SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File No. 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)
(212) 265-1500
Registrant's telephone number
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Class A common stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part lll of this Form 10-K or any
amendment to this Form 10-K. ( X )
Aggregate market value of the voting stock held by nonaffiliates of the
registrant as of the close of business on March 24, 1997: $ 138,039,544
Number of shares of Class A Common Stock, $.01 par value, outstanding as of
the close of business on March 24, 1997: 7,363,946
Number of shares of Class B Common Stock, $.01 par value, outstanding as of
the close of business on March 24, 1997: 5,785,398
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Form 10-K is incorporated herein by
reference to the Registrant's definitive proxy statement to be mailed to the
stockholders of the Registrant by April 29, 1997
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Kenneth Cole Productions, Inc.
TABLE OF CONTENTS
PART 1
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Item Page
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Item 1 Business 3
Item 2 Properties 12
Item 3 Legal Proceedings 12
Item 4 Submission of Matters to a Vote of Security Holders 12
PART ll
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters 13
Item 6 Selected Financial Data 14
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 8 Financial Statements and Supplementary Data 18
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 18
PART lll
Item 10 Directors and Executive Officers of the Registrant 19
Item 11 Executive Compensation 19
Item 12 Security Ownership of Certain Beneficial Owners and Management 19
Item 13 Certain Relationships and Related Transactions 19
PART lV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 20
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Important Factors Relating to Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Annual Report on Form 10-K
("Annual Report") and those that may be made in the future by or on behalf of
the Company which are identified as forward-looking, the Company notes that
there are various factors that could cause actual results to differ materially
from those set forth in any such forward-looking statements. The forward-looking
statements contained in this Annual Report 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 Annual Report will be realized or that actual
results will not be significantly higher or lower. The statements have not been
audited by, examined by, compiled by or subject to agreed-upon procedures by
independent accountants, and no third party has independently verified or
reviewed such statements. Readers of this Annual Report should consider these
facts in evaluating the information contained herein. In addition, the business
and operations of the Company are subject to substantial risks which increase
the uncertainty inherent in the forward-looking statements contained in this
Annual Report. The inclusion of the forward-looking statements contained in this
Annual Report should not be regarded as a representation by the Company or any
other person that the forward-looking statements contained in this Annual Report
will be achieved. In light of the foregoing, readers of this Annual Report are
cautioned not to place undue reliance on the forward-looking statements
contained herein.
Item 1. Business
General
Kenneth Cole Productions, Inc. (the "Company") designs, sources and markets
a broad range of quality footwear, handbags and accessories primarily under its
Kenneth Cole, Unlisted and Kenneth Cole Reaction brand names. In addition, a
variety of apparel and accessory products utilizing its Kenneth Cole, Unlisted
and Kenneth Cole Reaction brand names are produced and sold pursuant to certain
license arrangements made with third parties. Licensed products for men include:
neckwear, briefcases, portfolios, fabric outerwear, jewelry, belts, scarves,
leather outerwear, sunglasses, eyewear, watches and luggage. Licensed products
for women include: hosiery, small leather goods, belts, scarves and wraps,
leather outerwear, sunglasses, eyewear, watches and luggage. Kenneth D. Cole is
the Company's President and Chief Executive Officer and provides leadership and
direction for all aspects of the design process. The Company's branded products
are designed to appeal to fashion conscious consumers in the bridge-designer,
better and junior market segments. These products include core basics, which
generally remain in demand from season to season, and fashion products which are
designed to establish or capitalize on market trends. The Company was
incorporated in September 1982 under the name "Kenneth Cole, Inc." and changed
its name to "Kenneth Cole Productions, Inc." in August 1983.
The Company markets its products to more than 2,500 department and
specialty store locations, and through its expanding base of retail and outlet
stores and its own consumer catalog. The Company plans to grow by broadening its
range of product offerings and by increasing its penetration and expanding its
channels of distribution. Through the expansion of product offerings, the
Company believes it will serve a wider variety of customer needs. The Company
believes the range of its product offerings distinguishes the Company from its
competitors in terms of product categories (men's and women's footwear, handbags
and accessories), prices (from "better" to "moderate") and styling. The
diversity of the Company's product mix provides balance to its overall product
sales and business planning and increases sales opportunities to wholesale
customers which do not carry the Company's full range of products.
During the past year, the Company entered into several new product license
agreements including, men's tailored clothing, men's jewelry, men's and women's
watches and, most recently, men's sportswear. In addition to expanding its
licensing operations, the Company continues to pursue strategies to expand its
distribution within the retailing arena. As of December 31, 1996 the Company
operated 35 specialty retail and outlet stores, as compared with 24 as of
December 31, 1995, and plans to open approximately 10 new stores and one
flagship store during 1997. A flagship store would be larger in size than the
Company's existing stores and would departmentalize its entire product offerings
including all licensed products. The Company believes that the sales of footwear
and accessories through its specialty retail and outlet stores increase consumer
awareness of the Company's brands.
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Products
The Company markets its products principally under its Kenneth Cole,
Unlisted and Kenneth Cole Reaction brand names. The Company's products are
targeted to appeal to a different market segment within each brand.
Kenneth Cole
Kenneth Cole brand products are generally designed for the urban-minded,
fashion conscious consumer and targets professional men and women. The Company
believes the Kenneth Cole brand has become a core resource for department stores
and shows significant brand growth potential. The product offering has evolved
from a very trendy line to one with broader appeal, including both fashion
forward styling and core basics. The Company is now leveraging the strength of
the name through brand extensions (e.g., Kenneth Cole Reaction), in-store shops
and the licensing of many new product categories.
The characteristics of the products sold by the Company under its Kenneth Cole
brand name are summarized in the following table:
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Footwear Leathergoods
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Kenneth Cole Kenneth Cole
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Women's Men's Handbags Accessories
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Market: Bridge-Designer Bridge-Designer Bridge-Designer Bridge-Designer
Retail Price Range: Better Better Better Better
$90-$160 $130-$170 $90-$150 $40-$75
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Kenneth Cole brand women's footwear includes dress, casual and special
occasion (e.g., bridal) footwear. Women's footwear manufactured under the
Kenneth Cole label is generally constructed with leather soles and linings, and
leather, fabric, satin or silk uppers. Women's footwear is manufactured
primarily in Spain, because the capabilities of the manufacturers are consistent
with the quality requirements and image of Kenneth Cole brand footwear products.
The Company also sources a portion of its Kenneth Cole brand women's footwear
from manufacturers in Brazil due to the ability of those manufacturers to meet
the Company's quality specifications on a cost effective basis. The Company
sells approximately 110 styles of Kenneth Cole brand women's footwear each
season.
Kenneth Cole brand men's footwear is designed as comfortable, practical
shoes intended to be worn with dress or casual clothes. Kenneth Cole men's
footwear, consistent with men's footwear in general, is less style-driven than
women's footwear and is built around core basics with a fashion component. As a
result, the Company offers fewer styles and makes fewer style changes from
season to season. The men's line is sold through open stock repenishment
programs. Kenneth Cole men's footwear is manufactured primarily in Italy. The
Company sells approximately 50 styles of Kenneth Cole brand men's footwear each
season.
Kenneth Cole brand handbags are designed to be practical and versatile with
a contemporary and unstructured look. These products are generally manufactured
with soft, high quality leather. Kenneth Cole brand handbags are manufactured
primarily in India because of low production costs and the presence of
established quality leathergoods manufacturers with skilled labor forces. These
operations benefit from their close proximity to tanneries for processing
quality leather and the availability of other raw materials and components. The
Company believes its strong factory relationships in India have given the
Company the ability to achieve excellent value, producing comparable-quality
merchandise priced below its competitors. The Company sells approximately 100
styles of Kenneth Cole handbags each season.
Unlisted
Unlisted brand footwear and leathergoods are designed and targeted to the
trendy, 15 to 30 year old junior segment of the women's market. The Unlisted
brand was developed to expand the Company's sales into more moderately priced
products and includes approximately 45 styles of casual and dress shoes per
season and approximately 60 styles of handbags per season. Unlisted footwear and
handbags are generally retailed in the moderate price range with footwear at $20
to $50 per pair, and handbags at $30 to $50 each. Unlisted brand footwear and
handbags are manufactured primarily in China. The production facilities located
in China are generally larger than facilities in other countries and enable
manufactures to produce significant quantities of moderately priced quality
footwear and handbags.
