Donna Karan International Inc – IPO: ‘S-1/A’ on 5/28/96

As of:  Tuesday, 5/28/96   ·   Accession #:  950130-96-2007   ·   File #:  333-03600

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Initial Public Offering (IPO):  Pre-Effective Amendment to Registration Statement (General Form)   —   Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1/A       Amendment No. 1 to Form S-1                          124    780K 
 2: EX-23.1     Consent of Ernst & Young LLP                           1      5K 
 3: EX-27.1     Financial Data Schedule                                2      6K 

S-1/A   —   Amendment No. 1 to Form S-1
Document Table of Contents

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1996      

                                           REGISTRATION NO. 333-3600
------------------------------------------------------------------------------- 
------------------------------------------------------------------------------- 

SECURITIES AND EXCHANGE COMMISSION  
WASHINGTON, D.C. 20549  

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

AMENDMENT NO. 1       

TO      
FORM S-1  
REGISTRATION STATEMENT  
UNDER THE SECURITIES ACT OF 1933  

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

DONNA KARAN INTERNATIONAL INC.      
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)  

DELAWARE                     2337                    13-3882426 
(STATE OR OTHER           (PRIMARY STANDARD          (I.R.S. EMPLOYER 
 JURISDICTION OF              INDUSTRIAL             IDENTIFICATION NO.)
INCORPORATION OR          CLASSIFICATION CODE                           
ORGANIZATION)                 NUMBER)                               

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

550 SEVENTH AVENUE  
NEW YORK, NEW YORK 10018 (212) 789-1500 
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF 
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) 

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

STEPHAN WEISS 

DONNA KARAN INTERNATIONAL INC. 550 SEVENTH AVENUE NEW YORK, NEW YORK 10018  
(212) 789-1500      
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,  
OF AGENT FOR SERVICE) 

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

COPIES TO:  
ARNOLD S. JACOBS, ESQ.                   JEFFREY SMALL, ESQ.    
PROSKAUER ROSE GOETZ & MENDELSOHN LLP  SARAH JONES BESHAR, ESQ. DAVIS POLK &  
1585 BROADWAY NEW YORK, NEW YORK 10036    WARDWELL 450 LEXINGTON AVENUE NEW     
        (212) 969-3000               YORK, NEW YORK 10017 (212) 450-4000

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE      
PUBLIC: As soon as possible after the Registration Statement becomes            
effective.                                                                      

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

If any of the securities being registered on this Form are to be offered on 
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of  
1933, check the following box: [_]                                              

If this Form is filed to register additional securities for an offering     
pursuant to Rule 462(b) under the Securities Act, please check the following    
box and list the Securities Act registration statement number of the earlier    
effective registration statement for the same offering. [_] ________________    

If this Form is a post-effective amendment filed pursuant to Rule 462(c)    
under the Securities Act, check the following box and list the Securities Act   
registration statement number of the earlier effective registration statement   
for the same offering. [_] _________________________________________            

If delivery of the prospectus is expected to be made pursuant to Rule 434,  
please check the following box. [_]                                             

CALCULATION OF REGISTRATION FEE 

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                                                                [Download Table]

           TITLE OF EACH                                                       
        CLASS OF SECURITIES         PROPOSED MAXIMUM AGGREGATE    AMOUNT OF    
         TO BE REGISTERED               OFFERING PRICE(1)      REGISTRATION FEE
-------------------------------------------------------------------------------
                                                                               
Common Stock, $.01 par value.......        $265,794,000           $91,654(2)   

------------------------------------------------------------------------------- 
------------------------------------------------------------------------------- 
(1) Estimated pursuant to Rule 457 solely for the purpose of calculating the    
registration fee.                                                           

(2) Previously paid.                                                            

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR    
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT      
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS              
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH     
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT  
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID  
SECTION 8(a), MAY DETERMINE.                                                    

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DONNA KARAN INTERNATIONAL INC.      

CROSS REFERENCE SHEET SHOWING LOCATION
IN PROSPECTUS OF INFORMATION REQUIRED BY PART I OF FORM S-1 

                                                                [Download Table]

      REGISTRATION STATEMENT                                                    
         ITEM AND HEADING                       LOCATION IN PROSPECTUS          
      ----------------------                    ----------------------          
                                                                                
 1.Forepart of the Registration                                                 
    Statement and Outside Front                                                 
    Cover Page of Prospectus.......  Facing Page of Registration Statement;     
                                      Cross Reference Sheet; Outside Front Cover
                                      Page                                      
 2.Inside Front and Outside Back                                                
    Cover Pages of Prospectus......  Inside Front Cover of Prospectus           
 3.Summary Information, Risk                                                    
    Factors and Ratio of Earnings                                               
    to Fixed Charges...............  Prospectus Summary; Risk Factors           
 4.Use of Proceeds.................  Use of Proceeds                            
 5.Determination of Offering                                                    
    Price..........................  Underwriters                               
 6.Dilution........................  Dilution                                   
 7.Selling Security Holders........  Not Applicable                             
 8.Plan of Distribution............  Underwriters                               
 9.Description of Securities to be                                              
    Registered.....................  Outside Front Cover Page; Description of   
                                      Capital Stock                             
10.Interest of Named Experts and                                                
    Counsel........................  Not applicable                             
11.Information With Respect to the                                              
    Registrant                                                                  
(a) Description of Business........  The Company; Reorganization; Business      
(b) Description of Property........  Business                                   
(c) Legal Proceedings..............  Business                                   
(d) Dividends and Related                                                       
    Stockholder Matters............  Risk Factors; Dividend Policy; Description 
                                      of Capital Stock                          
(e) Financial Statements...........  Predecessor Combined Financial Statements  
                                      of Donna Karan International Inc.         
(f) Selected Financial Data........  Selected Combined Financial Data           
(g) Supplementary Financial                                                     
    Information....................  Pro Forma Combined Financial Information   
(h) Management's Discussion and                                                 
      Analysis of Financial                                                     
      Condition and Results of                                                  
      Operations...................  Management's Discussion and Analysis of    
                                      Financial Condition and Results of        
                                      Operations                                
(i) Changes in and Disagreements                                                
      with Accountants on                                                       
      Accounting and Financial                                                  
      Disclosure...................  Not applicable                             
(j) Directors and Executive                                                     
    Officers.......................  Management                                 
(k) Executive Compensation.........  Management                                 
(l) Security Ownership.............  Principal Stockholders                     

(m) Certain Transactions...........  Certain Relationships and Related Transac- 
                                      tions                                     
12.Disclosure of Commission                                                     
    Position on Indemnification for                                             
    Securities Act Liabilities.....  Not applicable                             

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EXPLANATORY NOTE  

This Registration Statement contains two separate prospectuses. The first   
prospectus relates to a public offering in the United States and Canada of an   
aggregate of 7,525,000 shares of Common Stock (the "U.S. Offering"). The        
second prospectus relates to a concurrent offering outside the United States    
and Canada of an aggregate of 3,225,000 shares of Common Stock (the             
"International Offering" and, together with the U.S. Offering, the              
"Offering"). The prospectuses for each of the U.S. Offering and the             
International Offering will be identical with the exception of the alternate    
front cover page for the International Offering. Such alternate page appears    
in this Registration Statement immediately following the complete prospectus    
for the U.S. Offering.                                                          

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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY  +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE      +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE    +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF  +
+ANY SUCH STATE.                                                               +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)                                              

Issued May 28, 1996                                                             

10,750,000 Shares     

Donna Karan International Inc.      
COMMON STOCK

----------- 

OF THE 10,750,000  SHARES OF COMMON  STOCK BEING OFFERED,  7,525,000 SHARES ARE 
BEING  OFFERED  INITIALLY  IN  THE   UNITED  STATES  AND  CANADA  BY  THE  U.S. 
UNDERWRITERS AND  3,225,000 SHARES  ARE BEING  OFFERED INITIALLY  OUTSIDE THE 
UNITED   STATES   AND  CANADA   BY   THE   INTERNATIONAL  UNDERWRITERS.   SEE 
"UNDERWRITERS."  ALL OF THE 10,750,000 SHARES OF COMMON STOCK  OFFERED HEREBY 
ARE BEING SOLD  BY THE  COMPANY. PRIOR TO  THE OFFERING, THERE  HAS BEEN NO 
PUBLIC  MARKET  FOR  THE COMMON  STOCK  OF  THE  COMPANY. IT  IS  CURRENTLY 
ESTIMATED THAT THE INITIAL PUBLIC OFFERING  PRICE WILL BE BETWEEN $    AND
$    PER  SHARE. SEE  "UNDERWRITERS"  FOR  A  DISCUSSION  OF THE  FACTORS 
CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.              

----------- 

THE COMPANY INTENDS TO MAKE APPLICATION TO LIST THE COMMON STOCK ON THE NEW 
YORK STOCK EXCHANGE UNDER THE SYMBOL "DK."

----------- 

SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR INFORMATION THAT 
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.      

----------- 

THESE  SECURITIES  HAVE NOT  BEEN  APPROVED OR  DISAPPROVED BY  THE  SECURITIES 
AND  EXCHANGE COMMISSION  OR  ANY  STATE SECURITIES  COMMISSION  NOR HAS  THE 
SECURITIES AND  EXCHANGE  COMMISSION  OR  ANY  STATE  SECURITIES COMMISSION 
PASSED   UPON   THE  ACCURACY   OR  ADEQUACY   OF   THIS  PROSPECTUS.   ANY 
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.                     

----------- 

PRICE $    A SHARE

----------- 

                                                                [Download Table]

                                                   UNDERWRITING                
                                 PRICE TO          DISCOUNTS AND    PROCEEDS TO
                                  PUBLIC          COMMISSIONS(1)     COMPANY(2)
                                 --------         --------------    -----------
                                                                               
Per Share..................        $                   $               $       
Total(3)...................       $                   $                $       

-----                                                                           
(1)  The Company has agreed to indemnify the Underwriters against certain   
     liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."                                      
(2)  Before deducting expenses of the Offering payable by the Company,      
estimated at $   .                                                

(3)  The Company has granted to the U.S. Underwriters an option, exercisable
  within 30 days of the date hereof, to purchase up to an aggregate of
 1,612,500 additional Shares of Common Stock at the price to public,
less underwriting discounts and commissions, for the purpose of   
 covering over-allotments, if any. If the Underwriters exercise such
   option in full, the total price to public, underwriting discounts and
   commissions, and proceeds to Company will be $    , $    , and $    ,
respectively. See "Underwriters."                                 

----------- 

The Shares are offered, subject to prior sale, when, as and if accepted by  
the Underwriters named herein and subject to the approval of certain legal      
matters by Davis Polk & Wardwell, counsel for the Underwriters. It is expected  
that delivery of the Shares will be made on or about    , 1996 at the office of 
Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in  
same day funds.                                                                 

----------- 

MORGAN STANLEY & CO.                                    BEAR, STEARNS & CO. INC.
Incorporated                                                  

MERRILL LYNCH & CO.                               

SMITH BARNEY INC.         

, 1996                                                            

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NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE 
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS             
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT  
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER.  
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN    
OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED HEREBY TO ANY     
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR     
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY    
SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION       
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.                 

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

NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY OR   
ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR      
POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY JURISDICTION WHERE ACTION  
FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS INTO     
WHOSE POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE COMPANY AND THE      
UNDERWRITERS TO INFORM THEMSELVES ABOUT, AND TO OBSERVE ANY RESTRICTIONS AS     
TO, THE OFFERING OF THE COMMON STOCK AND THE DISTRIBUTION OF THIS PROSPECTUS.   

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

TABLE OF CONTENTS 

                                                                [Download Table]

                                     PAGE
                                     ----
                                         
Prospectus Summary.................    3 
Risk Factors.......................   11 
Reorganization.....................   19 
Use of Proceeds....................   21 
Dividend Policy....................   21 
Capitalization.....................   22 
Dilution...........................   24 
Pro Forma Combined Financial Infor-      
 mation............................   26 
Selected Combined Financial Data...   30 
Management's Discussion and              
 Analysis of Financial Condition         
 and Results of Operations.........   31 
Business...........................   38 
Management.........................   58 
                                                                [Download Table]

                                                                       PAGE
                                                                       ----
                                                                           
Certain Relationships and Related Transactions........................  66 
Principal Stockholders................................................  69 
Description of Capital Stock..........................................  70 
Shares Eligible for Future Sale.......................................  73 
Certain United States Federal Tax                                          
 Consequences to Non-United States Holders of Common Stock............  74 
Underwriters..........................................................  77 
Legal Matters.........................................................  80 
Experts...............................................................  80 
Additional Information................................................  80 
Glossary..............................................................  81 
Index to Predecessor Combined Financial Statements.................... F-1 

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

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT  
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK   
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH    
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-   
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE             
DISCONTINUED AT ANY TIME.                                                       

DURING THE OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING  
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR    
THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES    
10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.              

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

UNTIL       , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS 
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN     
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY       
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A            
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD         
ALLOTMENTS OR SUBSCRIPTIONS.                                                    

IN THIS PROSPECTUS, REFERENCES TO "DOLLAR" AND "$" ARE TO UNITED STATES     
DOLLARS, AND THE TERMS "UNITED STATES" AND "U.S." MEAN THE UNITED STATES OF     
AMERICA, ITS STATES, ITS TERRITORIES, ITS POSSESSIONS, AND ALL AREAS SUBJECT    
TO ITS JURISDICTION.                                                            

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

Donna Karan New York(R), DKNY(R), DK(R), Donna Karan(R), DK Men(TM), a logo 
consisting of the block letters DKNY and the words Donna Karan New York (with   
dots below each word), DKNY Jeans and design graphics(R), and DKNY Coverings    
and design graphics(R) are trademarks that will be licensed to the Company      
upon the closing of the Offering. See "Business--Trademarks" and "Certain       
Relationships and Related Transactions--License Agreement for Principal         
Trademarks."                                                                    

2 

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed     
information and financial statements (including the notes thereto) appearing    
elsewhere in this Prospectus. Unless otherwise indicated, the information in    
this Prospectus gives effect to the Reorganization (as defined in               
"Reorganization"). As used in this Prospectus, references to the "Company" mean 
the DK Companies (as defined in "Reorganization") as of dates and periods prior 
to the closing of the Offering and, thereafter, collectively, Donna Karan       
International Inc. and its subsidiaries. See "Reorganization." The financial    
information of the Company contained herein includes the Intermediate Entities  
(as defined in "Reorganization"). References herein to a specific year refer to 
the Company's fiscal year, which is the 52- or 53-week period ending on the     
Sunday nearest December 31. Certain capitalized terms used in this Prospectus   
are defined in the Glossary included herein.                                    

THE COMPANY 

Donna Karan International Inc. is one of the world's leading international  
fashion design houses. The Company designs, contracts for the production 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(R) and DKNY(R) brand names, respectively. The Company also develops,       
contracts for the production of, markets, and distributes collections of men's  
and women's fragrance, bath and body, and treatment products under the DK       
Men(TM) and Donna Karan New York(TM) brand names, respectively. In addition,    
the Company selectively has granted licenses for the manufacture and            
distribution of certain other products under the Donna Karan New York(R) and    
DKNY(R) brand names, including hosiery, intimate apparel, eyewear, and, most    
recently, a license for children's apparel under the DKNY(R) brand name in      
Europe and the Middle East. In 1995, the Company's net revenues were $510.1     
million and its operating income was $42.5 million, representing a 21.4% and    
46.7% increase, respectively, over 1994 net revenues and operating income. The  
Company's net income in 1995 was $53.7 million. On a pro forma basis, after     
giving effect to the Reorganization, the Offering, and certain other            
adjustments, the Company's net revenues were $504.6 million, its operating      
income was $30.1 million, and its net income was $18.4 million for 1995. The    
Company's products have significant international appeal, and in 1995,          
approximately 33.9% of the Company's net revenues (excluding net revenues       
generated from outlet stores and licensing) were to customers in international  
markets.                                                                        

The Company's net revenues (in millions) for 1995 were distributed as       
follows:                                                                        

                                                                [Download Table]

PRODUCT CATEGORIES                 
------------------                 
                                   
Donna Karan New York(R)            
 collections for women(1)....  $ 77
DKNY(R) collections for            
 women(1)....................   271
Donna Karan New York(R)            
 collections for men(1)......    40
DKNY(R) collections for            
 men(1)......................    37
Beauty products..............    30
Outlet stores and licensing..    55
                                                                [Download Table]

GEOGRAPHIC MARKETS                
------------------                
                                  
United States(2)............  $301
Japan.......................    64
Europe and the Middle East..    57
Asia (excluding Japan)......    23
Other markets...............    10

--------                                                                        
(1) Includes apparel, accessory, and shoe collections.                          
(2) Excludes in the United States $55 million of net revenues from outlet       
stores and licensing.                                                   

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The Company has achieved its success through the implementation of the      
following operating strategies:                                                 

.  building the global name recognition and the distinctive brand image of  
  Donna Karan New York(R) in the exclusive designer market and the DKNY(R)
brand in the larger bridge market;                                    

.  establishing successful designer collections and then leveraging the     
success of those collections and the depth of its design talent in the
larger bridge market;                                                 

.  expanding on a worldwide basis, including in the United States, Europe   
and the Middle East, Japan, and other parts of Asia;                  

.  maintaining exclusivity of the brand image through coordinated global    
advertising and marketing, selective licensing arrangements, and      
controlled retail distribution; and                                   

.  offering a "head-to-toe" assortment of complementary luxury product      
categories designed to satisfy the lifestyle needs of its customers.  

Founded in 1984 on the talents of Ms. Donna Karan, a leading fashion        
designer, the Company's initial focus was the Donna Karan New York(R)           
Collection of women's designer apparel and accessories. The original collection 
was based on 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 consistent, but       
varied, high fashion look. The Donna Karan New York(R) Collection for women     
continues to represent high fashion apparel, made primarily with exclusively-   
developed luxury fabrics and designed with an emphasis on comfort and fit. The  
Donna Karan New York(R) Collection for women is recognized worldwide as one of  
the premier women's designer collections. Each of the spring and fall           
collections is introduced at major fashion shows which generate extensive       
coverage in the domestic and international fashion press, as well as the        
general media. The Donna Karan New York(R) Collection for women established the 
Company as a leading international fashion design house.                        

The initial success of the Donna Karan New York(R) Collection for women made
possible the launch of the DKNY(R) bridge collection of women's apparel and     
accessories in 1989. DKNY(R) 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(R) designer image. The Company was    
able to leverage the depth within its design team, as well as its sourcing      
capabilities and distribution strength to successfully address the market       
opportunity in the larger bridge market, thereby increasing its customer base   
and range of products. Today, the women's apparel, accessory, and shoe          
collections sold under the DKNY(R) brand name constitute the Company's largest  
division, representing 53.1% of net revenues in 1995.                           

Consistent with its operating philosophy and leveraging its name recognition
and its strengths in design, sourcing, and distribution, the Company introduced 
the Donna Karan New York(R) Collection for men in 1991 and the DKNY(R) men's    
collection in 1992. The Donna Karan New York(R) Collection of designer apparel  
for men is sophisticated, elegant, comfortable, and made of luxury fabrics. The 
DKNY(R) men's collection is innovative, modern, relaxed, and made of            
lightweight, tactile fabrics. The combined men's collections, which include     
apparel and shoes, accounted for 15.0% of the Company's 1995 net revenues and   
experienced a 68.2% increase in net revenues from 1994 to 1995.                 

To further leverage its strong brand name and image, in 1992 the Company    
launched the Donna Karan New York(R) fragrance for women. Based upon the        
success of that launch, the Company introduced men's and women's fragrance,     
bath and body, and treatment products. Sales of the Beauty Division have grown  
at a 96.0% compound annual growth rate since 1993 and represented 5.9% of the   
Company's net revenues in 1995. The Company intends to introduce a new women's  
fragrance under the Donna Karan New York(R) brand name in the second half of    
1996. The Company also plans to introduce a DKNY(TM) women's fragrance in 1998  
and a DKNY(TM) men's fragrance in 1999 with an appeal to a broader consumer     
base.                                                                           

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Due to the global recognition of the Donna Karan New York(R) and DKNY(R)    
brands, the Company has been able to expand its sales internationally. In 1995, 
the Company's net revenues in Japan, Europe and the Middle East, and other      
parts of Asia represented 14.1%, 12.4%, and 5.1%, respectively, of net revenues 
(excluding net revenues generated from outlet stores and licensing).            
International sales increased from 1991 to 1995 from 14.4% to 33.9% of such net 
revenues. Management believes international sales will continue to grow as a    
percentage of the overall business and is focused on continuing to build the    
infrastructure to support the growth of its brands worldwide.                   

To preserve the exclusivity of its brands, the Company maintains tight      
control over advertising, marketing, distribution, and licensing. All worldwide 
advertising, public relations, and marketing programs are managed on a          
centralized basis through the Company's Creative Services and Public Relations  
Departments in New York, which promote a consistent global image. Combined      
expenditures by the Company and its product licensees on advertising, public    
relations, and marketing of the Company's products totaled $44.2 million in     
1995 (and cumulatively, $124.9 million since 1993). Similarly, the Company has  
been very selective in pursuing licensing opportunities and has maintained      
strict control over design, quality, advertising, marketing, and distribution   
in its five existing product licensing arrangements.                            

To reinforce its exclusive image and appeal, the Company sells its products 
in the United States through a limited number of stores, including better       
department stores and large specialty stores, such as Bloomingdale's, Macy's,   
Saks Fifth Avenue, Neiman Marcus, Bergdorf Goodman, and Nordstrom, and better   
boutiques catering to fashion-conscious customers. Management believes sales of 
the Company's products typically rank among the leading fashion houses in terms 
of revenues in the department and large specialty stores in which they are      
sold. The Company sells its products internationally through better department  
and specialty stores and boutiques, as well as full-price, free-standing retail 
stores operated by third parties under the names Donna Karan New York(TM),      
DKNY(TM), and Donna Karan(TM) (the "International Retail Stores"). These free-  
standing retail stores exclusively showcase the Company's products. As of March 
1, 1996, 29 free-standing International Retail Stores were located in 16        
countries in Europe, the Middle East, and Asia. In March 1995, the Company      
entered into a retail agreement (the "Retail Agreement") with Hotel Properties  
Limited, a Singapore public company ("HPL"), and a corporation owned by a       
private investor with a substantial interest in HPL, providing for the          
establishment by HPL of an aggregate of 29 free-standing International Retail   
Stores, in Hong Kong, The People's Republic of China, The Philippines, South    
Korea, Taiwan, and Japan by December 31, 2000, the first of which opened in     
Hong Kong in January 1996.                                                      

The Company has continued to develop additional products which address the  
lifestyle needs of its customers. During the past five years, the Company has   
expanded its product offerings to include the Donna Karan New York(R)           
Essentials and DKNY(R) Essentials collections for women, the Donna Karan New    
York(R) Signature collection for men, the DKNY(R) jeans and petite collections  
for women, DK Men(TM) and Donna Karan New York(TM) men's and women's beauty     
products, respectively, as well as DKNY(R) men's and women's shoes. By          
expanding its collections, the Company establishes a larger potential customer  
base by offering a "head-to-toe" product assortment.                            

The Company's goals are to continue to leverage its strong brand name and   
image by expanding its current product offerings and to increase its presence   
in domestic and international markets. The principal elements of the Company's  
growth strategy are to:                                                         

.  Increase number of doors. During 1996, the Company expects selectively   
to increase the number of domestic doors (a "door" is a single retail 
outlet) through which its more recently-introduced products, including
 its beauty products and men's apparel, will be sold and to increase the
number of international doors through which the Company's products are
sold.                                                                 

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.  Increase number of free-standing retail stores. The Company anticipates  
that 10 additional free-standing International Retail Stores will be  
opened in 1996 (including five stores to be opened under the Retail   
Agreement with HPL) and currently is considering a strategy for the   
  opening of full-price, free-standing retail stores by or in arrangements
with third parties in select locations in the United States.          

.  Continue product segmentation and expansion. By continuing to segment    
  and expand its collections, the Company provides a greater "head-to-toe"
product assortment to better satisfy the lifestyle needs of existing  
customers and to appeal to new customers. In addition, expanding its  
 product offerings allows the Company to increase sales through existing
doors. The Company intends to launch a new women's fragrance under the
Donna Karan New York(R) brand name in the second half of 1996, to add 
casual sportswear to its Donna Karan New York(R) men's collection, and
 to expand the range of the current activewear offerings included within
  the DKNY(R) women's collection for spring 1997. In addition, the Company
intends to increase the product range of its Donna Karan New York(R)  
Essentials collection for women under its new Donna Karan New York(R) 
Signature label for spring 1997.                                      

.  Broaden customer base. The Company plans to target broader market        
 opportunities at lower prices than its apparel products with additional
luxury products in categories such as beauty and accessories.         

.  Expand licensing efforts. Having successfully established its brands     
worldwide, the Company now intends to expand its licensing efforts    
through the selective granting of new product licenses.               

Ms. Karan, the Company's Chairman, Chief Executive Officer, Chief Designer, 
and a substantial stockholder, has been designing fashion-forward apparel for   
over 25 years and is recognized as one of the world's preeminent fashion        
designers. Mr. Ruzow, the Company's President and Chief Operating Officer, has  
over 30 years of experience in the apparel industry. The Company's other        
executive officers and division presidents have significant experience in the   
fashion industry, with an average of over 20 years of experience.               

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.       

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THE OFFERING

COMMON STOCK OFFERED:                                                           

U.S. Offering.............                                                  
7,525,000 Shares  

International Offering....                                                  
3,225,000 Shares  

Total.....................                                                  
10,750,000 Shares   

Common Stock to be                                                              
Outstanding After the                                                         
Offering(1)(2).............  20,523,488 Shares                                

Use of Proceeds(2)..........                                                    
                            The net proceeds of the Offering will be used to
                            pay: (i) approximately $116.0 million to members
                        of the Takihyo Group (as defined herein) and
                        members of the Karan/Weiss Group (as defined
                             herein) in satisfaction of the Distribution Notes
                            (as defined herein) previously issued (including
                   accrued interest thereon), representing
                            cumulative undistributed taxable income on which
                 taxes previously have been paid; (ii)
                        approximately $70.0 million to the Company's
                     lenders to repay the term loans under the
                          Company's Credit Agreement (as defined herein)
                          and to reduce the amount outstanding under the
                     Company's revolving line of credit; (iii)
                            approximately $17.4 million (approximately $26.9
                       million if the Underwriters' over-allotment
                          option is exercised in full) to members of the
                          Takihyo Group as partial consideration for the
                     contribution of their interests in the DK
                           Companies to the Company in connection with the
                           Reorganization; (iv) $5.0 million to Stephen L.
                             Ruzow, the President of the Company, representing
                         a one-time payment pursuant to his employment
                           agreement; and (v) an estimated $5.0 million to
                 Gabrielle Studio (as defined herein),
                   representing a one-time payment made in
                             connection with the License Agreement (as defined
                      herein) (which by its terms will supersede
                           previously existing licensing arrangements that
                         could in certain circumstances, including the
                            Offering, provide for higher royalty payments to
                         Gabrielle Studio than those under the License
                     Agreement). See "Reorganization," "Use of
                      Proceeds," "Capitalization," "Management's
                          Discussion and Analysis of Financial Condition
                     and Results of Operations," "Management--
                    Compensation Arrangements," and "Certain
                           Relationships and Related Transactions--License
                Agreement for Principal Trademarks."

Proposed New York Stock                                                         
Exchange  symbol............  "DK"                                              
--------                                                                        

(1) Excludes an aggregate of     shares of Common Stock reserved for issuance   
   under the Company's 1996 Stock Incentive Plan. The Company expects to grant
   options for     shares of Common Stock at the initial public offering price
on the effective date of the Offering. Also excludes an aggregate of    
  shares of Common Stock reserved for issuance under the Company's 1996 Non-
  Employee Director Stock Option Plan. See "Management--1996 Stock Incentive
Plan" and "--1996 Non-Employee Director Stock Option Plan."             

(2) Assumes an initial public offering price of $21.50 and no exercise of the   
 Underwriters' over-allotment option. If the initial public offering price
is other than $21.50 or if the Underwriters' over-allotment option is   
   exercised in whole or in part, the Common Stock to be outstanding after the
  Offering and the amount of cash to be paid to members of the Takihyo Group
will be different. See "Reorganization."                                

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SUMMARY COMBINED FINANCIAL DATA 

The following table sets forth, for the periods and at the dates indicated, 
summary combined financial data for the Company. Such data have been derived    
from the audited and unaudited Predecessor Combined Financial Statements of the 
Company included elsewhere herein. See "Selected Combined Financial Data." The  
following table also includes certain unaudited pro forma combined statement of 
income data for 1995 and 1996 which give effect to the Reorganization, the      
Offering, and certain other adjustments as if they occurred on January 2, 1995. 
In addition, the unaudited pro forma combined balance sheet data gives effect   
to the Reorganization, the Offering, and certain other adjustments as if they   
occurred on January 1, 1995. See "Pro Forma Combined Financial Information."    

                                                        [Enlarge/Download Table]

                                              FISCAL YEAR ENDED                      FISCAL QUARTER ENDED   
                          ---------------------------------------------------------- ---------------------- 
                          DECEMBER 28, JANUARY 2, JANUARY 2, JANUARY 1, DECEMBER 31,  APRIL 2,   MARCH 31,  
                            1991(1)       1993       1994       1995        1995        1995        1996    
                          ------------ ---------- ---------- ---------- ------------ ----------  ---------- 
                                           (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)                    
                                                                                                            
STATEMENT OF INCOME                                                                                         
 DATA:                                                                                                      
 Net revenues...........    $196,570    $259,947   $364,705   $420,164   $  510,126  $  120,693  $  159,585 
 Gross profit...........      64,496      92,309    130,475    148,992      179,437      44,203      52,861 
 Selling, general, and                                                                                      
  administrative                                                                                            
  expenses..............      54,544      63,933    102,748    119,995      136,906      33,041      39,411 
                            --------    --------   --------   --------   ----------  ----------  ---------- 
 Operating income.......       9,952      28,376     27,727     28,997       42,531      11,162      13,450 
 Equity in earnings of                                                                                      
  affiliate(2)..........         --          --         --         --         2,519         --          988 
 Interest expense, net..         (82)       (892)    (4,063)    (8,862)      (7,650)     (1,701)     (2,047)
 Other expense(3).......         --          --      (2,980)    (2,651)         --          --          --  
 Gain on sale of                                                                                            
  interests in                                                                                              
  affiliate(2)..........         --          --         --         --        18,673      18,673         --  
                            --------    --------   --------   --------   ----------  ----------  ---------- 
 Income before provision                                                                                    
  for certain state,                                                                                        
  local, and foreign                                                                                        
  income taxes..........       9,870      27,484     20,684     17,484       56,073      28,134      12,391 
 Provision for certain                                                                                      
  state, local, and                                                                                         
  foreign income taxes..       2,187       3,522      1,312      1,139        2,398       1,408         690 
                            --------    --------   --------   --------   ----------  ----------  ---------- 
 Net income.............    $  7,683    $ 23,962   $ 19,372   $ 16,345   $   53,675  $   26,726  $   11,701 
                            ========    ========   ========   ========   ==========  ==========  ========== 
PRO FORMA STATEMENT OF INCOME DATA (UNAUDITED)(4)(5)(6):                                                    
 Net revenues..........................................................  $  504,605  $  115,172  $  159,585 
 Gross profit..........................................................     159,817      34,468      48,699 
 Selling, general, and administrative expenses.........................     129,761      27,634      38,661 
                                                                         ----------  ----------  ---------- 
 Operating income......................................................      30,056       6,834      10,038 
 Equity in earnings of affiliate.......................................       2,913         394         988 
 Interest expense, net.................................................        (926)        (32)       (152)
                                                                         ----------  ----------  ---------- 
 Income before provision for income taxes..............................      32,043       7,196      10,874 
 Provision for income taxes............................................      13,668       3,108       4,696 
                                                                         ----------  ----------  ---------- 
 Net income............................................................  $   18,375  $    4,088  $    6,178 
                                                                         ==========  ==========  ========== 
 Pro forma per share information(7)....................................  $     1.11  $      .25  $      .37 
                                                                         ==========  ==========  ========== 
 Number of common shares assumed outstanding(7)........................  16,497,278  16,497,278  16,497,278 

                                                                [Download Table]

                                                             MARCH 31, 1996     
                                                         -----------------------
                                                                    PRO FORMA,  
                                                                  AS ADJUSTED(8)
                                                          ACTUAL   (UNAUDITED)  
                                                         -------- --------------
                                                             (IN THOUSANDS)     
                                                                                
BALANCE SHEET DATA:                                                             
 Working capital.......................................  $118,766    $141,066   
 Total assets..........................................   226,267     239,087   
 Total long-term debt, including current portion.......    72,724       2,724   
 Stockholders' equity and partners' capital............    91,791     177,231   

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(1) Selling, general, and administrative expenses for 1991 included payments of 
 and accruals for consulting fees to the Principals (as defined herein) of
   $14.0 million in addition to amounts paid to certain executives pursuant to
their then existing employment arrangements. Excluding these consulting 
fees, operating income and net income would have been $24.0 million and 
$21.7 million, respectively.                                            

(2) On March 31, 1995, the Company sold 70% of its interest in the operations   
of Donna Karan Japan to a nonaffiliated party. The Company recognized a 
gain on this transaction, net of transaction costs, of $18.7 million.   
Subsequent to the sale, the Company has accounted for its remaining 30% 
  interest in the operations of Donna Karan Japan using the equity method of
accounting. Equity in earnings of affiliate amounted to $2.5 million and
$1.0 million for the year ended December 31, 1995 and the quarter ended 
 March 31, 1996, respectively. See Note 9 to Notes to Predecessor Combined
Financial Statements.                                                   

(3) 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.                                                                

(4) The unaudited pro forma statement of income data for the fiscal year ended  
December 31, 1995 reflects the Reorganization, the Offering, and the    
following adjustments as if they had occurred on January 2, 1995: (a)   
 royalties of $12.8 million to be paid to Gabrielle Studio pursuant to the
License Agreement; (b) a decrease in aggregate compensation from $4.3   
million to $2.0 million for two of the Company's executives pursuant to 
  their new employment agreements; (c) a reduction in interest costs of $6.2
million assuming the application of approximately $70.0 million of the  
proceeds from the Offering to reduce the actual outstanding indebtedness
   under the Credit Agreement; (d) a reduction of $0.6 million in amortization
of deferred financing costs, which costs would have been written off in 
connection with repayment of outstanding indebtedness under the Credit  
   Agreement; and (e) an increase of $11.3 million for income taxes based upon
  pro forma pre-tax income as if the Company had been subject to Federal and
additional state income taxes. In addition, the unaudited pro forma     
  statement of income data reflects 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.                                            

(5) The unaudited pro forma statement of income data for the fiscal quarters    
ended April 2, 1995 and March 31, 1996 reflect the Reorganization, the  
  Offering, and the following adjustments as if they had occurred on January
 2, 1995: (a) royalties of $2.9 million and $4.2 million in 1995 and 1996,
respectively, payable to Gabrielle Studio pursuant to the License       
Agreement; (b) a decrease in aggregate compensation from $1.1 million to
   $0.5 million in 1995, and from $1.5 million to $0.5 million in 1996 for two
of the Company's executives pursuant to their new employment agreements;
  (c) a reduction in interest costs of $1.5 million and $1.6 million in 1995
and 1996, respectively, assuming the application of approximately $70.0 
  million of the proceeds from the Offering to reduce the actual outstanding
indebtedness under the Credit Agreement; (d) a reduction of $0.1 million
and $0.3 million in 1995 and 1996, respectively, in amortization of     
deferred financing costs, which costs would have been written off in    
connection with repayment of outstanding indebtedness under the Credit  
   Agreement; and (e) an increase of $1.7 million and $4.0 million 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. In addition, the unaudited pro forma statement of income data for
  the quarter ended April 2, 1995 reflects 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.                                     

(6) The pro forma statement of income data does not include the non-recurring   
  pre-tax charge of approximately $17.7 million (approximately $10.0 million
on an after-tax basis) which the Company expects to accrue immediately  
following the closing of the Offering, relating to (a) the anticipated  
 consolidation of the Company's warehouse facilities ($5.0 million), (b) a
   one-time payment to the President of the Company pursuant to his employment
agreement ($5.0 million), (c) a one-time payment to Gabrielle Studio in 
  connection with the License Agreement (estimated at $5.0 million), and (d)
 the write-off of deferred financing costs related to the Company's Credit
   Agreement ($2.7 million). In addition, the unaudited pro forma statement of
income data does not include a deferred tax asset of approximately $15.5
 million, net of certain state and local deferred tax assets recorded on a
  historical basis, which the Company will record concurrently with becoming
subject to Federal and additional state and local income taxes.         

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(7) Pro forma per share information is based on 9,773,488 shares of Common      
Stock outstanding prior to the Offering, increased by (a) the sale of   
 5,846,774 shares of Common Stock assuming an offering price of $21.50 per
 share ($19.84, net of expenses), the proceeds of which would be necessary
to pay approximately $116.0 million in satisfaction of the Distribution 
Notes and (b) the sale of 877,016 shares of Common Stock assuming an    
  offering price of $21.50 per share ($19.84, net of expenses), the proceeds
 of which would be necessary to pay approximately $17.4 million to members
   of the Takihyo Group as partial consideration for the contribution of their
interests in the DK Companies to the Company in connection with the     
Reorganization.                                                         

Supplementary pro forma per share information for the year ended December   
31, 1995, and quarters ended April 2, 1995 and March 31, 1996 are $1.38,    
$.31, and $.46, respectively, based on 9,773,488 shares of Common Stock     
outstanding prior to the Offering, increased by the sale of 3,528,226       
shares of Common Stock assuming an offering price of $21.50 per share       
($19.84, net of expenses), the proceeds of which would be necessary to      
repay approximately $70.0 million outstanding under the Company's credit    
facility.                                                                   

(8) The unaudited pro forma, as adjusted, balance sheet data reflects (a) the   
Reorganization, (b) the issuance of the Distribution Notes and the      
liability to members of the Takihyo Group for partial consideration of  
their contribution of the DK Companies to the Company in connection with
 the Reorganization, (c) the sale of the shares of Common Stock offered by
  the Company hereby assuming an initial public offering price of $21.50 per
 share and no exercise of the Underwriters' over-allotment option, (d) the
   application of the estimated net proceeds received by the Company therefrom
  as described under "Use of Proceeds," (e) the non-recurring pre-tax charge
   of approximately $17.7 million (approximately $10.0 million on an after-tax
basis) which the Company expects to accrue immediately following the    
closing of the Offering as described in note 6 above, and (f) a deferred
tax asset of approximately $15.5 million described in note 6 above.     

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RISK FACTORS  

Prospective investors should consider carefully the following information in
conjunction with the other information contained in this Prospectus before      
purchasing the Common Stock offered hereby.                                     

DEPENDENCE ON KEY PERSONNEL                                                     

The future success of the Company largely is dependent on the talents and   
efforts of Ms. Karan, the Company's Chairman of the Board, Chief Executive      
Officer, and Chief Designer, as well as on the talents and abilities of key     
members of the Company's design teams and other key management executives. The  
Company believes that it has developed depth and experience within its design   
teams and management; however, no assurance can be given that the Company's     
business would not be adversely affected if certain key members of the          
Company's design teams or management ceased to be active in the business of     
the Company. Ms. Karan is also integral to the Company's marketing efforts.     
The loss of the services of Ms. Karan would have a material adverse effect on   
the Company. The Company maintains key-person life insurance in the amount of   
$1,000,000 on the life of Ms. Karan.                                            

Effective upon the consummation of the Offering, Ms. Karan and the Company  
will enter into an employment agreement, which provides for Ms. Karan to be     
the Company's Chairman of the Board of Directors, Chief Executive Officer, and  
Chief Designer. Under the employment agreement, Ms. Karan may engage in         
certain activities for her personal benefit, such as personal endorsements and  
appearances, motion pictures, television, writing, speaking and teaching        
engagements, photography, the fine arts, designing for stage, film and other    
media, architectural, industrial, and interior design (exclusive of home        
furnishings) and sales of limited edition products based on such designs, and   
consulting services in connection with the foregoing; provided such activities  
are not directly competitive with the Company's principal product lines and     
price points and do not interfere with her primary obligations to the Company.  
The employment agreement requires Ms. Karan to provide at least four months'    
notice of intent to terminate the agreement. During the initial three-year      
term of the employment agreement, Ms. Karan may terminate her employment as     
Chief Executive Officer without reason, and after such initial three-year       
term, Ms. Karan may terminate her employment as Chairman of the Board of        
Directors, Chief Executive Officer, and Chief Designer without reason. The      
employment agreement also may be terminated at any time without notice by Ms.   
Karan for "good reason," which includes, among other events, a Change in        
Control (as defined in the Glossary), 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 changes in the         
composition of the Board of Directors. See the Glossary for a complete          
description of Change in Control. The employment agreement provides that for a  
period of one year following termination Ms. Karan shall not participate or     
engage in, either directly or indirectly, any business activity that is         
directly competitive with the Company's then current principal product lines    
and price points and could reasonably be expected to have a material adverse    
effect on the Company. In addition, the Company has employment agreements with  
certain other of its key management executives. See "Management--Compensation   
Arrangements."                                                                  

DEPENDENCE ON AND PROTECTION OF LICENSED TRADEMARKS                             

In connection with the Reorganization and upon the closing of the Offering, 
Gabrielle Studio, Inc. ("Gabrielle Studio"), a corporation wholly-owned by Ms.  
Karan, her husband, Stephan Weiss, and trusts established for the benefit of    
Ms. Karan and for the benefit of Ms. Karan's and Mr. Weiss' children (the "KW   
Trusts"), will enter into a license agreement with the Company (the "License    
Agreement"), which will amend, restate, and supersede in its entirety the       
licensing arrangements previously existing between the Company and Gabrielle    
Studio. The License Agreement provides for the grant of an exclusive license    
in perpetuity throughout the world to use, and sublicense the right to use,     
the trademarks "Donna Karan," "Donna Karan New York," "DKNY," "DK," and, in     
addition, all variations thereof (collectively, the "Licensed Marks"), and to   
use, and sublicense the right to use, the name and likeness of Ms. Donna        
Karan, in connection with the design, manufacture, distribution, sale (both at  
retail and at wholesale), advertising, marketing, and promotion of products     
and offering of services, other than products and services for which Gabrielle  
Studio has retained the right to use or license such trademarks. See "Certain   
Relationships and Related Transactions--License                                 

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Agreement for Principal Trademarks" for a more complete description of the      
terms of this license and the royalty payable thereunder. The Company           
considers its rights under the License Agreement to be material, and as a       
result, termination of the License Agreement and the loss of the right to use   
such Licensed Marks would have a material adverse effect upon the Company.      

The License Agreement will impose certain obligations on the Company with   
respect to the quality of the products to be sold bearing, and services         
offered in connection with, the Licensed Marks and the sales and promotional    
materials used with respect to the products bearing the Licensed Marks and      
services offered in connection therewith. In addition, the License Agreement    
will provide that at such time as Ms. Karan is no longer the Chief Executive    
Officer and Chief Designer or Chairman of the Board of Directors and Chief      
Designer of the Company, the Licensed Marks may only be used by the Company in  
the market segments in which such Licensed Marks previously were used.          

The License Agreement will provide that it 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 License Agreement and fails to initiate and           
thereafter pursue appropriate corrective action within 45 days after a final    
unappealable determination by an arbitration tribunal or court of competent     
jurisdiction that such violation has occurred. The License Agreement also may   
be terminated by Gabrielle Studio upon the occurrence of, among other events,   
a Change in Control, 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 changes in the composition of the    
Board of Directors. See the Glossary for a complete description of Change in    
Control.                                                                        

While Gabrielle Studio and its shareholders have lessened the likelihood of 
a bankruptcy proceeding by agreeing that Gabrielle Studio will not engage in    
any activities other than those related to the License Agreement, there can be  
no assurance that a case under the Federal bankruptcy laws will not be          
commenced by or against Gabrielle Studio in the future. If such a case were to  
be commenced, the trustee in the bankruptcy case or Gabrielle Studio, as        
debtor-in-possession, could reject the License Agreement. In such event, the    
Company would lose its right to use the Licensed Marks, which would have a      
material adverse effect on the Company. See "Reorganization" and "Certain       
Relationships and Related Transactions--License Agreement for Principal         
Trademarks."                                                                    

The Company devotes substantial resources to the registration, maintenance, 
and protection of its trademarks (including the Licensed Marks). There can be   
no assurance that the actions taken by the Company to establish and protect     
its trademarks, including the Licensed Marks, and other proprietary rights      
will prevent imitation of its products or infringement of its trademarks by     
others, or prevent the loss of revenue or other damages caused thereby. As a    
result of the Company offering new products, utilizing new trademarks, and      
selling its products in foreign countries, the Company is in the process of     
expanding its trademark rights. There can be no assurance that all such         
efforts will be successful or that others will not resist such efforts or seek  
to block sales of the Company's products as violative of their trademark and    
proprietary rights. In addition, the laws of certain foreign countries do not   
protect proprietary rights to the same extent as do the laws of the United      
States. See "Business--Trademarks."                                             

FASHION AND APPAREL INDUSTRY RISKS                                              

The Company believes that its success depends in substantial part on its    
ability to originate and define fashion trends as well as to anticipate and     
react to changing consumer demands in a timely manner. There can be no          
assurance that the Company will continue to be successful in this regard. The   
Company attempts to reduce the risks of changing fashion trends and product     
acceptance by contracting for the production of the bulk of its apparel         
products only after receiving a significant portion of the anticipated orders   
for such products. Nevertheless, if the Company misjudges the market for its    
collections, it may be faced with a significant amount of unused fabrics and    
yarns, which could have a material adverse effect on the Company.               

