SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-13082
KENNETH COLE PRODUCTIONS, INC.
(Exact name of registrant as specified in its charter)
New York 13-3131650
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
152 West 57th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 265-1500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class November 4, 1996
----- ----------------
Class A Common Stock ( $.01 par value) 7,353,179
Class B Common Stock ( $.01 par value) 5,785,398
Page 1 of 18
Exhibit Index Appears on Page 16
<PAGE>
Kenneth Cole Productions, Inc.
Index to 10-Q
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995 ............................................... 3
Consolidated Statements of Income for the three month
and nine month periods ended September 30, 1996 and 1995 ............ 5
Consolidated Statement of Changes in Shareholders'
Equity for the nine month period ended
September 30, 1996 .................................................. 6
Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 1996 and 1995 .............. 7
Notes to Consolidated Financial Statements .......................... 8
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition ........................................... 10
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 14
Item 2. Changes in Securities ............................................. 14
Item 3. Defaults Upon Senior Securities ................................... 14
Item 4. Submission of Matters to a Vote of Security Holders ............... 14
Item 5. Other Information ................................................. 14
Item 6. Exhibits and Reports on Form 8-K .................................. 14
Signatures ................................................................ 15
2
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, December 31,
1996 1995
------------------------------
(Unaudited)
Assets
Current assets:
Cash $ 1,055,000 $ 2,204,000
Due from factors 21,530,000 13,898,000
Accounts receivable, net 2,921,000 2,316,000
Inventories 20,346,000 16,361,000
Prepaid expenses and other current assets 1,464,000 909,000
Deferred taxes 514,000 514,000
------------------------------
Total current assets 47,830,000 36,202,000
Property and equipment:
Furniture and fixtures 2,886,000 1,716,000
Machinery and equipment 2,455,000 1,788,000
Leasehold improvements 5,619,000 4,523,000
------------------------------
10,960,000 8,027,000
Less accumulated depreciation and amortization 3,085,000 2,374,000
------------------------------
Net property and equipment 7,875,000 5,653,000
------------------------------
Other assets:
Deferred taxes 422,000 422,000
Deposits and sundry 1,657,000 1,030,000
------------------------------
Total other assets 2,079,000 1,452,000
------------------------------
Total assets $57,784,000 $43,307,000
==============================
See accompanying notes to consolidated financial statements.
3
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, December 31,
1996 1995
------------------------------
(Unaudited)
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 7,891,000 $ 6,765,000
Accrued expenses and other current liabilities 2,107,000 1,859,000
Current portion of long-term debt 59,000 54,000
Income taxes payable 2,421,000
Deferred license income 227,000 121,000
------------------------------
Total current liabilities 12,705,000 8,799,000
------------------------------
Deferred rent payable 428,000 367,000
Other non-current liabilities 1,024,000 652,000
Shareholders' equity:
Preferred stock, par value $1.00,
1,000,000 shares authorized,
none outstanding
Class A common stock, par value $.01,
20,000,000 shares authorized,
7,335,841 and 7,299,382
outstanding in 1996 and 1995 73,000 73,000
Class B common stock, par value $.01,
6,000,000 shares authorized,
5,785,398 outstanding 58,000 58,000
Additional paid-in capital 18,741,000 18,510,000
Translation adjustments 1,000
Retained earnings 24,879,000 15,145,000
Deferred compensation (125,000) (297,000)
------------------------------
Total shareholders' equity 43,627,000 33,489,000
------------------------------
Total liabilities and shareholders' equity $ 57,784,000 $ 43,307,000
==============================
See accompanying notes to consolidated financial statements.