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Kenneth Cole Reaction
Kenneth Cole Reaction brand women's footwear, introduced in 1994, is more
casual in nature and includes footwear styles that are constructed with rubber
soles. Kenneth Cole Reaction branded women's footwear is designed for the
workplace as well as outside the office, with an emphasis on comfort,
contemporary styling and perceived value. The targeted consumer is
sophisticated, influenced by brand recognition and demands a certain quality
level that an established designer label ensures. Kenneth Cole Reaction footwear
is targeted to compete in the largest single category of women's footwear sold
in department stores, "women's better casual" footwear.Kenneth Cole Reaction is
priced to sell below the price points of the Kenneth Cole line. The majority of
the line retails in the $60-80 price range and, each season, includes
approximately 25 styles.
Kenneth Cole Reaction branded men's footwear combines an outdoor look with
more fashionable styling. The line retails in the $90-130 price range and
includes approximately 15 styles.
Kenneth Cole Reaction branded handbags are designed to be multi functional
with a contemporary look and are primarily made of non-leather trend
fabrications, such as nylon, microfiber and straw. Kenneth Cole Reaction brand
handbags are one of the fastest growing products of the Company, generally
retail in the $40-$70 price range and include approximately 35 styles each
season.
Divisions
The Company distributes its products through wholesale distribution
channels and its own Kenneth Cole retail and outlet stores. During the periods
presented below, the percentage of net sales contributed by the Company's
wholesale (including catalog) and retail divisions were as follows:
Year Ended
December 31
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1996 1995 1994
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Wholesale 78% 84% 90%
Retail 22 16 10
Total 100% 100% 100%
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Wholesale Operations
The Company's wholesale strategy is to provide affordable fashion
accessories as well as marketing and management support to its wholesale
customers. The Company provides this support by producing strong image
advertising campaigns, offering creative, quality products and maintaining
adequate inventory levels of new products as well as products included in the
Company's open its products stock program. The Company employs 16 independent
wholesale agents to sell its products and to manage its relationships with its
wholesale customers, including analyzing and monitoring their selling
information.
The Company's products are distributed to more than 800 wholesale accounts
for sale in more than 2,500 store locations in the United States. The Company
markets its branded products to major department stores and chains, such as the
department store divisions of Dayton Hudson Corporation, Dillard Department
Stores, Inc., Federated Department Stores (including Macy's, Bloomingdales, and
Burdines), The May Department Stores Company (including Lord & Taylor and
Foley's) and Nordstrom, Inc., and upscale specialty retailers, such as Neiman
Marcus and Saks Fifth Avenue. In addition, the Company sells out-of-season
branded products and overruns principally to The Marmaxx Group (formerly T.J.
Maxx and Marshalls) and through the Company's outlet stores. In addition, the
Company sells its products, directly or through distributors, to wholesale
customers in Australia, Canada, Hong Kong, Japan, Thailand, the Philippines and
Singapore.
The Company markets its product lines and introduces new styles at separate
industry-wide footwear and leathergoods shows which occur several times annually
in New York and Las Vegas and at regional shows throughout the year. These shows
also afford the Company the opportunity to assess preliminary demand for its
products. After each show, the Company's wholesale agents and corporate account
specialists visit customers to review the Company's product lines and to secure
purchase commitments. The Company's products are also displayed at separate
leathergoods and footwear showrooms in New York.
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Private Label
In response to the growing demand among retailers for private label
products, the Company designs, develops and sources private label footwear and
leathergoods for selected retailers. These private label customers include,
among others, major retailers that do not purchase the Company's brands, such as
Sears, Roebuck and Co., J.C. Penney, and Mervyns. Private label footwear sales
commenced in 1992 and private label handbag sales commenced in January 1994.
The retail industry has experienced significant changes and difficulties
over the past several years, including consolidation of ownership, increased
centralization of buying decisions, restructurings, bankruptcies and
liquidations. Although to date these developments have not had a material
adverse effect on the Company, the Company cannot predict what effect, if any,
continued changes within the retail industry will have on the Company's results
from operations.
Retail Operations
The Company continues to pursue several strategies to enhance and expand
its retail operations. At December 31, 1996 the Company operated 24 specialty
retail stores and 10 outlet stores under the Kenneth Cole name and one outlet
store under the Unlisted name.
The Company's retail stores are primarily operated to develop consumer
recognition of its brand names and to provide a showcase for Kenneth Cole
branded products marketed by the Company and its licensees. The Company believes
that these stores compliment its wholesale business by building brand awareness.
In addition, Kenneth Cole retail stores enable the company to reach consumers
who prefer the environment of a specialty store. Approximately 20% to 25% of the
Company's retail store products are sourced exclusively for such stores which
differentiates the product mix of its stores from that of its wholesale
customers. The Company opened seven retail stores in 1996 and plans to open 5-6
new stores in 1997.
At December 31, 1996, the Company operated eleven outlet stores. The
Company establishes its outlet stores to enable it to sell a portion of its
excess wholesale inventory and to dispose of excess inventory from its retail
stores and catalog distribution in a manner which it believes does not have an
adverse impact on its wholesale customers and the Company's retail operations.
The Company generally does not make a style available in its outlet stores or to
off-price retailers until wholesale customers have taken their first markdown on
that style. The Company anticipates that as higher levels of sales are achieved
and additional retail stores are opened, it will require additional outlet
stores. The Company opened four outlet stores in 1996 and plans to open 4-5 new
stores in 1997.
The Company believes that the Kenneth Cole brand name has developed into
the upper echelon of American designers and seeks to propel the brand into
global recognition. As such, the company is planning to open a flagship store
that will serve as a showcase for all of its products and further enhance the
strength of the Kenneth Cole brand name.
The success of its stores, and the opening and success of any stores to be
opened this year and in future years, will depend on various factors, including
general economic and business conditions affecting consumer spending, the
acceptance by consumers of the Company's retail concept, the ability of the
Company to manage such expansion and hire and train personnel, the availability
of desirable locations, the negotiation of acceptable lease terms for new
locations and the expansion of the Company's management information systems to
support the growth of its retail operations. The Company believes that its
retail stores further enhance the Company's image and represent an opportunity
for revenue and earnings growth.
Licensing
The Company views entering into licensing agreements as a vehicle to
further extend its product offerings and enhance consumer awareness of its
brands. The Company considers entering into licensing, joint venture and
distribution agreements with respect to certain products if such arrangements
provide more effective sourcing, marketing and distribution of such products
than could be achieved internally. The Company continues to pursue opportunities
in new product categories which are believed to be complimentary to its existing
product lines.
Licensees range from small to medium size manufacturers to companies which
are among the industry leaders in their respective product categories. The
Company selects licensees that it believes can produce and service
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quality fashion products consistent with the Kenneth Cole, Unlisted and Kenneth
Cole Reaction brand images. The Company's licensing department communicates the
Company's design ideas to and coordinates all marketing efforts with its
licensees. The Company generally grants licenses for three to five years with
renewal options, limits licensees to certain territorial rights, and retains the
right to terminate the license if certain specified sales levels are not
attained. Each license provides that the Company has the right to review,
inspect and/or approve all designs, the quality of the products and any use of
its trademarks.
The following table summarizes the Company's licensed product categories:
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Product Category Kenneth Cole Reaction Unlisted
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Men's Neckwear X
Men's Scarves X
Men's Tailored Clothing X
Men's Jewelry X
Men's and Women's Optical Frames X
Women's Hosiery X
Women's Scarves & Wraps X
Men's Sportswear X X
Men's Leather & Fabric Outerwear X X
Men's/Women's Watches X X
Women's Leather & Fabric Outerwear X X
Luggage/Men's Small Leather Goods X X
Men's/Women's Sunglasses X X X
Women's Small Leather Goods X X X
Men's/Women's Belts X X
</TABLE>
All of the Company's licensees and distributors are required to contribute
a percentage of their net sales of Kenneth Cole products, subject to minimum
amounts, to the advertisement and promotion of the Kenneth Cole Trademark.
International
The Company sells its products, directly or through distributors, to
wholesale customers in Australia, Canada, Hong Kong, Japan, Thailand, the
Philippines and Singapore. During 1997, the Company intends to expand its
international licensing and wholesale distribution programs as a means of
developing global brand recognition and creating additional wholesale markets
for its products.