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The apparel industry is cyclical. Purchases of apparel and related          
merchandise tend to decline during recessionary periods and also may decline    
at other times. The increase in the Company's sales in each of 1993, 1994, and  
1995 was in contrast to general apparel industry trends and the difficult       
retail environment. There can be no assurance that the Company will be able to  
maintain its historical rate of growth in revenues and earnings, or remain      
profitable, particularly if the retail environment remains stagnant or          
declines. Further, a recession in the general economy or uncertainties          
regarding future economic prospects could affect consumer spending habits and   
have an adverse effect on the Company's results of operations.                  

Competition is strong in the segments of the fashion industry in which the  
Company operates. The Company competes with numerous designers and              
manufacturers of apparel and accessory products, domestic and foreign, none of  
which accounts for a significant percentage of total industry sales, but some   
of which are significantly larger and have substantially greater resources      
than the Company. In addition, with substantial financial backing, talented     
designers can become competitors within several years of establishing a new     
label. The Company's business depends, in part, on its ability to shape and     
stimulate consumer tastes and demands by producing innovative, attractive, and  
exciting fashion products, as well its ability to remain competitive in the     
areas of design and quality. See "Business--Products" and "--Competition."      

CHANGES IN THE RETAIL INDUSTRY                                                  

The retail industry periodically has experienced consolidation and other    
ownership changes. In addition, some of the Company's customers have operated   
under the protection of the federal bankruptcy laws. In January 1996, Barneys,  
Inc. and Barneys America, Inc. (together, "Barneys") and certain affiliated     
entities filed for protection under the Federal bankruptcy laws. Barneys        
accounted for 2.3% of the Company's gross revenues during 1995, and the         
Company estimates that its maximum uninsured loss as a result of Barneys'       
bankruptcy will be approximately $2.0 million, which amount has been reserved   
for at December 31, 1995. In the future, other retailers in the United States   
and in foreign markets may consolidate, undergo restructurings or               
reorganizations, or realign their affiliations, any of which could decrease     
the number of stores that carry the Company's products or increase the          
ownership concentration within the retail industry. While such changes in the   
retail industry to date have not had a material adverse effect on the           
Company's business or financial condition, there can be no assurance as to the  
future effect of any such changes. See "Business--Management Information        
Systems; Inventory and Credit Control."                                         

RISKS OF GROWTH STRATEGIES                                                      

As part of the Company's growth strategy, the Company plans to increase     
sales by increasing the number of domestic doors through which its more         
recently-introduced products will be sold and by further increasing the number  
of international doors through which its products are sold. The Company also    
plans to grow its sales through distribution to free-standing International     
Retail Stores and is considering a strategy for the opening of full-price,      
free-standing retail stores in select locations in the United States. There     
can be no assurance that these strategies will be successful or that the        
Company's overall net revenues will increase as a result of an increase in the  
number of its doors or as a result of sales to full-price, free-standing        
retail stores. See "Business--Customers" and "--International Business."        

In addition, the Company's plan has been and continues to be to segment and 
extend its existing collections, as well as to increase its customer base by    
adding new luxury products in lower price categories than its apparel           
products, such as beauty products and accessories. There can be no assurance    
that certain of the Company's collections or any new products or collections    
that it may add in the future will achieve the same degree of success as that   
achieved by the Donna Karan New York(R) collections of men's and women's        
apparel and by the DKNY(R) collections of men's and women's apparel, or that    
such collections or products will be profitable. The introduction of new        
collections and products generally is characterized by relatively high start-   
up costs, as well as production, distribution, and marketing inefficiencies     
associated with the initial limited distribution of such collections and        
products. Further, the introduction of new products at lower prices may dilute  
the Company's brand image, and as a result, may lower the appeal of the         
Company's existing products and collections. There                              

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can be no assurance that any collection or product which the Company has or     
may introduce will achieve sales levels sufficient to enable it to generate     
profits or positive cash flow. Expansion of the Company's operations or of its  
collections or products also could require capital beyond that provided by the  
Offering and the Company's credit facility. There can be no assurance that      
such capital will be available to the Company, or, if available, that it will   
be available on terms the Company considers reasonable. See "Management's       
Discussion and Analysis of Financial Condition and Results of Operations."      

The Company continually evaluates the markets for its products and whether  
it would be more advantageous to the Company to license, joint venture, or      
otherwise dispose of certain of its product lines. For example, although the    
Company initially contracted for the manufacture of and distributed hosiery as  
part of its Donna Karan New York(R) Collection for women, the Company           
determined for business and financial considerations that a license of such     
hosiery business would be more appropriate. Accordingly, the Company entered    
into a license agreement with Hanes Hosiery, a division of Sara Lee             
Corporation, which currently provides for the manufacture and worldwide         
distribution of hosiery bearing certain of the Licensed Marks. See "Business--  
Licensed Products." However if the Company determines to license, joint         
venture, or otherwise dispose of any of such product lines, there can be no     
assurance that the Company will be able to do so on commercially reasonable     
terms or at all. See "Management's Discussion and Analysis of Financial         
Condition and Results of Operations."                                           

DEPENDENCE ON CERTAIN CUSTOMERS AND LICENSEES                                   

Certain of the Company's customers, including some under common ownership,  
have accounted for significant portions of the Company's gross revenues.        
During 1995, Bloomingdale's, Macy's, and affiliated stores owned by Federated   
Department Stores together accounted for approximately 12.3% of the Company's   
gross revenues; Saks Fifth Avenue stores accounted for approximately 9.8% of    
the Company's gross revenues; Neiman Marcus stores and Bergdorf Goodman         
stores, owned by The Neiman Marcus Group, Inc., together accounted for          
approximately 7.8% of the Company's gross revenues; and Nordstrom stores        
accounted for approximately 7.1% of the Company's gross revenues. Sales to      
entities affiliated with HPL, including Donna Karan Japan, the Company's        
distributor in Japan in which the Company has a 30% equity interest, and        
certain free-standing International Retail Stores, accounted for approximately  
11.1% of the Company's gross revenues for 1995. See "Business--Customers" and   
"--International Business." The Company's 10 largest customers accounted for    
approximately 60.8% of the Company's gross revenues during 1995. A decision by  
the controlling owner of a group of stores or any substantial customer,         
whether motivated by fashion concerns, financial difficulties, or otherwise,    
to decrease the amount of merchandise purchased from the Company or to cease    
carrying the Company's products could materially adversely affect the Company.  

FOREIGN OPERATIONS AND SOURCING; IMPORT RESTRICTIONS                            

During 1995, approximately 46.6% of the Company's direct purchases of raw   
materials, labor and finished goods for its apparel, accessories, shoes, and    
beauty products were produced in Hong Kong, Taiwan, South Korea, and other      
Asian countries; approximately 28.1% were produced in the United States;        
approximately 22.9% were produced in Europe; and approximately 2.4% were        
produced elsewhere, all through arrangements with independent contractors. In   
addition, the Company has been increasing its international sales and, in       
1995, approximately 33.9% of the Company's net revenues (excluding net          
revenues generated from outlet stores and licensing) were to customers in       
international markets. As a result, the Company's operations may be affected    
adversely by political instability resulting in the disruption of trade from    
the countries in which the Company's contractors, suppliers, or customers are   
located, the imposition of additional regulations relating to imports, the      
imposition of additional duties, taxes, and other charges on imports,           
significant fluctuations of the value of the dollar against foreign             
currencies, or restrictions on the transfer of funds. The Company currently     
hedges its exposure to certain foreign currency fluctuations. The inability of  
a contractor to ship orders of the Company's products in a timely manner could  
cause the Company to miss the delivery date requirements of its customers for   
those items, which could result in cancellation of orders, refusal to accept    
deliveries, or a reduction in sales prices. Further, since the Company is       
unable to return merchandise to its suppliers, it could be faced with a         

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significant amount of unsold merchandise, which could have a material adverse   
effect on the Company. See "Business--Sourcing and Product Development."        

Sovereignty over Hong Kong is scheduled to be transferred from the United   
Kingdom to The People's Republic of China effective July 1, 1997. If the        
business climate in Hong Kong were to experience an adverse change as a result  
of the transfer, the Company believes it could relocate its production and      
sourcing facilities outside Hong Kong and replace the merchandise currently     
produced in Hong Kong with merchandise produced elsewhere without a material    
adverse effect on the Company. Nevertheless, there can be no assurance that     
the Company would be able to do so.                                             

The Company's import operations are subject to constraints imposed by       
bilateral textile agreements between the United States and a number of foreign  
countries, including Taiwan, South Korea, and Hong Kong. These agreements,      
which have been negotiated bilaterally either under the framework established   
by the Arrangement Regarding International Trade in Textiles, known as the      
Multifiber Agreement, and other applicable statutes, impose quotas on the       
amounts and types of merchandise which may be imported into the United States   
from these countries. These agreements also allow the United States to impose   
restraints at any time on the importation of categories of merchandise that,    
under the terms of the agreements, are not currently subject to specified       
limits. The Company's imported products are also subject to United States       
customs duties which comprise a material portion of the cost of the             
merchandise. A substantial increase in customs duties could have an adverse     
effect on the Company's operating results. The United States and the countries  
in which the Company's products are produced or sold may, from time to time,    
impose new quotas, duties, tariffs, or other restrictions, or adversely adjust  
prevailing quota, duty, or tariff levels, any of which could have a material    
adverse effect on the Company.                                                  

CONFLICTS OF INTEREST                                                           

Ms. Karan, Mr. Weiss, and the KW Trusts are the sole shareholders of        
Gabrielle Studio. The Company will license from Gabrielle Studio the right to   
use and sublicense the Licensed Marks pursuant to the License Agreement. In     
connection with the License Agreement, the Company will make a one-time         
payment to Gabrielle Studio estimated at $5.0 million. The Company will also    
pay an annual royalty to Gabrielle Studio based on the Company's net sales (as  
defined in the License Agreement). In addition, Mr. Weiss is the owner of the   
designs of the bottles in which the Beauty Division products are packaged.      
Upon the closing of the Offering, Mr. Weiss will grant to the Company an        
exclusive, royalty-free, worldwide, in perpetuity license for the use of the    
designs for the bottles and a non-exclusive, royalty-free, worldwide license    
for the term of the patents for use of the utility patents for the bottles.     
Mr. Weiss will receive approximately $       , representing his out-of-pocket   
costs incurred in the development of the bottles and the issuance of the        
patents thereon, upon the grant of these licenses to the Company. Such          
expenses are comprised substantially of outside legal fees incurred in          
connection with the registration and maintenance of such patents around the     
world.                                                                          

Ms. Karan is the Company's Chairman of the Board of Directors, Chief        
Executive Officer, and Chief Designer. In addition, upon completion of the      
Offering, Ms. Karan, Mr. Weiss, and the KW Trusts will beneficially own in the  
aggregate approximately 25.8% of the outstanding Common Stock, assuming an      
initial public offering price of $21.50 per share and no exercise of the        
Underwriters' over-allotment option. As a result of Ms. Karan's and Mr. Weiss'  
interests in Gabrielle Studio (the Licensor under the License Agreement),       
their positions at the Company, and their ownership of the Company's Common     
Stock, various conflicts of interest may arise upon completion of the           
Offering. The Bylaws, however, provide that Donna Karan and Stephan Weiss       
shall not participate in any vote of the Board of Directors regarding any       
transaction by the Company with Gabrielle Studio, including transactions        
related to the License Agreement. See "Certain Relationships and Related        
Transactions."                                                                  

MATERIAL BENEFITS TO PRINCIPAL STOCKHOLDERS AND KEY PERSONNEL                   

The net proceeds of the Offering will be used to pay: (i) approximately     
$58.0 million to Mr. Tomio Taki, Mr. Frank Mori, Takihyo Inc., and certain      
affiliates of Messrs. Taki and Mori (collectively, the "Takihyo Group"), and    
$58.0 million to Ms. Karan, Mr. Weiss, and the KW Trusts, in satisfaction of    
the Distribution Notes previously issued (including accrued interest thereon),  
representing cumulative undistributed taxable income on which taxes             

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previously have been paid; (ii) approximately $70.0 million to the Company's    
lenders to repay the term loans under the Company's Credit Agreement and to     
reduce the amount outstanding under the Company's revolving line of credit;     
(iii) assuming an initial public offering price of $21.50 per share,            
approximately $17.4 million (approximately $26.9 million if the Underwriters'   
over-allotment option is exercised in full) to certain members of the Takihyo   
Group as partial consideration for the contribution of their interests in the   
DK Companies to the Company in connection with the Reorganization; (iv) $5.0    
million to the President of the Company representing a one-time payment         
pursuant to his employment agreement; and (v) an estimated $5.0 million to      
Gabrielle Studio, representing a one-time payment made in connection with the   
License Agreement. In addition to the cash to be received by members of the     
Takihyo Group from the net proceeds of the Offering, as part of the             
Reorganization Ms. Karan, Mr. Weiss, the KW Trusts, and Gabrielle Studio,       
considered as a group (the "Karan/Weiss Group"), and the Takihyo Group will     
receive shares of Common Stock. In consideration of the Company repaying        
amounts outstanding under the Credit Agreement, the Company's lenders will      
release certain liens held by them on the license agreement between Ms. Karan   
and Gabrielle Studio and the current license agreement between Gabrielle        
Studio and the Company. Gabrielle Studio, wholly-owned by Ms. Karan, Mr.        
Weiss, and the KW Trusts, will commence receiving royalties after the closing   
of the Offering pursuant to the License Agreement. See "Certain Relationships   
and Related Transactions--License Agreement for Principal Trademarks" for the   
royalties to be received by Gabrielle Studio. See also "Reorganization," "Use   
of Proceeds," and "Capitalization."                                             

CONTROL BY PRINCIPAL STOCKHOLDERS; CERTAIN ANTI-TAKEOVER PROVISIONS             

Upon completion of the Offering, assuming an initial public offering price  
of $21.50 per share, Ms. Karan, Mr. Weiss, and the KW Trusts will beneficially  
own, in the aggregate, approximately 25.8% of the outstanding Common Stock,     
and the Takihyo Group will beneficially own approximately 21.8% of the          
outstanding Common Stock (24.4% and 18.6%, respectively, of the outstanding     
Common Stock if the Underwriters' over-allotment option is exercised in full).  
As a result of the beneficial ownership of their stock, Ms. Karan, Mr. Weiss,   
the KW Trusts, and the Takihyo Group will have sufficient voting power to       
control the election of the entire Board of Directors of the Company and,       
subject to their fiduciary duties, the operations and policies of the Company.  
Pursuant to a stockholders agreement, the Takihyo Group will be entitled to     
designate two members of the Board of Directors of the Company until such time  
as the Takihyo Group sells any shares of Common Stock (other than shares        
distributed to stockholders of Takihyo) and, thereafter, has the right to       
designate one member of the Board of Directors, so long as the Takihyo Group    
continues to own a certain percentage of Common Stock, and Ms. Karan and Mr.    
Weiss will be entitled to designate one member of the Board of Directors of     
the Company, in addition to themselves, until such time as the Karan/Weiss      
Group owns less than 20% of the then outstanding Common Stock. The Karan/Weiss  
Group on the one hand, and the Takihyo Group on the other hand, have agreed to  
vote the shares of Common Stock owned by them for each other's designees (and   
in the case of the Takihyo Group, for Ms. Karan and Mr. Weiss) as directors.    
See "Management--Board of Directors."                                           

Ms. Karan, Mr. Weiss, and the KW Trusts may have the ability, by virtue of  
their stock ownership, to prevent or cause a change in control of the Company.  
Certain provisions of the Company's Restated Certificate of Incorporation and   
material agreements, including the License Agreement with Gabrielle Studio and  
the employment agreement with Ms. Karan, may be deemed to have the effect of    
discouraging a third party from pursuing a non-negotiated takeover of the       
Company and preventing certain changes in control of the Company. In addition,  
the Company's 1996 Stock Incentive Plan and 1996 Non-Employee Director Stock    
Option Plan provide for accelerated vesting of stock options upon a "change in  
control" of the Company. See "Management--Compensation Arrangements," "--Board  
of Directors," "--The 1996 Stock Incentive Plan," "--The 1996 Non-Employee      
Director Stock Option Plan," "Certain Relationships and Related Transactions--  
License Agreement for Principal Trademarks," and "Description of Capital        
Stock."                                                                         

CHANGE IN ORGANIZATIONAL STRUCTURE; RESIGNATIONS OF MESSRS. TAKI AND MORI       

Until completion of the Reorganization, the Company will continue to consist
of the DK Companies, a series of affiliated partnerships and corporations. The  
policies of the DK Companies currently are determined by                        

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Ms. Karan and Mr. Weiss and Messrs. Taki and Mori, acting on behalf of their    
affiliates. Ms. Karan, as chief executive officer of the DK Companies, and      
other key management executives are responsible for the day-to-day              
implementation of the DK Companies' strategies. Pursuant to the                 
Reorganization, the interests of Ms. Karan, Mr. Weiss, Mr. Taki, and Mr. Mori   
(collectively, the "Principals") and their affiliates in the DK Companies will  
be consolidated into the Company, and thereafter the Company's business will    
be subject to the direction and control of the Board of Directors of the        
Company. Immediately prior to the closing of the Offering, Messrs. Taki and     
Mori will resign from the Board of Directors, upon the advice of counsel, to    
avoid the appearance of a conflict of interest due to their associations with   
the Company and Anne Klein & Company, an affiliate of Takihyo Inc. (with which  
Messrs. Taki and Mori are affiliated). Pursuant to a stockholders agreement,    
the Takihyo Group has the right to designate two members of the Board of        
Directors until such time as the Takihyo Group sells any shares of Common       
Stock (other than shares distributed to stockholders of Takihyo) and,           
thereafter, has the right to designate one member of the Board of Directors,    
so long as the Takihyo Group continues to own a certain percentage of Common    
Stock. There can be no assurance that the change in organizational structure    
or the resignation from the Board of Directors of Messrs. Taki and Mori will    
not have a material adverse effect on the Company. See "Management--Board of    
Directors."                                                                     

ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE              

Prior to the Offering, there has been no public market for the Common Stock.
The Company intends to make application to list the Common Stock on the New     
York Stock Exchange, but there can be no assurance that such application will   
be approved. The initial public offering price of the Common Stock will be      
determined by negotiation among the Company, the Principals, and the            
representatives of the Underwriters (the "Representatives"). There can be no    
assurance that an active trading market will develop for the Common Stock or    
that the Common Stock will trade in the public market at or above the initial   
public offering price. See "Underwriters."                                      

The stock market has from time to time experienced extreme price and volume 
volatility. In addition, the market price of the Company's Common Stock, like   
that of other apparel industry stocks, may be highly volatile due to certain    
risks inherent in the apparel industry. Factors such as quarter-to-quarter      
variations in the Company's revenues and earnings could cause the market price  
of the Common Stock to fluctuate significantly. Further, due to the volatility  
of the stock market and the prices of stocks of apparel companies generally,    
the price of the Common Stock could fluctuate for reasons unrelated to the      
operating performance of the Company.                                           

SHARES ELIGIBLE FOR FUTURE SALE                                                 

Upon completion of the Offering, assuming an initial public offering price  
of $21.50 per share, the Company will have 20,523,488 shares of Common Stock    
outstanding (21,694,193 shares if the Underwriters' over-allotment option is    
exercised in full), of which 10,750,000 shares (12,362,500 shares if the        
Underwriters' over-allotment option is exercised in full) will be freely        
tradeable without restriction or further registration under the Securities Act  
of 1933, as amended (the "Securities Act"), except for any shares held by an    
"affiliate" of the Company. All the remaining 9,773,488 shares (9,331,693       
shares if the Underwriters' over-allotment option is exercised in full) are     
deemed to be "restricted securities," as that term is defined in Rule 144       
under the Securities Act ("Rule 144"), in that such shares were issued in       
private transactions not involving a public offering. None of such shares will  
be eligible for sale under Rule 144 prior to the second anniversary of the      
closing of the Offering. For a description of the requirements of Rule 144 and  
a description of the shares available for future sale if the initial public     
offering price is other than $21.50 per share. See "Shares Eligible for Future  
Sale."                                                                          

Upon completion of the Offering, assuming an initial public offering price  
of $21.50 per share and no exercise of the Underwriters' over-allotment         
option, Ms. Karan, Mr. Weiss, and the KW Trusts will beneficially own an        
aggregate of 5,290,846 shares of restricted Common Stock and the Takihyo Group  
will beneficially own 4,482,642 shares of restricted Common Stock (including    
441,795 shares which the Takihyo Group has the right to receive if the          
Underwriters' over-allotment option is not exercised). Assuming an initial      
public offering price                                                           

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of $   per share and no exercise of the Underwriters' over-allotment option,    
upon completion of the Offering the Takihyo Group will beneficially own         
     shares of restricted Common Stock (including         shares which the
Takihyo Group has the right to receive if the Underwriters' over-allotment      
option is not exercised). Assuming an initial public offering price of $   per  
share and no exercise of the Underwriters' over-allotment option, upon          
completion of the Offering, the Takihyo Group will beneficially own             
shares of restricted Common Stock. If the Underwriters' over-allotment option   
is exercised in full, the Takihyo Group will beneficially own 4,040,847 shares  
of restricted Common Stock. All existing stockholders of the Company have       
entered into lock-up agreements with the Representatives wherein they have      
agreed not to sell any of their shares for a period of 180 days after the date  
of the Prospectus without the prior written consent of Morgan Stanley & Co.     
Incorporated on behalf of the Underwriters. See "Underwriters."                 

The Company has granted to members of the Takihyo Group (other than the     
Intermediate Entities) the right to demand, on an aggregate of two occasions,   
registration under the Securities Act, at the Company's expense, of all or a    
portion of the shares which they will beneficially own upon completion of the   
Offering, subject to a minimum demand of 5% of the then outstanding shares of   
Common Stock. The first such demand cannot be made earlier than six months      
after the effective date of the Offering (the "Effective Date") and the second  
such demand cannot be made earlier than 12 months after the effective date of   
any subsequent offering. In addition, the Takihyo Group will have the right to  
join in any registration statement filed by the Company with respect to an      
offering of any of its securities by it or on behalf of any of its              
securityholders. If a member of the Takihyo Group makes a demand for the        
registration of its shares at any time prior to the first anniversary of the    
Effective Date, the Company may not include in such offering any of the         
Company's shares or any shares owned by any other securityholder of the         
Company if, in the good faith judgment of the managing underwriter of such      
offering, the inclusion of such shares would adversely affect the success of    
such offering or interfere with the successful marketing of, or require the     
exclusion of any portion of, the shares to be registered pursuant to the        
Takihyo Group's demand. If a demand is made by a member of the Takihyo Group    
more than one year from the Effective Date, the Company may elect to proceed    
with an offering of the Company's own shares, in which event each member of     
the Takihyo Group, together with the members of the Karan/Weiss Group, may      
elect to include certain of their shares in the Company's offering, subject to  
certain limitations, and such offering will not be deemed to have been made as  
a result of a demand by the Takihyo Group. If the Company does not so elect,    
the members of the Karan/Weiss Group may elect to include certain of their      
shares in the Takihyo Group's offering, subject to certain limitations. If,     
more than one year after the Effective Date, a member of the Karan/Weiss Group  
requests that the Company register shares owned by the Karan/Weiss Group, the   
Company may (but is not obligated to) elect to distribute its own shares to     
the public, in which event the members of the Karan/Weiss Group, together with  
the members of the Takihyo Group, may elect to include certain of their shares  
in the Company's offering, subject to certain limitations. If the Company does  
not so elect, the Company may (but is not obligated to) permit the members of   
the Karan/Weiss Group to proceed with an offering of certain of their shares    
in which event the members of the Takihyo Group may elect to include certain    
of their shares in the offering of the members of the Karan/Weiss Group,        
subject to certain limitations. See "Certain Relationships and Related          
Transactions--Registration Rights Agreement" and "Underwriters."                

DIVIDENDS                                                                       

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. It is expected that the     
credit facility which the Company will enter into shortly following the         
Offering will limit the amount of cash dividends the Company may pay to its     
stockholders. See "Dividend Policy."                                            

DILUTION                                                                        

Purchasers of Common Stock in the Offering will experience immediate        
dilution of $12.89 per share in the net tangible book value of the Common       
Stock from the public offering price. See "Dilution."                           

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REORGANIZATION  

In December 1984, Ms. Karan, Mr. Weiss, Mr. Taki, Mr. Mori, and Takihyo Inc.
formed The Donna Karan Company, a New York general partnership, to design,      
contract for the production of, and distribute the Donna Karan New York(R)      
Collection for women. Since that time, Ms. Karan, Mr. Weiss, Mr. Taki, Mr.      
Mori, and Takihyo Inc. have formed additional partnerships and corporations to  
engage in various aspects of the Company's business, each of which is           
ultimately owned one-half by Ms. Karan, Mr. Weiss, and the KW Trusts and one-   
half by members of the Takihyo Group. Such partnerships and corporations are    
referred to herein as the "DK Companies." Donna Karan International Inc., the   
issuer of the Common Stock offered hereby, was formed on April 10, 1996 to      
acquire and continue the various businesses conducted by the DK Companies.      
Prior to the consummation of the Reorganization, Donna Karan International      
Inc. conducted no business and held no assets or liabilities.                   

Prior to the consummation of the Reorganization, Donna Karan International  
Inc. had outstanding only a nominal number of shares of common stock, which     
consisted of nine shares of Class A Common Stock held by Ms. Karan, nine        
shares of Class A Common Stock held by Mr. Weiss, and one share of Class B      
Common Stock held by Mr. Taki and one share of Class B Common Stock held by     
Mr. Mori. On and after the closing date of the Offering, the Company will have  
only one class of Common Stock authorized. See "Description of Capital Stock."  

Simultaneously with the closing of the Offering, Ms. Karan, Mr. Weiss, and  
the KW Trusts will contribute to Donna Karan International Inc. all the         
outstanding shares of the various corporations which hold their interests in    
the DK Companies, except for their shares in Gabrielle Studio. Gabrielle        
Studio will contribute to the Company its partnership interest in the Donna     
Karan Studio, one of the DK Companies, representing the balance of the          
Karan/Weiss Group's interests in the DK Companies. Messrs. Taki and Mori and    
Mr. Mori's children (who own a small portion of indirect equity interests in    
one of the Intermediate Entities attributed to Mr. Mori herein) will            
contribute to Donna Karan International Inc. all the outstanding shares of the  
various corporations which hold their interests in the DK Companies, and        
Takihyo Inc. will contribute to Donna Karan International Inc. the partnership  
interests representing the balance of the Takihyo Group's interest in the DK    
Companies. The foregoing contributions of stock and partnership interests will  
be made pursuant to the terms of the contribution agreement (the "Contribution  
Agreement") among the Company, Ms. Karan, Mr. Weiss, the KW Trusts, Mr. Taki,   
Mr. Mori, Mr. Mori's children, Takihyo Inc., and Gabrielle Studio, and such     
contributions are referred to collectively as the "Reorganization." In          
addition, upon the closing of the Offering, Gabrielle Studio and the Company    
will enter into the License Agreement. From and after the closing date of the   
Offering, all assets currently owned by the DK Companies and all businesses     
conducted by the DK Companies will be owned and conducted by the Company. See   
"Certain Relationships and Related Transactions."                               

The allocation of the amounts and forms of consideration to be received by  
the Karan/Weiss Group and the Takihyo Group pursuant to the Contribution        
Agreement were determined by negotiation among the Principals. Because all the  
interests of the Karan/Weiss Group and the Takihyo Group in the DK Companies    
are held by various partnerships and corporations (the "Intermediate            
Entities") ultimately owned by Ms. Karan, Mr. Weiss, the KW Trusts, Gabrielle   
Studio (which in turn, is owned by Ms. Karan, Mr. Weiss, and the KW Trusts),    
and the members of the Takihyo Group, all distributions by the DK Companies     
are made to the Intermediate Entities which, in turn, make payments and         
distributions to their respective owners. For purposes of the discussion        
herein, the Intermediate Entities will be disregarded and all distributions     
and payments will be attributed to the members of the Karan/Weiss Group and     
the Takihyo Group, as the case may be.                                          

As consideration for the contribution of their interests in the DK          
Companies, Ms. Karan, Mr. Weiss, the KW Trusts, and Gabrielle Studio will       
receive an aggregate of 5,290,846 shares of Common Stock. References in this    
Prospectus to the shares of Common Stock beneficially owned by Ms. Karan, Mr.   
Weiss, and the KW Trusts are deemed to include the shares held by Gabrielle     
Studio.                                                                         

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As consideration for the contribution of their interests in the DK          
Companies, members of the Takihyo Group will receive a combination of cash and  
Common Stock. All consideration received by members of the Takihyo Group will   
be allocated 60.0% to Takihyo Inc., 20.0% to Mr. Taki, and 20.0% to Mr. Mori.   
References in this Prospectus to the shares of Common Stock beneficially owned  
by Mr. Mori are deemed to include the shares held by his children.              

Upon completion of the Offering, assuming an initial public offering price  
of $21.50 per share and no exercise of the Underwriters' over-allotment         
option, the Takihyo Group will beneficially own 4,482,642 shares of restricted  
Common Stock (including 441,795 shares which the Takihyo Group has the right    
to receive if the Underwriters' over-allotment option is not exercised).        
Assuming an initial public offering price of $   per share and no exercise of   
the Underwriters' over-allotment option, upon completion of the Offering the    
Takihyo Group will beneficially own     shares of restricted Common Stock       
(including     shares which the Takihyo Group has the right to receive if the   
Underwriters' over-allotment option is not exercised). Assuming an initial      
public offering price of $   per share and no exercise of the Underwriters'     
over-allotment option, upon completion of the Offering the Takihyo Group will   
beneficially own         shares of restricted Common Stock. If the              
Underwriters' over-allotment option is exercised in full, the Takihyo Group     
will beneficially own 4,040,847 shares of restricted Common Stock.              

Upon completion of the Offering, assuming an initial public offering price  
of $21.50 per share, the amount of cash to be received by the Takihyo Group     
would be approximately $17.4 million (approximately $26.9 million, if the       
Underwriters' over-allotment option is exercised in full). If the initial       
public offering price is $   per share, the amount of cash to be received by    
members of the Takihyo Group would be approximately $   million (approximately  
$   million, if the Underwriters' over-allotment option is exercised in full).  
If the initial public offering price is $   per share, the amount of cash to    
be received by members of the Takihyo Group would be approximately $            
million, whether or not the Underwriters' over-allotment option is exercised.   

The policies and directions of the Company currently are determined in      
accordance with the 1984 partnership agreement of The Donna Karan Company.      
Pursuant thereto, the Principals, acting on behalf of their respective          
affiliates, agree upon an annual business plan and budget for the DK Companies  
and meet periodically to review and monitor the DK Companies' performance. Ms.  
Karan, as chief executive officer of the DK Companies, is responsible for the   
implementation of the agreed upon business plan. Any determination to amend     
the business plan and budget requires the unanimous consent of the Principals.  
Upon the consummation of the Reorganization, the Company's policies and         
direction will be determined by the Board of Directors of the Company.          

The closing of the Offering is conditioned upon, among other things, the    
consummation of the Reorganization. The approval of the banks under the Credit  
Agreement to the Reorganization and the Offering is conditioned upon, among     
other things, the Company's receipt of a minimum amount of net proceeds and     
certain specified uses of proceeds.                                             

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USE OF PROCEEDS 

The net proceeds to be received by the Company from the Offering, assuming  
an initial public offering price of $21.50 per share, are estimated to be       
approximately $213 million (approximately $246 million if the Underwriters'     
over-allotment option is exercised in full) after deducting underwriting        
discounts and commissions and estimated offering expenses. The Company will     
use such proceeds to pay: (i) approximately $116.0 million to members of the    
Takihyo Group and of the Karan/Weiss Group in satisfaction of the Distribution  
Notes previously issued (including accrued interest thereon), representing      
cumulative undistributed taxable income on which taxes previously have been     
paid; (ii) approximately $70.0 million to the Company's lenders to repay the    
term loans under the Company's Credit Agreement and to reduce the amount        
outstanding under the Company's revolving line of credit; (iii) approximately   
$17.4 million (approximately $26.9 million if the Underwriters' over-allotment  
option is exercised in full) to members of the Takihyo Group received by them   
as consideration for the contribution of their interests in the DK Companies    
to the Company in connection with the Reorganization; (iv) $5.0 million to      
Stephen L. Ruzow, the President of the Company, pursuant to his employment      
agreement; and (v) an estimated $5.0 million to Gabrielle Studio, representing  
a one-time payment made in connection with the License Agreement (which by its  
terms will restate, amend, and supersede previously existing licensing          
arrangements that in certain circumstances, including the Offering, could       
provide for higher royalty payments to Gabrielle Studio than those under the    
License Agreement). To the extent that there are excess net proceeds after      
payment in full of all amounts payable to the Takihyo Group, such excess net    
proceeds will be used by the Company for general corporate purposes. The        
Company's credit facility matures on December 31, 1998. At March 31, 1996, of   
the Company's term loans, $23.1 million bears interest at 2.75% above the       
London Interbank Offered Rate ("LIBOR") (8.063%), and $20.0 million bears       
interest at 3.25% above LIBOR (8.563%). Amounts outstanding under the           
Company's revolving line of credit bear interest at a rate of 1.5% over the     
lead bank's prime rate (9.75%). The Company's average weighted interest cost    
was 8.9% at March 31, 1996. This indebtedness was used for working capital and  
capital expenditures. The amount of cash to be distributed to members of the    
Takihyo Group may be different if the initial public offering price is other    
than $21.50. See "Reorganization" for a description of the manner in which the  
number of shares of Common Stock and amount of cash to be received by members   
of the Takihyo Group will be determined, "Capitalization--Distributions" for a  
description of the terms of the Distribution Notes, "Management's Discussion    
and Analysis of Financial Condition and Results of Operations" for a            
description of the terms of the Company's Credit Agreement, "Management--       
Compensation Arrangements" for a description of Mr. Ruzow's employment          
agreement, and "Certain Relationships and Related Transactions--License         
Agreement for Principal Trademarks" for a description of the License Agreement  
with Gabrielle Studio. See also "Pro Forma Combined Financial Information."     

DIVIDEND POLICY 

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 it 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 a party, and other factors considered relevant by the Board of       
Directors. It is expected that the credit facility which the Company will       
enter into shortly following the closing date of the Offering will limit the    
amount of cash dividends which the Company may pay to its stockholders. For     
certain information regarding distributions made by the Company prior to the    
date hereof, see "Reorganization," "Capitalization," and "Management's          
Discussion and Analysis of Financial Condition and Results of Operations."      

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CAPITALIZATION  

The following table sets forth (i) the capitalization of the Company at     
March 31, 1996, (ii) the pro forma capitalization of the Company as of such     
date, as adjusted to give effect to the Reorganization, the issuance of the     
Distribution Notes, the recording of a deferred tax assets concurrent with      
becoming subject to Federal and additional state and local income taxes, and    
the liability to members of the Takihyo Group for partial consideration for     
the contribution of their interests in the DK Companies to the Company in       
connection with the Reorganization, and (iii) the sale of the shares of Common  
Stock offered by the Company hereby at an assumed initial public offering       
price of $21.50 per share, the application of the estimated net proceeds        
received by the Company therefrom as described under "Use of Proceeds," the     
non-recurring pre-tax charge of approximately $17.7 million (approximately      
$10.0 million on an after-tax basis) which the Company expects to accrue        
immediately following the closing of the Offering, relating to (a) the          
anticipated consolidation of the Company's warehouse facilities ($5.0           
million), (b) a one-time payment to the President of the Company pursuant to    
his employment agreement ($5.0 million), (c) a one-time payment to Gabrielle    
Studio in connection with the License Agreement (estimated at $5.0 million),    
and (d) the write-off of deferred financing costs related to the Company's      
Credit Agreement ($2.7 million). The table should be read in conjunction with   
the Predecessor Combined Financial Statements of the Company and the related    
notes thereto included elsewhere in this Prospectus. See "Pro Forma Combined    
Financial Information" and "Management's Discussion and Analysis of Financial   
Condition and Results of Operations."                                           

                                                                [Download Table]

                                                     MARCH 31, 1996             
                                          --------------------------------------
                                                                    PRO FORMA,  
                                                                  AS ADJUSTED(3)
                                          ACTUAL(L)  PRO FORMA(2)  (UNAUDITED)  
                                          ---------  ------------ --------------
                                              (IN THOUSANDS)                    
                                                                                
Current debt:                                                                   
  Current portion of long-term debt...... $  7,759     $  7,759      $    259   
  Distribution Notes.....................      --       114,484           --    
  Obligation for Takihyo                                                        
   contribution(4).......................      --        17,400           --    
                                          --------     --------      --------   
    Total current debt................... $  7,759     $139,643      $    259   
                                          ========     ========      ========   
Long-term debt........................... $ 64,965     $ 64,965      $  2,465   
Stockholders' equity and partners'                                              
 capital:                                                                       
  Preferred stock, $.01 par value;                                              
   1,000,000 shares authorized;                                                 
   none issued and outstanding...........      --           --            --    
  Common stock, $.01 par value;                                                 
   shares authorized;                                                           
   20,523,488 shares outstanding                                                
   proforma, as adjusted(5)(6)...........      --            98           205   
  Common stock of Intermediate Entities..    1,146          --            --    
  Additional paid-in capital.............      --       (24,649)      177,068   
  Retained earnings and partners' capital                                       
   (deficit).............................   90,687          --            --    
  Cumulative translation adjustment......      (42)         (42)          (42)  
                                          --------     --------      --------   
    Total stockholders' equity(7)........   91,791      (24,593)      177,231   
                                          --------     --------      --------   
    Total capitalization................. $156,756     $ 40,372      $179,696   
                                          ========     ========      ========   

--------                                                                        
(1) Reflects the actual short-term and long-term indebtedness and               
 capitalization of the Company without giving effect to the Reorganization
or the consummation of the Offering. Prior to the Reorganization, the   
Company consisted of a related group of S corporations and partnerships.
See "Reorganization."                                                   

(2) Reflects the pro forma short-term and long-term indebtedness and            
capitalization of the Company after giving effect to the issuance of the
 Distribution Notes and to the Reorganization, the recording of a deferred
  tax asset concurrent with becoming subject to Federal and additional state
 and local income taxes, and the liability to members of the Takihyo Group
for partial consideration for the contribution of their interests in the
DK Companies to the Company in connection with the Reorganization, but  
without giving effect to the consummation of the Offering.              

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(3) Reflects the pro forma short-term and long-term indebtedness and            
capitalization of the Company as adjusted for the Reorganization, the   
issuance of the Distribution Notes, the liability to members of the     
  Takihyo Group for the partial consideration for the contributions of their
interests in the DK Companies to the Company in connection with the     
Reorganization, the sale of the shares of Common Stock offered by the   
Company hereby at an assumed initial public offering price of $21.50 per
  share and with no exercise of the Underwriters' over-allotment option, the
application of the estimated net proceeds as described under "Use of    
Proceeds," and the non-recurring charge and deferred tax asset described
  above. Shortly following the Offering, the Company expects to enter into a
new credit facility, which the Company anticipates will have terms more 
favorable to the Company than those of its existing credit facility.    

(4) Represents the amount owed by the Company to the Takihyo Group as partial   
 consideration for the contribution of their interests in the DK Companies
to the Company in connection with the Reorganization.                   

(5) Excludes an aggregate of     shares of Common Stock reserved for issuance   
under the Company's 1996 Stock Incentive Plan. The Company expects to   
grant options for     shares of Common Stock at the initial public      
offering price on the effective date of the Offering. Also excludes an  
aggregate of     shares of Common Stock reserved for issuance under the 
 Company's 1996 Non-Employee Director Stock Option Plan. See "Management--
 1996 Stock Incentive Plan" and "--1996 Non-Employee Director Stock Option
Plan."                                                                  

(6) Excludes an aggregate of 1,612,500 shares of Common Stock that may be sold  
by the Company pursuant to the Underwriters' over-allotment option.     

(7) Actual amounts include partners' capital.                                   

DISTRIBUTIONS                                                                   

Prior to the closing date of the Offering, the interests of the Principals  
in the DK Companies were held through the Intermediate Entities. Each of the    
Intermediate Entities that is a corporation has been treated for Federal and    
certain state tax purposes as an S corporation under the Internal Revenue Code  
and comparable state tax provisions. As a result, the Principals and their      
affiliates have been obligated to pay Federal and certain state income taxes    
on their allocable portion of the income of the DK Companies. The DK Companies  
have made various distributions to the Intermediate Entities which, in turn,    
have made various payments or distributions to the Principals and their         
affiliates which have enabled the Principals and their affiliates to pay their  
income taxes on their allocable portions of the income of the DK Companies.     
The DK Companies will continue to make distributions to the Intermediate        
Entities, which will make payments and distributions to provide the Principals  
and their affiliates with funds to pay income taxes on the taxable income of    
the DK Companies through the closing date of the Offering.                      

The Company and certain of the Intermediate Entities issued to Takihyo Inc. 
and the Principals or their affiliates promissory notes (the "Distribution      
Notes") on April 16, 1996 in the aggregate principal amount of $114.5 million,  
which amount was divided equally between certain members of the Takihyo Group,  
on the one hand, and Ms. Karan, Mr. Weiss, and the KW Trusts, on the other      
hand. The aggregate principal amount of the Distribution Notes is an estimate   
of the cumulative undistributed taxable income (on which taxes previously have  
been paid) of the DK Companies since their inception through the anticipated    
closing date of the Offering (as computed for Federal income tax purposes),     
net of an estimate of     million representing such cash distributions as may   
be made from April 16, 1996 through the anticipated closing date of the         
Offering. The Distribution Notes bear interest at the rate of 8% per annum. No  
adjustment will be made if the amount of the Distribution Notes is greater or   
less than the cumulative undistributed taxable income of the DK Companies (on   
which taxes previously have been paid) through the closing date of the          
Offering. By their terms, the Distribution Notes are due and payable on April   
9, 2003 (the "Maturity Date"), and cannot be prepaid in whole or in part prior  
to the Maturity Date without the prior written consent of the lenders under     
the Company's existing credit facility. Subject to such consent being           
obtained, the Distribution Notes will be prepaid on the closing date of the     
Offering out of the proceeds of the Offering. See "Use of Proceeds."            

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DILUTION  

The net tangible book value of the Company at March 31, 1996 was            
approximately $88.8 million. Although only a nominal number of shares in Donna  
Karan International Inc. will be outstanding prior to the completion of the     
Reorganization, for purposes of the computation of dilution, the interests of   
Ms. Karan, Mr. Weiss, the KW Trusts, and the Takihyo Group in the DK Companies  
prior to the Reorganization and consummation of the Offering have been deemed   
to be equivalent to 10,581,692 shares of Common Stock. Assuming such number of  
shares were outstanding as of March 31, 1996, the net tangible book value of    
the Company as of such date would have been approximately $8.39 per share.      
After giving effect to the issuance of the Distribution Notes, the liability    
to members of the Takihyo Group for partial consideration for the contribution  
of their interests in the DK Companies, and the recording of a deferred tax     
asset concurrent with becoming subject to Federal and additional state and      
local taxes, the net tangible book value deficit of the Company at March 31,    
1996 would have been ($27.6 million). Net tangible book value per share         
represents the amount of total tangible assets less total liabilities, divided  
by the number of shares of Common Stock then outstanding. Without taking into   
account any changes in net tangible book value attributable to operations       
after March 31, 1996, after giving effect to the Reorganization, the issuance   
of the Distribution Notes, recording the liability to members of the Takihyo    
Group for partial consideration for the contribution of their interests in the  
DK Companies, the sale of the Common Stock offered hereby at an assumed         
initial public offering price of $21.50 per share, the application of the       
estimated net proceeds as described under "Use of Proceeds," the non-recurring  
pre-tax charge of approximately $17.7 million (approximately $10.0 million on   
an after-tax basis) which the Company expects to accrue immediately following   
the closing of the Offering, and a deferred tax asset of approximately $15.5    
million, net of certain state and local deferred tax assets recorded on a       
historical basis, which the Company will record concurrently with becoming      
subject to Federal and additional state and local income taxes, the pro forma   
net tangible book value as adjusted at March 31, 1996 would have been $176.8    
million, or $8.61 per share of Common Stock. This represents an immediate       
increase in pro forma net tangible book value as adjusted of $11.04 per share   
of Common Stock to existing stockholders and an immediate dilution of $12.89    
per share of Common Stock to purchasers of Common Stock in the Offering. The    
following table illustrates such per share dilution:                            

                                                                [Download Table]
                                                                                
Assumed initial public offering price...........................          $21.50
  Net tangible book value per share at March 31, 1996(1)........  $ 8.39        
                                                                  ======        
  Pro forma net tangible book value deficit per share at March                  
   31, 1996, after giving effect to the issuance of the                         
   Distribution Notes, the liability to members of the Takihyo                  
   Group and the recording of a deferred tax asset..............   (2.61)       
  Increase in net tangible book value per share attributable to                 
   completion of the Reorganization and the Offering............   11.22        
                                                                  ------        
Pro forma net tangible book value as adjusted per share after                   
 giving effect to the Reorganization and the Offering(2)(3)(4)..            8.61
                                                                          ------
Dilution per share to purchasers in the Offering(5).............          $12.89
                                                                          ======

--------                                                                        

(1) Net tangible book value per share at March 31, 1996 is determined by        
dividing net tangible book value of the Company (tangible assets less   
liabilities), by 10,581,692 shares. Prior to the completion of the      
Offering, all the equity interests in the Company were ultimately owned 
one-half by Ms. Karan, Mr. Weiss, and the KW Trusts and one-half by     
members of the Takihyo Group. Upon completion of the Offering and the   
consummation of the Reorganization, Ms. Karan, Mr. Weiss, and the KW    
Trusts will own beneficially 5,290,846 shares. The consideration to be  
  received by the members of the Takihyo Group for the contribution of their
interests in the DK Companies to the Company is equal to that to be     
  received by Ms. Karan, Mr. Weiss, and the KW Trusts. Therefore, solely for
purposes of computing dilution it is assumed that if members of the     
Takihyo Group receive the maximum number of shares of Common Stock to   
which they are entitled in the Reorganization and after giving effect to
the Offering (assuming no exercise of the Underwriters' over-allotment  
option), members of the Takihyo Group would have owned beneficially     
4,482,642 shares upon completion of the Offering and that such shares,  
along with those to be beneficially                                     

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owned by Ms. Karan, Mr. Weiss, and the KW Trusts, would have been issued  
and outstanding as of March 31, 1996.                                     