4
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
1996 1995 1996 1995
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net sales $ 39,841,000 $ 32,574,000 $109,970,000 $ 83,965,000
Cost of goods sold 23,341,000 18,845,000 64,373,000 48,765,000
--------------------------- ---------------------------
Gross profit 16,500,000 13,729,000 45,597,000 35,200,000
Licensing and other income 887,000 486,000 2,042,000 1,252,000
Selling, general and administrative,
and shipping and warehousing 10,573,000 8,429,000 31,222,000 22,759,000
--------------------------- ---------------------------
Operating income 6,814,000 5,786,000 16,417,000 13,693,000
Interest expense, net 17,000 44,000 32,000 3,000
--------------------------- ---------------------------
Income before provision for
income taxes 6,797,000 5,742,000 16,385,000 13,690,000
Provision for income taxes 2,720,000 2,297,000 6,651,000 5,476,000
--------------------------- ---------------------------
Net income $ 4,077,000 $ 3,445,000 $ 9,734,000 $ 8,214,000
=========================== ===========================
Net income per share $ .30 $ .25 $ .72 $ .60
=========================== ===========================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
----------------- ----------------- Total Additional Deferred
Number Number Common Paid-in Translation Retained Compen-
of shares Amount of shares Amount Stock Capital Adjustment Earnings sation Total
--------- ------ --------- ------ ----- ------- ---------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholders' equity
January 1, 1996 7,299,382 $73,000 5,785,398 $58,000 $131,000 $18,510,000 $15,145,000 ($297,000) $33,489,000
Exercise of Stock
Options 36,459 231,000 231,000
Net Income 9,734,000 9,734,000
Translation
Adjustment $1,000 1,000
Amortization of
deferred
compensation 172,000 172,000
========================================================================================================
Shareholders' equity
September 30, 1996 7,335,841 $73,000 5,785,398 $58,000 $131,000 $18,741,000 $1,000 $24,879,000 ($125,000) $43,627,000
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
---------------------------
1996 1995
---------------------------
Cash flows from operating activities
Net income 9,734,000 8,214,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 711,000 590,000
Amortization of deferred compensation 172,000 195,000
Provision for doubtful accounts 10,000 21,000
Provision for deferred taxes 25,000
Increase in rent payable 53,000
Changes in assets and liabilities:
Increase in due from factors (7,632,000) (8,227,000)
(Increase) decrease in accounts receivable (615,000) 897,000
Increase in inventories (3,985,000) (4,666,000)
Increase in prepaid expenses and
other current assets (555,000) (1,187,000)
Increase in deposits (627,000) (403,000)
Increase (decrease) in accounts payable 1,126,000 (794,000)
Increase in income taxes payable 2,421,000 842,000
Increase (decrease) in accrued expenses
and other current liabilities 354,000 (80,000)
Increase in other non-current liabilities 438,000 373,000
---------------------------
Net cash provided by (used in) operating activities 1,552,000 (4,147,000)
Cash flows from investing activities
Acquisition of property and equipment, net (2,933,000) (1,843,000)
---------------------------
Net cash used in investing activities (2,933,000) (1,843,000)
Cash flows from financing activities
Proceeds from revolving line of credit, net 1,499,000
Proceeds from exercise of stock options 231,000 436,000
Repayment of long-term debt (52,000)
---------------------------
Net cash provided by financing activities 231,000 1,883,000
Effect of exchange rate changes on cash 1,000
---------------------------
Net decrease in cash (1,149,000) (4,107,000)
Cash, beginning of period 2,204,000 5,315,000
---------------------------
Cash, end of period $ 1,055,000 $ 1,208,000
===========================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 102,000 $ 74,000
Income taxes $ 3,485,000 $ 4,620,000
See accompanying notes to consolidated financial tatements.
7
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
General
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The data contained in these financial statements are
unaudited and are subject to year end adjustment, however, in the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and nine month periods ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1995.
The consolidated balance sheet at December 31, 1995 was derived from the audited
financial statements.
Basis of Presentation
The consolidated financial statements include the accounts of Kenneth Cole
Productions, Inc. and its wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated. Certain amounts in prior year's
financial statements have been reclassified to conform with the 1996
presentation.
Net Income Per Share
Net income per share is based on the average number of shares outstanding
including the effect of dilutive stock options.
8
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Contingencies
In 1992, legal action was commenced against the Company in the Supreme Court of
the State of New York situated in New York County. The complaint alleged that
the Company had breached its obligations under a lease with the plaintiff for
the rental of office space in New York City and, as amended, sought damages of
approximately $851,000, representing all rent then due under the lease. In
January 1994, a judgment was entered against the Company in the amount of
approximately $719,000, including interest costs and disbursements. The Company
contested the award based on the grounds that the plaintiff had failed to
mitigate its damages. In December 1995, the Court of Appeals affirmed the order
of the Appellate Division. Following the Court of Appeals decision, the Company
paid the full amount of judgment, plus post judgment interest, in the total
amount of $846,000.
In January 1994, a second action was commenced against the Company by the
plaintiff in the Supreme Court of the State of New York situated in New York
County for additional rent due under the lease. The complaint, as amended in
December 1995, sought damages of approximately $789,000.
In May 1996, the Company paid $608,000 in satisfaction of all plaintiff's claims
in the actions mentioned above, exclusive of the plaintiff's claim for
attorneys' fees. The Company believes it has established adequate reserves with
respect to this matter.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth the Company's condensed consolidated statements
of income in thousands of dollars and as percentage of net sales for the quarter
ended September 30, 1996 and September 30, 1995 as well as for the nine months
ended September 30, 1996 and September 30, 1995.