At December 31, 1996, the Company operated one store in the Netherlands and
licensed the Kenneth Cole retail store format to its joint venture in Hong Kong
and to a third party in Singapore The store licensee acquires Kenneth Cole
branded products through the Company and its licensees. The licensed store's
format and product mix are similar to that of the Company's Kenneth Cole retail
stores. In connection with the Company's business strategy of enhancing and
expanding its retailing operations, the Company is considering certain
licensing, joint venture and distribution agreements with respect to opening
additional retail stores internationally.
Design
The Company was founded by Kenneth D. Cole, Chief Executive Officer and
President, and its success to date is largely attributable to his design talent,
creativity and marketing abilities. The Company selects designers on the basis
of their ability to understand consumers' preferences and on their ability to
originate and define fashion trends as well as to anticipate and react to
changing consumer demands in a timely manner.
The Company maintains design and marketing committees for each of its
product lines that are responsible for the creation, development and marketing
of new product styles. The Company's design committees constantly monitor
fashion trends and search for new inspirations. Members of the various
committees travel extensively to assess fashion trends in Europe, the United
States and Asia and work closely with retailers to monitor consumer preferences.
In addition, the Company's design committees meet frequently to share ideas and
discuss fashion trends occurring within each of the market segments served by
the Company.
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The process of designing and introducing a new product takes approximately
three to four months. Design committee members work together to create a design
which they believe fits the Company's image, reflects current or approaching
trends and can be manufactured cost-effectively. Once the initial design is
complete, a prototype is developed, reviewed and refined prior to commencement
of production.
In order to reduce the impact of changes in fashion trends on the Company's
product sales and increase the profitability of the Company's products to its
wholesale customers, the Company continuously seeks to develop new core basic
product styles which remain fashionable from season to season without
significant changes in design or styling. Since these core basic products are
seasonless, retailers' inventories of core basic products tend to be maintained
throughout the year and reordered as necessary, primarily through electronic
data interchange.
Sourcing
The Company does not own or operate any manufacturing facilities and
sources its branded and private label products directly or indirectly through
independently owned manufacturers in Italy, Spain, Brazil, India, China and
Korea. The Company maintains offices in Florence, Italy and Hong Kong and
generally has long-standing relationships with several independent buying agents
to monitor the production, quality and timely distribution of the Company's
products from its manufacturers. The Company sources each of its product lines
separately based on the individual design, styling and quality specifications of
such products.
The Company attempts to limit the concentration of manufacturing with any
one manufacturer. However, approximately 14% and 28% of the dollar value of
Kenneth Cole women's footwear purchases in 1996 and 1995, respectively, were
produced by a single manufacturer in Spain and approximately 34% and 44% of the
dollar value of total leathergoods purchased by the Company in 1996 and 1995,
respectively, were produced by two manufacturers in India. These manufacturers,
however, subcontract a significant portion of such purchases to ensure the
consistent and timely delivery of quality products. The Company is the largest
customer of these manufacturers and has established long-standing relationships
with them. While the Company believes it has alternative manufacturing sources
available to meet its current and future production requirements, there can be
no assurance that in the event the Company is required to change from current
manufacturers, alternative suppliers will be available on terms comparable to
the company's existing arrangements.
In advance of the Fall and Spring selling seasons, the Company works with
its manufacturers to develop product prototypes for industry trade shows. During
this process, the Company works with the manufacturers to determine production
costs, materials, break-even quantities and component requirements for new
styles. Based on indications from the trade shows and initial purchasing
commitments from wholesalers, the Company places production orders with the
manufacturers. As a result of the need to maintain in-stock inventory positions,
the Company places manufacturing orders for open stock and certain fashion
products prior to receiving firm commitments. Once an order has been placed, the
manufacturing and delivery time ranges from three weeks to four months depending
on whether it is currently in production or a new product. Throughout the
production process, the Company monitors product quality through inspections at
both the factories and upon receipt at its warehouses. To reduce the risk of
overstocking, the Company monitors sell-through data on a weekly basis and seeks
input on product demand from wholesale customers to adjust production when
needed.
Advertising and Marketing
The Company believes that advertising to promote and enhance the Kenneth
Cole and Kenneth Cole Reaction brands is an intricate part of its long term
growth strategy. The Company believes that its award-winning advertising
campaigns, which have brought it national recognition for their focus on current
events and social issues, have resulted in increased sales and consumer
awareness of its branded products. The Company's advertisements appear in
magazines such as Vogue, Vanity Fair, Details, GQ, Glamour and Marie Claire,
newspapers and outdoor advertising media. All of the Company's licensees are
required to contribute a percentage of their net sales of licensed product,
subject to minimums, to the advertising and promotion of the Kenneth Cole
Trademark. In addition, selected personal appearances by Kenneth Cole and
charitable programs have been utilized to further enhance the Company's image.
The Company employs an advertising and public relations staff to implement these
efforts.
In order to continue to strengthen brand awareness of its products and
increase sales, the Company is actively involved in the development of marketing
and merchandising programs. As part of this effort, the Company utilizes
cooperative advertising programs, sales promotions and produces consumer
catalogs which feature a variety of Kenneth Cole and Kenneth Cole Reaction
branded products marketed by the Company and its licensees. In addition,
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the Company has, on a limited basis, worked with customers to develop
distinctive catalogs which market the Company's products and to develop point of
sale displays.
An important developing aspect of the Company's marketing efforts is the
creation of shop-in-shops, where an entire collection of the Company's branded
products is featured, along with focus areas, where specific product categories
are highlighted. These shop-in-shops and focus areas create an environment that
is consistent with the Company's image and enables the retailer to display and
stock a greater volume of the Company's products per square foot of retail
space. In addition, these shop-in-shops and focus areas encourage longer term
commitment by the retailer to the Company's products and enhance consumer brand
awareness.
Distribution
During 1996, the Company relocated and entered into a six year lease for a
244,000 square foot distribution and administrative facility located in New
Jersey. The new facility will be able to support the continued growth of the
Company's business. The Company also utilizes a public warehouse located in
California. Upon completion of manufacturing, the Company's products are
inspected, bar coded (in the case of most footwear), packed and shipped by ocean
or air to the United States. The Company utilizes fully integrated information
systems to facilitate the receipt, processing and distribution through its New
Jersey distribution facility. The products are then shipped to the Company's
wholesale customers either in bulk or under its open stock program. The
Company's open stock program allows its wholesale customers to reorder core
basic styles in a range of colors and sizes for immediate shipment. While the
open stock program requires an increased investment in inventories, the Company
believes this program is an important service for its wholesale customers by
allowing them to manage inventory levels more effectively.
The Company produces consumer catalogs which feature a variety of Kenneth
Cole and Kenneth Cole Reaction branded products. Catalog order taking and
fulfillment is currently performed by a third party service located in Virginia.
Management Information Systems
Sophisticated information systems are essential to the Company's
ability to maintain its competitive position and to support continued growth.
The Company's management information system was designed to provide, among other
things, comprehensive order processing, production, accounting and management
information for the sourcing, importing, distribution and marketing aspects of
the Company's business. The Company has also installed an electronic data
interchange ("EDI") system which provides a computer link between the Company
and certain of its wholesale customers that enables both the customer and the
Company to monitor purchases, shipments and invoicing. The Company's EDI system
also improves the efficiency of responding to customer needs. The Company is
expanding its use of bar codes to enhance the efficiency of the EDI system as
well as for the Company's own inventory tracking needs. In its retail stores,
the Company uses point-of-sales registers to capture sales data and track
inventories. The Company regularly evaluates the adequacy of its management
information systems and upgrades such systems to support its growth. However,
the Company's failure to continue to upgrade its management information systems
necessary to support growth or expansion could have a material adverse effect on
the Company's financial condition and its results of operations.
Trademarks
The Company, through its wholly-owned subsidiary, K.C.P.L., Inc., owns
federal registrations for the trademarks Kenneth Cole, Kenneth Cole New York,
Kenneth Cole Reaction, and Unlisted. Each of the federal registrations are
currently in full force and effect and are not the subject of any legal
proceedings. In addition, the Company has several pending federal applications
in the United States Patent and Trademark office for trademarks and service
marks including Kenneth Cole Collection and Reaction. Moreover, the Company is
expanding its current international registrations in numerous countries in Asia,
South America, Europe and elsewhere. The Company regards its trademarks and
other proprietary rights as valuable assets in the marketing and distribution of
its products, and fully intends to maintain and renew the registrations as well
as vigorously defend against infringements.