(2) Pro forma net tangible book value as adjusted per share is determined by    
dividing net tangible book value of the Company assuming the            
Reorganization had taken place on March 31, 1996, after giving effect to
the receipt of the estimated net proceeds of the Offering and the       
application of such proceeds as described in "Use of Proceeds," by the  
number of shares of Common Stock outstanding after giving effect to the 
Offering.                                                               

(3) Reflects an aggregate of 20,523,488 shares that will be outstanding,        
 including 441,795 shares that either will be sold by the Company pursuant
to the exercise of the Underwriters' over-allotment option or, to the   
 extent such over-allotment option is not exercised, issued by the Company
 to the Takihyo Group. Excludes an aggregate of 1,612,500 shares of Common
 Stock that may be sold by the Company pursuant to the Underwriters' over-
allotment option.                                                       

(4) Excludes an aggregate of     shares of Common Stock reserved for issuance   
under the Company's 1996 Stock Incentive Plan. The Company expects to   
grant options for     shares of Common Stock at the initial public      
  offering price on the effective date of the Offering. The exercise of such
options would not result in further dilution in book value to purchasers
 in the Offering. Also excludes an aggregate of     shares of Common Stock
  reserved for issuance under the Company's 1996 Non-Employee Director Stock
 Option Plan. See "Management--1996 Stock Incentive Plan" and "--1996 Non-
Employee Director Stock Option Plan."                                   

(5) Dilution is determined by subtracting pro forma net tangible book value     
per share assuming the Reorganization had taken place on March 31, 1996,
  and after giving effect to the receipt of the net proceeds of the Offering
and the application of such proceeds as described in "Use of Proceeds," 
from the assumed initial public offering price paid by purchasers in the
Offering for a share of Common Stock.                                   

The following table summarizes on a pro forma basis as of March 31, 1996 the
differences between the number of shares of Common Stock purchased from the     
Company, the total consideration paid, and the average price per share paid by  
the existing stockholders and by the purchasers of Common Stock in the          
Offering at an assumed initial public offering price of $    per share.         

                                                                [Download Table]

                            SHARES PURCHASED  TOTAL CONSIDERATION      AVERAGE 
                           ------------------ -----------------------   PRICE  
                             NUMBER   PERCENT    AMOUNT       PERCENT PER SHARE
                           ---------- ------- ------------    ------- ---------
                                                                               
Existing stockholders.....  9,773,488    48%  $          0(1)     0%   $ 0.00  
New investors............. 10,750,000    52%  $231,125,000      100%   $21.50  
                           ----------   ---   ------------      ---            
    Total................. 20,523,488   100%  $231,125,000      100%           
                           ==========   ===   ============      ===            

--------                                                                        

(1) The cash consideration paid by the members of the Karan/Weiss Group and of  
  the Takihyo Group has been reduced by distributions previously made to the
members of the Karan/Weiss Group and of the Takihyo Group and certain   
distributions to be received by the members of the Karan/Weiss Group and
 of the Takihyo Group out of the net proceeds of the Offering. See "Use of
Proceeds."                                                              

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PRO FORMA COMBINED FINANCIAL INFORMATION  

The following unaudited pro forma combined financial information is derived 
from the Company's Predecessor Combined Financial Statements. The unaudited     
pro forma combined statement of income gives effect to the Reorganization, the  
Offering, and certain other adjustments as if they occurred on January 2,       
1995. The unaudited pro forma combined balance sheet gives effect to the        
issuance of the Distribution Notes. The unaudited pro forma combined balance    
sheet, as adjusted, gives further effect to the Reorganization, the Offering    
at an assumed initial public offering price of $21.50 per share, the            
application of the estimated net proceeds received by the Company therefrom as  
described under "Use of Proceeds," and certain other adjustments as if they     
had occurred on March 31, 1996 and the recording of certain non-recurring       
charges and assets as if such charges and assets had been recorded on March     
31, 1996. See "Reorganization," "Use of Proceeds," "Capitalization," and        
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations."                                                                    

The pro forma adjustments are based upon available information and certain  
assumptions that the Company believes are reasonable under the circumstances.   
The unaudited pro forma combined financial information should be read in        
conjunction with the Predecessor Combined Financial Statements of the Company   
and related notes, "Management's Discussion and Analysis of Financial           
Condition and Results of Operations," and other financial information included  
elsewhere in this Prospectus. This pro forma combined financial information is  
provided for informational purposes only and does not purport to be indicative  
of the results which would have been obtained had the Reorganization, the       
issuance of the Distribution Notes, the Offering, and the other adjustments     
been completed on the dates indicated or which may be expected to occur in the  
future.                                                                         

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PRO FORMA COMBINED STATEMENT OF INCOME  
(UNAUDITED) 

                                                                [Download Table]

                                                  FISCAL YEAR ENDED            
                                                  DECEMBER 31, 1995            
                                          ------------------------------------ 
                                           ACTUAL     PRO FORMA     PRO FORMA  
                                          COMBINED   ADJUSTMENTS     COMBINED  
                                          --------  --------------  ---------- 
                                                    (IN THOUSANDS)             
                                                                               
Net revenues............................  $510,126     ($5,521)(a)  $  504,605 
Gross profit............................   179,437      (6,814)(a)     159,817 
                                                       (12,806)(b)             
Selling, general, and administrative                                           
 expenses...............................   136,906      (4,828)(a)     129,761 
                                                        (2,317)(c)             
                                          --------                  ---------- 
Operating income........................    42,531                      30,056 
Equity in earnings of affiliate.........     2,519         394 (a)       2,913 
Interest expense........................    (7,650)      6,150 (d)        (926)
                                                           574 (e)             
Gain on sale of interests in affiliate..    18,673     (18,673)(a)         --  
                                          --------                  ---------- 
Income before provision for income                                             
 taxes..................................    56,073                      32,043 
Provision for income taxes..............     2,398      11,270 (f)      13,668 
                                          --------                  ---------- 
Pro forma per share information.........  $ 53,675                  $   18,375 
                                          ========                  ========== 
Net income per share....................                            $     1.11 
                                                                    ========== 
Number of common shares assumed                                                
 outstanding(g).........................                            16,497,278 
                                                                    ========== 

--------                                                                        

(a) 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.
 Accordingly, a gain of $18.7 million has been excluded, and 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 through March 31, 1995, the
date of the sale. These adjustments also include (i) a decrease of $5.5 
million in net revenues, which reflects the difference between net      
  revenues from Donna Karan Japan to its customers and those net revenues of
  the Company derived from Donna Karan Japan (as if Donna Karan Japan were a
customer of the Company), (ii) a decrease of $6.8 million in gross      
profits, and (iii) a decrease of $4.8 million in selling, general, and  
administrative expenses, 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 9 to Notes to Predecessor Combined   
Financial Statements.                                                   

(b) Royalties of $12.8 million payable to Gabrielle Studio pursuant to the      
License Agreement. See "Certain Relationships and Related Transactions--
License Agreement for Principal Trademarks."                            
(c) Decrease in aggregate compensation from $4.3 million to $2.0 million for    
two of the Company's executives pursuant to their employment agreements.
See "Management--Compensation Arrangements."                            
(d) Reduction in interests costs of $6.2 million assuming the application of    
approximately $70.0 million of the proceeds from the Offering to reduce 
  the actual outstanding indebtedness, up to $70.0 million, under the Credit
Agreement. Shortly following the Offering, the Company will enter into a
new credit facility, which the Company anticipates will have terms more 
favorable to the Company than those of its existing credit facility. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."                                   
(e) Reduction of $0.6 million in amortization of deferred financing costs,      
which costs would have been written off in connection with repayment of 
outstanding indebtedness under the Credit Agreement.                    
(f) Increase of $11.3 million for income taxes based upon pro forma pre-tax     
 income as if the Company had been subject to Federal and additional state
income taxes. See Note 13 to Notes to Predecessor Combined Financial    
Statements.                                                             

(g) Pro forma per share information is based on 9,773,488 shares of Common      
Stock outstanding prior to the Offering, increased by (a) the sale of   
 5,846,774 shares of Common Stock assuming an offering price of $21.50 per
 share ($19.84, net of expenses), the proceeds of which would be necessary
to pay approximately $116.0 million in satisfaction of the Distribution 
Notes and (b) the sale of 877,016 shares of Common Stock assuming an    
offering price of $21.50 per share, ($19.84, net of expenses), the      
  proceeds of which would be necessary to pay approximately $17.4 million to
  members of the Takihyo Group as partial consideration for the contribution
of their interests in the DK Companies to the Company in connection with
the Reorganization.                                                     

Supplementary pro forma per share information for the year ended December   
31, 1995 is $1.38 based on 9,773,488 shares of Common Stock outstanding     
prior to the Offering, increased by the sale of 3,528,226 shares of Common  
Stock assuming an offering price of $21.50 per share ($19.84, net of        
expenses), the proceeds of which would be necessary to repay approximately  
$70.0 million of the amounts outstanding under the Company's credit         
facility.                                                                   

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PRO FORMA COMBINED STATEMENTS OF INCOME       

(UNAUDITED)       

                                                                [Download Table]

                                             QUARTER ENDED MARCH 31, 1996      
                                            ---------------------------------- 
                                             ACTUAL    PRO FORMA    PRO FORMA  
                                            COMBINED  ADJUSTMENTS    COMBINED  
                                            --------  -----------   ---------- 
                                                    (IN THOUSANDS)             
                                                                               
Net revenues..............................  $159,585                $  159,585 
Gross profit..............................    52,861     (4,162)(a)     48,699 
Selling, general, and administrative ex-                                       
 penses...................................    39,411       (750)(b)     38,661 
                                            --------                ---------- 
Operating income..........................    13,450                    10,038 
Equity in earnings of affiliate...........       988                       988 
Interest expense..........................    (2,047)     1,575 (c)       (152)
                                                            320 (d)            
                                            --------                ---------- 
Income before provision for income taxes..    12,391                    10,874 
Provision for income taxes................       690      4,006 (e)      4,696 
                                            --------                ---------- 
Net income................................  $ 11,701                $    6,178 
                                            ========                ========== 
Pro forma per share information...........                                $.37 
Number of common shares assumed outstand-                                      
 ing......................................                          16,497,278 

                                              QUARTER ENDED APRIL 2, 1995      
                                            ---------------------------------- 
                                             ACTUAL    PRO FORMA    PRO FORMA  
                                            COMBINED  ADJUSTMENTS    COMBINED  
                                            --------  -----------   ---------- 
                                                    (IN THOUSANDS)             
                                                                               
Net revenues..............................  $120,693     (5,521)(f) $  115,172 
Gross profit..............................    44,203     (6,814)(f)     34,468 
                                                         (2,921)(a)            
Selling, general, and administrative ex-                                       
 penses...................................    33,041     (4,828)(f)     27,634 
                                                           (579)(b)            
                                            --------                ---------- 
Operating income..........................    11,162                     6,834 
Equity in earnings of affiliate...........                  394 (f)        394 
Interest expense..........................    (1,701)     1,525 (c)        (32)
                                                            144 (d)            
Gain on sale of interests in affiliates...    18,673    (18,673)(f)            
                                            --------                ---------- 
Income before provision for income taxes..    28,134                     7,196 
Provision for income taxes................     1,408      1,700 (e)      3,108 
                                            --------                ---------- 
Net income................................  $ 26,726                $    4,088 
                                            ========                ========== 
Pro forma per share information...........                                $.25 
Number of common shares assumed outstand-                                      
 ing......................................                          16,497,278 

--------                                                                        

(a) Royalties of $2.9 million and $4.2 million in 1995 and 1996, respectively,  
payable to Gabrielle Studio pursuant to the License Agreement.          

(b) Decrease in aggregate compensation from $1.1 million to $0.5 million in     
1995, and from $1.3 million to $0.5 million in 1996, for two of the     
Company's executives pursuant to their employment agreements.           

(c) Reduction in interest costs of $1.5 million and $1.6 million in 1995 and    
1996, respectively, assuming the application of approximately $70.0     
  million of the proceeds from the Offering to reduce the actual outstanding
indebtedness, by $70.0 million under the Credit Agreement.              

(d) Reduction of $0.1 million and $0.3 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  
Credit Agreement.                                                       

(e) Increase of $1.7 million and $4.0 million 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.              

(f) 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                    

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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.                                  

Pro forma net income is based on 9,773,488 shares of Common Stock           
outstanding prior to the Offering, increased by (a) the sale of 5,846,774       
shares of Common Stock assuming an offering price of $21.50 per share ($19.84,  
net of expenses), the proceeds of which would be necessary to pay               
approximately $116.0 million in satisfaction of the Distribution Notes and (b)  
the sale of 877,016 shares of Common Stock assuming an offering price of        
$21.50 per share ($19.84, net of expenses), the proceeds of which would be      
necessary to pay approximately $17.4 members to the Takihyo Group as partial    
consideration for the contribution of their interests in the DK Companies to    
the Company in connection with the Reorganization.                              

Supplementary pro forma net income per the share for the quarters ended     
April 2, 1995 and March 31, 1996 are $.31 and $.46, respectively, based on      
9,773,488 shares of Common Stock outstanding prior to the Offering, increased   
by the sale of 3,528,226 shares of Common Stock assuming an offering price of   
$21.50 per share ($19.84, net of expenses), the proceeds of which would be      
necessary to repay approximately $70.0 million of the amounts outstanding       
under the Company's Credit Agreement.                                           

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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.                                  

Pro forma net income is based on 9,773,488 shares of Common Stock           
outstanding prior to the Offering, increased by (a) the sale of 5,846,774       
shares of Common Stock assuming an offering price of $21.50 per share ($19.84,  
net of expenses), the proceeds of which would be necessary to pay               
approximately $116.0 million in satisfaction of the Distribution Notes and (b)  
the sale of 877,016 shares of Common Stock assuming an offering price of        
$21.50 per share ($19.84, net of expenses), the proceeds of which would be      
necessary to pay approximately $17.4 members to the Takihyo Group as partial    
consideration for the contribution of their interests in the DK Companies to    
the Company in connection with the Reorganization.                              

Supplementary pro forma net income per the share for the quarters ended     
April 2, 1995 and March 31, 1996 are $.31 and $.46, respectively, based on      
9,773,488 shares of Common Stock outstanding prior to the Offering, increased   
by the sale of 3,528,226 shares of Common Stock assuming an offering price of   
$21.50 per share ($19.84, net of expenses), the proceeds of which would be      
necessary to repay approximately $70.0 million of the amounts outstanding       
under the Company's Credit Agreement.                                           

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PRO FORMA COMBINED BALANCE SHEET      

(UNAUDITED)     

                                                        [Enlarge/Download Table]

                                               MARCH 31, 1996                            
                          ---------------------------------------------------------------
                                     ISSUANCE OF                                         
                                     DISTRIBUTION                                        
                           ACTUAL     NOTES AND     PRO FORMA                  PRO FORMA 
                          COMBINED  REORGANIZATION  COMBINED   ADJUSTMENTS    AS ADJUSTED
                          --------  --------------  ---------  -----------    -----------
                                               (IN THOUSANDS)                            
                                                                                         
Current assets:                                                                          
  Cash..................  $  7,405                  $  7,405    $ 213,380 (b)  $  7,385  
                                                                 (116,000)(c)            
                                                                  (70,000)(d)            
                                                                  (17,400)(e)            
                                                                  (10,000)(f)            
  Accounts receivable...    87,014                    87,014                     87,014  
  Inventories...........    82,771                    82,771                     82,771  
  Prepaid expenses and                                                                   
   other current                                                                         
   assets...............    11,087     $ 12,200 (g)   23,287                     23,287  
                          --------     --------     --------    ---------      --------  
    Total current as-                                                                    
     sets...............   188,277       12,200      200,477          (20)      200,457  
Property and equipment..    25,338                    25,338                     25,338  
Deposits and other                                                                       
 noncurrent assets......    12,652        3,300 (g)   15,952       (2,660)(h)    13,292  
                          --------     --------     --------    ---------      --------  
                          $226,267     $ 15,500     $241,767    $  (2,680)     $239,087  
                          ========     ========     ========    =========      ========  
Current liabilities:                                                                     
  Accounts payable......  $ 38,998                  $ 38,998                   $ 38,998  
  Accrued expenses and                                                                   
   other current                                                                         
   liabilities..........    22,754                    22,754    $   5,000 (i)    20,134  
                                                                   (7,620)(j)            
  Current portion of                                                                     
   long-term debt.......     7,759                     7,759       (7,500)(d)       259  
  Distribution Notes....               $114,484 (a)  114,484     (114,484)(c)        --  
  Obligation for Takihyo                                                                 
   contribution.........                 17,400 (a)   17,400      (17,400)(e)        --  
                          --------     --------     --------    ---------      --------  
    Total current lia-                                                                   
     bilities...........    69,511      131,884      201,395     (142,004)       59,391  
Long-term debt..........    64,965                    64,965      (62,500)(d)     2,465  
Stockholders' equity and                                                                 
 partners' capital:                                                                      
  Common stock of Inter-                                                                 
   mediate Entities.....     1,146       (1,146)(k)       --                         --  
  Common Stock..........        --           98 (k)       98          107 (b)       205  
  Additional paid-in                                                                     
   capital..............        --      (23,797)(a)  (24,649)     213,273 (b)   177,068  
                                        (17,400)(a)               (10,040)(j)            
                                         15,500 (g)                (1,516)(c)            
                                          1,048 (k)                                      
  Retained earnings and                                                                  
   partners' capital                                                                     
   (deficit)............    90,687      (90,687)(a)       --                         --  
  Cumulative translation                                                                 
   adjustment...........       (42)                      (42)                       (42) 
                          --------     --------     --------    ---------      --------  
    Total stockholders'                                                                  
     equity and part-                                                                    
     ners' capital(f)...    91,791     (116,384)     (24,593)     201,824       177,231  
                          --------     --------     --------    ---------      --------  
                          $226,267     $ 15,500     $241,767    $  (2,680)     $239,087  
                          ========     ========     ========    =========      ========  

--------                                                                        

(a) Represents the Distribution Notes issued on April 16, 1996 to Takihyo Inc.  
  and the Principals or their affiliates and the liability to members of the
Takihyo Group for partial consideration for the contribution of their   
interests in the DK Companies to the Company in connection with the     
   Reorganization. The aggregate principal amount of the Distribution Notes is
  an estimate of the cumulative undistributed taxable income (on which taxes
have been previously paid) of the DK Companies through the closing date,
   net of an estimate of cash distributions of     million as may be made from
April 16, 1996 through the anticipated closing date of the Offering.    

(b) Represents the estimated net proceeds of the sale of shares of Common Stock 
 offered by the Company hereby at an assumed initial public offering price
of $21.50 per share.                                                    

(c) Represents the repayment of the Distribution Notes, including accrued       
interest thereon.                                                       

(d) Represents the repayment of the term loans under the Company's Credit       
Agreement and the reduction of the Company's revolving line of credit.  

(e) Represents the amount paid to the Takihyo Group as partial consideration    
 for the contribution of their interests in DK Companies to the Company in
connection with the Reorganization.                                     

(f) Represents a one-time payment of $5 million to the President of the         
 Company, pursuant to his employment, agreement, and a one-time payment to
Gabrielle Studio of $5 million in connection with the License Agreement.

(g) Represents a deferred tax asset of approximately $15.5 million, net of      
  certain state and local deferred tax assets, which the Company will record
concurrently with becoming subject to Federal and additional state and  
local income taxes. The deferred income taxes will reflect the net tax  
effect of temporary differences, primarily depreciation, allowance for  
  doubtful accounts and other book accruals, between the carrying amounts of
assets and liabilities for pro forma financial reporting and the amounts
used for income tax purposes.                                           

(h) Represents a write-off of deferred financing costs relating to the          
Company's Credit Agreement                                              

(i) Represents a charge related to the anticipated consolidation of the         
Company's warehouse facilities.                                         

(j) Represents the tax benefit and the net effect on additional paid-in capital 
for the adjustments noted in (f), (h), and (i) above.                   

(k) Represents the issuance of shares of Common Stock in exchange for the       
common stock of the Intermediate Entities in connection with the        
Reorganization.                                                         

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SELECTED COMBINED FINANCIAL DATA  

The following selected combined financial data should be read in conjunction
with the Company's Predecessor Combined Financial Statements and the notes      
thereto and "Management's Discussion and Analysis of Financial Condition and    
Results of Operations" included elsewhere herein. The statement of income data  
for the years ended January 2, 1994, January 1, 1995, and December 31, 1995     
and the balance sheet data as of January 1, 1995 and December 31, 1995 are      
derived from the Predecessor Combined Financial Statements of the Company that  
have been audited by Ernst & Young LLP, independent auditors, and are included  
elsewhere in this Prospectus. The statement of income data for the years ended  
December 28, 1991 and January 2, 1993 and the balance sheet data as of          
December 28, 1991, January 2, 1993, and January 2, 1994, are derived from       
financial statements of the Company audited by Ernst & Young LLP that are not   
included herein. See "Management's Discussion and Analysis of Financial         
Condition and Results of Operations."                                           

                                                        [Enlarge/Download Table]

                                                                                      FISCAL QUARTER   
                                             FISCAL YEAR ENDED                            ENDED        
                         ---------------------------------------------------------- -------------------
                         DECEMBER 28, JANUARY 2, JANUARY 2, JANUARY 1, DECEMBER 31, APRIL 2,  MARCH 31,
                           1991(1)       1993       1994       1995        1995       1995      1996   
                         ------------ ---------- ---------- ---------- ------------ --------  ---------
                               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)                           
                                                                                                       
STATEMENT OF INCOME                                                                                    
 DATA:                                                                                                 
Net revenues............   $196,570    $259,947   $364,705   $420,164    $510,126   $120,693  $159,585 
Gross profit............     64,496      92,309    130,475    148,992     179,437     44,203    52,861 
Selling, general, and                                                                                  
 administrative                                                                                        
 expenses...............     54,544      63,933    102,748    119,995     136,906     33,041    39,411 
                           --------    --------   --------   --------    --------   --------  -------- 
Operating income........      9,952      28,376     27,727     28,997      42,531     11,162    13,450 
Equity in earnings of                                                                                  
 affiliate(2)...........        --          --         --         --        2,519        --        988 
Interest expense, net...        (82)       (892)    (4,063)    (8,862)     (7,650)    (1,701)   (2,047)
Other expense(3)........        --          --      (2,980)    (2,651)        --                       
Gain on sale of                                                                                        
 interests in                                                                                          
 affiliate(2)...........        --          --         --         --       18,673     18,673       --  
                           --------    --------   --------   --------    --------   --------  -------- 
Income before provision                                                                                
 for certain state,                                                                                    
 local, and foreign                                                                                    
 income taxes...........      9,870      27,484     20,684     17,484      56,073     28,134    12,391 
Provision for certain                                                                                  
 state, local, and                                                                                     
 foreign income taxes...      2,187       3,522      1,312      1,139       2,398      1,408       690 
                           --------    --------   --------   --------    --------   --------  -------- 
Net income..............   $  7,683    $ 23,962   $ 19,372   $ 16,345    $ 53,675   $ 26,726  $ 11,701 
                           ========    ========   ========   ========    ========   ========  ======== 

                                                        [Enlarge/Download Table]

                          DECEMBER 28, JANUARY 2, JANUARY 2, JANUARY 1, DECEMBER 31, MARCH 31,
                              1991        1993       1994       1995        1995       1996   
                          ------------ ---------- ---------- ---------- ------------ ---------
                                                                                              
BALANCE SHEET DATA:                              (DOLLARS IN THOUSANDS)                       
Working capital.........    $   (54)    $25,521    $ 11,592   $52,289     $ 92,635   $118,766 
Total assets............     54,739      89,035     137,129   157,004      203,975    226,267 
Total long-term debt,                                                                         
 including current                                                                            
 portion................        --       17,450       1,044    51,426       53,538     72,724 
Stockholders' equity and                                                                      
 partners' capital......     10,837      30,809      42,329    47,837       80,846     91,791 

--------                                                                        
(1) Selling, general, and administrative expenses for 1991 included payments    
 of and accruals for consulting fees to the Principals of $14.0 million in
addition to amounts paid to certain executives pursuant to their then   
existing employment arrangements. Excluding these consulting fees,      
operating income and net income would have been $24.0 million and $21.7 
million, respectively.                                                  

(2) On March 31, 1995, the Company sold 70% of its interest in the operations   
of Donna Karan Japan to a nonaffiliated party. The Company recognized a 
gain on this transaction, net of transaction costs, of $18.7 million.   
Subsequent to the sale, the Company has accounted for its remaining 30% 
  interest in the operations of Donna Karan Japan using the equity method of
accounting. Equity in earnings of affiliate amounted to $2.5 million and
$1.0 million for the year ended December 31, 1995 and the quarter ended 
 March 31, 1996, respectively. See Note 9 to Notes to Predecessor Combined
Financial Statements.                                                   
(3) 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.                                                                

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MANAGEMENT'S DISCUSSION AND ANALYSIS  
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  

OVERVIEW                                                                        

The Company has generated increased net revenues each year since its        
inception and has operated profitably each year since 1987. Net revenues        
increased from $19.0 million in 1986 to $510.1 million in 1995, a compound      
annual growth rate of 44.1%, and operating income increased from $54,000 in     
1986 to $42.5 million in 1995. The Company's growth reflects annual increases   
in sales of its existing collections, successful extensions of its existing     
collections, introductions of new collections, and expansion of its domestic    
and international distribution. The Company intends to continue to grow         
principally by increasing the number of doors (a "door" is a single retail      
outlet) through which its products are sold, increasing the number of free-     
standing retail stores operated by third parties, continuing product            
segmentation and expansion, broadening its customer base, and selectively       
granting new licenses.                                                          

As part of its strategy of introducing new products and collections, during 
the past five years, the Company has expanded its product offerings to include  
the Donna Karan New York(R) Essentials and DKNY(R) Essentials collections for   
women, the Donna Karan New York(R) and DKNY(R) collections for men, the         
DKNY(R) jeans and petite collections for women, DK Men(TM) and Donna Karan New  
York(TM) men's and women's beauty products, respectively, and DKNY(R) men's     
and women's shoes. The introduction of new products and collections requires    
significant investments, such as costs related to advertising, infrastructure,  
and design, as well as additional inventory requirements. As a result, new      
products and collections have an adverse impact on the Company's overall        
operating profit margins until such products and collections achieve a          
sufficient sales level to offset such costs. For example, the Company's Donna   
Karan New York(R) men's division, which was established in 1991, did not        
provide a positive contribution to the Company's operating profit until 1994,   
and in 1995, this division continued the trend of increased net revenue and     
operating profitability. The Company expects that future products and           
collections will similarly impact the Company's overall operating               
profitability. In addition, the Beauty Division, which has experienced an       
increase in net revenues each year since its introduction in 1992, did not      
provide a positive contribution prior to allocation of corporate expenses       
until 1995. However, after such allocations, the Beauty Division has not yet    
been profitable.                                                                

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

The Company conducts operations in Japan through Donna Karan Japan. On March
31, 1995, the Company sold 70% of its interest in the operations of Donna       
Karan Japan to HPL and a corporation owned by a private investor with a         
substantial interest in HPL, and entered into an agreement with Donna Karan     
Japan which provides for a management fee payable to the Company based upon     
net sales of Donna Karan Japan. Subsequent to such sale, the Company has        
accounted for its remaining 30% interest in the operations of Donna Karan       
Japan using the equity method of accounting and has included the management     
fee income as an offset against selling, general, and administrative expenses.  
See Note 9 to Notes to Predecessor Combined Financial Statements.               

Immediately following the Offering, the Company will accrue a non-recurring 
pre-tax charge of approximately $17.7 million (approximately $10.1 million on   
an after-tax basis) relating to (i) the anticipated consolidation of the        
Company's warehouse facilities ($5.0 million), (ii) a one-time payment to the   
President of the Company pursuant to his employment agreement ($5.0 million),   
(iii) a one-time payment to Gabrielle Studio made in connection with the        
License Agreement (estimated at $5.0 million), and (iv) the write-off of        
deferred financing costs relating to the Company's Credit Agreement ($2.7       
million). In addition, the Company will record a deferred tax asset of          
approximately $15.5 million, net of certain state and local deferred tax        
assets recorded on a historical basis, concurrent with becoming subject to      
Federal and additional state and local income taxes in accordance with the      
provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,     
"Accounting for Income Taxes" effective January 3, 1993.                        

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RESULTS OF OPERATIONS                                                           

The following discussion provides information and analysis of the Company's 
results of operations from 1993 through 1995 and for the first quarters of      
1995 and 1996 and its liquidity and capital resources, and should be read in    
conjunction with the audited Predecessor Combined Financial Statements and      
notes thereto and Selected Combined Financial Data included elsewhere in this   
Prospectus. The Company utilizes a 52- or 53- week fiscal year ending on the    
Sunday nearest December 31. Accordingly, the years 1993, 1994, and 1995 ended   
January 2, 1994, January 1, 1995, and December 31, 1995, respectively and the   
first quarters of 1995 and 1996 ended April 2, 1995 and March 31, 1996,         
respectively. As used in "Management's Discussion and Analysis of Financial     
Condition and Results of Operations," the Donna Karan New York(R) collections   
and the DKNY(R) collections each include apparel, accessories, and shoes.       

COMPARISON OF FIRST QUARTER 1996 TO FIRST QUARTER 1995                      

                                                                [Download Table]

                                                     1995          1996     
                                                 ------------  ------------ 
                                                   (DOLLARS IN MILLIONS)    
                                                                            
Net revenues.................................... $120.7 100.0% $159.6 100.0%
Gross profit....................................   44.2  36.6    52.9  33.1 
Selling, general, and administrative expenses...   33.0  27.4    39.4  24.7 
Operating income................................   11.2   9.3    13.5   8.4 
Equity in earnings of affiliate.................    --    --      1.0   0.6 
Net income......................................   26.7  22.1    11.7   7.3 

Net revenues were $159.6 million in the first quarter of 1996, an increase  
of 32.2% from the net revenues of $120.7 million recorded in the first quarter  
of 1995. The increase was due primarily to a $19.6 million, or 27.8%, increase  
in the DKNY (R) women's collections; a $12.3 million, or 185.7%, increase in    
the DKNY (R) men's collections; a $2.6 million, or 28.8 %, increase in the      
Donna Karan New York (R) collections for men; a $1.3 million, or 39.5%,         
increase in beauty products; and a $3.0 million, or 28.7%, increase in outlet   
stores and licensing. Donna Karan New York (R) Collections for women net        
revenues were unchanged from first quarter 1995. Subsequent to the sale of 70%  
of the Company's interest in the operations of Donna Karan Japan in March       
1995, the Company no longer consolidated Donna Karan Japan, but rather          
accounted for its 30% interest in Donna Karan Japan using the equity method of  
accounting. As a result, product sales to Donna Karan Japan are reflected as    
revenues of the Company's divisions. If the interest in the operations of       
Donna Karan Japan had been sold at the beginning of 1995, pro forma net         
revenues for 1995 would have been $115.2 million in the first quarter.          

The increase in the DKNY (R) women's collections resulted from earlier      
shipments in 1996 relative to 1995 due to earlier production of the             
collections, and, to a lesser extent, an increase in the number of              
international doors. The increase in the DKNY (R) men's collections resulted    
from significant growth in international sales, as well as continued domestic   
growth. The increase in the Donna Karan New York (R) collections for men        
primarily resulted from an increase in doors domestically, as well as growth    
internationally. The increase in the Beauty Division is primarily due to the    
expanded product offering in 1996 compared to 1995.                             

Gross profit as a percent of sales was 33.1% and 36.6% in the first quarter 
of 1996 and 1995, respectively. The decrease in the gross margin is primarily   
due to the sale of the operations of Donna Karan Japan in March of 1995. This   
transaction resulted in a nonrecurring credit of $0.9 million to recognize      
previously deferred profit in Donna Karan Japan's inventory, as well as a 0.8%  
reduction in the consolidated margin in 1996 since Donna Karan Japan was        
accounted for on the equity basis. Without the nonrecurring credit and          
accounting for Donna Karan Japan under the equity method of accounting, the     
1995 first quarter net revenues would have been $115.2 million, the gross       
profit would have been $37.4 million, and the gross margin would have been      
32.5%.                                                                          

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Selling, general, and administrative expenses decreased to 24.7% of net     
revenues in the first quarter of 1996 from 27.4% of net revenues for the same   
period of 1995. This decrease is primarily due to the leverage obtained from    
the increased net revenue base, the $0.5 million of management fees received    
from Donna Karan Japan, and the difference in the product mix resulting in a    
lower percentage of beauty products, which have higher selling, general, and    
administrative expenses as a percent of net revenues.                           

Operating income increased to $13.5 million (8.4% of net revenues) in the   
first quarter of 1996 from $11.2 million (9.3% of net revenues) in the same     
period in 1995.                                                                 

Interest expense increased to $2.0 million in the first quarter of 1996 from
$1.7 million in the same period in 1995 primarily due to higher average         
borrowings.                                                                     

Equity in earnings of affiliate/gain on sale of interests in affiliate. The 
gain on sale of interests in affiliate, net of transaction costs, amounted to   
$18.7 million in 1995, resulting from the Company's sale of 70% of its          
interest in the operations of Donna Karan Japan. Subsequent to the sale, the    
Company has accounted for its remaining 30% interest in the operations of       
Donna Karan Japan using the equity method. Equity in earnings of Donna Karan    
Japan was $1.0 million in the first quarter of 1996.                            

Provision for certain state, local, and foreign income taxes decreased to   
$0.7 million in the first quarter of 1996 from $1.4 million in the same period  
in 1995, primarily due to lower pre-tax income in 1996 compared to 1995.        

Net income decreased to $11.7 million in the first quarter of 1996 from     
$26.7 million in the same period in 1995 primarily due to the gain on sale of   
interests in affiliate recognized in first quarter 1995, somewhat offset by     
higher operating income in the first quarter of 1996 compared to 1995 and       
other factors as described above.                                               

COMPARISON OF 1995 TO 1994                                                  

                                                                [Download Table]

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

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

The increase in the DKNY(R) women's collections resulted from increased     
penetration of existing domestic doors, and, to a lesser extent, an increase    
in the number of international doors. Net revenues of DKNY(R) women's           
collections through free-standing International Retail Stores increased 73.0%   
to $18.2 million in 1995. The increase in the DKNY(R) men's collections         
resulted from significant growth in international sales, as the collections     

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were able to leverage the success of the DKNY(R) women's collections'           
international penetration, as well as to continue its domestic growth. The      
increase in the Donna Karan New York(R) collections for men primarily resulted  
from a significant increase in doors domestically, as well as continued growth  
internationally. The increase in the Beauty Division resulted from continued    
expansion of the Company's product offerings, primarily a collection of         
fragrance and grooming products for men which was launched in October 1994,     
and continued growth of its women's fragrance collection.                       

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

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

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

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

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

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

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

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

COMPARISON OF 1994 TO 1993                                                    

                                                                [Download Table]

                                                        1993          1994     
                                                    ------------  ------------ 
                                                      (DOLLARS IN MILLIONS)    
                                                                               
Net revenues....................................... $364.7 100.0% $420.2 100.0%
Gross profit.......................................  130.5  35.8   149.0  35.5 
Selling, general, and administrative expenses......  102.7  28.2   120.0  28.6 
Operating income...................................   27.7   7.6    29.0   6.9 
Net income.........................................   19.4   5.3    16.3   3.9 

Net revenues were $420.2 million in 1994, an increase of 15.2% from $364.7  
million of net revenues recorded in 1993. The increase was due to a $39.6       
million, or 20.5%, increase in the DKNY(R) women's collections; a $10.3         
million, or 58.8%, increase in the Donna Karan New York(R) collections for      
men; a $9.0 million, or 115.4%, increase in the Company's Beauty Division; and  
a $4.1 million, or 5.4%, increase in the                                        

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Donna Karan New York(R) Collection for women. Approximately $18.5 million of    
the increase in net revenues in the DKNY(R) women's collections resulted from   
the December 1993 acquisition of the 50% of the Donna Karan Shoe Company which  
the Company did not previously own. The remainder of the increase was due to    
growth in international sales. Net revenues for the Donna Karan New York(R)     
collections for men increased primarily due to higher penetration of its Donna  
Karan New York(R) collections in new and existing domestic doors. Beauty        
Division net revenues increased primarily from the increased growth of Bath &   
Body Mist, which was introduced in the second half of 1993, as well as the      
introduction of the DK Men(TM) collection of fragrance and grooming products    
in the second half of 1994. These net revenues increases were offset somewhat   
by a decrease in net revenues in the Company's DKNY(R) men's collections.       
During 1994, the Company restructured the DKNY(R) men's collections in order    
to focus on a more targeted consumer need.                                      

Gross profit as a percentage of sales was 35.5% and 35.8% in 1994 and 1993, 
respectively. Although gross margin on individual collections may change over   
time, in the aggregate, consolidated gross margins have remained relatively     
constant.                                                                       

Selling, general, and administrative expenses increased to $120.0 million   
(28.6% of revenues) in 1994 from $102.7 million (28.2% of net revenues) in      
1993. This increase was primarily due to the investment in the additional       
infrastructure necessary to support new product introductions and penetration   
into international markets, particularly Japan. In addition, approximately      
$3.2 million of the increase was caused by the acquisition of the 50% of the    
Donna Karan Shoe Company which the Company did not previously own.              

Operating income increased 4.6% to $29.0 million (6.9% of net revenues) in  
1994 from $27.7 million (7.6% of net revenues) in 1993.                         

Interest expense increased to $8.9 million in 1994 from $4.1 million in     
1993, due to higher average borrowings resulting from planned capital           
expenditures and working capital requirements resulting from increased sales.   

Other expense was $2.7 million in 1994 and $3.0 million in 1993 consisting  
primarily of legal and other professional fees related to a proposed debt       
offering in 1994 and a proposed initial public offering in 1993.                

Provision for certain state, local, and foreign income taxes decreased to   
$1.1 million in 1994 from $1.3 million in 1993.                                 

Net income decreased 15.6% to $16.3 million in 1994 from $19.4 million in   
1993. This decrease was primarily due to increased interest expense             
attributable to debt incurred for working capital needs to support the          
Company's growth.                                                               

LIQUIDITY AND CAPITAL RESOURCES                                                 

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

Subsequent to the consummation of the Offering the Company's cash flow needs
will change as a result of (i) reduced interest costs associated with the       
application of the net proceeds of the Offering to reduce outstanding           
indebtedness under the Credit Agreement, (ii) decreased compensation for two    
of the Company's executives pursuant to their new employment agreements, and    
(iii) the absence of distributions, primarily for payment of taxes, paid by     
the Company to the partners and stockholders of the Intermediate Entities.      
Offsetting such changes will be the need to apply funds to the payment of       
Federal and additional state and local income taxes and royalties to Gabrielle  
Studio pursuant to the License Agreement. See "Pro Forma Combined Financial     
Information." Any net use of cash for such changes is expected to be funded     
through operations.                                                             

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At March 31, 1996, the Company had working capital of $118.8 million,       
compared to $92.6 million at December 31, 1995. Changes in working capital      
included an increase in accounts receivable of $24.8 million due to revenue     
growth which is influenced by seasonality. See "Seasonality of Business"        
below. This increase was partially offset by lower inventories of $2.9          
million. The net increase in current assets of $18.3 million was financed       
primarily through borrowings of $20.9 million under the Credit Agreement.       

The Company's current credit agreement (the "Credit Agreement"), provides   
for term loans, of which $43.1 million were outstanding at March 31, 1996, and  
a revolving line of credit for the issuance of letters of credit, acceptances,  
or direct borrowings of $105.0 million. Direct borrowings under the revolving   
line of credit bear interest at 1.5% over the lead bank's prime rate (9.75% at  
March 31, 1996) and are limited to a borrowing base calculated on eligible      
accounts receivable, inventory, and letters of credit. The term loan consists   
of term loan A, term loan B, and term loan C. The Credit Agreement provides     
for various borrowing rate options including borrowing rates based on a fixed   
spread over LIBOR. At March 31, 1996, $10.0 million of term loan C bears        
interest at 2.75% above LIBOR (8.063%), $13.1 million of term loan A bears      
interest at 2.75% above LIBOR (8.063%), and $20.0 million of term loan B bears  
interest at 3.25% above LIBOR (8.563%). Both the revolving credit facility and  
the term loans are secured by accounts receivable, inventory, and intangibles   
(including an interest in certain licensed trademarks), as well as certain      
intangibles of an affiliated company. Letters of credit and acceptances         
outstanding under the Credit Agreement were approximately $22.9 million and     
$33.9 million at March 31, 1996 and December 31, 1995, respectively. Direct     
borrowings outstanding under the Credit Agreement were approximately $72.2      
million and $53.0 million at March 31, 1996 and December 31, 1995,              
respectively. Shortly following the Offering, the Company expects to enter      
into a new credit agreement. Although there can be no assurance, the Company    
anticipates that the new credit agreement will have terms more favorable to     
the Company than those of its existing Credit Agreement. Such new credit        
agreement is expected to be a three-year $150.0 million revolving credit        
facility. The Company anticipates that the new facility will be used to repay   
any remaining amounts outstanding under the existing line of credit and for     
working capital needs.                                                          

Capital expenditures, primarily for equipment, machinery, computers, office 
furniture, leasehold improvements, and outlet stores, were approximately $4.1   
million, $4.3 million, and $3.4 million in the three months ended March 31,     
1996, in fiscal 1995, and in fiscal 1994, respectively. The Company             
anticipates capital expenditures to support the Company's growth to be          
approximately $3.9 million for the remainder of 1996. Furthermore, the Company  
may invest additional amounts in 1996 and 1997 in connection with its planned   
warehouse consolidation. It is expected that consolidation of the distribution  
facility will not be completed until 1997 and that the funds needed to          
accomplish such consolidation, including capital expenditures to improve the    
new warehouse, will be available from the Company's then existing credit        
agreement or lease financing arrangements.                                      

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.           

In January 1996, one of the Company's customers and certain of its          
affiliated entities, which accounted for 2.3% of the Company's gross revenues   
in 1995, filed for protection under the Federal bankruptcy laws. The Company    
has filed a claim with its insurance carrier for recovery and has accrued for   
its loss, net of expected insurance recovery, in 1995. See "Risk Factors--      
Changes in the Retail Industry" and Selling, general, and administrative        
expenses in the "Comparison of 1995 to 1994" and Note 1 of the Notes to         
Predecessor Combined Financial Statements above.                                

The Company enters into forward exchange contracts as hedges relating to    
identifiable currency positions. These financial instruments are designed to    
minimize exposure and reduce risk from exchange rate fluctuations in the        
regular course of business. The Company does not engage in speculation.         
Historically, gains and losses on foreign exchange contracts have not been      
material.                                                                       

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The Company anticipates that it will be able to satisfy its ongoing cash    
requirements for the foreseeable future, primarily with cash flow from          
operations, supplemented by borrowings under its then existing credit           
agreement.                                                                      

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 in the first half of each fiscal  
year as compared to the second half of its fiscal year. Accordingly, the        
Company's outstanding borrowings under the Credit Agreement, historically,      
have been lower on or about its fiscal year end. On a quarter to quarter        
basis, the Company's operations may vary with production and shipping           
schedules, the introduction of new products, and variations in the timing of    
certain holidays from year to year. To the extent the Company continues to      
expand its business, the Company's operating performance may not reflect the    
typical seasonality of the apparel and beauty industries.                       

The Company historically has experienced lower net revenues and operating   
income in the second quarter than in other quarters due to (i) lower demand     
among retail customers typical of the apparel industry, and (ii) certain        
expenses that are constant throughout the year being relatively higher as a     
percentage of net revenues. As sales of the Company's beauty products increase  
relative to sales of its other products, the Company's net revenues and         
operating income will be increasingly influenced by the seasonality of the      
beauty industry. In general, the fragrance portion of the beauty industry       
experiences lower net revenues and operating income in the first three          
quarters and has substantially higher net revenues and operating income in the  
fourth quarter. Fragrance products are the primary component of the Company's   
beauty business.                                                                

OTHER MATTERS                                                                   

In connection with the Offering, the Company will become subject to Federal 
and additional state and local income taxes. As discussed in Note 1 of Notes    
to Predecessor Combined Financial Statements, the Company has adopted the       
provisions of SFAS No. 109, "Accounting for Income Taxes" effective January 3,  
1993. Concurrent with becoming subject to Federal and additional state income   
taxes, the Company will record a deferred tax asset and a corresponding tax     
benefit in its statement of income in accordance with the provisions of SFAS    
No. 109. Had such amount been recorded as of December 31, 1995, the effect      
would have been approximately $14.8 million inclusive of certain state and      
local deferred tax assets recorded on a historical basis. See Note 13 of Notes  
to Predecessor Combined Financial Statements.                                   

