Karan, so recently soaring, is suddenly sputtering


Just a year ago, Donna Karan had a Midas touch.

Her collections of women's fashions were well-received. New units were created to tap into menswear and children's clothing. A fragrance company was opened. And plans for a public stock sale drew enormous interest on Wall Street.

Today, however, the fashion queen's mystique has been marred.

Over recent months, shipments to many retailers have run late. Friction with Ms. Karan's two financial partners increased, because they want to cash in their investments. The children's division was closed. The fragrance business is losing money. The stock sale was canceled.

Most embarrassing, though, has been a highly publicized feud with a former chief financial officer who was recently dismissed after only a month on the job.

The dispute, detailed in a pair of mudslinging lawsuits, hinges on the true nature of Ms. Karan's finances and is prompting questions about the viability of her company just as it contemplates a private stock sale to raise additional capital.

"She was Seventh Avenue's poster girl. No other women's designer has had such world-class potential," said fashion consultant Alan Millstein. "But now there's evidence that some of the seams are beginning to show. And no industry, except maybe for Hollywood, has longer and sharper knives."

To a great extent, the legal warfare between Ms. Karan and David Golden is over his job performance after he arrived in March from menswear designer Hugo Boss.

Karan executives charged that Mr. Golden, 40, prepared "incomplete and inaccurate" financial plans, throwing the company into default on its bank loans. He allegedly would not disclose information to all of the company's partners, jeopardizing an already tense situation with Ms. Karan's backers. And the company says he made lewd remarks to female employees.

In turn, Mr. Golden claimed the company already faced a "severe" crisis -- a reference to lower-than-expected earnings, cash restrictions placed on partnership distributions, violations of bank agreements and slow payments to suppliers, according to his suit. He's seeking $12.5 million, covering his $370,000 annual salary, and slander and breach of contract charges.

Stunned by the claims and the ensuing publicity, Karan executives issued a blistering statement saying that sales are up, that its recently compiled financial statements are accurate and that the terms of lending agreements are being met.

In an interview with Women's Wear Daily, Stephan Weiss, Ms. Karan's pony-tailed husband and co-chief executive, said that "95 percent of the rumors are false and 5 percent are lies."

Nonetheless, Karan's financial performance is declining. It said revenues rose 5 percent in this year's first quarter. But net income dropped 71 percent and income from operations dipped 41 percent.

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