Competition
Competition in the footwear and leathergoods industries is intense. The
Company's products compete with other branded products within their product
category as well as with private label products sold by retailers,
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including some of the Company's customers. In varying degrees depending on the
product category involved, the Company competes on the basis of style, price,
quality, comfort and brand prestige and recognition, among other considerations.
The Company also competes with numerous manufacturers, importers and
distributors of footwear and accessories for the limited shelf-space available
for the display of such products to the consumer. Moreover, the general
availability of contract manufacturing capacity allows access by new market
entrants. Some of the Company's competitors are larger, have achieved greater
recognition for their brand names, have captured greater market share and/or
have substantially greater financial, distribution, marketing and other
resources than the Company.
Foreign Operations
The Company's business is subject to risks of doing business abroad, such
as fluctuations in currency exchange rates, labor unrest, political instability
and the imposition of additional regulations relating to imports, including
quotas, duties or taxes and other charges on imports. While these factors have
not had a material adverse impact on the Company's operations to date, there can
be no assurance that they will not have a material adverse affect on the
Company's operations in the future.
In order to reduce the risk of exchange rate fluctuations, the Company
regularly enters into forward exchange contracts to protect the purchase price
under its agreements with its manufacturers or purchases products in United
States dollars. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this report. While
the Company believes that its current procedures with respect to the reduction
of risk associated with currency exchange rate fluctuations is adequate, there
can be no assurance that fluctuations in currency exchange rates in the future
will not have a material adverse effect on the results of operations of the
Company.
Government Regulation
Although the majority of the goods sold by the Company are not currently
subject to quotas, countries in which the Company's products are manufactured
may, from time to time, impose new or adjust prevailing quotas or other
restrictions on exported products. In addition, the United States may impose new
duties, tariffs and other restrictions on imported products, any of which could
have a material adverse affect on the Company's operations and its ability to
import its products at the Company's current or increased quantity levels. In
accordance with the Harmonized Tariff Schedule, a fixed duty structure in effect
for the United States, the Company pays import duties on its products ranging
from approximately 6% to 38%, depending on the principal component of the
product. Other restrictions on the importation of footwear and the Company's
other products are periodically considered by the United States government and
no assurance can be given that tariffs or duties on the Company's goods may not
be raised, resulting in higher costs to the Company, or that import quotas
respecting such goods may not be imposed or made more restrictive.
A significant portion of the Company's products are manufactured in and
imported from China. The Company's operations and its ability to import products
from China at current tariff levels could be materially and adversely affected
if the "most favored nation" status granted to China by the United States
government for trade and tariff purposes is terminated. As a result of such
status, products imported by the Company from China currently receive the lower
tariff rates made available to most of the United States' major trading
partners. While China has been granted "most favored nation" status in every
year since 1979, there can be no assurance that the United States will continue
to grant China "most favored nation" status in the future. In the event that
such status is not renewed in future years, tariff level on imports from China
could rise significantly and could have a material adverse effect on the
Company's results of operations. However, the Company believes that it would be
able to shift production of certain goods to other countries on a cost effective
basis and to continue to produce in China those goods subject to lower tariff
rates.
Customers Under Common Control
The Company's department store customers include major United States
retailers, certain of which are under common ownership. When considered together
as a group under common ownership, sales to the department store customers which
were owned by Federated Department Stores represented 14.2% and 15.8% of the net
sales of the Company for the years ended 1996 and 1995, respectively. The
Company's ten largest customers represented 51% and 53% of the Company's net
sales for the years ended December 31, 1996 and 1995, respectively. While the
Company believes that purchasing decisions have generally been made
independently by each division within a
10
<PAGE>
department store group, there is a trend among department store groups toward
centralized purchasing decisions of their divisions.
Backlog
At December 31, 1996 and 1995, the Company had unfilled wholesale customer
orders of $28.9 million and $23.4 million, respectively. The Company's backlog
at a particular time is affected by a number of factors, including seasonality,
timing of market weeks, and wholesale customer purchases of its core basic
products through the Company's open stock program. Accordingly, a comparison of
backlog from period to period may not be indicative of eventual actual
shipments.
Employees
At December 31, 1996, the Company had approximately 600 employees, 140 of
whom are covered under a collective bargaining agreement with a local affiliate
of the International Leather Goods, Plastics, Handbags and Novelty Workers'
Union, Local 1, Division of Local 342-50 United Food and Commercial Workers
Union. The Company considers its relationships with its employees to be
satisfactory.
Directors and Executive Officers
<TABLE>
<CAPTION>
Name Age Present Position
- - ---- --- ----------------
<S> <C> <C>
Kenneth D. Cole........ 43 President and Chief Executive Officer
Paul Blum.............. 37 Executive Vice President
Stanley A. Mayer....... 49 Executive Vice President and Chief Financial Officer
Susan Hudson........... 37 Vice President Men's Division
Dick Prout............. 52 Vice President
Maria C. Cole.......... 35 Director
Robert Grayson......... 51 Director
Denis F. Kelly......... 47 Director
Jeffrey G. Lynn........ 47 Director
</TABLE>
Kenneth D. Cole, age 43, has served as the Company's President and Chief
Executive Officer since its inception in 1982. Mr. Cole was a founder, and from
1976 through 1982, a senior executive of El Greco, Inc., a shoe manufacturing
and design company which manufactured Candie's women's shoes.
Paul Blum, age 37, has served as Executive Vice President since 1996 and as
Senior Vice President of the Company from 1992 through 1996. From 1982 until
1990, Mr. Blum served as Vice President and was a principal shareholder of The
Blum Co., a fashion accessory firm, the assets of which were purchased in 1990
by the Company.
Stanley A. Mayer, age 49, has served as Executive Vice President, Chief
Financial Officer, Treasurer and Secretary of the Company since March 1988 .
From 1986 until joining the Company, Mr. Mayer held the position of Vice
President-Finance and Administration of Swatch Watch USA, Inc. Mr. Mayer was the
controller of the Ralph Lauren and Karl Lagerfeld womenswear divisions of
Bidermann Industries, USA, Inc. from 1979 until 1986.
Richard Prout, age 52, is, and for more than the past five years has been,
the sole shareholder and employee of Dick Prout Enterprises, Inc., a corporation
that has been engaged by the Company to direct the operations of its landed
branded line of products.
Susan Q. Hudson, age 37, has served as Vice President in charge of men's
footwear since 1990. Prior to joining the Company, Ms. Hudson was at LA Gear,
where she served as Regional Sales Manager.
Maria Cuomo Cole, age 35, is the Chairperson of H.E.L.P., a position she
has held since January 1993. From time to time, Ms. Cole has acted as a
consultant to the Company with respect to public relations. From 1987 to 1992,
Ms. Cole was a partner in C.A. Associates, a public-relations firm based in New
York City which provided public-relations services to the Company.
Robert C. Grayson, age 51, is the Chairman, President and CEO of
Berglass-Grayson Associates (BGA), a consulting firm. From 1992-1996, Mr.
Grayson served initially as an outside consultant to Tommy Hilfiger Corp., a
11
<PAGE>
wholesaler and retailer of men's sportswear and boyswear, and later accepted
titles of Chairman of Tommy Hilfiger Retail, Inc. and Vice Chairman of Tommy
Hilfiger Corp. From 1970 to 1992, Mr. Grayson served in various capacities for
Limited Inc., including President and CEO of Lerner New York from 1985 to 1992,
and President and CEO of Limited Stores from 1983 to 1985.
Denis F. Kelly, age 47, is a Managing Director and the head of the Mergers
and Acquisitions Department at Prudential Securities Incorporated since July
1993. From 1991 until 1993, Mr. Kelly was President of Denbrook Capital Corp., a
merchant banking firm. Mr. Kelly was at Merrill Lynch from 1980 to 1991, where
he served as Managing Director, Mergers & Acquisitions from 1984 to 1986, and
then as a Managing Director, Merchant Banking, from 1986 to 1991.