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BUSINESS  

GENERAL                                                                         

Donna Karan International Inc. is one of the world's leading international  
fashion design houses. The Company designs, contracts for the production 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(R) and DKNY(R) brand names, respectively. The Company also develops,       
contracts for the production of, markets, and distributes collections of men's  
and women's fragrance, bath and body, and treatment products under the          
DK Men(TM) and Donna Karan New York(TM) brand names, respectively. In           
addition, the Company selectively has granted licenses for the manufacture and  
distribution of certain other products under the Donna Karan New York(R) and    
DKNY(R) brand names, including hosiery, intimate apparel, eyewear, and, most    
recently, a license for children's apparel under the DKNY(R) brand name in      
Europe and the Middle East. In 1995, the Company's net revenues were $510.1     
million and its operating income was $42.5 million, representing a 21.4% and    
46.7% increase, respectively, over 1994 net revenues and operating income. The  
Company's net income in 1995 was $53.7 million. On a pro forma basis, after     
giving effect to the Reorganization, the Offering, and certain other            
adjustments, the Company's net revenues were $504.6 million, its operating      
income was $30.1 million, and its net income was $18.4 million for 1995. The    
Company's products have significant international appeal, and in 1995,          
approximately 33.9% of the Company's net revenues (excluding net revenues       
generated from outlet stores and licensing) were to customers in international  
markets.                                                                        

OPERATING STRATEGY                                                              

The Company has achieved its success through the implementation of the      
following operating strategies:                                                 

.  BUILDING GLOBAL NAME AND IMAGE. The Company has employed a strategy of   
building the global name recognition and distinctive brand image of   
  Donna Karan New York(R) in the exclusive designer market and the DKNY(R)
 brand in the larger bridge market. The Company has in turn been able to
capitalize on its fashion leadership in both of these segments through
additional product introductions.                                     

.  BRAND LEVERAGING. The Company has employed a strategy of establishing    
  successful designer collections and then leveraging the success of those
collections and the depth of its design talent in the larger bridge   
market. The Company first utilized this approach with its DKNY(R)     
 women's apparel division to successfully address the market opportunity
afforded by the larger bridge market thereby increasing its customer  
base and range of products. Subsequently, the Company has successfully
implemented this approach in the men's apparel division and the shoe  
division and intends to implement this same approach in the beauty    
division.                                                             

.  WORLDWIDE GROWTH. Since its inception, the Company has been expanding on 
  a worldwide basis, including in the United States, Europe and the Middle
East, Japan, and other parts of Asia. Due to the global recognition of
the Donna Karan New York(R) and DKNY(R) brands, the Company has been  
able to expand its sales internationally through its commitment to    
  developing the necessary infrastructure to support the increase in sales
and through the further licensing of free-standing retail stores in   
international markets.                                                

.  MAINTAINING BRAND EXCLUSIVITY. The Company maintains the exclusivity of  
its brand image through coordinated global advertising and marketing, 
selective licensing arrangements, and controlled retail distribution. 
 All worldwide advertising, public relations, and marketing programs are
managed on a centralized basis through the Company's Creative Services
  and Public Relations Departments in New York, which promote a consistent
global image. To reinforce its exclusive image and appeal, the Company
sells through a limited number of stores, including better department 
and large specialty stores, such as Bloomingdale's, Macy's, Saks Fifth
Avenue, Neiman Marcus, and Nordstrom, and better boutiques catering to
fashion-conscious customers. Consistent with its operating philosophy,
 the Company has been very selective in pursuing licensing opportunities
and has maintained strict control over design, quality, advertising,  
marketing, and distribution in its five existing product licensing    
arrangements.                                                         

.  "HEAD-TO-TOE" DRESSING. The Company offers a "head-to-toe" assortment    
of complementary luxury product categories designed to satisfy the    
lifestyle needs of its customers. During the past five                

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years, the Company has expanded its product offerings to include the  
Donna Karan New York(R) Essentials and DKNY(R) Essentials collections 
  for women, the Donna Karan New York(R) Signature collection for men, the
DKNY(R) jeans and petite collections for women, DK Men(TM) and Donna  
Karan New York(TM) men's and women's beauty products, respectively, as
well as DKNY(R) men's and women's shoes.                              

GROWTH STRATEGY                                                                 

The Company's goals are to continue to leverage its strong brand name and   
image by expanding its current product offerings and to increase its presence   
in domestic and international markets. The principal elements of the Company's  
growth strategy are to:                                                         

.  INCREASE NUMBER OF DOORS. During 1996, the Company expects selectively   
to increase the number of domestic doors through which its more       
recently-introduced products, including its beauty products and men's 
 apparel, will be sold and to increase the number of international doors
through which the Company's products are sold.                        

.  INCREASE NUMBER OF FREE-STANDING RETAIL STORES. The Company anticipates  
that 10 additional free-standing International Retail Stores will be  
opened in 1996 (including five stores to be opened under the Retail   
Agreement with HPL) and currently is considering a strategy for the   
  opening of full-price, free-standing retail stores by or in arrangements
with third parties in select locations in the United States.          

.  CONTINUE PRODUCT SEGMENTATION AND EXPANSION. By continuing to segment    
  and expand its collections, the Company provides a greater "head-to-toe"
product assortment to better satisfy the lifestyle needs of existing  
 customers and to appeal to new customers. The Company intends to launch
 a new women's fragrance under the Donna Karan New York(R) brand name in
  the second half of 1996, to add casual sportswear to its Donna Karan New
York(R) men's collection, and to expand the range of the current      
 activewear offerings included within its DKNY(R) women's collection for
spring 1997. In addition, the Company intends to increase the product 
range of its Donna Karan New York(R) Essentials collection for women  
under its new Donna Karan New York(R) Signature label for spring 1997.

.  BROADEN CUSTOMER BASE. The Company plans to target broader market        
 opportunities at lower prices than its apparel products with additional
luxury products in categories such as beauty and accessories.         

.  EXPAND LICENSING EFFORTS. Having successfully established its brands     
worldwide, the Company now intends to expand its licensing efforts    
through the selective granting of new product licenses.               

PRODUCTS                                                                        

The apparel products sold by the Company are organized into two broad       
categories: fashion-forward designer apparel sold under the Donna Karan New     
York(R) brand name, and bridge apparel sold under the DKNY(R) brand name. The   
women's ready-to-wear apparel market in the United States is divided into five  
price levels, ranging from lowest to highest, as follows: "budget,"             
"moderate," "better," "bridge," and "designer".                                 

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

                                                                [Download Table]

                                                                  DRESSES   
                                        SKIRTS AND  SHIRTS AND  (OTHER THAN 
WOMEN'S                      JACKETS       PANTS    BODYSUITS  EVENING WEAR)
-------                    ------------ ----------- ---------- -------------
                                                                            
Donna Karan New York(R)                                                     
  Collection.............. $1,200-1,800   $400-900   $300-600   $650-1,200  
  Essentials..............    750-1,100    300-600    200-400      500-950  
DKNY(R)...................    265-1,250    125-600     85-725      200-550  

MEN'S                         SUITS     SPORTSCOATS  TROUSERS               
-----                      ------------ ----------- ----------              
                                                                            
Donna Karan New York(R)                                                     
  Collection ("black la-                                                    
   bel").................. $1,100-1,750 $950-1,750   $300-400               
  Signature ("gold la-                                                      
   bel")..................      875-995    595-750    225-275               
DKNY(R)...................    550-1,200    250-450     65-290               

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The Company sells collections of men's and women's fragrance, bath and body,
and treatment products under the DK Men(TM) and Donna Karan New York(TM) brand  
names, respectively. The beauty products generally have retail prices in the    
$15 to $375 range, although most products are priced in the $85 and under       
range. In addition, the Company sells collections of women's accessories and    
men's and women's shoes under both of its brand names. Accessories for women    
marketed under the Donna Karan New York(R) brand name generally have retail     
price ranges from $350 to $850 for handbags, $80 to $250 for belts, $200 to     
$800 for jewelry, and $75 to $200 for small leather goods. Accessories for      
women marketed under the DKNY(R) brand name generally have retail price ranges  
from $30 to $575 for handbags, $15 to $175 for hats, and $15 to $150 for small  
leather goods. Shoes marketed under the Donna Karan New York(R) and DKNY(R)     
brand names generally have retail price ranges from $110 to $700 and $50 to     
$400, respectively, for women's shoes, and from $275 to $600 and $75 to $295,   
respectively, for men's shoes.                                                  

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

                                                                [Download Table]

                                                              1993(2) 1994 1995
                                                              ------- ---- ----
                                                                (IN MILLIONS)  
                                                                               
Donna Karan New York(R)(1)...................................   $93   $107 $117
DKNY(R)(1)...................................................   215    250  308
Beauty products..............................................     8     17   30
Outlet stores and licensing(3)...............................    49     46   55
                                                               ----   ---- ----
                                                               $365   $420 $510
                                                               ====   ==== ====

--------                                                                        
(1) Includes apparel, accessory, and shoe collections.                          
(2) Revenues of the Company's shoe collections (the "Shoe Division") were       
 combined with the Company's sales commencing December 1993, at which time
the Company bought out its then joint venture partner.                  
(3) The Company was operating 24, 29, and 31 outlet stores, respectively, at    
 the end of each of 1993, 1994, and 1995. Also includes children's apparel
for 1993.                                                               

DONNA KARAN NEW YORK(R) DESIGNER COLLECTIONS                                  

The Donna Karan New York(R) designer collections include men's and women's  
apparel, women's accessories, and men's and women's shoes (the "Designer        
Collections").                                                                  

WOMEN'S APPAREL                                                             

Since its inception, a primary focus of the Company has been to establish   
and maintain itself as an internationally recognized fashion design house. To   
this end, the Company has established two designer collections of women's       
apparel under the Donna Karan New York(R) brand name: Collection and            
Essentials. The original Donna Karan New York(R) 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, with an emphasis on comfort and fit. The Donna   
Karan New York(R) Collection for women represents high fashion apparel, made    
primarily with exclusively-developed, luxury fabrics and designed with an       
emphasis on comfort and fit. Today, the Donna Karan New York(R) Collection for  
women is recognized worldwide as one of the premier women's designer            
collections. Each of the spring and fall collections is introduced at major     
fashion shows which generate extensive press coverage in the domestic and       
international fashion press, as well as in the general media.                   

The Donna Karan New York(R) Essentials collection focuses on the lifestyle  
of the working woman and provides a consistent, classic, and sensual            
collection of apparel for all aspects of a woman's life. The Donna Karan New    
York(R) Essentials collection, introduced in 1992, includes updated and         
redesigned versions of the Company's most successful silhouettes (styles), as   
well as newly-designed, classic, signature styles of Ms. Karan and her design   
teams. As a result, the Donna Karan New York(R) Essentials collection is        
fashionable while maintaining consistent and timeless qualities.                

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As part of its growth strategy, the Company intends to increase its         
offerings of its Donna Karan New York(R) Essentials collection of products      
under its new Donna Karan New York(R) Signature label, geared to the executive  
woman. The Donna Karan New York(R) Signature collection will be introduced in   
fall 1996 for delivery in spring 1997 at slightly lower prices than the         
current Donna Karan New York(R) Essentials collection to appeal to a wider      
group of consumers. The Company intends to convert all of its Donna Karan New   
York(TM) Essentials doors and certain of its existing Donna Karan New York(R)   
Collection doors to Donna Karan New York(R) Signature doors. The Donna Karan    
New York(R) Collection will be offered for limited distribution in key markets  
to retailers which the Company considers to be high-end, luxury retailers. In   
addition, the Company intends to increase the number of doors in which the      
Donna Karan New York(R) Signature collection products will be sold, including   
international doors.                                                            

The following table sets forth certain information concerning the           
approximate number and location of doors through which the Company's Designer   
Collections of women's apparel were sold as of December 31, 1995 and are        
expected to be sold by the end of 1996:                                         

                                                        [Enlarge/Download Table]

                                             APPROXIMATE NUMBER OF DOORS                    
                         -------------------------------------------------------------------
                                       1995                              1996               
                         --------------------------------- ---------------------------------
                         UNITED STATES INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
                         ------------- ------------- ----- ------------- ------------- -----
                                                                                            
Donna Karan New York(R)                                                                     
 Collection.............      102           117       219       103           112       215 
Donna Karan New York(R)                                                                     
 Essentials.............      124            73       197       133            55       188 

MEN'S APPAREL                                                               

Consistent with its operating philosophy and leveraging its name recognition
and its strengths in design, sourcing, and distribution, the Company            
established two designer collections of men's apparel: Donna Karan New York(R)  
(black label) and Donna Karan New York(R) Signature (gold label). The           
introduction of the men's collections expanded the Company's customer base and  
increased its opportunities for additional product lines. Additionally, the     
men's collections increased the Company's in-store visibility by adding more    
departments within each store that carries the Company's products. The Donna    
Karan New York(R) black label collection was introduced in fall 1991 at one     
specialty store in New York where it was sold on an exclusive basis through     
fall 1992, at which time the Company expanded distribution to approximately 75  
doors. In recognition of the Donna Karan New York(R) black label collection,    
Ms. Karan received the Council of Fashion Designers of America's Menswear       
Designer of the Year Award for 1992. In 1994, Ms. Karan became the first        
American fashion designer to be invited to show the Company's men's collection  
at one of the premier European menswear fashion shows in Florence, Italy.       

The Donna Karan New York(R) black label collection is marketed in three     
categories: Donna Karan New York(R) Couture, Donna Karan New York(R)            
Sartoriale, and Donna Karan New York(R). The Donna Karan New York(R) Couture    
category provides hand-tailored clothing made in the United States, using a     
limited range of fabrications and new silhouettes for select distribution. The  
Donna Karan New York(R) Sartoriale category provides hand-made garments made    
in Italy using a variety of exclusively-developed fabrications and specially-   
designed silhouettes for the European and Asian markets. The Donna Karan New    
York(R) category provides a full collection of suits, sportscoats, trousers,    
sportswear, and furnishings made from luxury fabrics primarily in the United    
States and Italy and is more widely distributed than the other categories of    
the black label collection.                                                     

The Donna Karan New York(R) Signature collection (gold label), was          
introduced in fall 1993 as the Company's second designer collection of men's    
apparel and includes designer suits, sportscoats, trousers, sportswear,         
outerwear, and furnishings. Targeting a broader audience, this collection is    
priced below the Donna Karan New York(R) black label collection but maintains   
a similar dedication to quality and design, while using lower cost              
fabrications and more commercial production techniques. The Donna Karan New     
York(R) Signature                                                               

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collection is comprised of the basic, essential pieces of a man's wardrobe for  
the more conservative yet modern man, in styles similar to the styles of the    
Company's Donna Karan New York(R) black label collection. By having both        
collections, the Company competes in two distinct market segments.              

Net revenues of the men's division increased 43.1% from 1994 to 1995. The   
following table sets forth certain information concerning the approximate       
number and location of doors through which the Company's Designer Collections   
of men's apparel were sold as of December 31, 1995 and are expected to be sold  
by the end of 1996:                                                             

                                                        [Enlarge/Download Table]

                                             APPROXIMATE NUMBER OF DOORS                    
                         -------------------------------------------------------------------
                                       1995                              1996               
                         --------------------------------- ---------------------------------
                         UNITED STATES INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
                         ------------- ------------- ----- ------------- ------------- -----
                                                                                            
Donna Karan New York(R)                                                                     
 black label                                                                                
 collection.............      104           106       210       113           127       240 
Donna Karan New York(R)                                                                     
 Signature collection...      158            98       256       221           134       355 

ACCESSORIES                                                                 

The designer collection of women's accessories marketed under the Donna     
Karan New York(R) brand name includes handbags, belts, jewelry, small leather   
goods, hats, gloves, and scarves. In accordance with its strategy of            
controlling distribution, the Company designs, contracts for the production     
of, and controls the distribution of its accessories.                           

The Company is in the process of refocusing its Donna Karan New York(R)     
accessory business from a collection-coordinated accessory line to a more       
expanded "main floor" accessory line which reflects the taste and               
sophistication of the Designer Collections of women's apparel. As part of this  
strategy, the Company expects to begin implementing the accessory concept       
through a more select group of retailers than its current accessory             
distribution. The Company also intends to launch a separate collection of       
Donna Karan New York(R) men's accessories in the fourth quarter of 1996. This   
collection initially is expected to consist primarily of belts retailing from   
$80 to $500 and small leather goods retailing from $75 to $200.                 

The following table sets forth certain information concerning the           
approximate number and location of doors through which the Company's women's    
accessories collection was sold as of December 31, 1995 and is expected to be   
sold by the end of 1996:                                                        

                                                                [Download Table]

                    APPROXIMATE NUMBER OF DOORS                    
-------------------------------------------------------------------
              1995                              1996               
--------------------------------- ---------------------------------
UNITED STATES INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
------------- ------------- ----- ------------- ------------- -----
                                                                   
     147           147       294       124           134       258 

SHOES                                                                       

The Donna Karan New York(R) collections of men's and women's shoes are high 
priced, sophisticated collections of shoes, made with luxurious and expensive   
materials. The women's collection includes sport and dress shoes, boots, and    
sandals, casual shoes, and evening shoes. The limited men's collection          
includes sport and classic dress shoes and boots and casual shoes. Segments of  
the Donna Karan New York(R) shoe collections are designed to complement the     
Donna Karan New York(R) apparel collections.                                    

In 1995, the Company conducted a test program to expand its distribution of 
women's shoes to additional department store doors and specialty shops          
emphasizing ready-to-wear apparel. Consistent with the strategy for the Donna   
Karan New York(R) Collection for women, in 1996 the Donna Karan New York(R)     
women's shoe collection will be offered to select retailers for limited         
distribution in key markets.                                                    

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The following table sets forth certain information concerning the           
approximate number and location of doors through which the Company's Donna      
Karan New York(R) men's and women's shoe collections were sold as of December   
31, 1995 and are expected to be sold by the end of 1996:                        

                                                        [Enlarge/Download Table]

                                             APPROXIMATE NUMBER OF DOORS                    
                         -------------------------------------------------------------------
                                       1995                              1996               
                         --------------------------------- ---------------------------------
                         UNITED STATES INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
                         ------------- ------------- ----- ------------- ------------- -----
                                                                                            
Donna Karan New York(R)                                                                     
 women's shoe                                                                               
 collection............       144            78       222       106            72       178 
Donna Karan New York(R)                                                                     
 men's shoe                                                                                 
 collection*...........        30            14        44        21            14        35 

--------                                                                        
* Introduced in spring 1995.                                                    

OVERVIEW OF DESIGNER MARKET                                                 

In the designer segment of the apparel market, competitors of the Donna     
Karan New York(R) Collection for women include Armani Borgonuovo, Jil Sander,   
and Escada, and competitors of the Donna Karan New York(R) Essentials           
collections for women include Armani Le Collezione, Calvin Klein, and Michael   
Kors. The Donna Karan New York(R) black label and the Donna Karan New York(R)   
Signature collections for men compete with Giorgio Armani, Hugo Boss, Calvin    
Klein, Valentino, Vestimenta, and Ermenegildo Zegna. Competitors of the Donna   
Karan New York(R) women's accessories collection include Prada, Bottega         
Veneta, and Calvin Klein. The Donna Karan New York(R) women's shoe collection   
competes with Giorgio Armani, Gucci, Prada, Calvin Klein, and Robert            
Clergerie, and the Donna Karan New York(R) men's shoe collection competes with  
Dolce & Gabbana, Giorgio Armani, Gucci, Fenestria, and Ralph Lauren.            

DKNY(R) COLLECTIONS                                                           

The DKNY(R) collections include men's and women's apparel, women's          
accessories, and men's and women's shoes.                                       

WOMEN'S APPAREL                                                             

The initial success of the Donna Karan New York(R) Collection for women made
possible the launch of the DKNY(R) bridge collection of women's apparel and     
accessories in 1989. DKNY(R) 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(R) designer image.       
Moreover, the Company was able to significantly leverage the depth within its   
design team, as well as its sourcing capabilities and distribution strength to  
successfully address the market opportunity afforded in the larger bridge       
market, thereby increasing its customer base and range of products. The         
designs of the DKNY(R) brand can be considered on the "cutting edge" within     
the bridge market. Today, the women's apparel, accessory, and shoe collections  
sold under the DKNY(R) brand name constitute the Company's largest division,    
representing 53.1% of net revenues in 1995.                                     

To increase its sales to existing doors, the Company has segmented its      
DKNY(R) women's apparel collection into three lines, which are often sold to    
or through different departments. The DKNY(R) women's collection is a           
spirited, lifestyle, and item-driven collection of skirts, blouses, bodysuits,  
dresses, jackets, vests, pants, jeans, denimwear, outerwear, and activewear     
which complements all aspects of a woman's lifestyle. As part of the DKNY(R)    
women's collection, the Company markets a collection of women's apparel under   
the DKNY(R) Essentials label which offers a collection of core pieces, from     
jackets to underpinnings. The DKNY(R) Essentials collection addresses all       
aspects of a woman's lifestyle, from casual to work, and provides women with    
pieces that easily can be used to update and replenish their wardrobes.         

The Company has further increased its consumer base by addressing consumer  
demand for casual clothing through its DKNY(R) jeans division. The DKNY(R)      
jeans division, which the Company established in 1991,                          

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addresses the consumer demand for more casualwear. The DKNY(R) jeans division   
offers a collection of jeans, activewear, outerwear, and related sportswear     
under the DKNY(R) brand name, made from a variety of fabrications. During       
1995, the DKNY(R) jeans division accounted for approximately 43.2% of the net   
revenues of the DKNY(R) women's apparel division.                               

The Company's DKNY(R) petite division, which was established in 1994 as part
of the Company's strategy of expanding its existing collections, offers a       
selection of styles from those offered by the DKNY(R) women's apparel           
division, but the garments are sized for the petite woman. Approximately 30%    
of the DKNY(R) women's apparel styles are offered in petite sizing.             

The following table sets forth certain information concerning the           
approximate number and location of doors through which the Company's DKNY(R)    
women's apparel collections were sold as of December 31, 1995 and are expected  
to be sold by the end of 1996:                                                  

                                                        [Enlarge/Download Table]

                                              APPROXIMATE NUMBER OF DOORS                    
                          -------------------------------------------------------------------
                                        1995                              1996               
                          --------------------------------- ---------------------------------
                          UNITED STATES INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
                          ------------- ------------- ----- ------------- ------------- -----
                                                                                             
DKNY(R) apparel                                                                              
 collections (other than                                                                     
 the jeans and petite                                                                        
 collections)...........       413           277       690       392           347       739 
DKNY(R) jeans collec-                                                                        
 tion...................       522           289       811       554           358       912 
DKNY(R) petite collec-                                                                       
 tion...................       114           --        114       145           --        145 

MEN'S APPAREL                                                               

In 1992, the Company introduced a limited selection of men's apparel under  
the DKNY(R) brand name. In 1994, the Company determined it could expand upon    
its opportunities in menswear by focusing its DKNY(R) men's collection on a     
more targeted consumer need. As a result, the DKNY(R) men's collection changed  
from a more casual collection of apparel to a more modern, sophisticated, yet   
youthful, lifestyle collection. The DKNY(R) men's collection is an innovative,  
but not overly designed, collection of shirts, pants, jackets, jeans,           
sweaters, outerwear, activewear, and furnishings made of modern, lightweight,   
tactile fabrics. Approximately 30% of the DKNY(R) men's collection consists of  
new, modern basic styles which are available on a reorderable basis.            

The following table sets forth certain information concerning the           
approximate number and location of doors through which the Company's DKNY(R)    
men's collection was sold as of December 31, 1995 and is expected to be sold    
by the end of 1996:                                                             

                                                                [Download Table]

                    APPROXIMATE NUMBER OF DOORS                      
---------------------------------------------------------------------
              1995                                1996               
---------------------------------------------------------------------
UNITED STATES   INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
-------------   ------------- ----- ------------- ------------- -----
                                                                     
 256                 132       388       271           212       483 

ACCESSORIES                                                                 

The collection of women's accessories marketed under the DKNY(R) brand name 
includes handbags, belts, fashion jewelry, small leather goods, hats, belts,    
gloves, scarves, and umbrellas. Consistent with its operating strategy, the     
Company designs, contracts for the production of, and controls the              
distribution of its accessories.                                                

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The following table sets forth certain information concerning the           
approximate number and location of doors through which the Company's DKNY(R)    
women's accessories collection was sold as of December 31, 1995 and is          
expected to be sold by the end of 1996:                                         

                                                                [Download Table]

                    APPROXIMATE NUMBER OF DOORS                      
---------------------------------------------------------------------
              1995                                1996               
---------------------------------------------------------------------
UNITED STATES   INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
-------------   ------------- ----- ------------- ------------- -----
                                                                     
  706                281       987       712           344      1,056

SHOES                                                                       

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

The following table sets forth certain information concerning the           
approximate number and location of doors through which the Company's DKNY(R)    
men's and women's shoe collections were sold as of December 31, 1995 and are    
expected to be sold by the end of 1996:                                         

                                                        [Enlarge/Download Table]

                                             APPROXIMATE NUMBER OF DOORS                    
                         -------------------------------------------------------------------
                                       1995                              1996               
                         --------------------------------- ---------------------------------
                         UNITED STATES INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
                         ------------- ------------- ----- ------------- ------------- -----
                                                                                            
DKNY(R) women's shoe                                                                        
 collection.............      350           196       546       348           241       589 
DKNY(R) men's shoe                                                                          
 collection*............       18            20        38        34            37        71 

--------                                                                        
* Introduced in fall 1995.                                                      

OVERVIEW OF BRIDGE MARKET                                                   

In the bridge segment of the apparel market, the DKNY(R) women's apparel    
collections compete with CK by Calvin Klein, Polo/Ralph Lauren, Dana Buchman,   
Ellen Tracy, Emmanuel, and Anne Klein II. The DKNY(R) men's collection          
competes with labels such as CK by Calvin Klein, Guess, Mondo, Nautica,         
Polo/Ralph Lauren, Tommy Hilfiger, and Versace Classic V2. Competitors of the   
DKNY(R) women's accessories collection include By Paloma, Coach, Dooney &       
Bourke, and Ferragamo. The DKNY(R) women's shoe collection competes with Anne   
Klein II, Bis (Charles Jourdan), Freelance, Polo/Ralph Lauren, and VS (Via      
Spiga), as well as certain private labels, and the DKNY(R) men's shoe           
collection competes with Cole Haan, Kenneth Cole, Paraboot, and Polo/Ralph      
Lauren.                                                                         

BEAUTY DIVISION                                                                 

To further leverage its strong brand name and image, the Company created its
Beauty Division in 1992 to provide consumers with beauty products consistent    
with the Donna Karan New York(R) "head-to-toe" philosophy. To ensure that its   
beauty products are of the highest quality and to best manage the brand, the    
Company controls all aspects of its Beauty Division, including product          
development, package design, production, marketing, and distribution. By        
developing its Beauty Division, the Company has positioned itself to benefit    
from the higher gross margins associated with the beauty business, as well as   
its comparative stability relative to the apparel business. In turn, the        
Beauty Division has benefited considerably from the advertising and promotion   
efforts associated with the building of the Donna Karan New York(R) apparel     
brand franchise. The success of the Company's Beauty Division is illustrated    
by the division's compounded annual growth in sales of 96% from $8 million in   
1993 to $30 million in 1995.                                                    

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In September 1992, the Company launched the Donna Karan New York(R)         
collection of women's fragrance products. Packaged in distinctive bottles and   
dispensers, the fragrance collection was introduced in select Bloomingdale's    
stores. The Donna Karan New York(R) fragrance products currently consist of a   
perfume in 1/2 oz. and 1 oz. bottles, an eau de parfum in 50 ml. and 100 ml.    
spray dispensers, a 100 ml. splash, and a 1/2 oz. purser. The Beauty Division   
products were expanded in 1993 to include a variety of bath and body and        
treatment products, including a cleansing lotion, body cream, body lotion,      
talc, and bar soap. A second fragrance for women called "Bath & Body Mist" was  
introduced in the second half of 1993. The success of the Company's fragrance   
products is evidenced by the continued annual sales growth of each such         
product since its launch.                                                       

In 1994, the Company launched DK Men(TM), a collection of fragrance and     
grooming products for men. The collection includes 2.5 oz. colognes in spray    
and pour, 4 oz. after shave skin conditioner, a combination                     
antiperspirant/deodorant, soap, and hair and body shampoo. Following the        
successful launch of DK Men(TM), the Company launched "Unleaded(TM)," a         
version of the DK Men(TM) fragrance, as a light after shower overall spray      
product.                                                                        

In 1992, the Company won the "Best Women's Fragrance in Exclusive           
Distribution" and "Best Women's Advertising Campaign" Awards at the Fragrance   
Foundation Awards for its Donna Karan New York(R) women's fragrance. In 1994,   
the Company won the "Best Men's Fragrance in Exclusive Distribution" for its    
DK Men(TM) fragrance at the Fragrance Foundation Awards.                        

Part of the Company's long-term strategy is to increase its consumer base by
expanding its limited product offerings through the introduction of new         
products and collections. New beauty products under the Donna Karan New         
York(TM) brand name are expected to include a new women's fragrance in 1996,    
new treatment products in 1996 and 1997, and a limited number of color          
products in 1996 and 1997. Furthermore, the Company anticipates launching new   
collections of women's and men's beauty products in 1998 and 1999,              
respectively, under the DKNY(TM) brand name which are intended to be carried    
in significantly more stores than the Donna Karan New York(TM) collections of   
beauty products.                                                                

The Company has been able to leverage the success of its apparel business   
and the brand recognition created through its advertising and marketing         
programs to obtain better positioning in the stores in which its beauty         
products are distributed. The Company believes that its Beauty Division         
products, taken as a whole, are currently in the top 10 selling brands of       
beauty products sold by stores in which Beauty Division products are            
distributed. Competitors of the Company's Beauty Division include Chanel,       
Calvin Klein, Giorgio Armani, Boucheron, Issey Miyake, and Tiffany.             

The Company distributes its Beauty Division products directly in the United 
States. To build its international distribution network, as of March 1, 1996,   
the Company had entered into 11 agreements for the distribution of its Beauty   
Division products in certain locations in Europe, Asia, the Middle East,        
Central America, South America, and Australia. The Company's distribution       
agreements require its distributors to make substantial investments in          
advertising and marketing. Generally, the distributor agrees to spend on        
advertising and marketing during each year an amount equal to a stated          
percentage of its sales during that year, with a minimum advertising and        
marketing obligation based upon that same percentage of its minimum sales       
requirement for that year.                                                      

The following table sets forth certain information concerning the           
approximate number and location of doors through which the Company's Donna      
Karan New York(R) beauty products were sold as of December 31, 1995 and are     
expected to be sold by the end of 1996:                                         

                                                                [Download Table]

                    APPROXIMATE NUMBER OF DOORS                      
---------------------------------------------------------------------
              1995                                1996               
---------------------------------------------------------------------
UNITED STATES   INTERNATIONAL TOTAL UNITED STATES INTERNATIONAL TOTAL
-------------   ------------- ----- ------------- ------------- -----
                                                                     
     617            2,079     2,696      752          2,624     3,376

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LICENSED PRODUCTS                                                               

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

To profit further from the Company's brand recognition and the quality and  
design standards which it successfully has established over the past 10 years,  
in addition to those material arrangements which currently are in place         
(described below), the Company is now more aggressively pursuing licensing as   
a way to continue to grow its brands with products for which it does not wish   
to develop the expertise in manufacturing and distribution. The Company         
intends to enter into other licensing or joint venture arrangements when it     
believes such arrangements will allow products sold under its brands to be      
manufactured with the highest quality and marketed and distributed most         
effectively. In determining whether to bring a new product to market on its     
own or through a joint venture or license, the Company considers various        
factors, including the Company's desire to bring a product to market at a       
particular time, the potential profit to be earned, and the capital and         
management resources available to the Company at such time.                     

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

                                                        [Enlarge/Download Table]

       LICENSEE                 PRODUCTS              LICENSED MARKS          TERRITORY    
       --------                 --------              --------------          ---------    
                                                                                           
Hanes Hosiery, a        Women's pantyhose, knee- Donna Karan New York(TM) Worldwide        
 division of Sara Lee   high stockings, tights,  DKNY(R)                                   
 Corp.                  and socks                                                          
Wacoal America, Inc.    Women's intimate apparel Donna Karan New York(TM) United States and
                                                                          Canada (1)       
The Lantis Corporation  Sunglasses, optical      Donna Karan New York(TM) Worldwide        
                        frames, magnifiers, and  DKNY(R)                                   
                        eyewear accessories                                                
Albert S.A.             Children's apparel       DKNY(R)                  Europe and       
                                                 DKNY(R) KIDS             the Middle East  
Butterick Company, Inc. Paper patterns and       Donna Karan New York(TM) Worldwide        
 (Vogue Patterns)       knitting patterns        DKNY(R)                                   

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

Effective in late 1995, the Company granted a license for the manufacture   
and distribution of children's apparel under the DKNY(R) brand name to Albert   
S.A. The Company previously test marketed children's apparel in 1992 in a       
limited number of doors in the United States. The Company subsequently          
determined that it would be more profitable to enter into a license for         
children's apparel with a licensee that had greater experience in               
manufacturing children's apparel. The Company has retained the right to         
manufacture and distribute, or license the right to manufacture and             
distribute, DKNY(R) children's apparel in all markets outside Europe and the    
Middle East. The Company currently is negotiating a non-exclusive supply        
agreement with Albert S.A. with respect to the supply of DKNY(R) children's     
apparel for those markets. The Company plans to begin distribution in certain   
territories outside of Europe and the Middle East in 1997. The Company also     
plans to introduce a full range of home furnishings starting in 1997.           

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DESIGN                                                                          

The Company was founded upon the marketing and design talents of Ms. Donna  
Karan, and its success to date is largely attributable to her vision and        
creative talent. The Company believes that its future success will depend in    
substantial part on its ability to continue to originate and define fashion     
trends, as well as to anticipate and react to changing consumer demands in a    
timely manner. Ms. Karan, who has been designing high fashion apparel for over  
25 years, ultimately is responsible for the Company's creative inspiration,     
strategic planning, marketing, and overall fashion direction. In addition to    
Ms. Karan, as of February 16, 1996, the Company employed a design staff of 115  
people, several of whom have assumed substantial design responsibilities under  
Ms. Karan's supervision. The Company has 11 design teams, each with a head      
designer, responsible for the creation, development, and coordination of the    
fabrications and silhouettes of the Company's collections. The Company          
encourages originality in its designers, and management believes that one of    
the keys to the growth of the Company has been not only Ms. Karan's individual  
talents, but also her willingness to delegate design responsibility to the      
various design teams and the ability of such teams to respond with creative     
and innovative designs.                                                         

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

The Company's design teams constantly monitor fashion trends and search for 
new inspiration. The Company seeks to assist its designers in developing new    
ideas through various means. These include frequent meetings of the design      
teams to discuss current fashion trends, review of the fashion library, which   
includes over 94,000 items from the Company's past collections and antique      
garments and accessories assembled by the Company, and installation of a        
computer-aided design system which allows a designer to view and modify two-    
and three-dimensional images of a new design on a computer screen. See          
"Management Information Systems; Inventory and Credit Control" below in this    
section.                                                                        

INTERNATIONAL BUSINESS                                                          

During 1995, 66.1% of the Company's net revenues (excluding net revenues    
generated from outlet stores and licensing) were derived from within the        
United States and 33.9% were derived from outside the United States. The        
Company views international distribution as a major opportunity for future      
sales growth of the Company's products. To service an international clientele,  
the Company has established a separate international division staffed by a      
multilingual sales and customer service staff in its New York headquarters and  
in its customer service and distribution centers in Hong Kong, Tokyo, The       
Netherlands, Toronto, and New Jersey. As an added convenience for its           
customers, the majority of the Company's products sold internationally are      
sold at prices which include all shipping and handling charges and duties. See  
"Warehouse and Distribution Centers" below in this section.                     

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

                                                                [Download Table]

                                                    1991 1992 1993 1994 1995   
                                                    ---- ---- ---- ---- ----   
                                                         (IN MILLIONS)         
                                                                               
United States(1)................................... $158 $195 $260 $268 $301   
Japan..............................................   17   16   31   51   64(2)
Europe and Middle East.............................    4   10   20   38   57   
Asia (excluding Japan).............................    4    7   11   16   23   
Other markets......................................    2    3    5    5   10   

--------                                                                        
(1) Excludes in the United States $12 million, $29 million, $38 million, $42    
 million, and $55 million of net revenues from outlet stores and licensing
for 1991, 1992, 1993, 1994, and 1995, respectively.                     
(2) As of March 31, 1995, the Company sold 70% of its interest in the           
operations of Donna Karan Japan. After the first quarter, sales are     
reflected as made from the Company's divisions directly to Donna Karan  
Japan.                                                                  

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DISTRIBUTION ARRANGEMENTS                                                     

The Company sells its products in Japan through Donna Karan Japan, a        
Japanese corporation in which the Company has a 30% equity interest. In March   
1995, the Company sold 52.5% of its interest in the operations of Donna Karan   
Japan to Hotel Properties Limited ("HPL") and 17.5% of its interest in the      
operations of Donna Karan Japan to a corporation owned by a private investor    
with a substantial interest in HPL. In connection with the sale to HPL, the     
Company entered into an agreement with HPL and the private investor which       
provides that Donna Karan Japan will be the exclusive distributor of the        
Company's products in Japan, subject to certain limited exceptions. The         
agreement also provides that the Company, for a management fee based on the     
net sales of Donna Karan Japan, will manage the day-to-day operations of Donna  
Karan Japan, for an initial term through December 31, 2000. The term is         
renewed automatically for successive five-year terms thereafter, subject to     
certain conditions. The Company believes that by selling its products in Japan  
through Donna Karan Japan, it can provide its Japanese customers with a higher  
level of customer service than that provided by the distributors of its         
competitors' products and can maintain greater control over its distribution    
policies and expenses. To reinforce its exclusive image and the uniqueness and  
appeal of its products, the Company's products are distributed in Japan only    
through better department stores and specialty stores. In addition, products    
will be distributed in Japan through four free-standing International Retail    
Stores which are scheduled to be opened by HPL by the year 1999 in accordance   
with the Retail Agreement (as defined herein). See below in this section for a  
description of the Company's Retail Agreement with HPL.                         

FREE-STANDING INTERNATIONAL RETAIL STORES                                     

As part of the Company's growth strategy, the Company has entered into      
license arrangements and strategic alliances for the opening of free-standing   
International Retail Stores in a number of international markets under the      
Donna Karan New York(TM), DKNY(TM), or Donna Karan(TM) names. The free-         
standing International Retail Stores operated under these names carry the       
corresponding product lines exclusively. As of March 1, 1996, there were 29     
free-standing International Retail Stores owned by third parties unaffiliated   
with the Company operating under the following names and located in the         
following countries:                                                            

                                                        [Enlarge/Download Table]

DONNA KARAN NEW YORK(TM)*                 DKNY(TM)*                   DONNA KARAN(TM)* 
-------------------------  -----------------------------------------  -----------------
                                                                                       
Israel(1)                  Belgium(1)         The Philippines(1)      Saudi Arabia(2)**
Malaysia(1)                England(1)         Singapore(1)                             
Singapore(1)               Greece(2)          Switzerland(3)                           
Switzerland(2)             Hong Kong(5)       Taiwan(1)                                
United Arab Emir-                                                                      
 ates(1)                   Indonesia(1)       Thailand(1)                              
                           Malaysia(1)        Turkey(1)                                
                           The Netherlands(1) United Arab Emirates(1)                  

--------                                                                        
* The numbers in parentheses indicate the number of stores opened in the      
particular country. Each Donna Karan New York(TM) free-standing             
International Retail Store exclusively carries Donna Karan New York(R) brand
name products and each DKNY(TM) free-standing International Retail Store    
exclusively carries DKNY (R) brand name products.                           
** In Saudi Arabia there are two stores which, for cultural reasons, carry      
only women's products under both of the Company's brand names.              

The Company anticipates that 10 additional free-standing International      
Retail Stores will be opened in 1996 (including five stores to be opened under  
the Retail Agreement with HPL). These stores are anticipated to be located in   
England, Hong Kong, Indonesia, South Korea, Lebanon, Norway, Saudi Arabia, and  
Taiwan.                                                                         

As part of the Company's strategy of opening additional, free-standing      
International Retail Stores, in March 1995, the Company entered into a retail   
agreement (the "Retail Agreement") with HPL and a corporation owned by the Ong  
family, who also have 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. The first free-standing International      
Retail Store under the Retail Agreement was opened in Hong Kong in January      
1996, and the Company anticipates that approximately five additional, free-     
standing                                                                        

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International Retail Stores will be opened in accordance with the Retail        
Agreement by the end of 1996. 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 distribution of any of its products or determines to     
distribute shoes or non-apparel products, HPL may have certain distribution     
rights in the Territories with respect to those products. During the term of    
the Retail Agreement, the Company is not entitled to distribute or sell its     
apparel products in the Territories (other than Japan) other than through the   
free-standing International Retail Stores in the Territories, except under      
limited circumstances.                                                          

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

CUSTOMERS                                                                       

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

Certain of the Company's customers, including some under common ownership,  
have accounted for significant portions of the Company's gross revenues.        
During 1995, Bloomingdale's, Macy's, and affiliated stores, owned by Federated  
Department Stores, together accounted for approximately 12.3% of the Company's  
gross revenues. Saks Fifth Avenue stores accounted for approximately 9.8% of    
gross revenues; Neiman Marcus stores and Bergdorf Goodman stores, owned by The  
Neiman Marcus Group, Inc., together accounted for approximately 7.8% of the     
Company's gross revenues; and Nordstrom stores accounted for approximately      
7.1% of the Company's gross revenues. Sales to entities affiliated with HPL,    
including Donna Karan Japan, the Company's 30%-owned distributor in Japan, and  
certain free-standing International Retail Stores, accounted for approximately  
11.1% of the Company's gross revenues for 1995. The Company's 10 largest        
customers accounted for approximately 60.8% of the Company's gross revenues     
during 1995.                                                                    

The Company is considering a strategy for the opening of full-price, free-  
standing retail stores in select locations in the United States under a         
license or franchise program, joint venture, or other arrangement. The Company  
believes that free-standing retail stores will provide a retail environment,    
fully coordinated with the Company's brand image and apparel collections.       

The Company has entered into license arrangements and strategic alliances   
for the opening of free-standing International Retail Stores. See               
"International Business" above in this section.                                 

OUTLET STORES                                                                   

As of December 31, 1995, the Company operated 31 outlet stores in 18 states:
five in California; four each in New York and Florida; two each in Maine, New   
Jersey, and Pennsylvania; and one each in Colorado, Hawaii, Indiana,            
Massachusetts, Michigan, New Hampshire, New Mexico, Ohio, South Carolina,       
Texas, Vermont, and Wisconsin. The Company established its outlet stores to     
dispose of the excess inventory in a manner which does not adversely impact     
upon its department and specialty store customers. The outlet stores also       
carry a limited amount of the Company's licensed products. The Company's        
policy has been to make a style available in its outlet stores after its        
customers have taken their first markdown on that style. Sales in the           
Company's outlet stores accounted for approximately 9.6% of the Company's net   
revenues for 1995. The Company currently anticipates that it will have          
approximately 36 outlet stores in operation by the end of 1996.                 

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SALES                                                                           

As of February 16, 1996, the Company had a sales force of 136 people, all of
whom were based in the Company's New York showrooms. Each division employs a    
separate sales force, managed by a vice president of sales. All sales           
personnel are salaried, other than the Beauty Division account executives who   
receive commissions. Each spring and fall season's men's and women's Designer   
Collections and DKNY(R) collections are introduced first to the press and       
retailers at fashion shows which generally are held three to six months in      
advance of shipping of the spring and fall merchandise.                         

The Company maintains a staff of apparel merchandise coordinators and 25    
Beauty Division account executives who service the stores carrying its          
collections, as well as three Beauty Division regional managers who supervise   
the Beauty Division account executives. Merchandise coordinators visit each of  
the stores carrying the Company's products several times a year, depending on   
the store's volume, to provide assistance in displaying the products, as well   
as conducting training seminars. The Beauty Division account executives call    
on all doors at least once every 30 days to train, motivate, schedule, and      
execute in-store events, hire rotators (sell-through personnel), and write      
orders. Beauty Division account executives also coordinate in-store training    
and events with all other Company product lines carried in each store.          

