, 1996)
 
      10.8     Employment Agreement, dated as of July 3, 1996, between the Company and Donna Karan (Incorporated by
                 reference from Exhibit 10.8 to the Company's Registration Statement on Form S-1, dated June 27,
                 1996)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.                                           DESCRIPTION OF EXHIBITS
-------------  -----------------------------------------------------------------------------------------------------
<C>            <S>
      10.9     Employment Agreement, dated as of July 3, 1996, between the Company and Stephan Weiss (Incorporated
                 by reference from Exhibit 10.9 to the Company's Registration Statement on Form S-1, dated June 27,
                 1996)
 
      10.10    Stockholders Agreement, dated as of June 10, 1996, among Donna Karan, Stephan Weiss, Stephan Weiss as
                 trustee under Trust Agreement for the benefit of Lisa Weiss Keyes, Corey Weiss, and Gabrielle
                 Karan, Stephan Weiss as trustee under Trust Agreement for the benefit of Donna Karan, Gabriel
                 Studio, Inc., Takihyo Inc., Tomio Taki, Frank Mori, Christopher Mori, and Heather Mori
                 (Incorporated by reference from Exhibit 10.10 to the Company's Registration Statement on Form S-1,
                 dated June 27, 1996)
 
      10.11    Employment Agreement, dated as of October 15, 1996, between The Donna Karan Company and Joseph B.
                 Parsons (Incorporated by reference from Exhibit 10.14 to the Company's Form 10-K for the year ended
                 December 29, 1996)
 
      10.12    Employment Agreement, dated as of July 25, 1997, among the Company, The Donna Karan Company and John
                 D. Idol, and related bonus programs. (Incorporated by reference from Exhibit 10.5 to the Company's
                 Form 10-Q for the quarter ended September 28, 1997)
 
      10.13    Amendment No. 1 to Employment Agreement between the Company and Donna Karan (Incorporated by
                 reference from Exhibit 10.2 to the Company's 10-Q for the quarter ended September 28, 1997)
 
      10.14    Amendment No. 1 to Employment Agreement between the Company and Stephan Weiss (Incorporated by
                 reference from Exhibit 10.3 to the Company's Form 10-Q for the quarter ended September 28, 1997)
 
      10.15    Amendment No. 2 to Employment Agreement between the Company and Stephan Weiss (Incorporated by
                 reference from Exhibit 10.4 to the Company's Form 10-Q for the quarter ended September 28, 1997)
 
      10.16    Agreement, dated as of September 30, 1997, between The Donna Karan Company and Estee Lauder Inc.
                 (Incorporated by reference from Exhibit 2.1 to the Company's Form 8-K, dated November 10, 1997).
 
      10.17    Executive Incentive Plan
 
      10.18    Wealth Accumulation Plan
 
      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>