Jeffrey G. Lynn, age 47, has been the Chairman, President and Chief
Executive Officer of Dunham's Athleisure Corp., a specialty retailer of
sportswear, since 1987. Mr. Lynn joined Dunham's Athleisure Corp. in 1985 and
served as President until 1987. Prior to 1985, he served as Executive Vice
President of the Musicland Group, a specialty retailer of audio/video
entertainment software.
Item 2. Properties
The Company leases its 26,000 square foot executive office and showroom
located in New York, New York under a lease which expires December 31, 2006.
During 1996, the Company relocated and entered into a lease for the use of
244,000 square feet of distribution and administrative office space in Secaucus,
New Jersey. The new facility replaces the 63,000 square foot distribution and
office facility located in Secaucus, New Jersey. The term of the lease for the
new distribution and office facility expires on June 29, 2002. The Company also
leases a 23,500 square foot facility in Secaucus used for outlet store space and
as a warehousing facility. The Company has technical and administrative offices
in Florence, Italy and Hong Kong. The Company does not own or operate any
manufacturing facilities.
At December 31, 1996 the Company operated 24 retail stores and 11 outlet
stores, all of which were leased. Generally, the leases provide for an initial
term of five to ten years, with renewal options permitting the Company to extend
the term thereafter.
As the Company continues to expand it will require alternative and/or
additional office space. Accordingly, the Company is currently evaluating
alternative and/or additional locations that will satisfy its projected space
requirements.
Item 3. Legal Proceedings
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 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,
sought total damages of approximately $789,000.
During 1996, the Company paid $846,000 and $608,000, respectively, in
satisfaction of all plaintiff's claims in the two actions mentioned above,
exclusive of the plaintiff's claim for attorneys fees. The Company has
established a reserve for the anticipated amount of attorney fees with respect
to this matter.
The Company is, from time to time, a party to litigation that arises in the
normal course of its business operations. The Company is not presently a party
to any such litigation that would have a material adverse effect on its business
or operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
12
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Class A Common Stock is listed and traded (trading symbol
KCP) on the New York Stock Exchange ("NYSE"). On October 17, 1995, the Board of
Directors declared a two-for-one stock split, to be effected in the form of a
stock dividend. Shareholders of record on October 27, 1995 received one
additional share of the Company's Class A Common Stock and Class B Common Stock
for each share of Class A Common Stock and Class B Common Stock held.
On March 24, 1997 the closing sale price for the Class A Common Stock was
$19.75. The following table sets forth the high and low sale prices for the
Class A Common Stock for each quarterly period for 1995 and 1996, as reported on
the NYSE Composite Tape (1):
1995: High Low
---- ---
First Quarter 13 3/8 9 1/16
Second Quarter 16 13/16 11 3/4
Third Quarter 20 16 1/16
Fourth Quarter 22 1/2 17 3/8
1996:
First Quarter 19 1/4 11 3/4
Second Quarter 20 1/2 17 1/8
Third Quarter 20 3/8 15 1/8
Fourth Quarter 20 1/4 14 1/2
(1) All per share amounts have been restated to reflect the stock split.
The number of shareholders of record of the Class A Common Stock on March
24, 1997 was 46.
There is one holder of record of Class B Common Stock and 5,785,398 shares
of Class B Common Stock are issued and outstanding. There is no established
public trading market for the Company's Class B Common Stock.
Dividend Policy
The Company intends to retain its earnings to finance the development,
expansion and growth of its existing business. Accordingly, the Company does not
anticipate paying cash dividends on its Class A Common Stock in the foreseeable
future. The payment of any future dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other things, future
earnings, operations, capital requirements, the financial condition of the
Company and general business conditions.
<PAGE>
Item 6. Selected Financial Data
The following selected financial data is derived from the financial
statements of the Company. The following data should be read in conjunction with
the consolidated financial statements and notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales ......................................... $ 148,258 $ 113,828 $ 84,893 $ 60,831 $ 46,049
Cost of goods sold ................................ 86,919 67,382 50,166 36,132 28,741
Gross profit ...................................... 61,339 46,446 34,727 24,699 17,308
Licensing and other income ........................ 3,575 1,856 795 514 332
Selling and general administrative
expense(1) .................................... 43,048 30,608 21,246 16,836 12,347
Executive officers' compensation (2) ............. 1,200 1,350 1,530 4,176 1,879
Loss on abandonment of leasehold
improvements and equipment (3) ................. 106 147 269 9
Operating income .................................. 20,560 16,344 12,746 4,054 3,145
Interest (income) expense, net .................... 22 (30) 25 180 298
Income before provision for income taxes .......... 20,538 16,374 12,721 3,874 2,847
Provision for income .............................. 8,251 6,550 2,894 351 252
Net income ........................................ 12,287 9,824 9,827 3,523 2,595
Earnings per share ................................ $ .90 $ .72
Weighted average shares of common
stock outstanding ................................. 13,578,326 13,575,572
Pro Forma Income Statement Data:(4)
Net sales ......................................... $ 84,893 $ 60,831
Cost of goods sold ................................ 50,166 36,132
Gross profit ...................................... 34,727 24,699
Licensing and other income ........................ 795 514
Selling, general and administrative expenses (1) .. 21,246 16,836
Executive officers' compensation .................. 1,530 1,471
Loss on abandonment of leasehold improvements
and equipment (3) ................................ 147
Operating income .................................. 12,746 6,759
Interest, net ..................................... 25 180
Income before provision for income taxes .......... 12,721 6,579
Provision for income taxes ........................ 5,088 2,609
Net income ........................................ 7,633 3,970
Supplementary pro forma net income per share ...... $ .60 $ .33
Supplementary pro forma shares outstanding (5) .... 12,689,640 11,909,148
</TABLE>
14
<PAGE>
As At December 31,
------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands)
Balance Sheet Data:
Working capital.............. $37,023 $27,309 $18,701 $7,449 $5,021
Total assets................. 65,255 43,307 31,886 20,307 12,355
Total debt, including current
maturities................ 489 102 166 1,858 516
Total shareholders' equity... 46,599 33,489 22,356 8,454 5,978
(1) Includes shipping and warehousing expenses. Includes non-recurring charges
of approximately $950,000 and $345,000 in 1993 and 1992, respectively, for
rent expense relating to vacated office space.
(2) Includes in 1993 (a) amounts paid to Kenneth Cole as additional
compensation to enable him to pay his taxes attributable to the Company's S
Corporation earnings and (b) a one-time bonus to an executive officer of
$245,000 paid in the form of shares of Class A Common Stock.
(3) Reflects losses on abandonment of leasehold improvements and equipment (a)
in 1996 and 1993 resulting from the decision to move its distribution and
administrative offices and (b) in 1992 resulting from the relocation of the
Company's principal offices.
(4) Reflects the effect on the historical income statement data for the year
ended December 31, 1994 and 1993 as if the Company's initial public
offering, which was consummated in June 1994, had been completed as of
January 1, 1993 and the Company (a) paid to its executive officers
aggregate annual compensation of $1,471,000 in 1993, which represents the
annual base salary payable to the Company's executive officers under their
respective employment agreements, and the estimated amortization of
compensatory stock options granted to an executive officer and (b) was
treated as a C Corporation filing on a consolidated return basis for income
tax purposes, with an assumed effective income tax rate of 40%.
(5) For 1993, supplementary pro forma shares includes 4,685,522 shares of Class
A Common Stock (including 2,058,064 shares sold at the Company's initial
public offering, the proceeds of which were used to repay short-term
borrowings of $11,484,000) and 7,096,542 shares of Class B Common Stock,
increased by 127,084 shares of Class A Common Stock representing the common
stock equivalents derived from applying the treasury stock method to the
exercise of options granted to an officer of the Company to purchase
200,000 shares of Class A Common Stock at $2.1875 per share.
For 1994, supplementary pro forma shares includes (i) the weighted average
shares outstanding during the period (12,463,360) and (ii) the assumed
exercise of options for the purchase of 222,950 and 373,900 shares of Class
A Common Stock at $2.1875 and 6.00 per share respectively.
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and the notes thereto included elsewhere
in this document.