DISTRIBUTION                                                                    

The Company has sought to maintain the uniqueness of, and consumer demand   
for, its products by distributing its products through better department and    
specialty stores and boutiques, and more recently through the free-standing     
International Retail Stores operated under the Donna Karan New York(TM),        
DKNY(TM), or Donna Karan(TM) brand name, all of which cater to fashion-         
conscious consumers, and by being attuned to its consumers' desires through an  
interactive, consumer-responsive approach to the design and quality of its      
products. The Company seeks to assist its retail customers to achieve a 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    
store's staff and assist the retailer's customers. The Company also constantly  
targets its retail customer base with various marketing programs and material,  
including outreach programs, trunk shows, mailers, and catalogs. In addition,   
the Company believes that its strategies of creating different brands           
positioned to appeal to different segments of the market and creating new       
products within existing brands support its marketing efforts, attract new      
customers, and generate additional sales.                                       

Each retail customer that carries one or more of the Company's collections  
was selected on the basis of its 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 a dedicated boutique within the store, or providing        
special signs, display cases, and display racks, depending on the collection.   
The Company believes that the profitability of the Company's collections for    
its retail customers encourages them to locate the Company's products in high   
traffic areas within their stores and to provide attractive displays for the    
Company's products. It also enables the Company to work closely with the store  
buyers to ensure that each store carries a representative cross-section of the  
complete collection for each season.                                            

When the Company launches a new collection, it typically does so at either a
single retail store or at a limited group of retail stores. For example, the    
Donna Karan New York(R) Collection for men initially was sold exclusively at    
one specialty store in New York for an entire year, and the Donna Karan New     
York(R) women's fragrance was launched only in select Bloomingdale's stores     
during the third and fourth quarters of 1992. The Company's experience has      
demonstrated that limiting the initial distribution of a collection encourages  
active promotional participation by the retailers involved in the launch and    
increases consumer demand for the product. The Company believes that, as a      
result of the success which its department and specialty store customers have   
experienced in selling the Company's products, it has received significant      
support for each of the new collections it has introduced.                      

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ADVERTISING, PUBLIC RELATIONS, AND MARKETING                                    

All worldwide advertising, public relations programs, and marketing programs
are managed on a centralized basis through the Company's Creative Services and  
Public Relations Departments located in New York. Centralization of the         
Company's advertising, public relations, and marketing programs enables the     
Company to promote a consistent global image for the Company and its products.  
Combined expenditures by the Company and its product licensees on advertising,  
public relations, and marketing totaled $44.2 million in 1995 (and              
cumulatively, $124.9 million since 1993).                                       

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(R) brand focuses on the international sophistication and   
urban lifestyle of affluent customers with an appreciation for luxury           
products, and the DKNY(R) brand focuses on customers who have a more casual,    
relaxed, and active lifestyle. The Company advertises principally in print and  
outdoor advertising media, but also makes extensive use of video for point-of-  
purchase displays, as well as mailers and catalogs. The Company's advertising   
efforts, as well as the efforts of its licensees, are coordinated through the   
Company's Creative Services Department which it established in 1993. The        
Company believes that having its own Creative Services Department enables it    
better to control advertising, media placement, and production costs.           

The Company's Creative Services Department is responsible for the worldwide 
consistency of and the creation of the advertising campaigns, mailers, and      
catalogs for the Company and its licensees. The Creative Services Department    
also is responsible for the media placement of such advertising, and is         
available to assist each division of the Company with a variety of projects,    
including the design and production of fashion shows, corporate presentations,  
and archival maintenance. Additionally, the Creative Services Department        
assists the other divisions of the Company with the marketing, graphic design,  
and production of collateral materials, such as point-of-purchase displays,     
in-store video displays, and boutique design. The Creative Services Department  
maintains constant contact with the Company's divisions which enables it to     
anticipate the advertising needs of each of the divisions. To assist its        
Creative Services Department in performing its various functions, the Company   
has provided it with a state-of-the-art computer-aided design system in its     
New York headquarters which can be used to create two-dimensional graphics and  
three-dimensional images for use in creating advertising and marketing pieces.  
The system is also used by the Company's designers in the development of new    
products. Additionally, when appropriate, the Creative Services Department      
utilizes specialized computer-aided design systems, such as stereolithography.  
As of February 16, 1996, the Company's Creative Services Department consisted   
of 29 full-time personnel.                                                      

PUBLIC RELATIONS                                                              

The Company's Public Relations Department is responsible for the worldwide  
coordination and communication for each of the Company's divisions with the     
industry and general press and media and offers up-to-date information on the   
Company's products and activities. The Public Relations Department consisted    
of 31 full-time employees as of February 16, 1996.                              

MARKETING                                                                     

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

The Company utilizes various means of advertising and marketing, such as    
corporate mailers, videos, catalogues, newsletters, and consumer awareness      
programs. For example, the Company markets its Donna Karan                      

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New York(R) brand name and image through its Woman to Woman(TM) newsletter      
which is a dialogue between the Company, the designer, and the consumers. The   
Woman to Woman(TM) newsletter offers a toll-free number to answer consumer      
questions and open dialogue with consumers and to improve and focus the         
Company's marketing programs; informs consumers of new products in all areas    
of the Company; and discusses new fashion trends, among other topics.           

The Company further strengthens awareness by sponsoring special events, such
as its sponsorship of a race car at the upcoming Indy 500 race to be held in    
May 1996, and through the House of Donna Karan which can be accessed through    
the Company's Internet site on the World Wide Web.                              

SOURCING AND PRODUCT DEVELOPMENT                                                

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

The Company works with fabric mills in the United States, Europe, and the   
Far East to develop woven and knitted fabrics that enhance the comfort,         
design, and look of its products. The Company employs fabric specialists in     
the United States, Italy, and Hong Kong who perform this function.              

The lead times for the various stages of the Company's operations from      
sourcing to delivery of finished goods differ for each of the Company's         
divisions and for the various selling seasons. Fabric acquisition for a         
substantial portion of the Company's apparel products takes place generally     
four to five months prior to the corresponding selling season, although the     
Company may begin to acquire fabric for certain products up to a year in        
advance of the corresponding selling season. Apparel production (cut,           
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 1995, approximately 46.6% 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 28.1% were produced in the United States,        
approximately 22.9% were produced in Europe, and approximately 2.4% were        
produced elsewhere. The production and sourcing staff in New York oversees all  
aspects of fabric acquisition, apparel manufacturing, quality control, and      
production, as well as researching and developing new sources of supply. The    
Company operates product sourcing and quality control offices in Hong Kong and  
Milan. Approximately 150 people are employed in Hong Kong and approximately 35  
people are employed in Milan, Italy. Finished goods production, quality         
control, and delivery are monitored through an exclusive agent in Seoul, South  
Korea and fabric production, quality control, and delivery are monitored        
through an exclusive agent in Prato, Italy.                                     

The Company does not own any production facilities. The Company's apparel   
products are produced for the Company by approximately 500 different            
contractors. None of the contractors engaged by the Company accounted for more  
than 10% of the Company's total production during 1995. 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 1995,     
approximately 35% of the Company's raw materials were purchased by the Company  
directly from suppliers and sent to contractors to be cut and sewn or           
assembled. The rest of the raw materials used in the Company's products were    
purchased by contractors from mills designated by the Company. In some cases,   
the Company must commit to purchase fabric from a mill before it will begin     
production. Although the Company must make commitments for a portion of its     
fabric purchases well in advance of sales, the Company's risk is not material,  
because the Company cuts the majority of its garments only to fill actual       
customer orders. If the Company overestimates the demand for a particular       
fabric or yarn, it frequently can utilize the excess in garments made for       
subsequent seasons or made into past season's silhouettes for distribution in   
its outlet stores. See "Outlet Stores" above in this section.                   

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QUALITY CONTROL                                                                 

The Company monitors the quality of its fabrics prior to the production of  
garments and inspects prototypes of each product before production runs are     
commenced. The Company also performs random in-line quality control checks      
during and after production before the garments leave the contractor. Final     
random inspections occur when the garments are received in the Company's        
distribution centers. The Company currently has 19 full-time personnel engaged  
in quality control located in its Hong Kong office, 14 located in New           
Jersey/New York, nine located in South Korea, and six Donna Karan Japan         
personnel in Japan. The Company believes that its policy of inspecting its      
products at its distribution centers and at the contractors' facilities is      
important in maintaining the quality and reputation that its garments enjoy.    

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

WAREHOUSE AND DISTRIBUTION CENTERS                                              

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

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

The Company currently intends to close most of its operations at the        
buildings comprising its Carlstadt facility and to relocate its apparel and     
shoe operations to a single facility in another location. The Company           
anticipates that such relocation will not be complete until the first half of   
1997 at the earliest. Immediately following the closing of the Offering, the    
Company will accrue a non-recurring pre-tax charge of approximately $5.0        
million, representing the anticipated costs of the relocation of its warehouse  
facilities. See "Management's Discussion and Analysis of Financial Condition    
and Results of Operations."                                                     

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

MANAGEMENT INFORMATION SYSTEMS; INVENTORY AND CREDIT CONTROL                    

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

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

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

The Company manages all its own credit and collection functions. The Company
does not factor its accounts receivable and maintains credit insurance to       
manage the risk of bad debts. The Company's bad debt write-offs were less than  
1% of sales for 1995. In January 1996, Barneys commenced bankruptcy             
proceedings under Chapter 11 of the United States Bankruptcy Code. Barneys      
accounted for 2.3% of the Company's gross revenues during 1995, and the         
Company estimates that its maximum uninsured loss as a result of Barneys'       
bankruptcy will be approximately $2.0 million, which amount has been reserved   
for at December 31, 1995. The Company does not believe that Barneys'            
bankruptcy will have a material adverse effect on the Company.                  

COMPETITION                                                                     

Competition is strong in the segments of the fashion industry in which the  
Company operates. The Company competes with numerous designers and              
manufacturers, domestic and foreign, none of which accounts for a significant   
percentage of total industry sales, but some of which are significantly larger  
and have substantially greater resources than the Company. Further, with        
sufficient financial backing, talented designers can become competitors within  
several years of establishing a new label. See "Products" above in this         
section for the Company's competitors.                                          

The Company competes primarily on the basis of fashion, quality, and        
service. The Company's business depends on its ability to shape and stimulate   
consumer tastes and demands by producing innovative, attractive, and exciting   
fashion products, as well as on its ability to remain competitive in the areas  
of quality and price. The Company believes that retailer and consumer           
acceptance and support of its products depends to a great extent on its well-   
recognized designer name and proprietary labels. The Company believes that      
future growth will be achieved by utilizing the high consumer recognition of    
its brand names and designer image to expand its existing business into         
international markets and by adding other collections and brands in those       
markets in which the Company is established and successful.                     

BACKLOG                                                                         

The Company generally receives orders for apparel, accessory, and shoe      
products approximately three to five months prior to the time the products are  
delivered to stores. All such orders are subject to cancellation for late       
delivery. At March 31, 1996 backlog was $158.0 million, as compared to $145.9   
million at April 2, 1995. 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(R) and DKNY(R) brand seasons, during which a significant percentage    
of the Company's orders are received. As a consequence, a comparison of         
backlog from period to period is not necessarily meaningful and may not be      
indicative of eventual shipments. See "Management's Discussion and Analysis of  
Financial Condition and Results of Operations."                                 

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TRADEMARKS                                                                      

The principal trademarks used by the Company to distinguish its brands are  
Donna Karan New York(R) and DKNY(R). Under these brands the Company also uses   
the following trademarks: DK(R), Donna Karan(R), DK Men(TM), a logo consisting  
of the block letters DKNY and the words Donna Karan New York (with dots below   
each word), DKNY Jeans and design graphics(R), and DKNY Coverings and design    
graphics(R). In connection with the Reorganization and upon the closing of the  
Offering, Gabrielle Studio will grant to the Company an exclusive worldwide     
license in perpetuity to use and sublicense the right to use the Licensed       
Marks, 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 services, other than     
those products and services for which Gabrielle Studio has retained the right   
to use or license such trademarks. See "Certain Relationships and Related       
Transactions--License Agreement for Principal Trademarks" for a more complete   
description of the terms of this license and the royalties payable thereunder.  

These trademarks are the subject of registrations and pending applications  
throughout the world filed by the Company on behalf of Ms. Karan, for use on a  
variety of items of apparel, apparel-related products, and beauty products, as  
well as in connection with retail services, and the Company continues to        
expand its worldwide usage and registration of related trademarks. The Company  
regards the license to use the trademarks and its other proprietary rights in   
and to the trademarks as valuable assets in the marketing of its products, and  
on a worldwide basis, vigorously seeks to protect them against infringement.    

EMPLOYEES                                                                       

As of February 16, 1996, the Company had approximately 1,515 employees,     
including 1,270 in the United States and 245 in foreign countries. Of the       
total, approximately 305 employees hold executive and administrative            
positions, 115 are engaged in design, 200 are engaged in production, 430 are    
engaged in sales (including the equivalent of 235 full-time sales personnel at  
the various retail outlet stores), 275 are engaged in distribution, 130 are     
engaged in merchandising activities, and 60 are engaged in creative services,   
media, and public relations. Approximately 240 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.                                         

PROPERTIES                                                                      

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

                                                                [Download Table]

                                                           APPROXIMATE AREA IN
LOCATION                               USE                     SQUARE FEET    
--------                               ---                 -------------------
                                                                              
550 Seventh Avenue                                                            
 New York, New York.... Principal executive and                   67,000      
                        administrative offices; Designer                      
                        Collections design facilities,                        
                        sales offices, and showrooms;                         
                        menswear, accessories, beauty,                        
                        and shoe division offices                             
240 West 40th Street                                                          
250 West 40th Street                                                          
New York, New York..... DKNY(R) executive and                    150,000      
                        administrative offices,                               
                        including its design facilities,                      
                        sales offices, showrooms, and                         
                        the Company's library of design                       
                        items                                                 
Carlstadt, New Jersey.. Distribution and warehouse               351,000      
                        facility; management information                      
                        systems and credit, and finance                       
                        operations                                            
Kowloon, Hong Kong..... Distribution and warehouse                63,000      
                        facility; production control,                         
                        sourcing, and quality control                         
Milan, Italy........... Production control, sourcing,              4,500      
                        and quality control                                   

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The leases for these offices expire between 1996 and 2008. The leases for   
the Company's New York offices provide for aggregate annual rentals of $5.4     
million in 1996. The leases for the Company's other facilities provide for      
aggregate annual rentals of $2.8 million in 1996. The Company anticipates that  
it will be able to extend those leases which expire in the near future on       
terms satisfactory to the Company or, if necessary, locate substitute           
facilities on acceptable terms. In addition, the Company intends to close most  
of its operations at the six buildings comprising its Carlstadt, New Jersey     
facility and to relocate its apparel and shoe operations to a single facility   
in another location. The Company anticipates that such relocation will not be   
complete until the first half of 1997 at the earliest. As to a related non-     
recurring pre-tax charge, see "Warehouse and Distribution Centers" above in     
this section. The Company also has engaged a consultant to conduct a            
cost/benefit analysis of consolidating its New York City facilities.            

As of December 31, 1995, the Company operated 31 retail outlet stores in    
leased premises. See "Outlet Stores" above in this section. The outlet stores   
range in size from approximately 2,800 square feet to 7,200 square feet. The    
leases for these stores expire between 1996 and 2004 and provide for aggregate  
minimum-guaranteed annual rentals of approximately $2.5 million in 1996, as     
well as an additional amount based upon the aggregate annual sales of such      
stores. The Company expects to renew, for the applicable renewal option         
period, those leases which expire in 1996.                                      

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

GOVERNMENT REGULATIONS                                                          

The Company and its products are subject to regulation by the Federal Trade 
Commission in the United States, and its Beauty Division products also are      
subject to regulation by the Food and Drug Administration, as well as various   
other federal, state, local, and foreign regulatory authorities. Such           
regulations relate principally to the labelling of the Company's products and   
the ingredients, labelling, packaging, and marketing of the Company's Beauty    
Division products. The Company believes that it is in substantial compliance    
with such regulations, as well as applicable federal, state, local, and         
foreign rules and regulations governing the discharge of materials hazardous    
to the environment. There are no significant capital expenditures for           
environmental control matters either estimated in the current year or expected  
in the near future.                                                             

LEGAL PROCEEDINGS                                                               

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

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MANAGEMENT  

DIRECTORS AND EXECUTIVE OFFICERS                                                

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

                                                        [Enlarge/Download Table]

NAME                     AGE                              POSITION                             
----                     ---                              --------                             
                                                                                               
Donna Karan.............  47 Chairman of the Board, Chief Designer, and Chief Executive Officer
Stephan Weiss...........  57 Vice Chairman and Director                                        
Stephen L. Ruzow........  52 President, Chief Operating Officer, and Director                  
Tomio Taki..............  61 Director                                                          
Frank R. Mori...........  55 Director                                                          
Lee Goldenberg..........  45 Executive Vice President--Operations                              
Joseph B. Parsons.......  43 Executive Vice President and Chief Financial Officer              
Louis Praino............  52 Executive Vice President--Worldwide Production                    
Julius Stern............  71 Executive Vice President                                          
David L. Bressman.......  45 Vice President, General Counsel, and Secretary                    

Donna Karan founded the Company along with Stephan Weiss, Tomio Taki, Frank 
Mori, and Takihyo Inc. in 1984. Ms. Karan has served as Chief Designer and      
Chief Executive Officer of the Company from the date of its formation.          
Immediately prior to the formation of the Company, Ms. Karan was the head of    
design 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 and as its Menswear         
Designer of the Year in 1992. Ms. Karan has served on the Board of Directors    
of the Company since April 15, 1996, and, upon the completion of the            
Reorganization, will serve as Chairman of the Board, Chief Executive Officer,   
and Chief Designer of the Company.                                              

Stephan Weiss served as the Operating Principal of the Company from 1985 to 
1992. Mr. Weiss has served the Company in various capacities, including having  
direct supervisory responsibility for the legal department, licensing, new      
business ventures, such as the Beauty Division and the Shoe Division, and       
developing the Creative Services Department. Mr. Weiss has been receiving       
compensation for his services with the Company since 1989. Mr. Weiss served as  
Co-Chief Executive Officer of the Company from 1993 to December 31, 1995. Mr.   
Weiss has served on the Board of Directors since April 15, 1996, and, upon the  
completion of the Reorganization, will serve as Vice Chairman. Mr. Weiss will   
consult with the Chief Executive Officer on strategic planning and will be      
responsible for the Company's Beauty Division and legal department. Mr. Weiss'  
office will not necessarily be a full-time position, but he will spend a        
substantial amount of time as Vice Chairman.                                    

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

Tomio Taki, one of the founders of the Company, has served as Chairman of   
Takihyo Inc. since 1986. From 1973 to 1985, Mr. Taki served as President of     
Takihyo Inc., an affiliate of Anne Klein & Company. Mr. Taki has served on the  
Board of Directors of the Company since April 15, 1996. Mr. Taki is a member    
of the Board of Directors of Issey Miyake USA Corp. and Wacoal U.S.A. Corp.     
and is a member of the Board of the Parsons School of Design, a division of     
The New School. Immediately prior to the closing of the Offering, Mr. Taki      
will resign from the Board of Directors. See "Board of Directors" below in      
this section and "Certain Relationships and Related Transactions."              

Frank R. Mori has served as President of Takihyo Inc. since 1986. Mr. Mori  
was one of the founders of the Company and has served on the Board of           
Directors of the Company since April 15, 1996. From 1975 until 1986, Mr. Mori   
served as President and Chief Executive Officer of Anne Klein & Co., an         
affiliate of Takihyo Inc. Mr.                                                   

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Mori has served on the Educational Foundation of the Fashion Institute of       
Technology, and as a board member of The Young Playwrights Inc. and the         
Purnell School. Immediately prior to the closing of the Offering, Mr. Mori      
will resign from the Board of Directors. See "Board of Directors" below in      
this section and "Certain Relationships and Related Transactions."              

Lee Goldenberg has been employed by the Company since April 1993 and has    
been Executive Vice President--Operations of the Company since November 1995.   
From April 1993 to November 1995, Mr. Goldenberg held increasingly responsible  
positions with the Company, such as 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. From January 1993 to February       
1996, Mr. Parsons held various financial positions with the Company, most       
recently as Vice President--Finance. From June 1990 through December 1992, Mr.  
Parsons was Assistant Controller at Crystal Brands, Inc., an apparel            
manufacturer.                                                                   

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

Julius Stern has been Executive Vice President of the Company since October 
1992. From 1985 to October 1992 he served as President of the Donna Karan New   
York(R) designer collection division.                                           

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

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

DIVISION PRESIDENTS                                                             

George Ackerman, 46, became President of the DKNY(R) men's division in      
January 1994. From April 1990 to November 1993, Mr. Ackerman was President of   
Ellesse U.S.A. Inc.                                                             

Angela Ahrendts, 35, has been employed by the Company since April 1992 and  
has been President of the Donna Karan New York(R) designer collections for      
women since October 1992. From August 1989 to October 1991, she was President   
of Carmelo Pomodoro Company.                                                    

Anna Bakst, 34, has been employed by the Company since January 1990 and has 
been President of the Shoe Division since September 1994. From December 1992    
to September 1994, Ms. Bakst was Managing Director of the Shoe Division. Prior  
to December 1992, Ms. Bakst was the Company's Director of Licensing.            

Linda Beauchamp, 49, became President of the Donna Karan New York(R)        
designer collections, men's division, in June 1991. From 1985 to June 1991,     
Ms. Beauchamp was employed by Saks Fifth Avenue as Vice President, Product      
Development and Fashion Merchandising.                                          

Sonja Caproni, 53, has been President of Home Furnishings Development since 
January 1996 and was President of the Donna Karan New York(R) accessory         
division from May 1989 through December 1995.                                   

Betty Ende, 50, became President of the Company's outlet store division in  
December 1995. From 1990 to December 1995, Ms. Ende was Vice President of such  
division.                                                                       

Peter Macri, 46, became President of the Donna Karan New York(R) accessory  
division in January 1996. From 1988 to 1995, Mr. Macri was President of the     
United States subsidiary of DeVecchi S.r.l., an Italian luxury, leather,        
fashion accessory company.                                                      

Rosella Pedretti, 42, has been employed by the Company since 1991 and has   
been President of the DKNY(R) accessories division since December 1995. From    
1991 to December 1995, Ms. Pedretti held increasingly responsible management    
positions in the DKNY(R) accessories division.                                  

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Jane Terker, 42, became President of the Beauty Division in May 1992. From  
1989 to May 1992, Ms. Terker was President of JTP Associates, a marketing and   
management consulting company. From 1984 to May 1989, Ms. Terker was Vice       
President, Marketing at Cosmair, Inc. Ms. Terker is on the Executive Committee  
of the Fragrance Foundation and the Board of Directors of Cosmetic Executive    
Women, an industry organization.                                                

Mary Wang, 41, became President of the DKNY(R) women's division in February 
1995. From February 1994 to February 1995, Ms. Wang was Vice President--        
Divisional Merchandising Manager for contemporary and junior sportswear at      
Bloomingdale's. Ms. Wang was Vice President--DKNY(R) Merchandising from         
October 1989 to February 1994.                                                  

BOARD OF DIRECTORS                                                              

The Company intends to establish a Board of Directors of nine persons. Upon 
the closing of the Offering, Messrs. Taki and Mori will resign as members of    
the Board of Directors, upon the advice of counsel, to avoid the appearance of  
a conflict of interest due to their associations with the Company and Anne      
Klein & Company, an affiliate of Takihyo Inc. At such time, the Board will      
consist of three members and will have six vacancies.                           

To fill the vacancies on the Board of Directors, the Board of Directors of  
the Company intends to appoint two directors who are neither officers nor       
employees of the Company or its affiliates, within three months following the   
closing of the Offering. As described below, the two members of the Board of    
Directors first designated by the Takihyo Group shall become directors          
concurrent with the appointment of the fifth member of the Board. Thereafter,   
the Board of Directors intends to appoint two additional directors within six   
months following the Offering, one designated by the Karan/Weiss Group, as      
described below, and one appointed by the Board of Directors of the Company.    

Pursuant to a stockholders agreement, the Karan/Weiss Group will be entitled
to designate one member to the Board of Directors of the Company (in addition   
to themselves) as long as the combined ownership of the shares of Common Stock  
held by members of the Karan/Weiss Group is not less than 20% of the then       
outstanding Common Stock. The Takihyo Group will be entitled to designate (a)   
two members of the Board of Directors until such time after the closing of the  
Offering as the Takihyo Group sells any shares of Common Stock owned by it      
(other than shares distributed to stockholders of Takihyo) and (b) thereafter,  
one member of the Board of Directors as long as the Takihyo Group owns not      
less than 10% of the then outstanding Common Stock, except that if either Mr.   
Taki or Mr. Mori is otherwise able to serve, and is serving, as the one         
designee of the Takihyo Group, then such person shall be entitled to continue   
to serve as a director as long as the Takihyo Group continues to own not less   
than 5% of the then outstanding Common Stock. Pursuant to the stockholders      
agreement, the Karan/Weiss Group, on the one hand, and the Takihyo Group, on    
the other hand, have agreed to vote the shares of Common Stock owned by them    
for each other's designees (and, in the case of the Takihyo Group, for Ms.      
Karan and Mr. Weiss) as directors. The designees to the Board of Directors of   
Ms. Karan and Mr. Weiss and of the Takihyo Group (other than Messrs. Taki or    
Mori) must be reasonably satisfactory to the Company's Board of Directors.      

The Company's Board of Directors is divided into three classes. Directors of
each class will be elected at the annual meeting of stockholders held in the    
year in which the term for such class expires and will serve thereafter for     
three years. The first class, whose term will expire at the first annual        
meeting after the Offering, currently consists of Mr. Ruzow; the second class,  
whose term will expire at the second annual meeting after the Offering,         
currently consists of Mr. Weiss and Mr. Mori; and the third class, whose term   
will expire at the third annual meeting after the Offering, currently consists  
of Ms. Karan and Mr. Taki. For further information on the effect of the         
classified Board of Directors, see "Description of Capital Stock--Certain       
Provisions of the Company's Certificate of Incorporation and Bylaws." Messrs.   
Taki and Mori will resign as members of the Board of Directors upon the         
closing of the Offering.                                                        

Directors who are employees of the Company will receive no compensation, as 
such, for service as members of the Board or its Committees. It is expected     
that directors who are not employees of the Company will receive stock options  
under the 1996 Non-Employee Director Stock Option Plan. All directors are       
reimbursed for expenses incurred in connection with attendance at meetings.     
See "Management--1996 Non-Employee Director Stock Option Plan."                 

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COMMITTEES OF THE BOARD OF DIRECTORS                                            

Upon appointment of the first two additional directors, the Board of        
Directors will establish an Audit Committee and a Compensation Committee. The   
functions of the Audit Committee will be to recommend annually to the Board of  
Directors the appointment of the independent auditors of the Company, discuss   
and review in advance the scope and the fees of the annual audit and review     
the results thereof with the independent auditors, review and approve non-      
audit services of the independent auditors, review compliance with existing     
major accounting and financial reporting policies of the Company, review the    
adequacy of the financial organization of the Company, and review management's  
procedures and policies relating to the adequacy of the Company's internal      
accounting controls and compliance with applicable laws relating to accounting  
practices.                                                                      

The functions of the Compensation Committee will be to review and approve   
annual salaries, bonuses, and grants of stock options pursuant to the           
Company's 1996 Stock Incentive Plan for all executive officers and key members  
of the Company's design teams and management staff, and to review and approve   
the terms and conditions of all employee benefit plans or changes thereto.      

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION                     

The Board of Directors does not currently have a compensation committee but 
anticipates establishing one within 90 days of the closing of the Offering.     
Prior to the Offering, the Company's principals and senior management were      
directly involved in setting compensation for the Company's executives.         

EXECUTIVE COMPENSATION                                                          

The following table sets forth, for the year ended December 31, 1995, the   
cash compensation paid to Ms. Karan and the Company's four most highly-paid     
executive officers for services rendered in all capacities in which they        
served during such year:                                                        

SUMMARY COMPENSATION TABLE  

                                                        [Enlarge/Download Table]

                                             ANNUAL COMPENSATION                               
                                  ------------------------------------------                   
                                      SALARY/                                                  
                                  CONSULTING FEES  BONUS     OTHER ANNUAL          OTHER       
NAME AND PRINCIPAL POSITION             ($)         ($)   COMPENSATION($)(1) COMPENSATION($)(2)
---------------------------       --------------- ------- ------------------ ------------------
                                                                                               
Donna Karan..............    1995    2,734,330        --           --                 --       
 Chairman of the Board,                                                                        
  Chief Executive                                                                              
  Officer, and Chief                                                                           
  Designer                                                                                     
Stephan Weiss............    1995    1,583,333        --           --                 --       
 Vice Chairman                                                                                 
Stephen L. Ruzow.........    1995      744,230    750,000       58,485(3)           4,620      
 President and Chief                                                                           
  Operating Officer                                                                            
Patrick Spainhour........    1995      359,327    190,000       18,946(3)         146,459      
 Executive Vice President                                                                      
  and Chief Financial                                                                          
  Officer(4)                                                                                   
Louis Praino.............    1995      357,307    150,000       23,603(3)           2,214      
 Executive Vice                                                                                
  President--Worldwide                                                                         
  Production                                                                                   

--------                                                                        
(1) Represents the dollar value of annual compensation not properly             
categorized as salary or bonus awarded to, earned by, or paid to the persons
listed for services rendered to the Company during 1995.                    
(2) Includes matching contributions under the Company's 401(k) Plan in respect  
of Mr. Ruzow, Mr. Spainhour, and Mr. Praino in the amounts of $4,620,       
$4,065, and $2,214, respectively, which contributions vest over a five-year 
period.                                                                     
(3) Includes for Mr. Ruzow and Mr. Praino, $18,000 and $14,400, respectively,   
for an annual automobile allowance, for Mr. Spainhour, $12,000 for an annual
travel allowance, and for Mr. Ruzow, Mr. Spainhour, and Mr. Praino, $40,485,
$6,946, and $9,203, respectively, for an annual clothing allowance.         
(4) As of February 1996, Mr. Spainhour resigned from the Company. Included      
under Other Compensation for Mr. Spainhour was $142,394 for reimbursement of
certain relocation expenses.                                                

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COMPENSATION ARRANGEMENTS                                                       

Effective upon consummation of the Offering, the Company will enter into an 
agreement with Ms. Karan for her employment as Chairman of the Board of         
Directors, Chief Executive Officer, and Chief Designer. The agreement has an    
initial three-year term which is automatically renewable for successive three-  
year terms, unless otherwise terminated. The employment agreement provides for  
an annual base salary of $500,000, as adjusted annually for the Consumer Price  
Index, and an annual bonus of up to 100% of base salary based on the pre-tax    
profits of the Company.                                                         

During the initial three-year term of the employment agreement, Ms. Karan   
may terminate her employment as Chief Executive Officer without reason, and     
after such initial three-year term, Ms. Karan may terminate her employment as   
Chairman of the Board of Directors, Chief Executive Officer, and Chief          
Designer without reason, in each case with at least four months' notice. The    
employment agreement also may be terminated at any time without notice by Ms.   
Karan for "good reason" if (i) Ms. Karan (without her prior written consent)    
is no longer Chairman of the Board, the sole Chief Executive Officer, and the   
sole Chief Designer; (ii) Ms. Karan is assigned duties and responsibilities     
inconsistent with the employment agreement (without her prior written           
consent); (iii) the Company fails to pay to Ms. Karan all amounts required      
under the employment agreement; (iv) there is a material breach of the          
employment agreement by the Company; (v) there is a Change in Control (as       
defined in the Glossary), including certain changes in ownership of voting      
securities, acquisition by a third party of 30% of the voting securities of     
the Company, mergers, sales of assets, and changes in the composition of the    
Board of Directors; (vi) there is any fundamental change to the business or     
operations of the Company which are material (without her prior written         
consent); (vii) the Company fails to pay Gabrielle Studio all amounts due       
under the License Agreement; or (viii) a physician of recognized skill          
confirms to the Board of Directors in writing that Ms. Karan's continued        
employment with the Company would have a material adverse impact on her health  
or have an adverse effect on her ability to perform her duties to the Company.  
The employment agreement may be terminated by the Company only for "cause."     

If Ms. Karan terminates her employment with the Company for "good reason" or
upon termination as a result of Ms. Karan's death or disability, the Company    
will pay to Ms. Karan (or her estate), a lump sum cash payment equal to the     
sum of her current base salary and incentive bonus from the prior year for the  
greater of one year or the remaining term of the employment agreement.          

The employment agreement provides that for a period of one year following   
the termination of Ms. Karan's agreement, Ms. Karan shall not participate or    
engage in, either directly or indirectly, any business activity that is         
directly competitive with the Company's then current principal product lines    
and price points and could reasonably be expected to have a material adverse    
effect on the Company. The employment agreement further provides that Ms.       
Karan will have no obligation to mitigate the Company's financial obligations   
in the event of her termination.                                                

During the term of the employment agreement, Ms. Karan is obligated to      
devote substantially all her business time and attention to the Company and     
may not have an interest in or perform any service that is in direct            
competition with the Company's principal product lines and price points, which  
activity could reasonably be expected to have a material adverse effect on the  
Company. Subject to the foregoing and provided there is no interference with    
Ms. Karan's primary obligations to the Company, Ms. Karan may engage in         
certain activities for her own personal benefit, such as personal endorsements  
and appearances; motion pictures; television; writing; speaking and teaching    
engagements; photography; the fine arts; designing for stage, film, and other   
media; architectural, industrial, and interior design (exclusive of home        
furnishings) and sales of limited edition products based on such designs; and   
consulting services in connection with the foregoing.                           

Effective upon consummation of the Offering, the Company will enter into an 
agreement with Mr. Weiss for his employment as Vice Chairman of the Board of    
Directors. The agreement has an initial one-year term which is automatically    
renewable for successive one-year terms, unless otherwise terminated. The       
employment agreement provides for an annual base salary of $500,000, as         
adjusted annually for the Consumer Price Index,                                 

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and an annual bonus of up to 100% of base salary based on the pre-tax profits   
of the Company. Under the employment agreement, Mr. Weiss shall have principal  
executive responsibility for strategic planning for the operations of the       
Beauty Division, and supervising the Company's legal matters. While Mr. Weiss'  
office will not necessarily be a full-time position, he will spend a            
substantial amount of time as Vice Chairman. Mr. Weiss' employment agreement    
is in other material respects relating to termination and non-competition       
similar to the employment agreement of Ms. Karan described above.               

Mr. Ruzow entered into an employment agreement, dated as of December 12,    
1995, providing for his employment as President and Chief Operating Officer of  
the Company until December 31, 2000. Pursuant to his employment agreement, Mr.  
Ruzow will be entitled to receive an annual base salary of $800,000, $850,000,  
$900,000, $950,000, and $1,000,000 in 1996, 1997, 1998, 1999, and 2000,         
respectively. Mr. Ruzow shall also be entitled to a maximum cash bonus each     
year of up to 100% of his then current base salary which shall be based on      
specified performance criteria, with a minimum cash bonus in years 1996         
through 1999, of 25% of his then current base salary. In addition, Mr. Ruzow    
shall be entitled to participate in the Company's benefit plans, and the        
Company has agreed to maintain a term life insurance policy on the life of Mr.  
Ruzow in the amount of $5,000,000, payable to Mr. Ruzow's beneficiaries.        

In connection with the Offering, Mr. Ruzow shall also be entitled pursuant  
to his employment agreement to the largest initial grant of options under the   
Company's 1996 Stock Incentive Plan on the same terms and conditions as those   
options provided to the other senior executive officers of the Company and its  
subsidiaries. In addition, upon the closing of the Offering, Mr. Ruzow shall    
be entitled to receive in cash an amount equal to $5.0 million.                 

The employment agreement with Mr. Ruzow requires six months' notice of      
intent to terminate by Mr. Ruzow and three months' notice of intent to          
terminate by the Company in the event Mr. Ruzow is terminated "without cause"   
(as defined therein) (or a shorter period of time if terminated for "cause"     
(as defined therein)). Mr. Ruzow has also agreed not to compete with the        
business of the Company for a period of one year following termination of his   
employment with the Company. In the event that Mr. Ruzow is terminated by the   
Company "without cause," his employment terminates because he is disabled, or   
he terminates the agreement for "good reason" (as defined therein), Mr. Ruzow   
shall be entitled to a severance payment in the amount of $1,000,000.           

INCENTIVE COMPENSATION PLAN                                                     

The purpose of the 1996 Incentive Compensation Plan is to enable dedicated  
and productive employees to share in the Company's financial growth. The plan   
is administered by a Committee designated by the Company's Chief Executive      
Officer, which committee includes the Company's Chief Operating Officer, Chief  
Financial Officer, and Vice President of Human Resources. The committee has     
the exclusive power to designate which officers and employees of the Company    
participate in the plan. Participants in the plan are awarded incentive         
compensation under the plan based on their achievement of performance criteria  
established by the committee at the beginning of the calendar year. There are   
approximately 100 employees currently subject to the plan, including executive  
officers (other than Ms. Karan and Mr. Weiss), Division Presidents, Vice        
Presidents, and certain other key employees.                                    

1996 STOCK INCENTIVE PLAN                                                       

The Company has adopted the 1996 Stock Incentive Plan (the "Plan") for the  
benefit of certain employees (primarily executive officers and Vice             
Presidents) of the Company and its subsidiaries. The purpose of the Plan is to  
attract and retain executives and other key employees who are important to the  
success and growth of the Company and to create a long-term mutuality of        
interest between such persons and the stockholders of the Company.              

Under the Plan, options to purchase an aggregate of not more than           
shares of Common Stock (subject to certain adjustments) may be granted from     
time to time to key employees, officers, advisors, and independent consultants  
to the Company or to any of its subsidiaries other than Ms. Karan, Mr. Weiss,   
Mr. Mori,                                                                       

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Mr. Taki, and directors who are neither officers nor employees of the Company   
or its affiliates. In general, if options are for any reason cancelled, or      
expire or terminate unexercised, the shares covered by such options shall       
again be available for the grant of options. No options may be granted after    
10 years from the effective date of the Plan. It is anticipated that options    
held by        key employees to purchase an aggregate of            shares of   
Common Stock at an exercise price equal to the initial public offering price    
will be outstanding on the closing date of the Offering.                        

The Plan provides for the grant of incentive stock options ("ISOs") to      
employees and nonqualified stock options ("NQSOs") to employees, advisors and   
independent consultants. In the case of ISOs, the exercise price of an option   
may not be less than 100% of the fair market value of a share of Common Stock   
at the time of grant (or 110% of such fair market value if the optionee owns    
more than 10% of the shares of Common Stock outstanding at the time of grant).  
In the case of NQSOs, the exercise price of an option may not be less than      
100% of the fair market value of a share of Common Stock at the time of grant.  

Options will be exercisable for a term determined by the Committee. Unless  
otherwise provided in the applicable option agreement, all options granted and  
not previously exercised will become vested and immediately exercisable upon a  
change in control of the Company (as defined in the Plan).                      

The Plan will be administered and interpreted by a committee (the           
"Committee") appointed by the Company's Board of Directors consisting of two    
or more members of the Company's Board of Directors, each of whom is intended   
to be a "disinterested person" under Section 16(b) of the Securities Exchange   
Act of 1934 (to the extent then required). The Committee generally is           
empowered to interpret the Plan, prescribe rules and regulations relating       
thereto, determine the terms of the option agreements, amend them (in certain   
cases only with the consent of the optionee), determine the individuals to      
whom options are to be granted, determine the number of shares subject to each  
option and the exercise price thereto, and take all actions in connection with  
the Plan and the options thereunder as the Committee, in its sole discretion,   
deems necessary or desirable. The Committee may modify, suspend, or terminate   
the Plan; provided, however, that certain material modifications affecting the  
Plan must be approved by the stockholders, and any change in the Plan that may  
adversely affect an optionee's rights under an option previously granted under  
the Plan requires the consent of the optionee.                                  

1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN                                    

Prior to the consummation of the Offering, the Company will adopt the 1996  
Non-Employee Director Stock Option Plan (the "Directors' Plan") which provides  
for the granting of nonqualified options to purchase shares of Common Stock to  
any director of the Company who is not an active employee or officer of the     
Company or a subsidiary thereof and who is not an officer, director or          
employee of certain affiliates of the Company (each, an "Eligible Director").   
Neither Ms. Karan or Mr. Weiss (nor Mr. Mori or Mr. Taki, if either of them is  
serving as a director) is eligible to receive options under the Directors'      
Plan. The Directors' Plan is designed to provide a means of giving Eligible     
Directors an increased opportunity to acquire an investment in the Company,     
thereby maintaining and strengthening their desire to remain with or join the   
Company's Board of Directors and stimulating their efforts on the Company's     
behalf.                                                                         

The Directors' Plan authorizes the issuance of up to           shares of    
Common Stock, subject to adjustments in certain circumstances. No options may   
be granted 10 years from the effective date of the Directors' Plan.             

Eligible Directors are eligible to receive options under the Directors' Plan
in accordance with the terms thereof. Each Eligible Director, on the initial    
grant date (as defined in the Directors' Plan), will be granted NQSOs to        
purchase           shares of Common Stock. Each year, other than with respect   
to the year in which an Eligible Director receives an initial grant of          
options, as of the first day of the month following the Annual Meeting of       
Stockholders, each Eligible Director will receive a nonqualified option to      
purchase            shares of Common Stock. Upon the exercise of an option,     
the purchase price paid by an Eligible Director will be 100% of the fair        
market value of such share at the time of the grant of the option, or the par   
value of the share, whichever is greater.                                       

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The options to purchase shares of Common Stock described above will be      
exercisable on or after six months after the date of grant. Options may be      
exercised only after the Eligible Director has served as a director of the      
Company for at least one year. In addition, options granted and not previously  
exercisable will become vested and fully exercisable immediately upon a change  
in control (as defined in the Directors' Plan).                                 

Each option will expire upon the tenth anniversary of the date of grant.    
Subject to the number of shares authorized for issuance under the Directors'    
Plan and the term of the Directors' Plan, the Directors' Plan shall continue    
in effect without limit unless and until the Board of Directors otherwise       
determines.                                                                     

If an Eligible Director terminates his or her service on the Board of       
Directors for any reason, including disability, death, resignation, or failure  
to stand for reelection, any exercisable option which has not expired may be    
exercised with respect to the number of shares of Common Stock which were       
exercisable on the date the Eligible Director terminated his or her service     
with the Company at any time during the earlier of (i) the one-year period      
following such date, or (ii) the remaining term of the option. Any unexpired    
but unexercisable option shall terminate and become null and void as of the     
date the Eligible Director terminates his or her service with the Company.      

The Directors' Plan is administered by the Board of Directors or a duly     
appointed committee of the Board which has the full and final authority to      
interpret the Directors' Plan and to adopt and amend such rules and             
regulations for the administration of the Directors' Plan as the Board may      
deem desirable. In addition, the Board of Directors has the right to amend or   
terminate the Directors' Plan in certain circumstances; provided, however,      
that unless first duly approved by the holders of Common Stock entitled to      
vote thereon, no amendment or change may be made in the Directors' Plan: (i)    
to increase the number of shares available for grant under the Directors'       
Plan; (ii) to reduce the minimum exercise price at which any option may be      
exercised; (iii) to change the requirements as to eligibility for               
participation under the Directors' Plan; (iv) to change the number of options   
to be granted or the date on which such options are to be granted; or (v) to    
increase the benefits accruing to participants under the Directors' Plan.       

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS  

LICENSE AGREEMENT FOR PRINCIPAL TRADEMARKS                                      

In connection with the Reorganization and upon the closing of the Offering, 
Gabrielle Studio (with respect to the License Agreement, the "Licensor"), a     
corporation wholly-owned by Ms. Karan, Mr. Weiss, and the KW Trusts, will       
enter into a license agreement (the "License Agreement"), which will amend,     
restate, and supersede in its entirety the licensing arrangements previously    
existing between the Company and Gabrielle Studio, the terms of which could,    
in certain circumstances, including the Offering, provide for higher royalty    
payments to Licensor than those under the License Agreement. The License        
Agreement provides for the grant of an exclusive license throughout the world   
to use, and to sublicense the right to use, the trademarks "Donna Karan,"       
"Donna Karan New York," "DKNY," "DK," and, in addition, all variations thereof  
(collectively, the "Licensed Marks") and to use and to sublicense the right to  
use the name and likeness of Ms. Karan (the "Name") in connection with the      
design, manufacture, distribution, sale (both at retail and at wholesale),      
advertising, marketing and promotion of products of any kind, nature, or        
description except for certain products and other matters unrelated to the      
Company's business, such as food products, restaurants, toys, and games. The    
term of the License Agreement will commence on the closing of the Offering and  
will continue in perpetuity unless earlier terminated as provided in the        
License Agreement. The License Agreement may be terminated by the Licensor      
upon the occurrence, of, among other events, a Change in Control, which         
includes 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 changes in the composition of the Board of Directors. See the    
Glossary for a complete description of Change in Control. All costs in          
connection with the transfer of record ownership of the Licensed Marks to       
Licensor will be paid by the Company.                                           

The License Agreement will, among other things, impose certain obligations  
on the Company with respect to the use of sales materials, protection of the    
Licensed Marks, indemnification of the Licensor, the maintenance of public      
liability insurance, and quality control of products bearing the Licensed       
Marks or the Name. The License Agreement will limit the use of the Licensed     
Marks in certain circumstances and in general will prohibit any transfer or     
assignment of the rights under the License Agreement.                           