Three Months ended
------------------
September 30, 1996 September 30, 1995
------------------ ------------------
(in thousands)
Net sales $39,841 100.0% $32,574 100.0%
Gross Profit 16,500 41.4 13,729 42.1
Licensing income 887 2.2 486 1.5
Selling, general and
administrative expenses 10,573 26.6 8,429 25.9
Operating income 6,814 17.0 5,786 17.8
Interest income, net 17 0.0 44 0.0
Income before income taxes 6,797 17.1 5,742 17.6
Income tax expense 2,720 6.8 2,297 7.1
Net income 4,077 10.2 3,445 10.6
Nine Months ended
-----------------
September 30, 1996 September 30, 1995
------------------ ------------------
(in thousands)
Net sales $109,970 100.0% $83,965 100.0%
Gross Profit 45,597 41.5 35,200 41.9
Licensing income 2,042 1.9 1,252 1.5
Selling, general and
administrative expenses 31,222 28.4 22,759 27.1
Operating income 16,417 14.9 13,693 16.3
Interest expense, net 32 0.0 3 0.0
Income before income taxes 16,385 14.9 13,690 16.3
Income tax expense 6,651 6.0 5,476 6.5
Net income 9,734 8.9 8,214 9.8
10
<PAGE>
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
Net sales increased $7.2 million, or 22.3%, to $39.8 million for the three
months ended September 30, 1996 compared to net sales of $32.6 million for the
three months ended September 30, 1995. Net sales of the Company's wholesale
operations, excluding sales to its retail division, increased $4.3 million, or
15.3%, to 32.4 million from $28.1 million. This increase was primarily due to
increases in sales of Kenneth Cole branded men's footwear and leather goods and
Unlisted branded footwear as a result of greater brand awareness and consumer
acceptance. Sales through the Company's retail and outlet stores increased $2.9
million, or 64.4%, to $7.4 million for the three months ended September 30, 1996
compared to the three months ended September 30, 1995. This increase was the
result of the sales of twenty stores which generated a 2.2% comparable store
sales decrease, the sales of seven retail and outlet stores open in the third
quarter of 1996 which were not open in the third quarter of 1995 and the sales
of four stores (one international) which opened during the third quarter of
1996.
Gross profit was $16.5 million or 41.4% for the three months ended September 30,
1996, an increase of $2.8 million, or 20.2%, from $13.7 million or 42.1% for the
three months ended September 30, 1995. This decrease in gross profit percentage
is attributed, in part, to changes in sales mix (i.e., increased sales generated
on a first-cost basis which carry lower margins than wholesales and retail
sales), and lower margins on sales of Kenneth Cole branded womens footwear. The
decrease in gross profit percentage is partially offset by the increase in
retail store sales as a percentage of total sales (retail gross margins being
higher than wholesale gross margins as a percentage of net sales).
The Company continues to expand its licensing efforts, resulting in an increase
in licensing income of $401,000, or 82.5% for the three months ended September
30, 1996 compared to the three months ended September 30, 1995.
Selling, general and administrative expenses, including shipping and warehousing
costs, were $10.6 million, or 26.6% of net sales for the three months ended
September 30, 1996, compared to $8.4 million or 25.8% of net sales, for the
three months ended September 30, 1995. The increase in selling, general and
administrative expense is due to the additional retail and outlet stores, which
carry a higher expense level than the wholesale division.
As a result of the above, operating income increased 17.8% to $6.8 million
(17.1% of net sales) from $5.8 million (17.7% of net sales) for the three months
ended September 30, 1996 and September 30, 1995, respectively.
11
<PAGE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995
Net sales were $110.0 million in the first nine months of 1996 compared to $84
million in the prior year's period, an increase of $26 million or 31.0 %. Net
sales of the Company's wholesale operations (excluding sales to its retail
division) increased $16.6 million or 22.9% to $89.4 million in the nine months
from $72.8 million in last year's same period. This increase was primarily due
to increases in sales of all product lines as a result of greater brand
awareness including sales of the recently introduced product line, Kenneth Cole
Reaction. Sales through the Company's retail and outlet stores increased $9.4
million or 83.9% to $20.5 million. This increase reflects flat comparable store
sales based on 20 retail and outlet stores, nine of which were open for the
entire nine months ended September 30, 1996, the sales of four stores open for
the entire first nine months of 1996 which were not open in the first nine
months of 1995 and the sales of seven stores opened during the first nine months
of 1996, including one international retail store.