Results of Operations
The Company's net sales and operating income have increased at compounded
annual growth rates of approximately 35% and 45%, respectively, since 1993,
principally as a result of increased wholesales sales of its branded footwear
and handbags and increased revenues generated from the higher number of retail
and outlet stores. Net income increased 25% to $12.3 million compared to net
income of $9.8 million in 1995. Net income for 1996 and 1995 reflects income
taxes with an effective tax rate of 40%. Pro forma net income reflects income
taxes as if the Company had been a "C" Corporation for all periods in 1994 with
an effective tax rate of 40%.
The following table sets forth operating data of the Company as a
percentage of net sales for the periods indicated below.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Net sales...................................................... 100.0% 100.0% 100.0%
Cost of goods sold............................................. 58.6 59.2 59.1
-------------------------------
Gross profit................................................... 41.4 40.8 40.9
Licensing and other income..................................... 2.4 1.6 0.9
Selling, general and administrative expenses(1)................ 29.9 28.0 26.8
Operating income............................................... 13.9 14.4 15.0
Income before provision for income taxes....................... 13.9 14.4 15.0
Provision for income taxes..................................... 5.6 5.8 3.4
-------------------------------
Net income..................................................... 8.3 8.6 11.6
-------------------------------
Pro forma net income........................................... N/A N/A 9.0
* ==============================
</TABLE>
(1) Includes shipping and warehousing expenses.
1996 Compared to 1995
Net sales were $148.3 million in 1996 compared to $113.8 million in 1995,
an increase of $34.5 million or 30.3%. Net sales of the Company's wholesale
operations, excluding sales to its retail division, increased $20.4 million or
21.3% to $116.1 million in 1996 from $95.7 million in 1995. Wholesale sales
increased due to increased brand awareness, continued growing consumer
acceptance and the strengthening of the Company's three distinct brands, Kenneth
Cole, Unlisted and Kenneth Cole Reaction. The Company's retail and outlet stores
sales increased $14.1 million, or 78%, from $18.1 million to $32.2 million. This
increase reflects a 5.4% comparable store sales gains and the opening of seven
retail stores and four outlet stores in 1996.
Gross profit was $61.3 million in 1996, an increase of $14.9 million or
32.1% from $46.4 million in 1995. As a percentage of net sales, gross profit
increased to 41.4% in 1996 from 40.8% in 1995. The increase in gross profit as a
percentage of net sales was primarily attributable to the relative increase in
retail operations which produce higher margins than wholesale operations.
Revenues from royalties increased 93% from $1.9 million in 1995 to $3.6
million in 1996. This increase primarily results from an increase in sales of
existing licensed products, including men's and women's leather outerwear and
new license agreements which introduced several new product offerings.
Selling, general and administrative expenses increased $12.4 million to
$44.4 million in 1996 from $32.0 million in 1995. The increase is due to volume
related expenses, including the hiring of new personnel, necessary to
16
<PAGE>
support the increase in revenue of the Company's wholesale and retail
operations. As a percentage of net sales, selling, general and administrative
expenses increased to 29.9% from 28.0% due to the continued expansion of the
Company's retail division which operates at a higher cost structure than its
wholesale operations.
As a result of the foregoing, operating income increased 26% in 1996 to
$20.6 million (13.9% of sales) from $16.3 million (14.4% of sales) in 1995.
1995 Compared to 1994
Net sales were $113.8 million in 1995 compared to $84.9 million in 1994, an
increase of $28.9 million or 34%. Net sales of the Company's wholesale
operations, excluding sales to its retail division, increased $19.2 million or
25.1% to $95.7 million in 1995 from $76.5 million in 1994. This increase was
primarily due to a $13.6 million or 28% increase in sales of Kenneth Cole
branded product reflecting increased brand awareness and consumer acceptance.
The Company's retail and outlet stores sales increased $9.7 million, or 115%,
from $8.4 million to $18.1 million. This increase reflects a 12.7% comparable
store sales gains and the opening of eight retail stores and five outlet stores
in 1995.
Gross profit was $46.4 million in 1995, an increase of $11.7 million or
33.7% from $34.7 million in 1994. As a percentage of net sales, gross profit
decreased to 40.8% in 1995 from 40.9% in 1994. The decrease in gross profit as a
percentage of net sales was attributable to additional markdowns that the
Company recorded during the fourth quarter of 1995, partially offset by an
increase in higher gross margins from sales generated by the Company's retail
stores.
Selling, general and administrative expenses were $32.0 million (28.0% of
sales) in 1995 and $22.8 million (26.8% of sales) in 1994. The increase is due
to the hiring of additional personnel to support wholesale and retail growth,
the increase in the number of retail stores and higher marketing and production
costs attributable to the Company's expanding catalog business and increased
marketing efforts. The increase as a percentage of sales is primarily due to the
increase in the number of retail stores, which carry a higher expense level than
the wholesale division.
As a result of the foregoing, operating income increased 28.3% in 1995 to
$16.3 million (14.4% of sales) from $12.7 million (15.0% of sales) in 1994.
Liquidity and Capital Resources
The Company relies primarily on cash flow from operations and borrowings
under its line of credit to finance operations and growth. Net cash provided by
operating activities in 1996 was $3.6 million. Cash (used in) provided by
operations in 1995 and 1994 was $(.2) million and $4.9 million, respectively.
The Company's primary funding requirements are to finance working capital and
the continued growth of the business. This includes the purchase of inventory in
anticipation of increased sales as well as the capital expenditures related to
the expansion of the retail operations.
During the first quarter of each year, the Company normally experiences
negative cash flows from operations due to the build-up of inventory and the
timing of collection of receivables (due from factors) relating to the peak
spring sales period. Cash flows may vary from time to time as a result of
seasonal requirements, the timing of the receipt of merchandise from suppliers
and the delivery by the Company of the merchandise to its customers, the
Company's open stock inventory program and the level of accounts receivable and
due from factors balances. At December 31, 1996 and 1995, working capital was
$36.9 million and $27.3 million, respectively.
The Company sells substantially all of its accounts receivable to two
factors without recourse. In circumstances where a customer's account cannot be
factored without recourse, the Company may take other measures to reduce its
credit exposure which could include requiring the customer to pay in advance or
to provide a letter of credit covering the sales price of the merchandise
ordered.
The Company currently has a line of credit, as amended on November 8, 1996,
under which up to $20.0 million is available to finance working capital
requirements and letters of credit to finance the Company's purchases.
Borrowings available under the line of credit are determined by a specified
percentage of eligible accounts receivable and inventories and bear interest at
(i) the higher of The Bank of New York's prime lending rate
17
<PAGE>
or the Federal Funds rate plus 0.5% at the date of borrowing or (ii) a
negotiated rate. In connection with the line of credit, the Company has agreed
to eliminate all the outstanding balances under the facility for at least 30
consecutive days during each calendar year. In addition, borrowings under the
line of credit are secured by certain assets of the Company.
Capital expenditures, which were primarily for leasehold improvements and
furniture and fixtures associated with new store openings, were approximately
$4.9 million, $3.4 million and $2.3 million for 1996, 1995 and 1994,
respectively. The Company anticipates opening, in total, approximately 10 to 12
retail and outlet stores in 1997 requiring aggregate capital expenditures of
approximately $3.0 million. In addition, the Company expects to spend
approximately $2.0 million for the initial inventory requirements of the new
stores.
The Company anticipates that it will require increased capital expenditures
to support its continued growth including an increase in its office and
warehouse space and improvements to its management information systems.
The Company believes that it will be able to satisfy its ongoing cash
requirements for the foreseeable future, including requirements for its
expansion, primarily with cash flow from operations, supplemented by borrowings
under its line of credit.
The retail industry has experienced significant changes and difficulties
over the past several years, including consolidation of ownership, increased
centralization of buying decisions, restructurings, bankruptcies and
liquidations. Although to date these circumstances have not had a material
adverse effect on the Company, the Company cannot predict what effect, if any,
continued changes within the retail industry will have on the Company's cash
flow from operations.
The Company regularly purchases inventory in foreign currencies from
manufacturers in Spain and Italy. In order to reduce the risks associated with
currency exchange rates, the Company regularly enters into forward exchange
contracts for the purchase of inventory at future dates, payable in foreign
currencies. At December 31, 1996, forward exchange contracts totaling $2.1
million were outstanding with settlement dates ranging from January 1997 through
March 1997. The Company expects to continue routinely to enter into additional
foreign exchange contracts throughout the year. While the Company believes that
its current procedures with respect to the reduction of risk associated with
currency exchange rate fluctuations is adequate, there can be no assurance that
such fluctuations will not have a material adverse effect on the results of
operations of the Company in the future.