The License Agreement provides that, commencing as of the closing date of   
the Offering, the Company shall pay to Licensor an annual royalty equal to      
1.75% of the first $250 million of net sales (as defined in the License         
Agreement) for such year, plus 2.5% of the next $500 million of net sales for   
such year, plus 3% of the next $750 million of net sales for such year, plus    
3.5% of all net sales for such year in excess of $1.5 billion. The royalty      
payable under the License Agreement for the period from the closing of the      
Offering to the end of 1996 shall be calculated based on the net sales          
commencing as of the closing of the Offering through the end of 1996. 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 Marks or the Name. If the royalty paid with         
respect to any year is less than an amount equal to the greater of (a) $3.0     
million as adjusted for inflation during the term of the License Agreement      
plus 25% of the average annual sales royalty payable to Licensor for the prior  
three years as adjusted for inflation or (b) one-third of the average annual    
sales royalty payable to Licensor over the prior three years as adjusted for    
inflation, Licensor may terminate the License Agreement unless the Company      
pays to Licensor the amount of such deficiency within 60 days of demand         
therefor. If the License Agreement had been in effect as of the commencement    
of 1995, the royalties which would have been payable for 1995 would have been   
$12.8 million. Out of the proceeds of the Offering, the Company will make a     
one-time payment of an estimated $5.0 million to Licensor in connection with    
the License Agreement.                                                          

LICENSE AGREEMENT FOR PERFUME BOTTLES                                           

Mr. Stephan Weiss is the owner of the designs and utility patents relating  
to the bottles in which the Company's Beauty Division products are packaged.    
Upon the closing of the Offering, Mr. Weiss will grant to the Company, an       
exclusive, royalty-free worldwide license in perpetuity on the use of the       
designs for the bottles                                                         

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and a non-exclusive, royalty-free worldwide license, for the term of the        
patents, for the use of the utility patents for the bottles developed by Mr.    
Weiss. Mr. Weiss will receive approximately $   , representing his out-of-      
pocket costs incurred in the development of the bottles and the issuance of     
the patents thereon, upon the grant of these licenses to the Company. Such      
expenses are comprised substantially of outside legal fees incurred in          
connection with the registration and maintenance of such patents around the     
world.                                                                          

ANNE KLEIN & COMPANY                                                            

Anne Klein & Company is an affiliated business of Takihyo Inc. The Company  
had from time to time purchased certain insurance policies jointly with Anne    
Klein & Company or its affiliates, including Takihyo Inc. (collectively, "Anne  
Klein"), which policies expired in 1994.                                        

The Company had a lease agreement with Anne Klein for approximately 47,000  
square feet of warehouse space from August 1993 through March 1994 and paid     
Anne Klein $200,000 in connection therewith. In the opinion of the Company's    
management, the rent and other terms and conditions of the sublease were        
comparable to those which could have been obtained from a third party. The      
Company does not have and does not expect to have any joint purchasing          
arrangements with Anne Klein and does not purchase or expect to purchase goods  
or services from Anne Klein.                                                    

REGISTRATION RIGHTS AGREEMENT                                                   

Simultaneously with the closing of the Offering, the Company, members of the
Takihyo Group, Ms. Karan, Mr. Weiss, the KW Trusts, and Gabrielle Studio will   
enter into a Registration Rights Agreement. All shares of Common Stock owned    
by Gabrielle Studio are beneficially owned by Ms. Karan, Mr. Weiss, and the KW  
Trusts. References in this Prospectus to the shares of Common Stock of Ms.      
Karan, Mr. Weiss, and the KW Trusts are deemed to include the shares held by    
Gabrielle Studio. The Registration Rights Agreement will grant to members of    
the Takihyo Group the right to demand on an aggregate of two occasions (the     
first of which shall not be earlier than six months after the Effective Date    
and the second of which shall not be earlier than 12 months after the           
effective date of the registration statement pertaining to any other offering   
of the Company's securities under the Securities Act) that the Company, at its  
expense, register all or a portion of the shares which they own upon            
completion of the Offering, subject to a minimum demand of 5% of the then       
outstanding shares of Common Stock. Upon receipt of a demand from a member of   
the Takihyo Group for the registration of the Company's shares, the Company     
(or its designee) shall have the option of purchasing the shares at the         
average of their closing market prices during the 10 trading days before and    
the 10 trading days after the demand. The Registration Rights Agreement will    
also grant to the Karan/Weiss Group the right to request on one occasion        
(which cannot be earlier than the first anniversary of the Effective Date)      
that the Company, at its expense, register all or a portion of the shares       
which the members of the Karan/Weiss Group own. In addition, the Takihyo Group  
and the Karan/Weiss Group will have the right to join ("piggyback") in any      
registration statement filed by the Company with respect to an offering of any  
of its securities by it or on behalf of any of its securityholders.             

Pursuant to the Registration Rights Agreement, if the Takihyo Group makes a 
demand for the registration of any of the Company's shares at any time prior    
to the first anniversary of the Effective Date, the Company may not include in  
such offering any of the Company's shares or any shares owned by any other      
securityholder of the Company if, in the good faith judgment of the managing    
underwriter of such offering, the inclusion of such shares would adversely      
affect the success of such offering or interfere with the successful marketing  
of, or require the exclusion of any portion of, the shares to be registered     
pursuant to the Takihyo Group's demand. If the Takihyo Group makes a demand     
for the registration of its shares on or after the first anniversary of the     
Effective Date, the Company may elect to proceed with an offering of the        
Company's own shares. In such event, the demand of the Takihyo Group shall be   
deemed to be a request to exercise their "piggyback" rights and they, together  
with the members of the Karan/Weiss Group, will be permitted to register and    
sell such number of shares (to be apportioned between the Takihyo Group and     
the Karan/Weiss Group pursuant to certain agreed-upon allocations) as the       
underwriter of the Company's offering determines can be sold without adversely  
affecting the Company's offering. If the Company does not so elect, the         
members of the Karan/Weiss Group                                                

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may elect to include certain of their shares in the Takihyo Group's offering,   
subject to certain limitations. If, more than one year after the Effective      
Date, a member of the Karan/Weiss Group requests that the Company register      
shares owned by the Karan/Weiss Group, the Company may (but is not obligated    
to) elect to distribute its own shares to the public, in which event the        
members of the Karan/Weiss Group , together with the members of the Takihyo     
Group, may elect to include certain of their shares in the Company's offering,  
subject to certain limitations. If the Company does not so elect, the Company   
may (but is not obligated to) permit the members of the Karan/Weiss Group to    
proceed with an offering of certain of their shares, in which event the         
members of the Takihyo Group may elect to include certain of their shares in    
the offering of the Karan/Weiss Group, subject to certain limitations.          

RELEASE OF SECURITY INTEREST                                                    

The Company's existing credit facility is secured by, among other           
collateral, a lien on the license agreement between Gabrielle Studio and the    
Company, a lien on the license agreement from Ms. Karan to Gabrielle Studio     
and a lien on the ownership interests in Donna Karan Studio, one of the DK      
Companies.                                                                      

A portion of the net proceeds of the Offering is to be paid to the lenders  
to reduce the amount outstanding under the Company's Credit Agreement. See      
"Use of Proceeds." The lenders have agreed that upon receipt of such repayment  
they will release their liens on the license agreement between Gabrielle        
Studio and the Company, the license agreement from Ms. Karan to Gabrielle       
Studio and on the ownership interests in Donna Karan Studio, one of the DK      
Companies. The release of such liens may be considered a benefit to Ms. Karan,  
Mr. Weiss, and the KW Trusts.                                                   

OTHER AGREEMENTS AND TRANSACTIONS                                               

For a discussion of the voting arrangement between the members of           
Karan/Weiss Group and members of the Takihyo Group, see "Management--Board of   
Directors." For a discussion of the agreement between the Company and the       
shareholders of Gabrielle Studio, see "Risk Factors--Dependence on Licensed     
Trademarks."                                                                    

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PRINCIPAL STOCKHOLDERS  

Prior to the consummation of the Reorganization and the closing of the      
Offering, Donna Karan International, Inc. will have outstanding only a nominal  
number of shares of Common Stock, all of which will ultimately be owned one-    
half by Ms. Karan and Mr. Weiss and one-half by certain members of the Takihyo  
Group. The following table sets forth certain information with respect to       
beneficial ownership of Common Stock of Donna Karan International, Inc.         
adjusted to reflect the sale of the shares of Common Stock offered hereby       
(assuming an initial public offering price of $21.50 and no exercise of the     
Underwriters' over-allotment option), by (i) each stockholder who is known by   
the Company to beneficially own in excess of five percent of the outstanding    
shares of Common Stock, (ii) each director, (iii) each of the executive         
officers named in the Summary Compensation Table, and (iv) all directors and    
executive officers as a group. Except as otherwise indicated, each stockholder  
listed below has sole voting and investment power with respect to shares        
beneficially owned by such person.                                              

                                                                [Download Table]

                                                       BENEFICIAL OWNERSHIP   
                                                        AFTER OFFERING(1)     
                                                       -----------------------
         NAME AND ADDRESS                              SHARES(2)    PERCENT(2)
         ----------------                              ---------    ----------
                                                                              
Donna Karan(3)(4)..................................... 5,290,846       25.8%  
Stephan Weiss(3)(4)................................... 5,290,846       25.8%  
Frank Mori(5)......................................... 3,586,114(7)    17.5%  
Tomio Taki(5)......................................... 3,586,114(7)    17.5%  
Takihyo Inc.(5)....................................... 2,689,586(7)    13.1%  
Stephen L. Ruzow......................................       --         --    
Louis Praino..........................................       --         --    
Patrick Spainhour(6)..................................       --         --    
David L. Bressman.....................................       --         --    
All directors and executive officers as a group (7                            
 persons)(4)(5)....................................... 9,773,488(7)    47.6%  

--------                                                                        
(1) Beneficial ownership prior to the Offering has not been included since      
prior to the consummation of the Reorganization and the closing of the  
  Offering, there were outstanding only a nominal number of shares of Common
 Stock. Prior to the consummation of the Reorganization and the closing of
the Offering, Donna Karan International, Inc. had outstanding only a    
nominal number of shares of Common Stock, which consisted of nine shares
of Class A Common Stock held by Ms. Karan, nine shares of Class A Common
Stock held by Mr. Weiss, one share of Class B Common Stock held by Mr.  
Taki, and one share of Class B Common Stock held by Mr. Mori. See       
"Description of Capital Stock."                                         
(2) Assuming no exercise of the Underwriters' over-allotment option.            
(3) The business address of Ms. Karan and Mr. Weiss is 550 Seventh Avenue, New  
York, New York 10018. Ms. Karan and Mr. Weiss are married.              
(4) The shares attributed to Ms. Karan include shares held of record by Mr.     
Weiss, the KW Trusts, and Gabrielle Studio. The shares attributed to Mr.
Weiss include shares held of record by Ms. Karan, the KW Trusts, and    
Gabrielle Studio.                                                       
(5) Takihyo Inc. is beneficially owned by Mr. Taki, Mr. Mori, and their         
affiliates. The shares attributed to Messrs. Taki and Mori include the  
shares shown as owned by Takihyo Inc. The business address of Mr. Taki, 
Mr. Mori, and Takihyo Inc. is 205 West 39th Street, New York, New York  
10018.                                                                  
(6) As of February 1996, Mr. Spainhour resigned from the Company.               

(7) If the initial public offering price is $21.50 per share, the number of     
shares which will be beneficially owned by Messrs. Taki and Mori        
(including those to be owned by Takihyo Inc.) and Takihyo Inc. will be  
3,586,114, 3,586,114, and 2,689,586, respectively) including 441,795    
shares which the Takihyo Group has the right to receive if the          
Underwriters' over-allotment option is not exercised (3,232,678,        
3,232,678, and 2,424,508, respectively, if the Underwriters' over-      
  allotment option is exercised in full), and the number of shares that will
be held by all directors and executive officers as a group will be      
9,773,488 (9,331,693 if the Underwriters' over-allotment option is      
exercised in full).                                                     

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DESCRIPTION OF CAPITAL STOCK  

The Company's authorized capital stock currently consists of twenty shares  
of common stock, par value $.01 per share, divided into two classes, Class A    
Common Stock and Class B Common Stock. The rights of the holders of such        
common stock are identical, except that the holders of Class A Common Stock     
are entitled to one vote per share for the election of directors and on all     
other stockholder matters and the holders of Class B Common Stock are entitled  
to nine votes per share for the election of directors and on all other          
stockholder matters. Effective as of the closing date of the Offering, the      
Company's Certificate of Incorporation shall be amended to provide for          
authorized capital stock of     shares of Common Stock, par value $.01 per      
share (the "Common Stock"), and 1,000,000 shares of preferred stock, par value  
$.01 per share ("Preferred Stock"). See "Principal Stockholders." The Company   
has no plans to issue any Preferred Stock at the present time. The following    
description of the capital stock of the Company and certain provisions of the   
Company's Amended and Restated Certificate of Incorporation (the "Charter")     
and Bylaws (the "Bylaws") is a summary and is qualified in its entirety by the  
provisions of the Company's Charter and Bylaws, to become effective as of the   
closing date of the Offering, copies of which have been filed as exhibits to    
the Company's Registration Statement, of which this Prospectus is a part.       

COMMON STOCK                                                                    

Holders of Common Stock are entitled to one vote per share for the election 
of directors and on all other matters requiring stockholder action. Subject to  
the rights of the holders of any series of Preferred Stock having a preference  
over the Common Stock, holders of Common Stock are entitled to dividends,       
when, as, and if declared by the Board of Directors out of funds legally        
available for the payment of dividends. See "Dividend Policy." Upon any         
liquidation, dissolution, or winding up of the Company, subject to the prior    
liquidation rights of the holders of Preferred Stock, if any, the net assets    
of the Company remaining after payment of creditors will be distributed pro     
rata to the holders of Common Stock in proportion to their interests. Holders   
of Common Stock are not entitled to vote cumulatively for the election of       
directors (which means that the holder or holders of a simple majority of the   
shares entitled to vote can elect all of the directors--see "Risk Factors"),    
and have no conversion rights, preemptive rights, or rights to subscribe for    
or purchase additional shares or other securities of the Company. All           
outstanding shares of Common Stock are, and the shares of Common Stock offered  
hereby by the Company when issued and paid for will be, fully paid and          
nonassessable.                                                                  

PREFERRED STOCK                                                                 

The Board of Directors of the Company is authorized to issue the shares of  
Preferred Stock in one or more series and, within certain limitations, to       
determine the voting rights (including the right to vote as a class or series   
on particular matters), dividend rates and preferences, and rights and terms    
of redemption, including redemption through operation of a sinking fund and     
liquidation preferences. The Board of Directors may increase or decrease the    
number of shares constituting any such series subsequent to the issuance of     
shares of such series (but not below the number of shares of such series then   
outstanding).                                                                   

The Board of Directors could issue a series of Preferred Stock with dividend
and liquidation rights more favorable than those pertaining to the Common       
Stock and with voting and conversion rights that could adversely affect the     
voting power and dilute the book value of the Common Stock. The issuance of     
Preferred Stock with such rights and preferences could have an adverse effect   
on holders of Common Stock by delaying or preventing a change in control of     
the Company, making removal of the present management of the Company more       
difficult, or imposing restrictions on the payment of dividends and other       
distributions to the holders of Common Stock.                                   

DELAWARE ANTI-TAKEOVER LAW                                                      

Under Section 203 of the Delaware General Corporation Law (the "Delaware    
Anti-Takeover law"), certain "business combinations" are prohibited between a   
Delaware corporation, the stock of which is generally publicly-traded or held   
of record by more than 2,000 stockholders, and an "interested stockholder" of   
such                                                                            

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corporation for a three-year period following the date that such stockholder    
became an interested stockholder, unless (i) the corporation has elected in     
its certificate of incorporation not to be governed by the Delaware Anti-       
Takeover law (the Company has not made such an election), (ii) the business     
combination was approved by the board of directors of the corporation before    
the other party to the business combination became an interested stockholder,   
(iii) upon consummation of the transaction that made it an interested           
stockholder, the interested stockholder owned at least 85% of the voting stock  
of the corporation outstanding at the commencement of the transaction           
(excluding voting stock owned by directors who are also officers or held in     
employee benefit plans in which the employees do not have a confidential right  
to tender or vote stock held by the plan), or (iv) the business combination     
was approved by the board of directors of the corporation and ratified by 66    
2/3% of the voting stock which the interested stockholder did not own. The      
three-year prohibition also does not apply to certain business combinations     
proposed by an interested stockholder following the announcement or             
notification of certain extraordinary transactions involving the corporation    
and a person who had not been an interested stockholder during the previous     
three years or who becomes an interested stockholder with the approval of a     
majority of the corporation's directors. The term "business combination" is     
defined generally to include mergers or consolidations between a Delaware       
corporation and an interested stockholder, transactions with an interested      
stockholder involving the assets or stock of the corporation or its majority-   
owned subsidiaries, and transactions which increase an interested               
stockholder's percentage ownership of stock. The term "interested stockholder"  
is defined generally as those stockholders who become beneficial owners of 15%  
or more of a Delaware corporation's voting stock.                               

CERTAIN ANTI-TAKEOVER PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION  
AND BYLAWS                                                                      

The Company's Charter and Bylaws contain several provisions that may be     
deemed to have the effect of making more difficult the acquisition of control   
of the Company by means of a hostile tender offer, open market purchases, a     
proxy contest, or otherwise.                                                    

The provisions of the Company's Charter and Bylaws discussed below are      
designed to help ensure that holders of Common Stock are treated fairly and     
equally in a multi-step acquisition. In addition, they are intended to          
encourage persons seeking to acquire control of the Company to initiate such    
an acquisition through arm's-length negotiations with the Company's Board of    
Directors. The Company's Charter and Bylaws may have the effect of              
discouraging a third party from making a tender offer or otherwise attempting   
to obtain control of the Company, even though such an attempt might be          
economically beneficial to the Company and its stockholders. In addition,       
because the Company's Charter and Bylaws are designed to discourage the         
accumulation of large blocks of the voting shares of the Company by purchasers  
whose objective it is to have such stock repurchased by the Company at a        
premium, the anti-takeover provisions of the Company's Charter and Bylaws       
could tend to reduce the price of the voting shares of the Company caused by    
such accumulations. In addition, these provisions may also have the effect of   
precluding a contest for the election of directors.                             

Classified Board of Directors. The Company's Board of Directors is divided  
into three classes of directors serving staggered terms. One class of           
directors will be elected at each annual meeting of stockholders for a three-   
year term. See "Management--Board of Directors." At least two annual meetings   
of stockholders, instead of one, generally will be required to change the       
majority of the Company's Board of Directors.                                   

Stockholder Meetings. Subject only to the rights of holders of preferred    
stock, only a majority of the Company's Board of Directors (excluding those     
directors affiliated with or elected by an interested stockholder), the         
Chairman, Vice Chairman, or the Chief Executive Officer will be able to call    
an annual or special meeting of stockholders. In addition, subject only to the  
rights of holders of preferred stock, stockholders may not take any action by   
written consent.                                                                

Restrictions on Certain Business Combinations. The Company's Charter        
provides that certain business combinations, such as mergers and stock and      
asset sales, with an interested stockholder (typically a beneficial owner of    
more than 15% of the outstanding voting shares of the Company's capital stock,  
excluding certain persons, including Ms. Karan, Mr. Weiss, their lineal         
descendants, affiliates, and associates, or trusts for their                    

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benefit), be approved by (i) the holders of 80% or more of the voting power of  
the then outstanding voting shares, voting together as a single class, and      
(ii) at least a majority of the voting power of the then outstanding voting     
shares, voting as a single class, which are not owned beneficially, directly    
or indirectly, by the interested stockholder, unless the transaction is         
approved by a majority of certain directors or meets certain fair price         
provisions.                                                                     

Requirements for Advance Notification of Stockholder Nomination and         
Proposals. The Company's Charter and the Company's Bylaws establish advance     
notice procedures with regard to stockholder proposals and the nomination,      
other than by or at the direction of the Board of Directors or a committee      
thereof, of candidates for election as directors.                               

Vote Required to Amend or Repeal Certain Provisions of the Company's Charter
and Bylaws. The Company's Charter establishes certain supermajority voting      
requirements to amend or repeal certain provisions of the Company's Charter or  
Bylaws.                                                                         

OTHER ANTI-TAKEOVER PROVISIONS                                                  

The Company has included provisions in certain of its material agreements   
which could have the effect of discouraging a third party from pursuing a non-  
negotiated takeover of the Company and preventing certain changes in control    
of the Company. The Company's License Agreement with Gabrielle Studio and the   
Company's employment agreement with Ms. Karan may be terminated by the          
Licensor and Ms. Karan, respectively, upon a Change in Control, which includes  
certain changes in the ownership of voting securities, an acquisition by a      
third party of 30% of the voting securities of the Company, mergers, sales of   
assets, and changes in the composition of the Board of Directors. In addition,  
the Company's 1996 Stock Incentive Plan and 1996 Non-Employee Director Stock    
Option Plan provide for accelerated vesting of stock options upon a "change in  
control" of the Company. See the Glossary for a complete description of Change  
in Control.                                                                     

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS                             

The Company has included in its Charter provisions to limit the personal    
liability of its officers and directors for monetary damages for breach of      
their fiduciary duty as directors, except for liability that cannot be          
eliminated under the Delaware General Corporation Law. The Charter provides     
that directors of the Company will not be personally liable for monetary        
damages for breach of their fiduciary duty as directors, except for liability   
(i) for any breach of their duty of loyalty to the Company or its               
stockholders, (ii) for acts or omissions not in good faith or which involve     
intentional misconduct or a knowing violation of law, (iii) for any unlawful    
payment of a dividend or unlawful stock repurchase or redemption, as provided   
in Section 174 of the Delaware General Corporation Law, or (iv) for any         
transaction from which the director derived an improper personal benefit. The   
Bylaws of the Company also provide that the Company shall indemnify its         
directors and officers to the fullest extent permitted by Section 145 of the    
Delaware General Corporation Law, including circumstances in which              
indemnification is otherwise discretionary. The Company has also entered into   
an agreement with a director and executive officer providing for his            
indemnification in his capacity as a director and executive officer. In         
addition, in the Contribution Agreement the Company has agreed to indemnify     
the Principals for (i) those acts they would have been indemnified for if they  
were acting as directors or officers and (ii) any New York State and New York   
City real estate transfer taxes and New York State real estate gains taxes      
incurred in connection with the Reorganization.                                 

TRANSFER AGENT AND REGISTRAR                                                    

The transfer agent and registrar for the Common Stock is    .               

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SHARES ELIGIBLE FOR FUTURE SALE 

Immediately prior to the Offering, there has been no established public     
trading market for the Common Stock and no predictions can be made as to the    
effect, if any, that public sales of shares or the availability of shares for   
sale will have on the market price of the Common Stock prevailing from time to  
time. In addition, there can be no assurance that a regular trading market      
will develop in the Common Stock. Sales of the Common Stock in the public       
market could have an adverse impact on the market price. All of the shares of   
Common Stock outstanding immediately prior to Offering are deemed to be         
"restricted securities," as that term is defined in Rule 144, in that such      
shares were issued in private transactions not involving a public offering.     
None of such shares will be eligible for sale under Rule 144 prior to the       
second anniversary of the closing of the Offering.                              

In general, under Rule 144 as currently in effect, subject to the           
satisfaction of certain other conditions, a person (or persons whose shares     
are aggregated), including an affiliate of the Company, who has owned           
restricted shares of Common Stock beneficially for at least two years is        
entitled to sell, in brokerage transactions within any three-month period, a    
number of shares (including non-restricted shares of the same class) equal to   
the greater of one percent of the total number of outstanding shares of the     
same class or the average weekly trading volume during the four calendar weeks  
preceding the sale. A person who has not been an affiliate of the Company for   
at least the three months immediately preceding the sale and who has            
beneficially owned shares of Common Stock for at least three years (or such     
shorter period as may be required under Rule 144) is entitled to sell such      
shares under Rule 144 without regard to any of the limitations described        
above.                                                                          

Upon completion of the Offering, assuming an initial public offering price  
of $21.50 per share and no exercise of the Underwriters' over-allotment         
option, Ms. Karan, Mr. Weiss, and the KW Trusts will beneficially own an        
aggregate of 5,290,846 shares of restricted Common Stock and the Takihyo Group  
will beneficially own 4,482,642 shares of restricted Common Stock (including    
441,795 shares which the Takihyo Group has the right to receive if the          
Underwriters' over-allotment option is not exercised). Assuming an initial      
public offering price of $    per share and no exercise of the Underwriters'    
over-allotment option, upon completion of the Offering the Takihyo Group will   
beneficially own         shares of restricted Common Stock (including           
shares which the Takihyo Group has the right to receive if the Underwriters'    
over-allotment option is not exercised). Assuming an initial public offering    
price of $    per share, upon completion of the Offering the Takihyo Group      
will beneficially own         shares of restricted Common Stock. If the         
Underwriters' over-allotment option is exercised in full, the Takihyo Group     
will beneficially own 4,040,847 shares of restricted Common Stock. The Company  
has granted to members of the Takihyo Group the right on an aggregate of two    
occasions to demand registration under the Securities Act at the Company's      
expense of all or a portion the shares of which they or their affiliates have   
beneficial ownership upon completion of the Offering. The Company has the       
option of purchasing at their then fair market value any shares which are the   
subject of a demand for registration. See "Certain Relationships and Related    
Transactions."                                                                  

All existing stockholders of the Company have entered into lock-up          
agreements with the Representatives wherein they have agreed not to sell any    
of their shares within 180 days after the date of the Prospectus without the    
prior written consent of Morgan Stanley & Co. Incorporated on behalf of the     
Underwriters. See "Underwriters" and "Certain Relationships and Related         
Transactions."                                                                  

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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES  
TO NON-UNITED STATES HOLDERS OF COMMON STOCK  

GENERAL                                                                         

The following is a general discussion of certain United States federal      
income and estate tax consequences of the ownership and disposition of Common   
Stock by a holder who is not a United States person (a "Non-U.S. Holder"), and  
who acquires and owns such Common Stock as a capital asset within the meaning   
of Section 1221 of the Internal revenue Code of 1986, as amended (the "Code").  
For this purpose, the term "Non-U.S. Holder" is defined as any person other     
than (i) a citizen or resident of the United States, (ii) a corporation,        
partnership or other entity created or organized in the United States or under  
the laws of the United States or of any state, or (iii) an estate or trust      
whose income is includible in gross income for United States federal income     
tax purposes, regardless of its source. This discussion does not consider       
specific facts and circumstances that may be relevant to a particular Non-U.S.  
Holder's tax position, does not address all aspects of United States federal    
income and estate taxes and does not deal with foreign, state, and local        
consequences and United States federal gift taxes that may be relevant to such  
Non-U.S. Holders in light of their personal circumstances. Further, it does     
not discuss the rules applicable to Non-U.S. Holders subject to special tax     
treatment under the federal income tax laws (including but not limited to,      
banks and insurance companies, dealers in securities, and holders of            
securities held as part of a "straddle", "hedge," or "conversion transaction."  
Furthermore, this discussion is based on current provisions of the Code,        
existing and proposed regulations promulgated thereunder and administrative     
and judicial interpretations thereof, all of which are subject to change,       
possibly on a retroactive basis. In addition, officials of the Treasury         
Department have recently stated that they intend to issue proposed regulations  
that will revise the rules which deal with withholding on payments to foreign   
persons. Each prospective purchaser of Common Stock is advised to consult a     
tax advisor with respect to current and possible future tax consequences of     
acquiring, holding, and disposing of Common Stock.                              

Proposed United States Treasury Regulations were issued on April 15, 1996   
(the "Proposed Regulations") which, if adopted, would affect the United States  
taxation of dividends paid to a Non-United States Holder on Common Stock. The   
Proposed Regulations are generally proposed to be effective with respect to     
dividends paid after December 31, 1997, subject to certain transition rules.    
The discussion below is not intended to be a complete discussion of the         
provisions of the Proposed Regulations, and prospective investors are urged to  
consult their tax advisors with respect to the effect the Proposed Regulations  
would have if adopted.                                                          

An individual may, among other ways, subject to certain exceptions, be      
deemed to be a resident alien (as opposed to a nonresident alien) by virtue of  
being present in the United States on at least 31 days in the calendar year     
and for an aggregate of at least 183 days during a three-year period ending in  
the current calendar year (counting, for such purposes, all of the days         
present in the current year, one-third of the days present in the immediately   
preceding year, and one-sixth of the days present in the second preceding       
year). Resident aliens are subject to United States federal income tax as if    
they were United States citizens.                                               

DIVIDENDS                                                                       

In general, dividends paid to a Non-U.S. Holder of Common Stock will be     
subject to withholding of United States federal income tax at a 30% rate or     
such lower rate as may be specified by an applicable income tax treaty, unless  
the dividends are effectively connected with the conduct of a trade or          
business of the Non-U.S. Holder within the United States ("United States trade  
or business income"). If the dividend is United States trade or business        
income, the dividend would be subject to United States federal income tax on a  
net income basis at applicable graduated individual or corporate rates and      
would be exempt from the 30% withholding tax described above. Any such          
dividends that are United States trade or business income received by a         
foreign corporation may, under certain circumstances, be subject to an          
additional "branch profits tax" at a 30% rate or such lower rate as may be      
specified by an applicable income tax treaty. Certain certification and         
disclosure requirements must be complied with in order to be exempt from        
withholding under the United States trade or business income exemption          
discussed above.                                                                

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Under current United States Treasury regulations, dividends paid to a       
stockholder at an address in a foreign country are presumed to be paid to a     
resident of such country for purposes of the withholding discussed above        
(unless the payor has knowledge to the contrary) and, under the current         
interpretation of United States Treasury regulations, for purposes of           
determining the applicability of a tax treaty rate, unless an applicable tax    
treaty requires some other method for determining a stockholder's residence.    

Under the Proposed Regulations, to obtain a reduced rate of withholding     
under a treaty, a Non-United States Holder would generally be required to       
provide an Internal Revenue Service Form W-8 certifying such Non-United States  
Holder's entitlement to benefits under a treaty. The Proposed Regulations       
would also provide special rules to determine whether, for purposes of          
determining the applicability of a tax treaty, dividends paid to a Non-United   
States Holder that is an entity should be treated as paid to the entity or      
those holding an interest in that entity.                                       

A Non-U.S. Holder of Common Stock eligible for a reduced rate of United     
States withholding tax pursuant to a tax treaty or whose dividends have         
otherwise been subjected to withholding in an amount which exceeds such         
holder's United States federal income tax liability, may obtain a refund or     
credit of any excess amounts withheld by filing an appropriate claim for        
refund with the United States Internal Revenue Service (the "Service").         

GAIN ON DISPOSITION OF COMMON STOCK                                             

A Non-U.S. Holder generally will not be subject to United States federal    
income tax with respect to gain recognized on a sale or other disposition of    
Common Stock unless (i) the gain is effectively connected with a trade or       
business of such holder in the United States, (ii) in the case of a Non-U.S.    
Holder who is a nonresident alien individual and holds the Common Stock as a    
capital asset, such holder is present in the United States for 183 or more      
days in the taxable year of the sale or other disposition and certain other     
conditions are met, (iii) the Non-U.S. Holder is subject to tax pursuant to     
provisions of United States tax law that apply to certain expatriates, or (iv)  
under certain circumstances if the Company is or has been during certain time   
periods a "U.S. real property holding corporation" for United States federal    
income tax purposes. The Company is not and does not anticipate becoming a      
"U.S. real property holding corporation" for United States federal income tax   
purposes.                                                                       

If an individual Non-U.S. Holder falls under clause (i) above, such person  
will be taxed on the net gain derived from the sale under regular graduated     
United States federal income tax rates. If the individual falls under clause    
(ii) above, such person will be subject to a flat 30% tax on such person's      
United States source capital gains for the taxable year which may be offset by  
United States source capital losses for such year (notwithstanding the fact     
that he is not considered a resident of the United States). Thus, Non-U.S.      
Holders who spend 183 days or more in the United States in the taxable year in  
which they contemplate a sale of the Common Stock are urged to consult their    
tax advisors as to the tax consequences of such sale.                           

If the Non-U.S. Holder that is a foreign corporation falls under clause (i) 
above, it will be taxed on its gain on a net income basis at applicable         
graduated corporate rates and, in addition, may be subject to the branch        
profits tax equal to 30% of its "effectively connected earnings and profits"    
within the meaning of the Code for the taxable year, as adjusted for certain    
items, unless it qualifies for a lower rate under an applicable income tax      
treaty.                                                                         

Periodically, legislation has been introduced in Congress pursuant to which 
the gain from the sale of stock of a domestic corporation by a foreign          
corporation or a non-resident alien individual would be considered to be        
effectively connected income, if such person owns 10% or more (by vote or       
value) of the domestic corporation at any time during the previous five years.  
It is not known whether such or similar legislation will be enacted.            

FEDERAL ESTATE TAXES                                                            

Common Stock that is owned, or treated as owned, by a non-resident alien    
individual (as specifically determined under residence rules for United States  
federal estate tax purposes) at the time of death or that has been the subject  
of certain lifetime transfers will be included in such holder's gross estate    
for United States federal estate tax purposes, unless an applicable estate tax  
treaty provides otherwise.                                                      

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UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING TAX                  

The Company must report annually to the Service and to each Non-U.S. Holder 
the amount of dividends paid to such holder and any tax withheld with respect   
to such dividends. These information reporting requirements apply regardless    
of whether withholding is required. Copies of the information returns           
reporting such dividends and withholding may also be made available under the   
provisions of an applicable treaty or agreement, to the tax authorities in the  
country in which such holder resides.                                           

United States backup withholding tax (which generally is a withholding tax  
imposed at the rate of thirty-one percent (31%) on certain payments to persons  
that fail to furnish certain information under the United States information    
reporting requirements) generally will not apply to dividends paid on Common    
Stock to a Non-U.S. Holder at an address outside the United States. Except as   
provided below, Non-U.S. Holders will not be subject to backup withholding      
with respect to the payment of proceeds from the disposition of Common Stock    
effected by the foreign office of a broker; except that if the broker is a      
United States person or a "U.S. related person", information reporting (but     
not backup withholding) is required with respect to the payment, unless the     
broker has documentary evidence in its files that the owner is a Non-U.S.       
Holder (and the broker has no actual knowledge to the contrary) and certain     
other requirements are met or the holder otherwise establishes an exemption.    
For this purpose, a "U.S. related person" is (i) a "controlled foreign          
corporation" for United States federal income tax purposes, or (ii) a foreign   
person 50% or more of whose gross income from all sources for the three-year    
period ending with the close of its taxable year preceding the collection or    
payment of such proceeds (or for such part of the period that the broker has    
been in existence) is derived from activities that are effectively connected    
with the conduct of a United States trade or business. The payment of the       
proceeds of a sale of shares of Common Stock to or through a United States      
office of a broker is subject to information reporting and possible backup      
withholding unless the owner certifies its non-United States status under       
penalties of perjury or otherwise establishes an exemption. Backup withholding  
is not an additional tax. Any amounts withheld under the backup withholding     
rules from a payment to a Non-U.S. Holder will be allowed as a refund or a      
credit against such Non-U.S. Holder's United States federal income tax          
liability, provided that the required information is furnished to the Service.  

The Proposed Regulations would, if adopted, alter the foregoing rules in    
certain respects. Among other things, the Proposed Regulations would provide    
certain presumptions under which a Non-United States Holder would be subject    
to backup withholding in the absence of the required certification.             

THE FOREGOING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY.          
ACCORDINGLY, EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT WITH HIS TAX        
ADVISOR WITH RESPECT TO THE UNITED STATES FEDERAL INCOME TAX AND FEDERAL        
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF COMMON STOCK,       
INCLUDING THE APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN,  
OR OTHER TAXING JURISDICTION.                                                   

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UNDERWRITERS  

Under the terms and subject to the conditions in the Underwriting Agreement 
dated the date of this Prospectus (the "Underwriting Agreement"), the Company   
has agreed to sell 10,750,000 shares of Common Stock and the U.S. Underwriters  
named below, for whom Morgan Stanley & Co. Incorporated, Bear, Stearns & Co.    
Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Smith Barney      
Inc. are serving as U.S. Representatives, have severally agreed to purchase,    
and the International Underwriters named below, for whom Morgan Stanley & Co.   
International Limited, Bear, Stearns, International Limited, Merrill Lynch      
International, and Smith Barney Inc. are serving as International               
Representatives, have severally agreed to purchase, the respective number of    
shares of Common Stock set forth opposite their names below:                    

                                                                [Download Table]

                                                                   NUMBER OF 
NAME                                                                 SHARES  
----                                                               ----------
                                                                             
U.S. Underwriters:                                                           
  Morgan Stanley & Co. Incorporated..............................            
  Bear, Stearns & Co. Inc........................................            
  Merrill Lynch, Pierce, Fenner & Smith                                      
       Incorporated..............................................            
  Smith Barney Inc...............................................            
                                                                   ----------
    Subtotal.....................................................   7,525,000
                                                                   ==========
International Underwriters:                                                  
  Morgan Stanley & Co. International Limited.....................            
  Bear, Stearns International Limited............................            
  Merrill Lynch International....................................            
  Smith Barney Inc...............................................            
                                                                   ----------
    Subtotal.....................................................   3,225,000
                                                                   ----------
    Total........................................................  10,750,000
                                                                   ==========

The U.S. Underwriters and the International Underwriters are collectively   
referred to as the "Underwriters." The Underwriting Agreement provides that     
the obligations of the several Underwriters to pay for and accept delivery of   
the shares of Common Stock offered hereby are subject to the approval of        
certain legal matters by counsel and to certain other conditions. The           
Underwriters are obligated to take and pay for all the shares of Common Stock   
offered hereby if any such shares are taken.                                    

Pursuant to the Agreement Between U.S. Underwriters and International       
Underwriters, each U.S. Underwriter has represented and agreed that, with       
certain exceptions, (a) it is not purchasing any U.S. Shares (as defined        
below) being sold by it for the account of anyone other than a United States    
or Canadian Person (as defined below) and (b) it has not offered or sold, and   
will not offer or sell, directly or indirectly, any U.S. Shares or distribute   
any prospectus relating to the U.S. Shares outside the United States or Canada  
or to anyone other than a United States or Canadian Person. Pursuant to the     
Agreement Between U.S. and International Underwriters, each International       
Underwriter has represented and agreed that, with certain exceptions, (a) it    
is not purchasing any International Shares (as defined below) being sold by it  
for the account of any United States or Canadian Person and (b) it has not      
offered or sold, and will not offer or sell, directly or indirectly, any        
International Shares or distribute any prospectus relating to the               
International Shares within the United States or Canada or to any United        
States or Canadian Person. With respect to any Underwriter that is a U.S.       
Underwriter and an International Underwriter, the foregoing representations     
and agreements (i) made by it in its capacity as a U.S. Underwriter shall       
apply only to shares purchased by it in its capacity as a U.S. Underwriter,     
(ii) made by it in its capacity as an International Underwriter shall apply     
only to shares purchased by it in its capacity as an International              
Underwriter, and (iii) do not restrict its ability to distribute any            
prospectus relating to the shares of Common Stock to any person. The foregoing  
limitations do not apply to stabilization transactions or to certain other      
transactions specified in the Agreement Between U.S. and International          
Underwriters. As used herein,                                                   

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"United States or Canadian Person" means any national or resident of the        
United States or Canada or any corporation, pension, profit-sharing, or other   
trust or other entity organized under the laws of the United States or Canada   
or of any political subdivision thereof (other than a branch located outside    
the United States and Canada of any United States or Canadian Person) and       
includes any United States or Canadian branch of a person who is otherwise not  
a United States or Canadian Person. All shares of Common Stock to be purchased  
by the U.S. Underwriters and the International Underwriters under the           
Underwriting Agreement are referred to herein as the "U.S. Shares" and the      
"International Shares," respectively.                                           

Pursuant to the Agreement Between U.S. Underwriters and International       
Underwriters, sales may be made between the U.S. Underwriters and               
International Underwriters of any number of shares of Common Stock to be        
purchased pursuant to the Underwriting Agreement as may be mutually agreed.     
The per share price of any shares so sold shall be the Price to Public set      
forth on the cover page hereof, in United States dollars, less an amount not    
greater than the per share amount of the concession to dealers set forth        
below.                                                                          

Pursuant to the Agreement Between U.S. Underwriters and International       
Underwriters, each U.S. Underwriter has represented that it has not offered or  
sold, and has agreed not to offer or sell, any shares of Common Stock,          
directly or indirectly, in Canada in contravention of the securities laws of    
Canada or any province or territory thereof and has represented that any offer  
of shares of Common Stock in Canada will be made only pursuant to an exemption  
from the requirement to file a prospectus in the province or territory of       
Canada in which such offer is made. Each U.S. Underwriter has further agreed    
to send to any dealer who purchases from it any shares of Common Stock a        
notice stating in substance that, by purchasing such shares of Common Stock,    
such dealer represents and agrees that it has not offered or sold, and will     
not offer or sell, directly or indirectly, any of such shares of Common Stock   
in Canada or to, or for the benefit of, any resident of Canada in               
contravention of the securities laws of Canada or any province or territory     
thereof and that any offer of shares of Common Stock in Canada will be made     
only pursuant to an exemption from the requirement to file a prospectus in the  
province of Canada in which such offer is made, and that such dealer will       
deliver to any other dealer to whom it sells any of such shares of Common       
Stock a notice to the foregoing effect.                                         

Pursuant to the Agreement Between U.S. Underwriters and International       
Underwriters, each International Underwriter has represented and agreed that    
(a) it has not offered or sold and will not offer or sell any shares of Common  
Stock in the United Kingdom except to persons whose ordinary activities         
involve them in acquiring, holding, managing, or disposing of investments (as   
principal or agent) for the purposes of their businesses or otherwise in        
circumstances which have not resulted and will not result in an offer to the    
public in the United Kingdom within the meaning of the Public Offers of         
Securities Regulations (1995) (the "Regulations"); (b) it has complied and      
will comply with all applicable provisions of the Financial Services Act 1986   
and the Regulations with respect to anything done by it in relation to the      
shares of Common Stock offered hereby in, from, or otherwise involving the      
United Kingdom; and (c) it has only issued or passed on and will only issue or  
pass on to any person in the United Kingdom any document received by it in      
connection with the issue of the shares of Common Stock, other than any         
document which consists of, or is part of, listing particulars, supplementary   
listing particulars, or any other document required or permitted to be          
published by listing rules under Part IV of the Financial Services Act 1986,    
if that person is of a kind described in Article 9(3) of the Financial          
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995, or to    
any person to whom the document may lawfully be issued or passed on.            

Pursuant to the Agreement Between U.S. Underwriters and International       
Underwriters, each International Underwriter has represented and agreed that    
it has not offered or sold, and agrees not to offer or sell, directly or        
indirectly, in Japan or to or for the account of any resident thereof, any of   
the shares of Common Stock acquired in connection with the distribution         
contemplated hereby, except for offers or sales to Japanese International       
Underwriters or dealers and except pursuant to any exemption from the           
registration requirements of the Securities and Exchange Law of Japan. Each     
International Underwriter further agrees to send to any dealer who purchases    
from it any of the shares of Common Stock a notice stating in substance that,   
by purchasing such shares, directly or indirectly in Japan or to or for the     
account of any resident thereof except pursuant to any exemption from the       
registration requirements of the Securities and Exchange Law of Japan, and      
that such dealer will send to any                                               

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other dealer whom it sells any of such shares of Common Stock a notice          
containing substantially the same statement as contained in the foregoing.      

The Underwriters propose to offer part of the shares of Common Stock        
directly to the public at the Price to Public set forth on the cover page       
hereof and part to certain dealers at a price which represents a concession     
not in excess of $    a share below the public offering price. The              
Underwriters may allow, and such dealers may reallow, a concession not in       
excess of $    a share to other Underwriters or to certain dealers. After the   
initial offering of the shares of Common Stock, the offering price and other    
selling terms may from time to time be varied by the Underwriters.              

Representatives of the Underwriters have informed the Company that the      
Underwriters do not intend sales to discretionary accounts to exceed five       
percent of the total number of shares of Common Stock offered by them.          

At the request of the Company, the Underwriters have reserved for sale, at  
the initial public offering price, up to 537,500 shares offered hereby for      
directors, officers, employees, business associates, and related persons of     
the Company. The number of shares of Common Stock available for sale to the     
general public will be reduced to the extent such persons purchase such         
reserved shares. Any reserved shares which are not so purchased will be         
offered by the Underwriters to the general public on the same basis as the      
other shares offered hereby.                                                    

Pursuant to the Underwriting Agreement, the Company has granted the U.S.    
Underwriters an option, exercisable for 30 days from the date of this           
Prospectus, to purchase up to 1,612,500 additional shares of Common Stock at    
the Price to Public set forth on the cover page hereof, less Underwriting       
Discounts and Commissions. The U.S. Underwriters may exercise such option to    
purchase solely for the purpose of covering over-allotments, if any, made in    
connection with the Offering. To the extent such option is exercised, each      
U.S. Underwriter will become obligated, subject to certain conditions, to       
purchase approximately the same percentage of such additional shares of Common  
Stock as the number set forth next to such U.S. Underwriter's name in the       
preceding table bears to the total number of shares of Common Stock offered by  
the U.S. Underwriters hereby.                                                   

The Company, all of the Company's executive officers and directors, and all 
existing stockholders of the Company, have agreed that, without the prior       
written consent of Morgan Stanley & Co. Incorporated on behalf of the           
Underwriters, they will not (i) offer, pledge, sell, contract to sell, sell     
any option or contract to purchase, purchase any option or contract to sell,    
grant any option, right, or warrant to purchase, or otherwise transfer or       
dispose of, directly or indirectly, any shares of Common Stock or any           
securities convertible into or exercisable or exchangeable for Common Stock     
(whether such shares or any such securities are now owned by such stockholder   
or acquired after the date of the Prospectus), or (ii) enter into any swap or   
other arrangement that transfers to another, in whole or in part, any of the    
economic consequences of ownership of the Common Stock, whether any such        
transaction described in clause (i) or (ii) above is to be settled by delivery  
of Common Stock or such other securities, in cash or otherwise, for a period    
of 180 days after the date of this Prospectus, other than the sale to the       
Underwriters of any shares of Common Stock pursuant to the Underwriting         
Agreements.                                                                     

The provisions of Section (c) (8) of the Corporate Financing Rule under     
Section 44 of Article III of the Rules of Fair practice of the National         
Association of Securities Dealers, Inc. (the "NASD") apply to the Offering      
since more than 10% of the net proceeds of the Offering may be paid to certain  
persons associated with NASD members participating in the Offering. Section     
(c) (8) requires, among other things, that the public offering price of the     
securities be no higher than that recommended by a "qualified independent       
underwriter," as such term is defined in Schedule E of the By-Laws of the       
NASD. In accordance with such requirements, Bear, Stearns & Co. Inc. has        
agreed to serve as a "qualified independent underwriter" and has conducted due  
diligence and will recommend a maximum price for the Common Stock.              

