NEW YORK — David M. Golden, the financial officer summarily fired from his $370,000-a-year job by The Donna Karan Co. in April, filed a $12.5 million lawsuit against the company and its partners Monday, charging slander and breach of contract and contending that the company’s finances are a shambles.
Golden’s suit comes only a few days after Donna Karan Co. sued him, charging negligence and misconduct. A Karan spokeswoman said Monday the company had not been made aware of Golden’s suit until late in the afternoon and that its legal counsel was reviewing it.
“Therefore, we cannot comment at this time,” she said.
Golden, who worked for Karan for only one month, alleges in his suit that the company is in a “severe liquidity crisis.” Its beauty and two men’s divisions, the suit claims, had accumulated losses of $25 million through December 1993 and were projected to lose another $8 million to $9 million in 1994.
The suit also alleges:
Karan’s first-quarter earnings were down about 50 percent from a year ago, or about $8 million to $9 million behind.
A substantial portion of the inventory, or about $8 million to $10 million worth, was over 10 months old and was sold to a liquidator for $6 million in March.
The company was in violation of its bank agreements in December 1993 and was expected to be in noncompliance on March 31.
The company was holding $10 million to $13 million in checks ranging from 30 to 60 days old that it had drawn to pay invoices.
Because of cash restrictions, the company could not make distributions to some partners to cover 1994 first-quarter estimated tax payments.
Golden was told the company earned $30 million before interest and taxes in 1993, but later learned that EBIT was about $26 million and that sales and earnings were flat or going down and the company’s financial condition was “deteriorating.”
In his 33-page complaint filed in Manhattan Supreme Court, Golden contends that he was lured to join the company under false pretenses, that he was fired without cause and escorted from the firm by five armed guards. At the time he was hired, says Golden, the company planned a private placement of junk bonds that would provide funds for operations and pay a tax-free distribution to the partners of about $10 million to $25 million, depending on how much was raised. He says he started working on financial data for the refinancing at the end of February, while still working for his former employer, Hugo Boss.
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Golden claims he made it clear that accurate information and projections were required and the company would need to provide the banks with realistic cash flows through June 30, 1994.
“The information highlighted a severe liquidity crisis, including DK’s inability to mail in excess of $10 million in checks already issued, and the immediate need for additional cash borrowing availability,” the suit says.
The company’s delinquency in trade payments, deteriorating earnings and lack of positive cash flow “alarmed” the bank group, the suit continues.
“Golden found himself constantly being criticized by the DK partners and executives for producing and disclosing this required information,” the complaint contends.
During his transition from Hugo Boss to Karan, the suit says, Golden learned that Karan was in noncompliance of all of its financial covenants and of its credit agreement in December 1993 and would be in noncompliance on March 31 and had exhausted its borrowing capacity. At the same time, the Karan company was getting calls from factors and vendors regarding late payments, the suit says.
To get its credit facility amended, the partners agreed to contingency plans in the event the private placement isn’t completed, the suit continues. These included the disposal or licensing of divisions, principally the beauty and the two men’s divisions, which at the end of 1993 had cumulative operating losses totaling more than $25 million, according to the suit.
Golden says he advised management that he could not include $8 million in overhead reductions that were only on paper; could not change the projections for the beauty and men’s divisions, which he projected would lose $8 million to $9 million in fiscal 1994, and could not change realistic projections submitted to the banks to reflect higher gross margins and debt repayments or project unrealistic expenses.
When it became apparent that the first quarter would not meet projections, Golden says, he would not artificially inflate first-quarter sales and income through predating invoices.
He further charged that he learned that Karan had overstated its earnings in the 1993 fiscal year by carryover into the following year of $1 million in advertising expenses that should have been expensed in 1993.
When Golden insisted that the carryover invoices be disclosed to Karan’s outside auditors, the suit charges, Stephen Ruzow, president and chief operating officer, refused to comply, noting that the disclosure would jeopardize the refinancing efforts and “potentially result in a bankruptcy filing.”
Turning to his termination, Golden says he received no advance warning. At 1 p.m. on April 29, he was summoned to a meeting at Ruzow’s office and told by Ruzow he was terminated, “effective immediately,” the complaint says.
The suit contends that the market soon learned of his dismissal and the manner in which it was carried out, creating a false perception that he “must have been guilty of gross misconduct or unlawful activities.”
Defendants, in addition to the company, include Donna Karan, her husband, Stephan Weiss, Ruzow, and investors Frank Mori and Tomio Taki.
The action was filed by Brauner Baron Rosenzweig & Klein and Vladeck, Waldman Elias & Engelhard.