The Company intends to retain its earnings to finance the development,
expansion and growth of its existing business. Accordingly, the Company does not
anticipate paying cash dividends on its Class A Common Stock in the foreseeable
future. The payment of any future dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other things, future
earnings, operations, capital requirements, the financial condition of the
Company and general business conditions.
Seasonality
The Company's products are marketed primarily for Fall and Spring seasons,
with slightly higher volume of wholesale products sold during the first and
third quarters. The Company's retail operations generally experience their
strongest results in the fourth quarter and their weakest in the first quarter.
Effects of Inflation
The Company does not believe that the relatively moderate rates of
inflation experienced over the last few years in the United States, where it
primarily competes, have had a significant effect on revenues or profitability.
Item 8. Financial Statements and Supplementary Data
See page F-1 for a listing of the consolidated financial statements
submitted as part of this report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
18
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Except for the information regarding directors and executive officers of
the registrant, which is included in Part I, the information required by this
item will be contained in the Company's Proxy Statement for its Annual
Shareholders Meeting to be held May 29, 1997 to be filed with the Securities and
Exchange Commission within 120 days after December 31, 1996 and is incorporated
herein by reference in response to this item.
Item 11. Executive Compensation
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Shareholders Meeting to be held May 29, 1997 to
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1996 and is incorporated herein by reference in response to this
item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Shareholders Meeting to be held May 29, 1997 to
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1996 and is incorporated herein by reference in response to this
item.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Shareholders Meeting to be held May 29, 1997 to
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1996 and is incorporated herein by reference in response to this
item.
19
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) See page F-1 for a listing of consolidated financial statements
submitted as part of this report.
(a) (2) All schedules, for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are shown in the financial statements or are inapplicable
and therefore have been omitted.
(a) (3). The following exhibits are included in this report.
Exhibit
No.
---
Description
-----------
3.01 -- Restated Certificate of Incorporation of Kenneth Cole Productions,
Inc.; Certificate of Merger of Cole Fifth Avenue, Inc. into Kenneth
Cole Productions, Inc.; Certificate of Merger of Cole Productions,
Inc. into Kenneth Cole Productions, Inc.; Certificate of Merger of
Cole Sunset, Inc., into Kenneth Cole Productions, Inc.; Certificate of
Merger of Cole Union Street, Inc. into Kenneth Cole Productions, Inc.;
Certificate of Merger of Cole West, Inc. into Kenneth Cole
Productions, Inc., Certificate of Merger of Kenneth Cole Woodbury,
Inc. into Kenneth Cole Productions, Inc.; Certificate of Merger of
Kenneth Cole Leather Goods, Inc. into Kenneth Cole Productions, Inc.;
Certificate of Merger of Unlisted into Kenneth Cole Productions, Inc.
(Incorporated by reference to Exhibit 3.01 to the Company's
Registration Statement on Form S-1, Registration No. 33-77636).
3.02 -- By-laws. (Incorporated by reference to Exhibit 3.02 to the Company's
Registration Statement on Form S-1, Registration No. 33-77636).
4.01 -- Specimen of Class A Common Stock Certificate. (Incorporated by
reference to Exhibit 4.01 to the Company's Registration Statement on
Form S-1, Registration No. 33-77636).
10.01 -- Tax Matters Agreement, dated as of June 1, 1994, among Kenneth Cole
Productions, Inc., Kenneth D. Cole, Paul Blum and Stanley A. Mayer.
(Incorporated by reference to Exhibit 10.01 to the Company's
Registration Statement on Form S-1, Registration No. 33-77636).
10.02 -- Term Loan Agreement, dated as of May 26, 1994, by and among Kenneth
Cole Productions, Inc., Kenneth Cole Leather Goods, Inc., Unlisted,
Inc., Cole West, Inc., Kenneth Cole Financial Services, Inc., Kenneth
Cole Woodbury, Inc., Cole Fifth Avenue, Inc., Cole Union Street, Inc.
and The Bank of New York; Promissory Notes, dated May 26, 1994, issued
by each of Kenneth Cole Leather Goods, Inc., Unlisted Inc., Cole West,
Inc., Kenneth Cole Financial Services, Inc., Kenneth Cole Woodbury,
Inc., Cole Fifth Avenue, Inc., Cole Union Street, Inc. to The Bank of
New York; Shareholder Guaranty by and between Kenneth D. Cole and The
Bank of New York, dated as of May 26, 1994; Subordination Agreement by
and among Kenneth D. Cole, Kenneth Cole Productions, Inc., Kenneth
Cole Leather Goods, Inc., Unlisted, Inc., Cole West, Inc., Kenneth
Cole Financial Services, Inc., Kenneth Cole Woodbury, Inc., Cole Fifth
Avenue, Inc., Cole Union Street, Inc. and The Bank of New York, dated
as of April 13, 1994; Reinvestment Agreement by and among Kenneth D.
Cole, Kenneth Cole Productions, Inc., Unlisted, Inc., Cole West, Inc.,
Kenneth Cole Financial Services, Inc., Kenneth Cole Woodbury, Inc.,
Cole Fifth Avenue, Inc., Cole Union Street, Inc. and The Bank of New
York, dated as of May 26, 1994; Amendment No. 1 to the Term Loan
Agreement and the Reinvestment Agreement by and among Kenneth D. Cole,
Kenneth Cole Productions, Inc., Cole West, Inc., Kenneth Cole
Woodbury, Inc., Cole Fifth Avenue, Inc., Cole Union Street, Inc.,
Kenneth Cole Financial Services, Inc. and The Bank of New York, dated
as of May 31, 1994. (Incorporated by reference to Exhibit 10.02 to the
Company's Registration Statement on Form S-1, Registration No.
33-77636).
10.03 -- Line of Credit Letter, dated January 13, 1994, from The Bank of New
York to Kenneth Cole Productions, Inc., Kenneth Cole Leather Goods,
Inc. and Unlisted, Inc.; $7,500,000 Promissory Note, dated February 1,
1994 by Kenneth Cole Productions, Inc., Kenneth Cole Leather Goods,
Inc. and Unlisted, Inc. issued to The Bank of New York; Letter
Agreement, dated December 16, 1993, between The Bank of New York and
Kenneth Cole Productions, Inc., Unlisted, Inc., Kenneth Cole Leather
Goods, Inc., Cole Productions, Inc., Cole West, Inc., Kenneth Cole
Financial Services, Inc., Cole Woodbury, Inc., Cole Sunset, Inc. and
Cole Fifth Avenue, Inc.; General Guarantees, dated December 16, 1993,
in favor of The Bank of New
20
<PAGE>
York by Kenneth Cole Leather Goods, Inc. for Unlisted, Inc., by
Kenneth Cole Leather Goods, Inc. for Kenneth Cole Productions, Inc.,
by Unlisted, Inc. for Kenneth Cole Productions, Inc., by Unlisted,
Inc. for Kenneth Cole Leather Goods, Inc., by Kenneth Cole
Productions, Inc. for Kenneth Cole Leather Goods, Inc., and by Kenneth
Cole Productions, Inc. for Unlisted, Inc.; General Loan and Security
Agreements, dated December 16, 1993, between The Bank of New York and
each of Kenneth Cole Productions, Inc., Kenneth Cole Leather Goods,
Inc. and Unlisted, Inc.; and Personal Guarantees of Mr. Kenneth D.
Cole, dated December 16, 1993, in favor of The Bank of New York for
Kenneth Cole Productions, Inc., Unlisted, Inc. and Kenneth Cole
Leather Goods, Inc. (Incorporated by reference to Exhibit 10.03 to the
Company's Registration Statement on Form S-1, Registration No.
33-77636).
Line of Credit Letter, dated December 9, 1994 from The Bank of New
York to Kenneth Cole Productions, Inc.; $7,500 Promissory Note, dated
December 15, 1994 by Kenneth Cole Productions, Inc. issued to The Bank
of New York; Letter of Termination of Personal Guarantees of Mr.
Kenneth D. Cole, dated December 8, 1994, in favor of The Bank of New
York for Kenneth Cole Productions, Inc., Unlisted, Inc. and Kenneth
Cole Leather Goods, Inc. (Incorporated by reference to Exhibit 10.03
to the Company's 1994 Form 10-K).