Gross profit was $45.6 million for the nine month period ended September 30,
1996, an increase of $10.4 million, or 30.0%, from $35.2 million in the
comparable period last year. As a percentage of sales, gross profit decreased to
41.5% from 42.0%. This was primarily attributable to changes in the Company's
sales mix of products (i.e., an increase in sales generated on a first-cost
basis, which carry lower gross margins than those generated from wholesale and
retail sales).
Selling, general and administrative expenses including shipping and warehousing
costs were $31.2 million or 28.4% of net sales for the nine month period ended
September 30, 1996, and $22.8 million or 27.1% of net sales in the comparable
period last year. The increase is primarily due to the additional retail and
outlet stores, which carry higher expense levels than the wholesale divisions
and the hiring of additional personnel to support the Company's growth. Selling,
general and administrative expenses related to the wholesale division as a
percentage of net sales, decreased from 22.4% for the nine months ended
September 30, 1995 to 21.5% for the nine months ended September 30, 1996.
As a result of the above, operating income increased 19.9% for the nine month
period ended September 30, 1996 to $16.4 million (14.9% of net sales) from $13.7
million (16.3% of net sales) for the same period last year.
12
<PAGE>
Liquidity and Capital Resources
The Company uses cash from operations and borrowings under its revolving line of
credit as the primary sources of financing for its expansion and seasonal
requirements. Cash requirements vary from time to time as a result of the timing
of the receipt of merchandise from suppliers, the delivery by the Company of
merchandise to its customers, the level of accounts receivable and due from
factors balances and the Company's inventory levels. Cash provided by operating
activities was $1.6 million for the nine months ended September 30, 1996,
compared to $4.1 million used in operating activities for the nine months ended
September 30, 1996. The increase in cash flow from operations is attributable,
in part, to the timing of the payment of income taxes and trade accounts payable
and smaller increases in the inventories and due from factors balance. At
September 30, 1996 and December 31, 1995, working capital was $35.1 million and
$27.4 million, respectively.
The Company currently has a $20.0 million line of credit under which up to $10.0
million is available to finance working capital requirements and up to $10.0
million in letters of credit is available to finance the Company's inventory
purchases.
Capital expenditures totaled $2.9 million and $1.7 million in the nine months
ended September 30, 1996 and 1995, respectively. Capital expenditures relate
primarily to the Company's retail and outlet store expansion and to the further
development and enhancement of the Company's management information systems.
The Company believes that cash flows from operations and borrowings under its
existing credit facilities will be sufficient to satisfy the Company's working
capital requirements for the next twelve months.
Important Factors Relating to Forward Looking Statements
This report contains certain forward looking statements, as defined in The
Private Securities Litigation Reform Act of 1994, with respect to cash flows
from operations. The forward-looking statements contained in the Form 10-Q were
prepared by management and are qualified by, and subject to, significant
business, economic, competitive, regulatory and other uncertainties and
contingencies, all of which are difficult or impossible to predict and many of
which are beyond the control of the Company. Accordingly, there can be no
assurance that the forward-looking statements contained in this Form 10-Q will
be realized or that actual results will not be significantly higher or lower.
13
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings. Incorporated by reference to the Financial Statements
included herein Part I, Item I. See Notes to Consolidated Financial
Statements Contingencies.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K: The Company did not file any reports on Form
8-K during the three months ended September 30, 1996.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Kenneth Cole Productions, Inc.
------------------------------
Registrant
November 13, 1996 /S/ STANLEY A. MAYER
------------------------------
Stanley A. Mayer
Executive Vice President and
Chief Financial Officer
15
<PAGE>
INDEX OF EXHIBITS
Sequential
Exhibit Number: Description Page No.
- - --------------- ----------- --------
27 Financial Data Schedule 17
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE KENNETH
COLE PRODUCTIONS, INC. CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30,1996, AND
THE CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,055
<SECURITIES> 0
<RECEIVABLES> 24,491
<ALLOWANCES> (40)
<INVENTORY> 20,346
<CURRENT-ASSETS> 47,830
<PP&E> 10,960
<DEPRECIATION> 711
<TOTAL-ASSETS> 57,784
<CURRENT-LIABILITIES> 12,705
<BONDS> 0
0
0
<COMMON> 131
<OTHER-SE> 43,496
<TOTAL-LIABILITY-AND-EQUITY> 57,784
<SALES> 109,970
<TOTAL-REVENUES> 112,012
<CGS> 64,373
<TOTAL-COSTS> 64,373
<OTHER-EXPENSES> 31,222
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32
<INCOME-PRETAX> 16,385
<INCOME-TAX> 6,651
<INCOME-CONTINUING> 9,734
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,734
<EPS-PRIMARY> .72
<EPS-DILUTED> .72
</TABLE>