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The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.            

PRICING OF OFFERING                                                             

Prior to the Offering, there has been no public market for the shares of    
Common Stock of the Company. Consequently, the initial public offering price    
was determined by negotiation among the Company, the Principals, and the        
Representatives. Among the factors considered in determining the initial        
public offering price were the Company's record of operations, the Company's    
current financial condition and future prospects, the experience of its         
management, the economics of the industry in general, the general condition of  
the equity securities market, and the market prices of similar securities of    
companies considered comparable to the Company. There can be no assurance that  
a regular trading market for the shares of Common Stock will develop after the  
Offering or, if developed, that a public trading market can be sustained.       
There can be no assurance that the prices at which the Common Stock will sell   
in the public market after the Offering will not be lower than the price at     
which it is issued by the Underwriters in the Offering.                         

LEGAL MATTERS 

The legality of the Common Stock offered hereby will be passed upon for the 
Company by Proskauer Rose Goetz & Mendelsohn LLP, 1585 Broadway, New York, New  
York 10036. Certain legal matters will be passed upon for the Underwriters by   
Davis Polk & Wardwell.                                                          

EXPERTS 

The predecessor combined financial statements and schedule of Donna Karan   
International Inc. at December 31, 1995 and January 1, 1995, and for each of    
the three fiscal years in the period ended December 31, 1995, appearing in      
this Prospectus and the Registration Statement have been audited by Ernst &     
Young LLP, independent auditors, as set forth in their reports thereon          
appearing elsewhere herein and in the Registration Statement, and are included  
in reliance upon such reports given upon the authority of such firm as experts  
in accounting and auditing.                                                     

ADDITIONAL INFORMATION  

The Company has filed with the Securities and Exchange Commission (the      
"Commission") a Registration Statement on Form S-1 (the "Registration           
Statement") under the Securities Act with respect to the Common Stock offered   
hereby. This Prospectus, which is part of the Registration Statement, does not  
contain all of the information set forth in the Registration Statement and the  
exhibits and schedules thereto, certain items of which are omitted as           
permitted by the rules and regulations of the Commission. For further           
information with respect to the Company and the Common Stock offered hereby,    
reference is made to the Registration Statement and to the financial            
statements, schedules, and exhibits filed as a part thereof. The Registration   
Statement, including all schedules and exhibits thereto, may be inspected       
without charge at the public reference facilities maintained by the Commission  
at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,             
Washington, D.C. and at the Commission's regional offices at 7 World Trade      
Center, 13th floor, New York, New York and 500 West Madison Street, Suite       
1400, Chicago, Illinois. Copies of such material may be obtained from the       
Public Reference Section of the Commission at 450 Fifth Street, N.W.,           
Washington, D.C. 20549 at prescribed rates.                                     

Statements contained in this Prospectus concerning the contents of any      
contract or other document are not necessarily complete and, in each instance,  
reference is made to the copy of such contract or other document filed as an    
exhibit to the Registration Statement or otherwise with the Commission, each    
such statement being qualified in all respects by such reference.               

The Company intends to furnish its stockholders with an annual report       
containing consolidated financial statements certified by its independent       
auditors and with quarterly reports for each of the first three quarters of     
each fiscal year containing unaudited consolidated financial information.       

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GLOSSARY  

"Change in Control." For purposes of the employment agreements with Ms.     
Karan and Mr.Weiss and the License Agreement, the acquisition by any "person"   
(as such term is used in Sections 13(d) and 14(d) of the Securities Exchange    
Act of 1934, as amended), other than a person who is a stockholder of the       
Company on the Effective Date of the Offering (an "Initial Stockholder") of     
30% or more of the voting securities of the Company, or the acquisition by an   
Initial Stockholder (other than members of the Karan/Weiss Group) of an         
additional 5% of the voting securities of the Company over and above that       
owned on the Effective Date of the Offering; any merger or sale of              
substantially all of the assets of the Company under circumstances where the    
holders of 20% or more of the equity securities of the surviving entity of      
such transaction were not holders of the Common Stock of the Company            
immediately prior to the consummation of such transaction; or any change in     
the composition of the Board of Directors of the Company not approved by a      
majority of the Board of Directors of the Company prior to such change.         

"Company." For purposes of this Prospectus, references to the "Company" mean
the DK Companies, as of dates and periods prior to the closing date of the      
Offering, and, thereafter, collectively, Donna Karan International Inc. and     
its subsidiaries.                                                               

"Contribution Agreement." The contribution agreement to be entered into by  
the Company, Ms. Donna Karan, Mr. Stephan Weiss, the KW Trusts, Gabrielle       
Studio, Mr. Frank Mori, Mr. Mori's children, Mr. Tomio Taki, and Takihyo Inc.,  
simultaneously with the closing of the Offering, effecting the Reorganization.  

"Designer Collections." The designer collections of men's and women's       
clothing, sportswear, accessories, and shoes marketed under the Donna Karan     
New York(R) brand name.                                                         

"Distribution Notes." Promissory notes, bearing interest at the rate of 8%  
per annum, in the aggregate principal amount of approximately $114.5 million.   

"DK Companies." The partnerships and corporations, including The Donna Karan
Company, engaged in various aspects of the Company's business prior to the      
Reorganization, each of which is ultimately owned one-half by Ms. Karan, Mr.    
Weiss, and the KW Trusts and one-half by certain members of the Takihyo Group.  

"Donna Karan Japan." Donna Karan Japan K.K., a Japanese corporation in which
the Company has a 30% equity interest.                                          

"Door." A single retail outlet; a "store" refers to one or more retail      
outlets operated under the same name.                                           

"Effective Date." The effective date of the Offering.                       

"Gabrielle Studio." Gabrielle Studio, Inc., a New York corporation wholly-  
owned by Ms. Karan, Mr. Weiss, and the KW Trusts.                               

"HPL." Hotel Properties Limited, a Singapore public company.                

"Intermediate Entities." The various partnerships and corporations through  
which the interests of the Principals in the DK Companies are held.             

"International Offering." The public offering outside the United States of  
an aggregate of 3,225,000 shares of Common Stock.                               

"International Retail Stores." Full-price, free-standing retail stores      
licensed to third parties under the brand names Donna Karan New York(TM),       
DKNY(TM), and Donna Karan(TM) in international markets.                         

"International Underwriters." The several underwriters of the International 
Offering, for whom Morgan Stanley & Co. International Limited, Bear, Stearns    
International Limited, Merrill Lynch International, and Smith Barney Inc. are   
acting as representatives.                                                      

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"Karan/Weiss Group." Ms. Donna Karan, Mr. Stephan Weiss, the KW Trusts, and 
Gabrielle Studio, as a group.                                                   

"KW Trusts." Trusts established for the benefit of Ms. Karan and for the    
benefit of Ms. Karan's and Mr. Weiss' children.                                 

"License Agreement." The license agreement between Gabrielle Studio and the 
Company to be entered into simultaneously with the closing of the Offering.     

"Licensed Marks." The trademarks "Donna Karan(R)," "Donna Karan New         
York(R)," "DKNY(R)," "DK(R)," and all variations thereof.                       

"Licensor." Gabrielle Studio, with respect to the License Agreement.        

"Offering." The U.S. Offering and the International Offering.               

"Principals." Ms. Karan, Mr. Weiss, Mr. Taki, and Mr. Mori.                 

"Reorganization." The contribution by Ms. Karan, Mr. Weiss, the KW Trusts,  
Gabrielle Studio, Mr. Mori, Mr. Taki, and Takihyo Inc. and certain of their     
affiliates to Donna Karan International Inc. of all of the outstanding stock    
of and partnership interests in the DK Companies and the various entities       
which hold their interests in the DK Companies, in exchange for various         
combinations of Common Stock and cash, pursuant to the Contribution Agreement.  

"Representatives." The representatives of the several U.S. Underwriters and 
International Underwriters. Morgan Stanley & Co. Incorporated, Bear, Stearns &  
Co. Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Smith Barney  
Inc. are the Representatives of the U.S. Underwriters and Morgan Stanley & Co.  
International Limited, Bear, Stearns International Limited, Merrill Lynch       
International, and Smith Barney Inc. are the Representatives of the             
International Underwriters.                                                     

"Retail Agreement." The agreement entered into in March 1995 by the Company,
HPL, and a corporation owned by a private investor with a majority interest in  
HPL, providing for the establishment of an aggregate of 29 free-standing        
International Retail Stores by HPL in the Territories by December 31, 2000.     

"Shoe Division." The Company's shoe collections.                            

"Takihyo Group." Mr. Tomio Taki, Mr. Frank Mori, Takihyo Inc., and certain  
affiliates of Messrs. Taki and Mori, as a group.                                

"Territories." Hong Kong, The People's Republic of China, The Philippines,  
South Korea, Taiwan, and Japan.                                                 

"U.S. Offering." The public offering in the United States of an aggregate of
7,525,000 shares of Common Stock.                                               

"U.S. Underwriters." The several underwriters of the U.S. Offering, for whom
Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc., Merrill Lynch,     
Pierce, Fenner & Smith Incorporated, and Smith Barney Inc. are acting as        
representatives.                                                                

"Underwriters." The U.S. Underwriters and the International Underwriters.   

"Underwriting Agreement." The Underwriting Agreement between the Company,   
the U.S. Underwriters, and the International Underwriters.                      

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DONNA KARAN INTERNATIONAL INC.      

INDEX TO PREDECESSOR COMBINED FINANCIAL STATEMENTS  

YEARS ENDED JANUARY 2, 1994, JANUARY 1, 1995, AND DECEMBER 31, 1995 

                                                                [Download Table]

                                                                           PAGE
                                                                           ----
                                                                               
Report of Independent Auditors...........................................   F-2
Predecessor Combined Statements of Income for the years ended January 2,       
 1994, January 1, 1995, and December 31, 1995............................   F-3
Predecessor Combined Balance Sheets as of January 1, 1995 and December         
 31, 1995................................................................   F-4
Predecessor Combined Statements of Stockholders' Equity and Partners'          
 Capital for the years ended January 2, 1994, January 1, 1995, and             
 December 31, 1995.......................................................   F-5
Predecessor Combined Statements of Cash Flows for the years ended January      
 2, 1994, January 1, 1995, and December 31, 1995.........................   F-6
Notes to Predecessor Combined Financial Statements.......................   F-7
         QUARTERS ENDED APRIL 2, 1995 AND MARCH 31, 1996 (UNAUDITED)           
Predecessor Combined Statements of Income for the quarters ended April 2,      
 1995 and                                                                      
 March 31, 1996..........................................................  F-19
Predecessor Combined Balance Sheet as of March 31, 1996..................  F-20
Predecessor Combined Statements of Stockholders' Equity and Partners'          
 Capital for the quarters ended April 2, 1995 and March 31, 1996.........  F-21
Predecessor Combined Statements of Cash Flows for the quarters ended           
 April 2, 1995 and                                                             
 March 31, 1996..........................................................  F-22
Notes to Predecessor Combined Financial Statements.......................  F-23

The balance sheet of Donna Karan International Inc., which was formed in April  
1996, has not been included because the amounts are immaterial.                 

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REPORT OF INDEPENDENT AUDITORS  

The Board of Directors of                                                       

Donna Karan International Inc.                                                  

We have audited the accompanying predecessor combined balance sheets of     
Donna Karan International Inc. (the "Company") as of January 1, 1995 and        
December 31, 1995, and the related predecessor combined statements of income,   
stockholders' equity and partners' capital and cash flows for each of the       
three years in the period ended December 31, 1995. These financial statements   
are the responsibility of the Company's management. Our responsibility is to    
express an opinion on these financial statements 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 combined financial position of Donna Karan        
International Inc. at January 1, 1995 and December 31, 1995, and the combined   
results of their operations and their cash flows for each of the three years    
in the period ended December 31, 1995, in conformity with generally accepted    
accounting principles.                                                          

                                               Ernst & Young LLP
New York, New York                                                              
April 16, 1996                                                                  

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DONNA KARAN INTERNATIONAL INC.      

PREDECESSOR COMBINED STATEMENTS OF INCOME 

                                                                [Download Table]

                                                        YEAR ENDED            
                                            ----------------------------------
                                            JANUARY 2, JANUARY 1, DECEMBER 31,
                                               1994       1995        1995    
                                            ---------- ---------- ------------
                                                      (IN THOUSANDS)          
                                                                              
Net revenues...............................  $364,705   $420,164   $  510,126 
Cost of sales..............................   234,230    271,172      330,689 
                                             --------   --------   ---------- 
Gross profit...............................   130,475    148,992      179,437 
Selling, general, and administrative                                          
 expenses (Notes 1, 6, 7, and 12)..........   102,748    119,995      136,906 
                                             --------   --------   ---------- 
Operating income...........................    27,727     28,997       42,531 
Other income (expense):                                                       
  Equity in earnings of affiliate (Note                                       
   9)......................................        --         --        2,519 
  Interest expense (Note 4)................    (4,147)    (8,862)      (7,650)
  Interest income..........................        84         --           -- 
  Other expense (Note 10)..................    (2,980)    (2,651)          -- 
  Gain on sale of interests in affiliate                                      
   (Note 9)................................        --         --       18,673 
                                             --------   --------   ---------- 
Income before income taxes.................    20,684     17,484       56,073 
Provision for income taxes (Note 1)........     1,312      1,139        2,398 
                                             --------   --------   ---------- 
Net income.................................  $ 19,372   $ 16,345   $   53,675 
                                             ========   ========   ========== 
Pro forma (Notes 1 and 13)--unaudited                                         
Historical income before income taxes......                        $   56,073 
Pro forma adjustments other than income                                       
 taxes.....................................                            24,030 
                                                                   ---------- 
Pro forma income before income taxes.......                            32,043 
Pro forma provision for income taxes (Note                                    
 13).......................................                            13,668 
                                                                   ---------- 
Pro forma net income.......................                        $   18,375 
                                                                   ========== 
Pro forma net income per common share......                        $     1.11 
                                                                   ========== 
Pro forma common shares outstanding........                        16,497,278 
                                                                   ========== 

See notes to predecessor combined financial statements. 

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DONNA KARAN INTERNATIONAL INC.      

PREDECESSOR COMBINED BALANCE SHEETS 

                                                                [Download Table]

                                                        JANUARY 1, DECEMBER 31,
                                                           1995        1995    
                                                        ---------- ------------
                                                            (IN THOUSANDS)     
                                                                               
                        ASSETS                                                 
Current assets:                                                                
  Cash.................................................  $  3,728    $ 12,153  
  Accounts receivable, net of allowances of $22,507 at                         
   December 31,1995 and $15,013 at January 1, 1995                             
   (Note 4)............................................    49,879      62,231  
  Inventories (Notes 1, 2, and 4)......................    63,606      85,655  
  Prepaid expenses and other current assets............     8,241       9,946  
                                                         --------    --------  
    Total current assets...............................   125,454     169,985  
Property and equipment, at cost--net (Note 3)..........    24,467      22,505  
Deposits and other noncurrent assets (Notes 4 and 9)...     7,083      11,485  
                                                         --------    --------  
                                                         $157,004    $203,975  
                                                         ========    ========  
       LIABILITIES AND STOCKHOLDERS' EQUITY AND                                
                   PARTNERS' CAPITAL                                           
Current liabilities:                                                           
  Short-term borrowings under revolving credit facility                        
   (Note 4)............................................  $ 11,214    $    --   
  Accounts payable.....................................    29,153      53,825  
  Accrued expenses and other current liabilities (Note                         
   5)..................................................    17,374      15,766  
  Current portion of long-term debt....................    15,424       7,759  
                                                         --------    --------  
    Total current liabilities..........................    73,165      77,350  
Long-term debt (Note 4)................................    36,002      45,779  
Commitments and contingencies (Notes 4, 6, 7, and 12)                          
Stockholders' equity and partners' capital (Note 1):                           
  Common Stock.........................................     1,146       1,146  
  Retained earnings and partners' capital..............    46,886      79,748  
  Cumulative translation adjustment....................      (195)        (48) 
                                                         --------    --------  
    Total stockholders' equity and partners' capital...    47,837      80,846  
                                                         --------    --------  
                                                         $157,004    $203,975  
                                                         ========    ========  

See notes to predecessor combined financial statements. 

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DONNA KARAN INTERNATIONAL INC.      

PREDECESSOR COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL 

                                                                [Download Table]

                                                RETAINED                        
                                                EARNINGS                        
                                                   AND     CUMULATIVE           
                                        COMMON  PARTNERS'  TRANSLATION          
                                         STOCK   CAPITAL   ADJUSTMENT   TOTAL   
                                        ------- ---------  ----------- -------- 
                                                    (IN THOUSANDS)              
                                                                                
Balance at January 2, 1993............. $ 1,146 $ 29,649      $  14    $ 30,809 
Net income.............................      --   19,372         --      19,372 
Translation adjustment.................      --       --       (142)       (142)
Less distributions to partners.........      --   (7,710)        --      (7,710)
                                        ------- --------      -----    -------- 
Balance at January 2, 1994.............   1,146   41,311       (128)     42,329 
Net income.............................      --   16,345         --      16,345 
Translation adjustment.................      --       --        (67)        (67)
Less distributions to partners.........      --  (10,770)        --     (10,770)
                                        ------- --------      -----    -------- 
Balance at January 1, 1995.............   1,146   46,886       (195)     47,837 
Net income.............................      --   53,675         --      53,675 
Translation adjustment.................      --       --        147         147 
Less distributions to partners.........      --  (20,813)        --     (20,813)
                                        ------- --------      -----    -------- 
Balance at December 31, 1995........... $ 1,146 $ 79,748      $ (48)   $ 80,846 
                                        ======= ========      =====    ======== 

See notes to predecessor combined financial statements. 

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DONNA KARAN INTERNATIONAL INC.      

PREDECESSOR COMBINED STATEMENTS OF CASH FLOWS 

                                                                [Download Table]

                                                         YEAR ENDED            
                                             ----------------------------------
                                             JANUARY 2, JANUARY 1, DECEMBER 31,
                                                1994       1995        1995    
                                             ---------- ---------- ------------
                                                       (IN THOUSANDS)          
                                                                               
OPERATING ACTIVITIES                                                           
Net income..................................  $ 19,372   $ 16,345    $ 53,675  
Adjustments to reconcile net income to net                                     
 cash (used in) provided by operating                                          
 activities, as adjusted for effect of sale                                    
 of Donna Karan Japan:                                                         
  Depreciation and amortization.............     5,354      7,590       6,742  
  Provision for bad debts...................       544        773       3,122  
  Equity in earnings of affiliate...........        --         --      (2,519) 
  Gain on sale of interests in affiliate                                       
   (Note 9).................................        --         --     (18,673) 
  Loss on sale of property and equipment....        --         --          32  
  Changes in operating assets and                                              
   liabilities:                                                                
   Increase in accounts receivable..........   (13,497)    (9,658)    (14,392) 
   Increase in inventories..................   (22,205)    (6,410)    (29,611) 
   Increase in prepaid expenses and other                                      
    current assets..........................    (2,531)    (2,253)     (2,876) 
   Increase in deposits and other noncurrent                                   
    assets..................................    (1,542)    (3,543)     (4,956) 
   Increase in accounts payable, accrued                                       
    expenses, and other current                                                
    liabilities.............................       982      4,887      27,905  
                                              --------   --------    --------  
Net cash (used in) provided by operating                                       
 activities.................................   (13,523)     7,731      18,449  
                                              --------   --------    --------  
INVESTING ACTIVITIES                                                           
Purchase of property and equipment..........   (11,056)    (3,445)     (4,289) 
Net cash from sale of interests in                                             
 affiliates.................................        --         --      23,526  
Proceeds from sale of property and                                             
 equipment..................................        --         --          42  
Net cash from acquisition of remaining 50%                                     
 interest in joint venture (Note 8).........       269         --          --  
                                              --------   --------    --------  
Net cash (used in) provided by investing                                       
 activities.................................   (10,787)    (3,445)     19,279  
                                              --------   --------    --------  
FINANCING ACTIVITIES                                                           
Net increase (decrease) in borrowings under                                    
 revolving credit facility..................    34,667    (40,903)     (3,253) 
Proceeds of long-term debt..................        --     50,000      10,000  
Payments under capital leases...............      (162)      (230)       (237) 
Repayments of long-term debt................        --         --     (15,000) 
Decrease in due from affiliates.............    (3,623)        --          --  
Distributions to partners...................    (7,710)   (10,770)    (20,813) 
                                              --------   --------    --------  
Net cash provided by (used in) financing                                       
 activities.................................    23,172     (1,903)    (29,303) 
                                              --------   --------    --------  
(Decrease) increase in cash.................    (1,138)     2,383       8,425  
Cash at beginning of year...................     2,483      1,345       3,728  
                                              --------   --------    --------  
Cash at end of year.........................  $  1,345   $  3,728    $ 12,153  
                                              ========   ========    ========  
SUPPLEMENTAL CASH FLOW INFORMATION                                             
Interest paid...............................  $  3,409   $  8,420    $  6,410  
                                              ========   ========    ========  
Taxes paid..................................  $  5,192   $    942    $  2,444  
                                              ========   ========    ========  

See notes to predecessor combined financial statements. 

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DONNA KARAN INTERNATIONAL INC.      

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS  

DECEMBER 31, 1995 

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES                    

Basis of Presentation                                                         

The accompanying predecessor combined financial statements include the      
operations of The Donna Karan Company, Donna Karan Studio, Donna Karan Company  
Store G.P., D.K. 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 and Donna Karan Italy S.R.L.,     
which are foreign corporations; and, for the period it was a wholly-owned       
subsidiary (see Note 9), Donna Karan Japan, K.K. ("Donna Karan Japan"), a       
Japanese joint stock company (together, the "Company"). All companies other     
than The Donna Karan Company, Donna Karan Studio, Donna Karan Company Store,    
G.P., D.K. Footwear Partners, Donna Karan (H.K.) Limited, Donna Karan Italy     
S.R.L., and Donna Karan Japan are intermediate United States holding            
companies.                                                                      

The predecessor financial statements of these companies 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. All            
significant intercompany balances and transactions have been eliminated.        
Because Donna Karan International, Inc. will conduct no business operations     
prior to its acquisition of the companies, the statement of operations for      
Donna Karan International Inc. is not included herewith. The equity method of   
accounting is used for The Donna Karan Shoe Company during the periods when it  
was 50% owned by a nonaffiliated partner (see Note 8), and for Donna Karan      
Japan during the period when it is 70% owned by a nonaffiliated partner (see    
Note 9).                                                                        

Amounts included for common stock represent the combined par or stated value
of the outstanding shares of the various corporations included in the           
predecessor combined financial statements.                                      

Pro Forma Adjustments (Unaudited)                                             

In connection with the Company's initial public offering of stock           
("Offering"), the Principals and certain of their affiliates are                
simultaneously contributing to Donna Karan International Inc. all of the        
outstanding stock of and partnership interests in the entities which comprise   
the Company, in exchange for various combinations of common stock and cash      
("Reorganization"). As consideration for the contribution of their interests    
in the DK Companies, Ms. Karan, Mr. Weiss, the KW Trusts, and Gabrielle Studio  
will receive an aggregate of 5,290,846 shares of Common Stock. As               
consideration for the contribution of their interests in the DK Companies,      
member of the Takihyo Group will receive an aggregate of 4,040,847 shares of    
Common Stock, $17.4 million in cash, assuming an initial public offering price  
of $21.50 per share, and the rights to an additional 441,795 shares if the      
over-allotment option is not exercised, or an additional $9.5 million in cash,  
if the over-allotment is exercised in full.                                     

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DONNA KARAN INTERNATIONAL INC.      

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

The following table sets forth for fiscal 1995: (a) actual combined         
statement of income data; (b) pro forma adjustments to reflect the              
Reorganization, the Offering, certain other adjustments as if they occurred on  
January 2, 1995; and (c) pro forma combined statement of income data.           

PRO FORMA COMBINED STATEMENT OF INCOME  
(UNAUDITED) 

                                                                [Download Table]

                                           ACTUAL     PRO FORMA       PRO FORMA
                                          COMBINED   ADJUSTMENTS      COMBINED 
                                          --------  --------------    ---------
                                                    (IN THOUSANDS)             
                                                                               
Net revenues............................  $510,126     ($5,521)(vi)   $504,605 
Gross profit............................   179,437      (6,814)(vi)    159,817 
                                                       (12,806)(i)             
Selling, general, and administrative                                           
 expenses...............................   136,906      (4,828)(vi)    129,761 
                                                        (2,317)(ii)            
                                          --------                    -------- 
Operating income........................    42,531                      30,056 
Equity in earnings of affiliate.........     2,519         394 (vi)      2,913 
Interest expense........................    (7,650)      6,150 (iii)      (926)
                                                           574 (iv)            
Gain on sale of interests in affiliate..    18,673     (18,673)(vi)        --  
                                          --------                    -------- 
Income before provision for income                                             
 taxes..................................    56,073                      32,043 
Provision for income taxes..............     2,398      11,270 (v)      13,668 
                                          --------                    -------- 
Net income..............................  $ 53,675                    $ 18,375 
                                          ========                    ======== 

--------                                                                        

(i) Royalties of $12.8 million payable to a corporation owned by two of the     
  Company's stockholders and their affiliated trusts pursuant to a licensing
agreement.                                                              
(ii) Decrease in aggregate compensation from $4.3 million to $2.0 million for   
  two of the Company's executives pursuant to their employment agreements.
(iii) Reduction in interest costs of $6.2 million assuming the application of   
   approximately $70.0 million of the proceeds from the Offering to reduce
the actual outstanding indebtedness, up to $70.0 million, under the 
Credit Agreement.                                                   
(iv) Reduction of $0.6 million in amortization of deferred financing costs,     
  which costs would have been written off, in connection with repayment of
outstanding indebtedness under the Credit Agreement.                  
(v) Increase of $11.3 million for income taxes based upon pro forma pre-tax     
income as if the Company had been subject to Federal and additional     
statement income taxes.                                                 

(vi) 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 from Donna Karan Japan to its customers and those
 net revenues of the Company derived from 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 9.)              

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DONNA KARAN INTERNATIONAL INC.      

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

The following table sets forth the capitalization of the Company at December
31, 1995, and the pro forma capitalization of the Company as of such date       
after giving effect to the issuance of promissory notes (the "Distribution      
Notes") to the Principals or their intermediate companies or partnerships in    
the aggregate principal amount of $114.5 million giving effect to the           
liability to members of the Takihyo Group for the partial consideration for     
the contribution of their interests in the DK Companies to the Company in       
connection with the Reorganization and recording a deferred tax asset of $15.6  
million, net of certain state and local deferred tax assets in connection with  
the Company becoming subject to Federal and additional state and local income   
taxes. Additionally, the resulting deficit in Retained Earnings and Partners'   
Capital has been reclassified to additional paid-in-capital.                    

                                                                [Download Table]

                                                         ACTUAL   PRO FORMA
                                                         -------  ---------
                                                          (IN THOUSANDS)   
                                                                           
Common stock of Intermediate Entities................... $ 1,146  $    --  
Common Stock............................................                98 
Additional Paid in Capital..............................     --    (35,488)
Retained earnings and partners' capital (deficit).......  79,748       --  
Cumulative translation adjustment.......................     (48)      (48)
                                                         -------  -------- 
Total stockholders' equity and partners' capital                           
 (deficit).............................................. $80,846  $(35,438)
                                                         =======  ======== 

The Distribution Notes have been calculated to approximate the cumulative   
undistributed taxable income of the predecessor companies (as computed for      
Federal income tax purposes) (on which taxes previously have been paid) at the  
date of the closing of the Offering contemplated hereby. The Distribution       
Notes, which bear interest at 8%, mature on April 9, 2003 and may be prepaid    
on the closing date of the Offering out of the proceeds therefrom.              

Pro Forma Net Income Per Share                                                

Pro forma net income per share is based upon (i) 9,773,488 shares of common 
stock outstanding during the period, (ii) the number of shares of common stock  
(5,846,774) being sold by the Company, assuming an offering price of $21.50     
($19.84, net of expenses) per share, the proceeds of which would be necessary   
to pay approximately $116.0 million to members of the Takihyo Group and         
members of the Karan/Weiss Group in satisfaction of the Distribution Notes      
previously issued (including accrued interest thereon), representing            
cumulative undistributed taxable income on which taxes previously have been     
paid, and (iii) the number of shares of common stock (877,016) being sold by    
the Company, assuming an offering price of $21.50 per share ($19.84 net of      
expenses), the proceeds of which would be necessary to pay approximately $17.4  
million to members of the Takihyo Group received by them as partial             
consideration for the contribution of their interests in the DK Companies to    
the Company in connection with the Reorganization.                              

Supplementary pro forma net income per share is $1.38, based upon (i)       
9,773,488 shares of common stock outstanding during the period and (ii) the     
number of shares of common stock (3,528,226) being sold by the Company,         
assuming an offering price of $21.50 per share ($19.84 net of expenses), the    
proceeds of which would be necessary to repay approximately $70.0 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.                                                                         

Business                                                                      

The Company, which operates in one business segment, designs, contracts for 
the manufacture of, and markets fashion apparel, accessories, and beauty        
products. Its sales are principally to department and specialty stores located  
throughout the United States, Asia and Europe and through Company owned outlet  
stores located throughout the United States. A significant amount of the        
Company's products are produced in Asia, through arrangements with independent  
contractors. As a result, the Company's operations could be adversely affected  
by political instability resulting in the disruption of trade from the          
countries in which these contractors are located, or by the imposition of       
additional duties or regulations relating to imports.                           

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DONNA KARAN INTERNATIONAL INC.      

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

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

Several of the Company's customers have engaged in leveraged buyouts or     
transactions in which they incurred significant amounts of debt, and certain    
customers have operated or are currently operating under the protection of the  
Federal bankruptcy laws. In January 1996, Barneys, Inc. and Barneys America,    
Inc. (together, "Barneys") and certain affiliated entities filed for            
protection under the Federal bankruptcy laws. Barneys accounted for 2.3% of     
the Company's gross revenues during 1995, and the Company estimates that its    
maximum uninsured loss as a result of Barneys' bankruptcy will be               
approximately $2.0 million, which amount has been reserved for at December 31,  
1995. The Company does not factor its accounts receivable and maintains credit  
insurance to minimize the risk of bad debts.                                    

The Company had one customer which accounted for approximately 7.2%, 12.4%, 
and 12.3% of sales for the years ended January 2, 1994, January 1, 1995, and    
December 31, 1995, respectively. During the year ended December 31, 1995,       
another customer accounted for 11.1% of sales. During the year ended January    
2, 1994, two different customers accounted for 11.9% and 10.3% of net sales,    
respectively.                                                                   

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. At December 31, 1995,   
the unamortized balance of these costs of $2,034,000 is included in "Deposits   
and other noncurrent assets" in the accompanying predecessor combined balance   
sheets. 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 January 1, 1995 and December 31,    
1995, advertising costs totaling $1,327,000 and $1,334,000, respectively, were  
included in "Prepaid expenses and other current assets" in the accompanying     
predecessor combined balance sheets. Advertising, marketing, and public         
relations expenses, including costs related to the Company's Creative Services  
Department, for the years ended January 2, 1994, January 1, 1995, and December  
31, 1995 were $32,517,000, $35,409,000 and $33,831,000 respectively.            

Income Taxes                                                                  

The entities in the combined group are partnerships, or corporations that   
have elected to be taxed as S corporations pursuant to the Internal Revenue     
Code. Therefore, no provision has been made in the                              

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DONNA KARAN INTERNATIONAL INC.      

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED) 
accompanying predecessor combined financial statements for Federal income       
taxes, since such taxes are the liability of the partners. The provision for    
income taxes principally reflects taxes levied by state and local governments   
($1,010,000 in 1993, $753,000 in 1994, and $2,120,000 in 1995), as well as      
income taxes levied by foreign governments ($302,000 in 1993, $386,000 in       
1994, and $278,000 in 1995).                                                    

Effective January 3, 1993, the Company changed its method of accounting for 
income taxes from the deferred method to the liability method required by       
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for   
Income Taxes." The cumulative effect of adopting SFAS No. 109 as of January 3,  
1993 was not material to the Company.                                           

Deferred income taxes reflect the net tax 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):  

                                                                [Download Table]

                                                      JANUARY 1, DECEMBER 31,
                                                         1995        1995    
                                                      ---------- ------------
                                                                             
Current:                                                                     
  Uniform inventory capitalization...................   $   80      $   70   
  Allowance for doubtful accounts....................      160         270   
  Other book accruals................................      970         962   
                                                        ------      ------   
                                                         1,210       1,302   
Non Current:                                                                 
  Depreciation.......................................      350         380   
                                                        ------      ------   
                                                        $1,560      $1,682   
                                                        ======      ======   

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.                        

Foreign Exchange Contracts                                                    

The Company enters into forward exchange contracts as hedges relating to    
identifiable currency positions. These financial instruments are designed to    
minimize exposure and reduce risk from exchange rate fluctuations               

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DONNA KARAN INTERNATIONAL INC.      

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

in the regular course of business. The Company does not engage in speculation.  
Gains and losses on foreign exchange contracts which hedge exposures on firm    
foreign currency commitments are deferred and recognized as adjustments to the  
bases of those assets. For the years ended January 2, 1994, January 1, 1995     
and December 31, 1995, gains and losses on foreign exchange contracts were not  
material.                                                                       

At December 31, 1995, the Company had approximately $587,000 of outstanding 
forward exchange contracts, maturing at various dates in 1996, denominated in   
Italian Lire. The Company's risk that counterparties to these contracts may be  
unable to perform is minimized by limiting the counterparties to major          
international banks and financial institutions. The Company does not expect     
any losses as a result of counterparty default.                                 

Stock Options                                                                 

The Company intends to grant stock options for a fixed number of shares to  
employees with an exercise price equal to the fair value of the shares on the   
date of grant. The Company will account for stock option grants in accordance   
with APB Opinion No. 25, Accounting for Stock Issued to Employees, and,         
accordingly, will recognize no compensation expense for the stock option        
grants.                                                                         

Impact of Recently Issued Accounting Standards                                

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

2. INVENTORIES                                                                  

Inventories consist of the following (in thousands):                        

                                                                [Download Table]

                                                      JANUARY 1, DECEMBER 31,
                                                         1995        1995    
                                                      ---------- ------------
                                                                             
Raw materials........................................  $17,766     $16,369   
Work in process......................................    9,598      11,697   
Finished goods.......................................   36,242      57,589   
                                                       -------     -------   
                                                       $63,606     $85,655   
                                                       =======     =======   

3. PROPERTY AND EQUIPMENT                                                       

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

                                                                [Download Table]

                                                     JANUARY 1, DECEMBER 31,
                                                        1995        1995    
                                                     ---------- ------------
                                                                            
Machinery, equipment, and fixtures..................  $ 18,305    $ 18,592  
Property and equipment under capital leases.........     2,156       1,207  
Leasehold improvements..............................    22,789      25,568  
                                                      --------    --------  
                                                        43,250      45,367  
Less accumulated depreciation and amortization......   (18,783)    (22,862) 
                                                      --------    --------  
                                                      $ 24,467    $ 22,505  
                                                      ========    ========  

Deprecation and amortization of property and equipment amounted to          
$5,354,000, $5,796,000, and $5,624,000 for the years ended January 2, 1994,     
January 1, 1995, and December 31, 1995, respectively.                           

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DONNA KARAN INTERNATIONAL INC.      

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

4. BORROWINGS                                                                   

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

                                                                [Download Table]

                                                      JANUARY 1, DECEMBER 31,
                                                         1995        1995    
                                                      ---------- ------------
                                                                             
Revolving credit facility............................  $    --     $ 7,961   
Term Loan A..........................................    30,000     15,000   
Term Loan B..........................................    20,000     20,000   
Term Loan C..........................................        --     10,000   
Capital lease obligations............................     1,426        577   
                                                       --------    -------   
                                                         51,426     53,538   
Less current portion.................................   (15,424)    (7,759)  
                                                       --------    -------   
                                                       $ 36,002    $45,779   
                                                       ========    =======   

Repayment of long-term debt is as follows (in thousands):                   

                                                                [Download Table]

                                                                    REVOLVING
               YEAR                                                  CREDIT  
               ENDED                 TOTAL  TERM A  TERM B  TERM C  FACILITY 
               -----                ------- ------- ------- ------- ---------
                                                                             
1996............................... $ 7,500 $ 7,500 $    -- $    --  $  --   
1997...............................   7,500   7,500      --      --     --   
1998...............................  37,961      --  20,000  10,000   7,961  
                                    ------- ------- ------- -------  ------  
                                    $52,961 $15,000 $20,000 $10,000  $7,961  
                                    ======= ======= ======= =======  ======  

At January 2, 1994, the Company had a credit facility available for the     
issuance of letters of credit, acceptances, or direct borrowings up to          
$110,000,000 of which $80,000,000 was available for direct borrowings. Direct   
borrowings bore interest at 0.5% over the lead bank's prime rate and were       
limited to a borrowing base calculated on eligible accounts receivable,         
inventory, letters of credit, and intangibles. The lines of credit were         
secured by accounts receivable, inventory, and intangibles (including an        
interest in certain licensed trademarks), as well as certain intangibles of an  
affiliated company.                                                             

In October 1994, the Company entered into a new credit agreement which      
consists of a $50,000,000 term loan and a revolving line of credit available    
for the issuance of letters of credit, acceptances, or direct borrowings up to  
$75,000,000. Direct borrowings under the revolving line of credit bear          
interest at 1.5% over the lead bank's prime rate (10.0% at December 31, 1995)   
and are limited to a borrowing base calculated on eligible accounts             
receivable, inventory, and letters of credit.                                   

In December 1995, the Company amended its credit agreement to increase its  
borrowing capability. The amended agreement calls for an additional term loan   
of $10,000,000 and an increase in the revolving credit facility from            
$75,000,000 to $105,000,000. The Company pays a commitment fee of 0.5% on the   
unused portion of the revolving credit facility.                                

The revised term loan consists of a Term loan A, Term loan B, and Term loan 
C. The credit agreement provides for various borrowing rate options including   
borrowing rates based on a fixed spread over the London Interbank Offered Rate  
(LIBOR). At December 31, 1995, $10,000,000 of Term loan C bears interest at     
1.5% over the lead bank's prime rate (10.0%), $15,000,000 of Term loan A bears  
interest at 2.75% above LIBOR (8.625%), and $20,000,000 of Term loan B bears    
interest at 3.25% above LIBOR (9.125%).                                         

The revolving credit facility and the term loans are secured by accounts    
receivable, inventory, and intangibles.                                         

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DONNA KARAN INTERNATIONAL INC.      

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

The revolving credit facility matures on December 31, 1998. The term loan is
payable in quarterly installments, with the final payment due on December 31,   
1998. The carrying amounts of the Company's borrowings approximate their fair   
value.                                                                          

The agreements contain certain restrictive covenants which, among other     
things, require the Company to maintain certain financial ratios and restrict   
investments, additional indebtedness, and payment of partner distributions.     
The Company was in full compliance with all loan covenants as of December 31,   
1995.                                                                           

In connection with its credit facility, the Company incurred certain        
financing costs which were deferred and are being amortized over the term of    
the credit facility. At December 31, 1995, unamortized financing costs of       
$2,954,000 are included in "Deposits and other noncurrent assets" in the        
accompanying combined balance sheet.                                            

The Company leases certain property and equipment under long-term           
noncancellable lease agreements which are accounted for as capital leases.      
These leases expire at various dates through 1998. Future minimum lease         
payments as of December 31, 1995 are as follows (in thousands):                 

                                                                [Download Table]
                                                                             
1996.................................................................... $299
1997....................................................................  299
1998....................................................................   37
                                                                         ----
                                                                          635
Amount representing interest............................................   58
                                                                         ----
Present value of total future minimum lease payments....................  577
Less current portion....................................................  259
                                                                         ----
Long-term portion of capital lease obligation........................... $318
                                                                         ====

Letters of credit and acceptances outstanding were approximately $27,849,000
at January 1, 1995 and $33,934,000 at December 31, 1995.                        

On April 16, 1996, the Company issued Distribution Notes in the aggregate   
principal amount of $114,484,000 (see Note 1), which bear interest at 8% and    
mature on April 9, 2003.                                                        

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES                               

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

                                                                [Download Table]

                                                      JANUARY 1, DECEMBER 31,
                                                         1995        1995    
                                                      ---------- ------------
                                                                             
Accrued operating expenses...........................  $ 9,870     $ 8,590   
Accrued state and local income taxes.................    2,859       2,351   
Accrued compensation.................................    1,162         885   
Accrued taxes other than income taxes................    1,835       2,244   
Other................................................    1,648       1,696   
                                                       -------     -------   
                                                       $17,374     $15,766   
                                                       =======     =======   

6. EMPLOYEE BENEFIT PLANS                                                       

The Company is required to make contributions to a multi-employer union     
pension and health and welfare plan. These payments are based on wages paid to  
the Company's union employees and amounts paid to                               

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DONNA KARAN INTERNATIONAL INC.      

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED) 
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 $1,412,000,           
$1,811,000, and $1,947,000 for the years ended January 2, 1994, January 1,      
1995, and December 31, 1995, respectively. Pension expense approximated         
$757,000, $890,000, and $908,000 for the years ended January 2, 1994, January   
1, 1995, and December 31, 1995, respectively. Separate actuarial calculations   
regarding the Company's share of plan benefits and net assets available for     
plan benefits have not been determined.                                         

Under the Employee Retirement Income Security Act of 1974, as amended, an   
employer, upon withdrawal from or termination of a multi-employer plan, is      
required to continue funding its proportionate share of the plan's unfunded     
vested benefits. As of December 31, 1995, the Company had no intention of       
withdrawing from the plan.                                                      

The Company sponsors a contributory 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 $321,000,      
$441,000, and $802,000 for the years ended January 2, 1994, January 1, 1995,    
and December 31, 1995, respectively.                                            

7. LEASES                                                                       

Future minimum annual rental commitments under noncancellable operating     
leases for office, warehouse and retail facilities, and equipment as of         
December 31, 1995 are as follows (in thousands):                                

                                                                [Download Table]
                                                                             
1996................................................................. $11,479
1997.................................................................  10,867
1998.................................................................  10,248
1999.................................................................   9,455
2000.................................................................   7,962
Thereafter...........................................................  35,553
                                                                      -------
                                                                      $85,564
                                                                      =======

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 $11,145,000, $12,498,000, and        
$14,105,000 for the years ended January 2, 1994, January 1, 1995, and December  
31, 1995, respectively.                                                         

8. JOINT VENTURE                                                                

The Donna Karan Shoe Company was formed as a joint venture in 1992 between  
DK Footwear Partners and a nonaffiliated partner. Effective December 1993, DK   
Footwear Partners bought back the remaining 50% interest of the nonaffiliated   
partner, and as a result, The Donna Karan Shoe Company was dissolved. At the    
time of this transaction, the assets and liabilities assumed aggregated         
$4,773,000 and $5,042,000, respectively. In connection therewith, the Company   
recorded goodwill of $486,000 which is being amortized on a straight-line       
basis over 20 years.                                                            

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DONNA KARAN INTERNATIONAL INC.      

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

9. SALE OF INTERESTS IN AFFILIATE                                               

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 a nonaffiliated party. The Company recognized a gain on this transaction,    
net of transaction costs, of $18,673,000. Subsequent to the sale, the Company   
records a 27% interest in the operations of Donna Karan Japan through its 30%   
interest in the DSTF Agreement and a 3% interest in the operations of Donna     
Karan Japan through its remaining interest in Donna Karan Japan. As a result,   
the Company has accounted for its combined 30% interest in the operations of    
Donna Karan Japan using the equity method of accounting. Equity earnings for    
the year ended December 31, 1995 amounted to $2,519,000. 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, which is included in selling, general, and               
administrative expenses, amounted to $1,130,000 during the year ended December  
31, 1995. The equity investment in Donna Karan Japan of $2,535,000 is included  
in "Deposits and other noncurrent assets" in the accompanying combined balance  
sheet.                                                                          

10. OTHER EXPENSE                                                               

During 1994, the Company incurred certain costs, primarily legal and other  
professional fees, related to a proposed debt offering. Ultimately, the         
Company decided to obtain additional private financing (see Note 4), and as a   
result, recorded a charge of $2,651,000 for these costs. Additionally, during   
1993, the Company recorded a charge of $2,980,000 for related legal and other   
professional fees incurred in connection with a proposed initial public         
offering.                                                                       

11. GEOGRAPHIC DATA                                                             

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

                                                                [Download Table]

                                          JANUARY 2, JANUARY 1, DECEMBER 31,
                                             1994       1995        1995    
                                          ---------- ---------- ------------
                                                                            
Japan....................................  $30,754    $ 51,078    $ 64,162  
Europe and Middle East...................   19,743      37,986      56,704  
Asia (excluding Japan)...................   11,589      15,830      23,230  
Other....................................    4,778       5,728      10,111  
                                           -------    --------    --------  
                                           $66,864    $110,622    $154,207  
                                           =======    ========    ========  

12. COMMITMENTS AND CONTINGENCIES                                               

In January 1993, the Company obtained a favorable resolution of arbitration 
which had been commenced in November 1990 between the Company and a licensee.   
The arbitration was for claims arising out of defaults under a license          
agreement. Under the terms of the resolution, the licensee agreed to remit to   
the Company certain minimum license payments and to terminate the license       
agreement. As a result of the arbitration and resolution thereof, in the first  
quarter of 1993 the Company reversed amounts previously accrued of              
approximately $1,425,000 which were related to this arbitration.                

The Company has entered into an employment agreement expiring December 31,  
2000 with its President and Chief Operating Officer. The agreement provides     
for base salary and other benefits to be paid to the executive during the term  
of the agreement. In addition, under the agreement, the executive is entitled   
to a severance payment, as defined, under certain circumstances. The agreement  
contains a provision whereby in the event of an initial public offering, the    
executive will be paid the greater of $5,000,000 or 3% of the difference        

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DONNA KARAN INTERNATIONAL INC.      

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED) 
between the "Aggregate Book Value" of the Company as of December 31, 1995 and   
the "Fair Market Value" of the Company, as defined, on the date of the          
Offering. The agreement also contains a provision whereby in the event of a     
future disposition, in whole or in part, of the equity interests of the         
Company by merger, consolidation, or sale to any third party, the executive     
will be paid the lesser of (i) the aggregate amount received upon consummation  
of the disposition, or (ii) 3% of the difference between the net sales price    
and the attributed book value.                                                  

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.                                              

13. PRO FORMA INCOME TAXES (UNAUDITED)                                          

As discussed in Note 1, the entities in the combined group are partnerships 
or corporations that have elected to be taxed as S corporations pursuant to     
the Internal Revenue Code. In connection with the offering made hereby, the     
Company will become subject to Federal and additional state income tax. 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.                                                  

Also, as discussed in Note 1, the Company has adopted the provisions of SFAS
No. 109. This adoption had no material effect on the provision for income       
taxes. SFAS No. 109 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. The pro forma income tax provision has been prepared according to  
SFAS No 109.                                                                    

Concurrent with becoming subject to Federal and additional state income     
taxes, the Company will record a deferred tax asset and a corresponding tax     
benefit in the statement of income in accordance with the provisions of SFAS    
No. 109. The amount at December 31, 1995 would have been increased by           
approximately $15.6 million, resulting in a total deferred tax asset of         
approximately $17,300,000 inclusive of certain state and local tax assets       
recorded on a historical basis. The deferred tax asset includes approximately   
$2,500,000 as a result of certain changes in accounting for inventory reserves  
for income tax purposes.                                                        

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

                                                                [Download Table]

                                                                  YEAR ENDED 
                                                                 DECEMBER 31,
                                                                     1995    
                                                                 ------------
                                                                             
Domestic........................................................   $26,589   
Foreign.........................................................     5,454   
                                                                   -------   
                                                                   $32,043   
                                                                   =======   

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

                                                                [Download Table]

                                                                  YEAR ENDED 
                                                                 DECEMBER 31,
                                                                     1995    
                                                                 ------------
                                                                             
Current income taxes:                                                        
  Federal taxes.................................................   $12,189   
  State and local taxes.........................................     4,925   
  Foreign taxes.................................................       643   
                                                                   -------   
                                                                    17,757   
  Deferred income taxes.........................................    (4,089)  
                                                                   -------   
                                                                   $13,668   
                                                                   =======   

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DONNA KARAN INTERNATIONAL INC.      

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED) 
A reconciliation setting forth the differences between the pro forma        
effective tax rate of the Company and the U.S. Federal statutory tax rate is    
as follows:                                                                     

                                                                [Download Table]

                                                                YEAR ENDED 
                                                               DECEMBER 31,
                                                                   1995    
                                                               ------------
                                                                           
Federal statutory rate........................................     35.0%   
State and local taxes, net of Federal tax benefits............      7.6    
Other items, net, none of which individually exceeds 5% of                 
 Federal taxes at statutory rates.............................      0.1    
                                                                   ----    
Effective tax rate............................................     42.7%   
                                                                   ====    

Pro forma deferred income taxes will reflect the net tax effects of         
temporary differences between the carrying amounts of assets and liabilities    
for pro forma financial reporting and the amounts used for income tax           
purposes. Significant components of the Company's deferred tax asset as of      
December 31, 1995 are as follows (in thousands):                                

                                                                [Download Table]
                                                                            
Book over tax depreciation.......................................... $ 3,300
Allowance for doubtful accounts.....................................   2,400
Inventory reserves..................................................   2,500
Uniform inventory capitalization....................................     600
Other book accruals.................................................   8,500
                                                                     -------
                                                                     $17,300
                                                                     =======

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DONNA KARAN INTERNATIONAL INC.      

PREDECESSOR COMBINED STATEMENTS OF INCOME     

(UNAUDITED)     

                                                                [Download Table]

                                                             QUARTER ENDED      
                                                         ---------------------- 
                                                          APRIL 2,   MARCH 31,  
                                                            1995        1996    
                                                         ----------  ---------- 
                                                            (IN THOUSANDS)      
                                                                                
Net revenues............................................ $  120,693  $  159,585 
Cost of sales...........................................     76,490     106,724 
                                                         ----------  ---------- 
Gross profit............................................     44,203      52,861 
Selling, general and administrative expenses............     33,041      39,411 
                                                         ----------  ---------- 
Operating income........................................     11,162      13,450 
Other income (expense):                                                         
  Equity in earnings of affiliate.......................        --          988 
  Interest expense......................................     (1,701)     (2,047)
  Gain on sale of interests in affiliate................     18,673         --  
                                                         ----------  ---------- 
Income before income taxes..............................     28,134      12,391 
Provision for income taxes..............................      1,408         690 
                                                         ----------  ---------- 
Net income.............................................. $   26,726  $   11,701 
                                                         ==========  ========== 
Pro forma (Notes 3 and 6)                                                       
Historical income before income taxes................... $   28,134  $   12,391 
Pro forma adjustments other than income taxes...........     20,938       1,517 
                                                         ----------  ---------- 
Pro forma income before income taxes....................      7,196      10,874 
Pro forma provision for income taxes....................      3,108       4,696 
                                                         ----------  ---------- 
Pro forma net income.................................... $    4,088  $    6,178 
                                                         ==========  ========== 
Pro forma net income per common share................... $      .25  $      .37 
                                                         ==========  ========== 
Pro forma common shares outstanding..................... 16,497,278  16,497,278 
                                                         ==========  ========== 

See notes to predecessor combined financial statements.     

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DONNA KARAN INTERNATIONAL INC.      

PREDECESSOR COMBINED BALANCE SHEETS     

(UNAUDITED)     

                                                                [Download Table]

                                                                     MARCH 31,  
                                                                       1996     
                                                                     PRO FORMA  
                                                          MARCH    LIABILITY AND
                                                           31,     STOCKHOLDERS'
                                                           1996       EQUITY    
                                                         --------  -------------
                                                             (IN THOUSANDS)     
                                                                                
                         ASSETS                                                 
Current assets:                                                                 
  Cash.................................................. $  7,405               
  Accounts receivable, net of allowances of $24,351.....   87,014               
  Inventories...........................................   82,771               
  Prepaid expenses and other current assets.............   11,087               
                                                         --------               
    Total current assets................................  188,277               
Property and equipment, at cost--net....................   25,338               
Deposits and other noncurrent assets....................   12,652               
                                                         --------               
                                                         $226,267               
                                                         ========               
        LIABILITIES AND STOCKHOLDERS' EQUITY AND                                
                    PARTNERS' CAPITAL                                           
Current liabilities:                                                            
  Accounts payable...................................... $ 38,998               
  Accrued expenses and other current liabilities........   22,754               
  Current portion of long-term debt.....................    7,759               
  Distribution Notes payable............................      --     $114,484   
  Obligation for Takihyo contribution...................      --       17,400   
                                                         --------    --------   
    Total current liabilities...........................   69,511               
Long-term debt..........................................   64,965               
Commitments and contingencies...........................                        
Stockholders' equity and partners' capital:                                     
  Common stock of Intermediate Entities.................    1,146         --    
  Common stock..........................................      --           98   
  Additional paid-in-capital............................              (24,649)  
  Retained earnings and partners' capital...............   90,687         --    
  Cumulative translation adjustment.....................      (42)        (42)  
                                                         --------    --------   
    Total stockholders' equity and partners' capital....   91,791    $(24,593)  
                                                         --------    ========   
                                                         $226,267               
                                                         ========               

See notes to predecessor combined financial statements.     

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DONNA KARAN INTERNATIONAL INC.      

PREDECESSOR COMBINED STATEMENTS OF STOCKHOLDERS EQUITY      

AND PARTNERS' CAPITAL     

(UNAUDITED)     

                                                                [Download Table]

                                              RETAINED                         
                                              EARNINGS                         
                                                 AND     CUMULATIVE            
                                      COMMON  PARTNERS'  TRANSLATION           
                                      STOCK    CAPITAL   ADJUSTMENT    TOTAL   
                                     -------- ---------  ----------- --------- 
                                                                               
Balance at January 1, 1995.......... $  1,146 $  46,886   $   (195)  $  47,837 
Net income..........................      --     26,726        --       26,726 
Translation adjustment..............      --        --         151         151 
Less distributions to partners......      --        (24)       --          (24)
                                     -------- ---------   --------   --------- 
Balance at April 2, 1995............ $  1,146 $  73,588   $    (44)  $  74,690 
                                     ======== =========   ========   ========= 
Balance at December 31, 1995........ $  1,146 $  79,748   $    (48)  $  80,846 
Net income..........................      --     11,701        --       11,701 
Translation adjustment..............      --        --           6           6 
Less distributions to partners......      --       (762)       --         (762)
                                     -------- ---------   --------   --------- 
Balance at March 31, 1996........... $  1,146 $  90,687   $    (42)  $  91,791 
                                     ======== =========   ========   ========= 

See notes to predecessor combined financial statements.     

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DONNA KARAN INTERNATIONAL INC.      

PREDECESSOR COMBINED STATEMENTS OF CASH FLOWS     

(UNAUDITED)     

                                                                [Download Table]

                                                              QUARTER ENDED    
                                                            -------------------
                                                            APRIL 2,  MARCH 31,
                                                              1995      1996   
                                                            --------  ---------
                                                              (IN THOUSANDS)   
                                                                               
OPERATING ACTIVITIES                                                           
Net income................................................  $ 26,726  $ 11,701 
Adjustments to reconcile net cash used in operating                            
 activities, as adjusted for effect of sale of Donna Karan                     
 Japan:                                                                        
  Depreciation and amortization...........................     2,071     1,875 
  Provision for bad debts.................................       137       127 
  Equity in earnings of affiliate.........................       --       (988)
  Gain on sale of interest in affiliate...................   (18,673)      --  
  Changes in operating assets and liabilities:                                 
    Increase in accounts receivable.......................   (23,928)  (24,910)
    Decrease in inventories...............................     6,673     2,889 
    Increase in prepaid expenses and other current                             
     assets...............................................    (5,640)   (1,141)
    Increase in deposits and other noncurrent assets......    (1,247)     (738)
    Decrease in accounts payable, accrued expenses, and                        
     other current liabilities............................    (6,215)   (7,839)
                                                            --------  -------- 
Net cash used in operating activities.....................   (20,096)  (19,024)
                                                            --------  -------- 
INVESTING ACTIVITIES                                                           
Purchase of property and equipment........................    (1,666)   (4,148)
Net cash from sale of interests in affiliates.............    23,526       --  
                                                            --------  -------- 
Net cash provided by (used in) investing activities.......    21,860    (4,148)
                                                            --------  -------- 
FINANCING ACTIVITIES                                                           
Net increase in borrowings under revolving credit facili-                      
 ty.......................................................     5,630    21,124 
Payments under capital leases.............................       (59)      (63)
Repayments of long-term debt..............................    (9,375)   (1,875)
Distributions to partners.................................       (24)     (762)
                                                            --------  -------- 
Net cash (used in) provided by financing activities.......    (3,828)   18,424 
                                                            --------  -------- 
Decrease in cash..........................................    (2,064)   (4,748)
Cash at beginning of period...............................     3,728    12,153 
                                                            --------  -------- 
Cash at end of period.....................................  $  1,664  $  7,405 
                                                            ========  ======== 
SUPPLEMENTAL CASH FLOW INFORMATION                                             
Interest paid.............................................  $  1,365  $  1,781 
                                                            ========  ======== 
Taxes paid................................................  $    145  $    272 
                                                            ========  ======== 

See notes to predecessor combined financial statements.     

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DONNA KARAN INTERNATIONAL INC       

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS      

MARCH 31, 1996      

(UNAUDITED)       

1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS                                  

The unaudited predecessor combined financial statements do not include all  
information and footnote disclosures normally included in financial statements  
prepared in accordance with generally accepted accounting principles. For       
further information, such as significant accounting policies followed by the    
Company, refer to the notes to the Company's audited predecessor combined       
financial statements.                                                           

In the opinion of management, the unaudited predecessor combined financial  
statements include all necessary adjustments (consisting of normal, recurring   
accruals) for a fair presentation of the financial position, results of         
operations and cash flows for the interim periods presented. The results of     
operations for the three-month periods ended April 2, 1995 and March 31, 1996   
are not necessarily indicative of the operating results to be expected for a    
full year.                                                                      

2. BASIS OF PRESENTATION                                                        

The accompanying predecessor combined financial statements include the      
operations of The Donna Karan Company, Donna Karan Studio, Donna Karan Company  
Store G.P., D.K. 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 and Donna Karan Italy S.R.L.,     
which are foreign corporations; and, for the period it was a wholly-owned       
subsidiary (see Note 5), Donna Karan Japan, K.K. ("Donna Karan Japan"), a       
Japanese joint stock company (together, the "Company"). All companies other     
than The Donna Karan Company, Donna Karan Studio, Donna Karan Company Store,    
G.P., D.K. Footwear Partners, Donna Karan Canada Inc., Donna Karan (H.K.)       
Limited, Donna Karan Italy S.R.L., and Donna Karan Japan are intermediate       
United States holding companies.                                                

The predecessor financial statements of these companies 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. All            
significant intercompany balances and transactions have been eliminated.        
Because Donna Karan International Inc. will conduct no business operations      
prior to its acquisition of the companies, the statement of operations for      
Donna Karan International Inc., is not included herewith. The equity method of  
accounting is used for The Donna Karan Shoe Company during the periods when it  
was 50% owned by a nonaffiliated partner and for Donna Karan Japan during the   
period when it is 70% owned by a nonaffiliated partner (see Note 5).            

3.  PRO FORMA ADJUSTMENTS (UNAUDITED)                                           

In connection with the Company's initial public offering of stock           
("Offering"), the Principals and certain of their affiliates are                
simultaneously contributing to Donna Karan International Inc. all of the        
outstanding stock of and partnership interests in the entities that comprise    
the Company, in exchange for various combinations of common stock and cash      
("Reorganization").                                                             

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

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DONNA KARAN INTERNATIONAL INC.      

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

PRO FORMA COMBINED STATEMENTS OF INCOME       

(UNAUDITED)       

                                                                [Download Table]

                                             QUARTER ENDED MARCH 31, 1996      
                                            -----------------------------------
                                             ACTUAL    PRO FORMA      PRO FORMA
                                            COMBINED  ADJUSTMENTS     COMBINED 
                                            --------  -----------     ---------
                                                    (IN THOUSANDS)             
                                                                               
Net revenues..............................  $159,585                  $159,585 
Gross profit..............................    52,861     (4,162)(i)     48,699 
Selling, general, and administrative ex-                                       
 penses...................................    39,411       (750)(ii)    38,661 
                                            --------                  -------- 
Operating income..........................    13,450                    10,038 
Equity in earnings of affiliate...........       988                       988 
Interest expenses.........................    (2,047)     1,575 (iii)     (152)
                                                            320 (iv)           
                                            --------                  -------- 
Income before provision for income taxes..    12,391                    10,874 
Provision for income taxes................       690      4,006 (v)      4,696 
                                            --------                  -------- 
Net income................................  $ 11,701                  $  6,178 
                                            ========                  ======== 

                                             QUARTER ENDED APRIL 2, 1995       
                                            -----------------------------------
                                             ACTUAL    PRO FORMA      PRO FORMA
                                            COMBINED  ADJUSTMENTS     COMBINED 
                                            --------  -----------     ---------
                                                    (IN THOUSANDS)             
                                                                               
Net revenues..............................  $120,693     (5,521)(vi)  $115,172 
Gross profit..............................    44,203     (6,814)(vi)    34,468 
                                                         (2,921)(i)            
Selling, general, and administrative ex-                                       
 penses...................................    33,041     (4,828)(vi)    27,634 
                                                           (579)(ii)           
                                            --------                  -------- 
Operating income..........................    11,162                     6,834 
Equity in earnings of affiliate...........         0        394 (vi)       394 
Interest expenses.........................    (1,701)     1,525 (iii)      (32)
                                                            144 (iv)           
Gain on sale of interest in affiliates....    18,673    (18,673) (vi)        0 
                                            --------                  -------- 
Income before provision for income taxes..    28,134                     7,196 
Provision for income taxes................     1,408      1,700 (v)      3,108 
                                            --------                  -------- 
Net income................................  $ 26,726                  $  4,088 
                                            ========                  ======== 

--------                                                                        

(i) Royalties of $2.9 million and $4.2 million in 1995 and 1996, respectively,  
  to be paid to a corporation owned by two of the Company's stockholders and
their affiliated trusts pursuant to a licensing agreement.              

(ii) Decrease in aggregate compensation from $1.1 million to $0.5 million in    
1995, and from $1.3 million to $0.5 million in 1996 for two of the    
Company's executives pursuant to their employment agreements.         

(iii) Reduction in interest costs of $1.5 million and $1.6 million in 1995 and  
1996, respectively, assuming the application of approximately $70.0 
million of the proceeds from the Offering to reduce the actual      
outstanding indebtedness, up to $70.0 million, under the Credit     
Agreement.                                                          

(iv) Reduction of $0.1 million and $0.3 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 Credit Agreement.                              

(v) Increase of $1.7 million and $4.0 million 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.              

(vi) 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 5)                                                  

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DONNA KARAN INTERNATIONAL INC.      

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

The pro forma liability and stockholders' equity at March 31, 1996 gives    
effect to the issuance of promissory notes (the "Distribution Notes") to the    
Principals or their intermediate companies or partnerships in the aggregate     
principal amount of $114.5 million and to the liability to members of the       
Takihyo Group for the partial consideration for the contribution of their       
interests in the DK Companies to the Company in connection with the             
Reorganization. Additionally the resulting deficit in Retained earnings and     
partners' capital has been reclassified to additional paid-in capital.          

The Distribution Notes have been calculated to approximate the cumulative   
undistributed taxable income of the predecessor companies (as computed for      
Federal income tax purposes) (on which taxes previously have been paid) at the  
date of the closing of the Offering contemplated hereby. The Distribution       
Notes, which bear interest at 8%, mature on April 9, 2003 and may be prepaid    
on the closing date of the Offering out of the proceeds therefrom.              

Pro Forma Net Income Per Share                                                

Pro forma net income per share is based upon (i) 9,773,488 shares of common 
stock outstanding during the period, (ii) the number of shares of common stock  
(5,846,774) being sold by the Company, assuming an offering price of $21.50     
per share, $19.84, net of expenses), the proceeds of which would be necessary   
to pay approximately $116.0 million to members of the Takihyo Group and         
members of the Karan/Weiss Group in satisfaction of the Distribution Notes      
previously issued (including accrued interest thereon), representing            
cumulative undistributed taxable income on which taxes previously have been     
paid, and (iii) the number of shares of common stock (877,016) being sold by    
the Company, assuming an offering price of $21.50 per share ($19.84, net of     
expenses), the proceeds of which would be necessary to pay approximately $17.4  
million to members of the Takihyo Group received by them as partial             
consideration for the contribution of their interests in the DK Companies to    
the Company in connection with the Reorganization.                              

Supplementary pro forma net income per share for the quarters ended April 2,
1995 and March 31, 1996 are $.31 and $.46, respectively, based upon (i)         
9,773,488 shares of common stock outstanding during the period and (ii) the     
number of shares of common stock (3,528,226) being sold by the Company,         
assuming an offering price of $21.50 per share, ($19.84, net of expenses), the  
proceeds of which would be necessary to repay approximately $70.0 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.                                                                         

4.  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES                              

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

                                                                [Download Table]

                                                                  MARCH 31,
                                                                    1996   
                                                                  ---------
                                                                           
Accrued operating expenses.......................................  $12,430 
Accrued state and local income taxes.............................    3,918 
Accrued compensation.............................................    3,487 
Accrued taxes other than income taxes............................    1,717 
Other............................................................    1,202 
                                                                   ------- 
                                                                   $22,754 
                                                                   ======= 

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DONNA KARAN INTERNATIONAL INC.      

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

5. SALE OF INTERESTS IN AFFILIATE                                               

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 a nonaffiliated party. The Company recognized a gain on this transaction,    
net of transaction costs, of $18,673,000. Subsequent to the sale, the Company   
records a 27% interest in the operations of Donna Karan Japan through its 30%   
interest in the DSTF Agreement and a 3% interest in the operations of Donna     
Karan Japan through its remaining interest in Donna Karan Japan. As a result,   
the Company has accounted for its combined 30% interest in the operations of    
Donna Karan Japan using the equity method of accounting. Equity earnings for    
the three months ended March 31, 1996 amounted to $988,000. 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, which is included in selling, general, and        
administrative expenses, amounted to $497,000 during the three months ended     
March 31, 1996. The equity investment in Donna Karan Japan of $3,524,000 as of  
March 31, 1996 is included in "Deposits and other noncurrent assets" in the     
accompanying combined balance sheet.                                            

6. PRO FORMA INCOME TAXES                                                       

The entities in the combined group are partnerships, or corporations that   
have elected to be taxed as S corporations pursuant to the Internal Revenue     
Code. In connection with the offering made hereby, the Company will become      
subject to Federal and additional state income tax. 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.                                                                          

The Company has adopted the provisions of SFAS No. 109. This adoption had no
material effect on the provision for income taxes. SFAS No. 109 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. The pro forma     
income tax provision has been prepared according to SFAS No. 109.               

Concurrent with becoming subject to Federal and additional state income     
taxes, the Company will record a deferred tax asset and a corresponding tax     
benefit in the statement of income in accordance with the provisions of SFAS    
No. 109. The amount at March 31, 1996 would have been increased by              
approximately $15.5 million, resulting in a total deferred tax asset of         
approximately $17.2 million which includes certain state and local tax assets   
recorded on a historical basis. The deferred tax asset includes approximately   
$2,500,000 as a result of certain changes in accounting for inventory reserves  
for income tax purposes.                                                        

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

                                                                [Download Table]

                                                           QUARTER ENDED   
                                                         ------------------
                                                         MARCH 31, APRIL 2,
                                                           1996      1995  
                                                         --------- --------
                                                                           
Domestic................................................  $ 9,877   $6,802 
Foreign.................................................      997      394 
                                                          -------   ------ 
                                                          $10,874   $7,196 
                                                          =======   ====== 

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DONNA KARAN INTERNATIONAL INC.      

NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

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

                                                                [Download Table]

                                                           QUARTER ENDED   
                                                         ------------------
                                                         MARCH 31, APRIL 2,
                                                           1996      1995  
                                                         --------- --------
                                                                           
Current income taxes:                                                      
Federal taxes...........................................  $3,183    $2,802 
State and local taxes...................................   1,333     1,162 
Foreign taxes...........................................      50        61 
                                                          ------    ------ 
                                                           4,566     4,025 
Deferred income taxes...................................     130      (917)
                                                          ------    ------ 
                                                          $4,696    $3,108 
                                                          ======    ====== 

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

                                                                [Download Table]

                                                         QUARTER ENDED   
                                                       ------------------
                                                       MARCH 31, APRIL 2,
                                                         1996      1995  
                                                       --------- --------
                                                                         
Federal statutory rate................................    35.0%    35.0% 
State and local taxes, net of Federal tax benefits....     8.2      8.1  
Other items, net, none of which individually exceeds                     
 5% of Federal taxes at statutory rates...............   (0.1)      0.1  
                                                         -----     ----  
Effective tax rate....................................    43.1%    43.2% 
                                                         =====     ====  

Pro forma deferred income taxes will reflect the net tax effects of         
temporary differences between the carrying amounts of assets and liabilities    
for pro forma financial reporting and the amounts used for income tax           
purposes. Significant components of the Company's deferred tax asset as of      
March 1996 are as follows (in thousands):                                       

                                                                [Download Table]
                                                                          
Book over tax depreciation........................................ $ 3,500
Allowance for doubtful accounts...................................   2,400
Inventory reserves................................................   2,500
Uniform inventory capitalization..................................     600
Other book accruals...............................................   8,200
                                                                   -------
                                                                   $17,200
                                                                   =======

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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY  +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE      +
+SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE      +
+WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES +
+LAWS OF ANY SUCH JURISDICTION.                                                +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                                                       [ALTERNATE INTERNATIONAL]
PROSPECTUS (Subject to Completion)                                              

Issued May 28, 1996                                                             

10,750,000 Shares     

Donna Karan International Inc.      
COMMON STOCK

----------- 

OF THE 10,750,000  SHARES OF COMMON  STOCK BEING OFFERED,  3,225,000 SHARES ARE 
BEING  OFFERED   INITIALLY  OUTSIDE  THE  UNITED  STATES  AND  CANADA   BY  THE 
INTERNATIONAL UNDERWRITERS AND  7,525,000 SHARES ARE  BEING OFFERED INITIALLY 
IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE "UNDERWRITERS." 
ALL  OF THE 10,750,000 SHARES OF  COMMON STOCK OFFERED HEREBY ARE  BEING SOLD 
BY THE COMPANY. PRIOR TO THE  OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR 
THE  COMMON  STOCK OF  THE  COMPANY. IT  IS  CURRENTLY  ESTIMATED THAT  THE 
INITIAL PUBLIC OFFERING PRICE WILL BE  BETWEEN $   AND $   PER SHARE.  SEE
"UNDERWRITERS" FOR A DISCUSSION  OF THE FACTORS CONSIDERED IN DETERMINING 
THE INITIAL PUBLIC OFFERING PRICE.                                        

----------- 

THE COMPANY INTENDS TO MAKE APPLICATION TO LIST THE COMMON STOCK ON THE NEW 
YORK STOCK EXCHANGE UNDER THE SYMBOL "DK."

----------- 

SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR INFORMATION THAT 
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.      

----------- 

THESE  SECURITIES  HAVE NOT  BEEN  APPROVED OR  DISAPPROVED BY  THE  SECURITIES 
AND  EXCHANGE COMMISSION  OR  ANY  STATE SECURITIES  COMMISSION  NOR HAS  THE 
SECURITIES AND  EXCHANGE  COMMISSION  OR  ANY  STATE  SECURITIES COMMISSION 
PASSED   UPON   THE  ACCURACY   OR  ADEQUACY   OF   THIS  PROSPECTUS.   ANY 
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.                     

----------- 

PRICE $    A SHARE

----------- 

                                                                [Download Table]

                                                   UNDERWRITING                
                                 PRICE TO          DISCOUNTS AND    PROCEEDS TO
                                  PUBLIC          COMMISSIONS(1)     COMPANY(2)
                                 --------         --------------    -----------
                                                                               
Per Share..................        $                   $               $       
Total(3)...................       $                   $                $       

-----                                                                           
(1)  The Company has agreed to indemnify the Underwriters against certain   
     liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."                                      
(2)  Before deducting expenses of the Offering payable by the Company,      
estimated at $   .                                                

(3)  The Company has granted to the U.S. Underwriters an option, exercisable
  within 30 days of the date hereof, to purchase up to an aggregate of
 1,612,500 additional Shares of Common Stock at the price to public,
less underwriting discounts and commissions, for the purpose of   
 covering over-allotments, if any. If the Underwriters exercise such
   option in full, the total price to public, underwriting discounts and
   commissions, and proceeds to Company will be $    , $    , and $    ,
respectively. See "Underwriters."                                 

----------- 

The Shares are offered, subject to prior sale, when, as and if accepted by  
the Underwriters named herein and subject to the approval of certain legal      
matters by Davis Polk & Wardwell, counsel for the Underwriters. It is expected  
that delivery of the Shares will be made on or about      , 1996 at the office  
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor  
in same day funds.                                                              

----------- 

MORGAN STANLEY & CO.                         BEAR, STEARNS INTERNATIONAL LIMITED
International                                                                 
MERRILL LYNCH INTERNATIONAL     
                                                               SMITH BARNEY INC.

, 1996                                                              

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PART II 

INFORMATION NOT REQUIRED IN THE PROSPECTUS  

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.                           

The following table shows the expenses, other than underwriting discounts,  
which the Company expects to incur in connection with the issuance and          
distribution of the securities being registered under this registration         
statement. All expenses are estimated except for the Securities and Exchange    
Commission registration fee and the NASD filing fee.                            

                                                                [Download Table]
                                                                            
Securities and Exchange Commission registration fee................. $91,654
New York Stock Exchange listing fee.................................       *
NASD filing fee.....................................................  27,080
Blue Sky fees and expenses..........................................  20,000
Legal fees and expenses.............................................       *
Accounting fees and expenses........................................       *
Printing and engraving expenses.....................................       *
Registrar and transfer agent's fee..................................       *
Miscellaneous.......................................................       *
                                                                     -------
Total............................................................... $     *
                                                                     =======

--------                                                                        
*  To be filed by Amendment.                                                    

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.                             

Section 145 of the General Corporation Law of the State of Delaware         
("Section 145") permits a Delaware corporation to indemnify any person who was  
or is a party or is threatened to be made a party to any threatened, pending,   
or completed action, suit, or proceeding, whether civil, criminal,              
administrative, or investigative (other than an action by or in the right of    
the corporation) by reason of the fact that such person is or was a director,   
officer, employee, or agent of the corporation, or is or was serving at the     
request of the corporation as a director, officer, employee, or agent of        
another corporation, partnership, joint venture, trust, or other enterprise,    
against expenses (including attorneys' fees), judgments, fines, and amounts     
paid in settlement actually and reasonably incurred by such person in           
connection with such action, suit, or proceeding if such person acted in good   
faith and in a manner such person reasonably believed to be in or not opposed   
to the best interests of the corporation, and, with respect to any criminal     
action or proceeding, had no reasonable cause to believe such person's conduct  
was unlawful.                                                                   

In the case of an action by or in the right of the corporation, Section 145 
permits the corporation to indemnify any person who was or is a party or is     
threatened to be made a party to any threatened, pending, or completed action   
or suit by or in the right of the corporation to procure a judgment in its      
favor by reason of the fact that such person is or was a director, officer,     
employee, or agent of the corporation, or is or was serving at the request of   
the corporation as a director, officer, employee, or agent of another           
corporation, partnership, joint venture, trust, or other enterprise against     
expenses (including attorneys' fees) actually and reasonably incurred by such   
person in connection with the defense or settlement of such action or suit if   
he acted in good faith and in a manner such person reasonably believed to be    
in or not opposed to the best interests of the corporation. No indemnification  
may be made in respect of any claim, issue, or matter as to which such person   
shall have been adjudged to be liable to the corporation unless and only to     
the extent that the Court of Chancery or the court in which such action or      
suit was brought shall determine upon application that, despite the             
adjudication of liability but in view of all the circumstances of the case,     
such person is fairly and reasonably entitled to indemnity for such expenses    
which the Court of Chancery or such other court shall deem proper.              

To the extent that a director, officer, employee, or agent of a corporation 
has been successful on the merits or otherwise in defense of any action, suit,  
or proceeding referred to in the preceding two paragraphs, Section 145          
requires that such person be indemnified against expenses (including            
attorneys' fees) actually and reasonably incurred by such person in connection  
therewith.                                                                      

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Section 145 provides that expenses (including attorneys' fees) incurred by  
an officer or director in defending any civil, criminal, administrative, or     
investigative action, suit, or proceeding may be paid by the corporation in     
advance of the final disposition of such action, suit, or proceeding upon       
receipt of an undertaking by or on behalf of such director or officer to repay  
such amount if it shall ultimately be determined that such person is not        
entitled to be indemnified by the corporation as authorized in Section 145.     

Article Eighth of the Company's Certificate of Incorporation eliminates the 
personal liability of the directors of the Company to the Company or its        
stockholders for monetary damages for breach of fiduciary duty as directors,    
with certain exceptions. Article Ninth requires indemnification of directors    
and officers of the Company, and for advancement of litigation expenses to the  
fullest extent permitted by Section 145.                                        

The Underwriting Agreement filed herewith as Exhibit 1.1 provides for       
indemnification of the directors, certain officers, and controlling persons of  
the Company by the Underwriters against certain civil liabilities, including    
liabilities under the Securities Act. The Company has also entered into an      
agreement with a director and executive officer providing for his               
indemnification in his capacity as a director and executive officer, including  
liabilities under the Federal securities laws. In addition, in the              
Contribution Agreement the Company has agreed to indemnify the Principals for   
those acts they would have been indemnified for if they were acting as          
directors or officers.                                                          

See Item 17 below.                                                          

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.                               

See "Reorganization."                                                       

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.                            

(i) Exhibits                                                                

                                                                [Download Table]

EXHIBIT                                                                       
NO.                             DESCRIPTION OF EXHIBITS                       
-------                         -----------------------                       
                                                                              
  1.1    Form of Underwriting Agreement*                                      
  2.1(1) Form of Agreement and Plan of Contribution 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           
  3.1    Certificate of Incorporation of the Company*                         
  3.2(1) Form of Amended and Restated Certificate of Incorporation of the     
         Company                                                              
  3.3(1) Form of Bylaws of the Company                                        
  5.1(1) Opinion of Proskauer Rose Goetz & Mendelsohn LLP                     
 10.1    Credit Agreement dated as of December 15, 1995 among The Donna Karan 
         Company,                                                             
         The Donna Karan Company Store, G.P., Donna Karan Studio, DK Footwear 
         Partners, certain                                                    
         lending institutions, and Citibank, N.A., as Agent*                  
 10.2(1) Form of 1996 Stock Incentive Plan of the Company                     
 10.3(1) Form of 1996 Non-Employee Director Stock Option Plan                 
 10.4(1) Form of Registration Rights Agreement 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                             

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                                                                [Download Table]

EXHIBIT                                                                       
NO.                              DESCRIPTION OF EXHIBITS                      
-------                          -----------------------                      
                                                                              
 10.5(1)  Form of License Agreement to be entered into between Gabrielle      
          Studio, Inc. and Donna Karan Studio                                 
 10.6(1)  Form of Guaranties of License from the Company to Gabrielle Studio, 
          Inc.                                                                
 10.7(1)  Form of License Agreement to be entered into between Donna Karan    
          Studio and Stephan Weiss                                            
 10.8(1)  Form of Employment Agreement between the Company and Donna Karan    
 10.9(1)  Form of Employment Agreement between the Company and Stephan Weiss  
 10.10(1) Form of Stockholders Agreement 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*                                 
 10.11(1) Form of Incentive Compensation Plan                                 
 10.12    Employment Agreement between The Donna Karan Company and Stephen L. 
          Ruzow*                                                              
 21.1     Subsidiaries of the Company*                                        
 23.1     Consent of Ernst & Young LLP                                        
 23.2(1)  Consent of Proskauer Rose Goetz & Mendelsohn LLP (included in its   
          opinion to be filed as Exhibit 5.1 to the Registration Statement)   
 27.1     Financial Data Schedule                                             

--------                                                                        
(1) To be filed by Amendment.                                                   

*Previously filed.                                                            

(ii) Financial Statement Schedule                                           

Report of Independent Auditors on Schedule                                  

Schedule II--Valuation & Qualifying Accounts & Reserves                     

ITEM 17. UNDERTAKINGS.                                                          

The Registrant hereby undertakes that:                                      

 (1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of  
this registration statement in reliance upon Rule 430A and contained in a   
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or    
(4) under the Securities Act shall be deemed to be part of this             
registration statement as of the time it was declared effective.            

 (2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus   
shall be deemed to be a new registration statement relating to the          
securities offered therein, and the offering of such securities at that     
time shall be deemed to be the initial bona fide offering thereof.          

The Registrant hereby undertakes to provide to the Underwriters at the      
closing specified in the Underwriting Agreement (filed herewith as Exhibit      
1.1) certificates in such denominations and registered in such names as         
required by the Underwriters to permit prompt delivery to each purchaser.       

Insofar as indemnification for liabilities arising under the Securities Act 
of 1933 may be permitted to directors, officers, and controlling persons of     
the Registrant pursuant to the provisions described above in Item 14 or         
otherwise, the Registrant has been advised that in the opinion of the           
Securities and Exchange Commission                                              

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such indemnification is against public policy as expressed in the Securities    
Act of 1933 and is, therefore, unenforceable. In the event that a claim for     
indemnification against such liabilities (other than the payment by the         
Registrant of expenses incurred or paid by a director, officer, or controlling  
person of the Registrant in the successful defense of any action, suit, or      
proceeding) is asserted against the Registrant by such director, officer, or    
controlling person in connection with the securities being registered, the      
Registrant will, unless in the opinion of its counsel the matter has been       
settled by controlling precedent, submit to a court of appropriate              
jurisdiction the question whether such indemnification by it is against public  
policy as expressed in the Securities Act of 1933 and will be governed by the   
final adjudication of such issue.                                               

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SIGNATURES  

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT  
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE        
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE      
CITY OF NEW YORK, STATE OF NEW YORK, ON MAY 24, 1996.                           

                                   Donna Karan International, Inc.

                                           /s/ Donna Karan
                                         By: _________________________________
                                          DONNA KARANCHAIRMAN OF THE BOARD
                                           AND CHIEF
                                           EXECUTIVE OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT  
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS    
IN THE CAPACITIES AND ON THE DATES INDICATED.                                   

       SIGNATURE                        TITLE                 DATE

             Chairman of the
        /s/ Donna Karan              Board and Chief          May 24, 1996
-------------------------------------   Executive Officer                       
DONNA KARAN                (principal                 
                  executive officer)

               Vice Chairman and
       /s/ Stephan Weiss             Director                 May 24, 1996
-------------------------------------                                           
STEPHAN WEISS                                           

              President, Chief
     /s/ Stephen L. Ruzow            Operating Officer,       May 24, 1996
-------------------------------------   and Director                            
STEPHEN L. RUZOW                                            

            Executive Vice
     /s/ Joseph B. Parsons           President and Chief      May 24, 1996
-------------------------------------   Financial Officer                       
JOSEPH B. PARSONS             (principal                    
              accounting and
                  financial officer)

      Director
       /s/ Frank R. Mori                                      May 24, 1996
-------------------------------------                                           
FRANK R. MORI                                           

      Director
        /s/ Tomio Taki                                        May 24, 1996
-------------------------------------                                           
TOMIO TAKI                                            

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REPORT OF INDEPENDENT AUDITORS ON SCHEDULE  

The Board of Directors of                                                       

Donna Karan International Inc.                                                  

We have audited the predecessor combined financial statements of Donna Karan
International Inc. (the "Company") as of January 1, 1995 and December 31,       
1995, and for each of the three years in the period ended December 31, 1995,    
and have issued our report thereon dated April 16, 1996 (included elsewhere in  
this Registration Statement). Our audits also included the financial statement  
schedule listed in Item 16(b) of this Registration Statement. This schedule is  
the responsibility of the Company's management. Our responsibility is to        
express an opinion based on our audits.                                         

In our opinion, the financial statement schedule referred to above, when    
considered in relation to the basic financial statements taken as a whole,      
present fairly in all material respects the information set forth therein.      

                                         ERNST & YOUNG LLP

New York, New York                                                              

April 16, 1996                                                                  

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                                                                     SCHEDULE II

DONNA KARAN INTERNATIONAL INC.      

VALUATION & QUALIFYING ACCOUNTS & RESERVES

                                                                [Download Table]

                                                ADDITIONS                        
                         --------------------------------------------------------
                          BALANCE AT  CHARGED TO CHARGED TO            BALANCE AT
                         BEGINNING OF COSTS AND    OTHER                 END OF  
      DESCRIPTION           PERIOD     EXPENSES   ACCOUNTS  DEDUCTIONS   PERIOD  
      -----------        ------------ ---------- ---------- ---------- ----------
                                              (IN THOUSANDS)                     
                                                                                 
Year ended January 2,                                                            
 1994                                                                            
  Allowance for doubtful                                                         
   accounts.............   $ 1,709     $   544      $--      $   264    $ 1,989  
  Allowance for                                                                  
   chargebacks..........     1,753       4,207       --          779      5,181  
  Allowance for cash                                                             
   discounts............     1,345      16,984       --       17,316      1,013  
  Allowance for sales                                                            
   returns..............       806      22,791       --       22,583      1,014  
                           -------     -------      ----     -------    -------  
                           $ 5,613     $44,526      $--      $40,942    $ 9,197  
                           =======     =======      ====     =======    =======  
Year ended January 1,                                                            
 1995                                                                            
  Allowance for doubtful                                                         
   accounts.............   $ 1,989     $   773      $--      $   158    $ 2,604  
  Allowance for                                                                  
   chargebacks..........     5,181       7,075       --        4,456      7,800  
  Allowance for cash                                                             
   discounts............     1,013      17,034       --       16,668      1,379  
  Allowance for sales                                                            
   returns..............     1,014      21,942       --       19,726      3,230  
                           -------     -------      ----     -------    -------  
                           $ 9,197     $46,824      $--      $41,008    $15,013  
                           =======     =======      ====     =======    =======  
Year ended December 31,                                                          
 1995                                                                            
  Allowance for doubtful                                                         
   accounts.............   $ 2,604      $3,122      $--      $    73    $ 5,653  
  Allowance for                                                                  
   chargebacks..........     7,800      13,172       --        8,067     12,905  
  Allowance for cash                                                             
   discounts............     1,379      17,493       --       17,184      1,688  
  Allowance for sales                                                            
   returns..............     3,230      19,000       --       19,969      2,261  
                           -------     -------      ----     -------    -------  
                           $15,013     $52,787      $--      $45,293    $22,507  
                           =======     =======      ====     =======    =======  

The above reserves are deducted from accounts receivable in the predecessor 
combined balance sheets.                                                        

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                                                   REGISTRATION NO. 333-

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

EXHIBITS
TO

AMENDMENT     

NO.1      

TO      
FORM S-1
REGISTRATION STATEMENT
UNDER 
THE SECURITIES ACT OF 1933

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

DONNA KARAN INTERNATIONAL INC.      
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

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EXHIBIT INDEX 

                                                                [Download Table]

EXHIBIT                                                                       
NO.                        DESCRIPTION OF EXHIBITS                    PAGE NO.
-------                    -----------------------                    --------
                                                                              
  1.1     Form of Underwriting Agreement*                                     
  2.1(1)  Form of Agreement and Plan of Contribution 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                
  3.1     Certificate of Incorporation of the Company*                        
  3.2(1)  Form of Amended and Restated Certificate of Incorporation           
          of the Company                                                      
  3.3(1)  Form of Bylaws of the Company                                       
  5.1(1)  Opinion of Proskauer Rose Goetz & Mendelsohn LLP                    
 10.5(1)  Form of License Agreement to be entered into between                
          Gabrielle Studio, Inc. and Donna Karan Studio                       
 10.1     Credit Agreement dated as of December 15, 1995 among The            
          Donna Karan Company, The Donna Karan Company Store, G.P.,           
          Donna Karan Studio, DK Footwear Partners, certain lending           
          institutions, and Citibank, N.A., as Agent*                         
 10.2(1)  Form of 1996 Stock Incentive Plan of the Company                    
 10.3(1)  Form of 1996 Non-Employee Director Stock Option Plan                
 10.4(1)  Form of Registration Rights Agreement 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                                                                
 10.6(1)  Form of Guaranties of License from the Company to                   
          Gabrielle Studio, Inc.                                              
 10.7(1)  Form of License Agreement to be entered into between                
          Donna Karan Studio and Stephan Weiss                                
 10.08(1) Form of Employment Agreement between the Company and                
          Donna Karan                                                         
 10.09(1) Form of Employment Agreement between the Company and                
          Stephan Weiss                                                       
 10.10(1) Form of Stockholders Agreement 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                                              
 10.11(1) Form of Incentive Compensation Plan                                 
 10.12    Employment Agreement between The Donna Karan Company and            
          Stephen L. Ruzow*                                                   
 21.1     Subsidiaries of the Company*                                        
 23.1     Consent of Ernst & Young LLP                                        
 23.2(1)  Consent of Proskauer Rose Goetz & Mendelsohn LLP                    
          (included in its opinion to be filed as Exhibit 5.1 to              
          the Registration Statement)                                         
 27.1     Financial Data Schedule                                             

--------                                                                        

(1) To be filed by Amendment.                                                   

* Previously filed.                                                           

Dates Referenced Herein   and   Documents Incorporated by Reference

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