10.03A $10,000 Promissory Note, dated July 31, 1995 by Kenneth Cole
Productions, Inc. issued to The Bank of New York. (Previously filed as
Exhibit 10.03A to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference).
*10.04 -- Kenneth Cole Productions, Inc. 1994 Stock Option Plan. (Incorporated
by reference to Exhibit 10.04 to the Company's Registration Statement
on Form S-1, Registration No. 33-77636).
*10.05 -- Employment Agreement, dated as of April 30, 1994, between Kenneth Cole
Productions, Inc. and Kenneth D. Cole. (Incorporated by reference to
Exhibit 10.05 to the Company's Registration Statement on Form S-1,
Registration No. 33-77636).
*10.06 -- Employment Agreement, dated as of April 30, 1994, between Kenneth Cole
Productions, Inc. and Paul Blum. (Incorporated by reference to Exhibit
10.06 to the Company's Registration Statement on Form S-1,
Registration No. 33-77636).
*10.07 -- Employment Agreement, dated as of April 30, 1994, between Kenneth Cole
Productions, Inc. and Stanley A. Mayer; Stock Option Agreement dated
as of March 31, 1994 between Kenneth Cole Productions, Inc. and
Stanley A. Mayer. (Incorporated by reference to Exhibit 10.07 to the
Company's Registration Statement on Form S-1, Registration No.
33-77636).
Stock Option Agreement dated as of June 1, 1994, between Kenneth Cole
Productions, Inc. and Stanley A. Mayer; Stock Option Agreement dated
as of July 7, 1994, between Kenneth Cole Productions, Inc. and Stanley
A. Mayer (Incorporated by reference to Exhibit 10.07 to the Company's
1994 Form 10-K).
10.08 -- Collective Bargaining Agreement by and between the New York Industrial
Council of the National Fashion Accessories Association, Inc. and
Leather Goods, Plastics, Handbags and Novelty Workers' Union, Local 1,
dated as of April 25, 1987; Memorandum of Agreement by and between the
New York Industrial Council of the National Fashion Accessories
Association, Inc. and Leather Goods, Plastics, Handbags and Novelty
Workers' Union, Local 1, Division of Local 342-50 United Food and
Commercial Workers Union, dated as of June 16, 1993. (Incorporated by
reference to Exhibit 10.08 to the Company's Registration Statement on
Form S-1, Registration No. 33-77636).
10.09 Memorandum of Agreement between the New York Industrial Council of the
National Fashion Accessories Association Inc. and Local 1 Leather
Goods, Plastics, Handbags, and Novelty Workers Union, Division of
Local 342-50 United Food and Commercial Workers Union (Previously
filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1996 and incorporated
herein by reference).
10.10 Employment Agreement between Kenneth Cole Productions, Inc., and Paul
Blum. Previously filed as Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1996 and
incorprated herein by reference).
+10.11 Sublease Agreement, dated June 17, 1996, between Kenneth Cole
Productions, Inc. and Liz Claiborne Accessories, Inc.
21
<PAGE>
+21.01 -- List of Subsidiaries.
+23.01 Consent of Ernst & Young LLP
+27 Financial Data Schedule
- - ----------------------------
* Management contract or compensatory plan or arrangement required to be
identified pursuant to Item 14(a) of this report.
+ Filed herewith.
(b) Reports on Form 8-K
None.
(c) See (a) (3) above for a listing of the exhibits included as a part of this
report.
22
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Page
----
Report of Independent Auditors........................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995.......... F-3
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994................................... F-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994............... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994................................... F-7
Notes to Consolidated Financial Statements............................ F-8
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Kenneth Cole Productions, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Kenneth
Cole Productions, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. 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 consolidated financial position of Kenneth Cole
Productions, Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
February 25, 1997
F-2
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1996 1995
-----------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 1,626,000 $ 2,204,000
Due from factors 17,976,000 13,898,000
Accounts receivable, less allowance for doubtful accounts
of $65,000 in 1996, and $30,000 in 1995 3,339,000 2,316,000
Inventories 29,265,000 16,361,000
Prepaid expenses and other current assets 1,001,000 909,000
Deferred income taxes 755,000 514,000
-----------------------------------
Total current assets 53,962,000 36,202,000
-----------------------------------
Property and equipment - at cost:
Furniture and fixtures 3,234,000 1,716,000
Machinery and equipment 2,916,000 1,788,000
Leasehold improvements 6,610,000 4,523,000
-----------------------------------
12,760,000 8,027,000
Less accumulated depreciation and amortization 3,428,000 2,374,000
-----------------------------------
Net property and equipment 9,332,000 5,653,000
-----------------------------------
Other assets:
Deferred income taxes 145,000 422,000
Deposits and sundry 1,816,000 1,030,000
-----------------------------------
Total other assets 1,961,000 1,452,000
-----------------------------------
Total assets $ 65,255,000 $ 43,307,000
===================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------------------------
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 12,738,000 $ 6,765,000
Accrued expenses and other current liabilities 2,376,000 1,859,000
Advances due under revolving credit facility and
current portion of long-term debt 489,000 54,000
Income taxes payable 1,247,000
Deferred license income 89,000 121,000
------------------------------------
Total current liabilities 16,939,000 8,799,000
Rent payable 521,000 367,000
Other non-current liabilities 1,196,000 652,000
Commitments and contingencies
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, 7,353,179 and 7,299,382
outstanding in 1996 and 1995 74,000 73,000
Class B Convertible Common Stock, par value $.01,
6,000,000 shares authorized, 5,785,398
outstanding in 1996 and 1995 58,000 58,000
Additional paid-in capital 19,104,000 18,510,000
Retained earnings 27,432,000 15,145,000
Deferred compensation--stock options (69,000) (297,000)
------------------------------------
Total shareholders' equity 46,599,000 33,489,000
------------------------------------
Total liabilities and shareholders' equity $ 65,255,000 $ 43,307,000
------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
-----------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 148,258,000 $ 113,828,000 $ 84,893,000
Cost of goods sold 86,919,000 67,382,000 50,166,000
-----------------------------------------------------------
Gross profit 61,339,000 46,446,000 34,727,000
Licensing and other income 3,575,000 1,855,000 795,000
Operating costs and expenses:
Selling, general and administrative and shipping
and warehousing 44,354,000 31,957,000 22,776,000
-----------------------------------------------------------
44,354,000 31,957,000 22,776,000
-----------------------------------------------------------
Operating income 20,560,000 16,344,000 12,746,000
Interest (income) expense, net 22,000 (30,000) 25,000
-----------------------------------------------------------
Income before provision for income taxes 20,538,000 16,374,000 12,721,000
Provision for income taxes 8,251,000 6,550,000 2,894,000
Net income $ 12,287,000 $ 9,824,000 $ 9,827,000
Earnings per share $ .90 $ .72
Shares used to compute earnings per share 13,578,000 13,576,000
Unaudited pro forma information:
Historical income before taxes $ 12,721,000
Pro forma adjustment for taxes (5,088,000)
--------------------
Pro forma net income $ 7,633,000
--------------------
Supplementary pro forma net income
per share
$.60
--------------------
Shares used to compute supplementary pro forma
net income per share 12,690,000
--------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Class A Common Stock Class B Common Stock
----------------------------- ---------------------------- Total
Number Number Common
of Shares Amount of Shares Amount Stock
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shareholders' equity,
December 31, 1993 1,155,714 $ 11,000 3,548,271 $ 36,000 $ 47,000
Deferred compensation under
stock option plan
Stock grants
Exercise of stock option 158,015 2,000 2,000
S corporation dividends
Distribution to shareholders
Net proceeds from initial public
offering, net 1,613,000 16,000 16,000
Net income
Amortization of deferred
compensation ------------------------------------------------------------------------
Shareholders' equity,
December 31, 1994 2,926,729 29,000 3,548,271 36,000 65,000
Conversion of Class B to Class A 655,572 7,000 (655,572) (7,000)
Exercise of stock option,
including tax benefit from 67,390 1,000 1,000
exercise of stock options
Net income
Amortization of deferred
compensation
Two-for-one stock split 3,649,691 36,000 2,892,699 29,000 65,000
------------------------------------------------------------------------
Shareholders' equity,
December 31, 1995 7,299,382 73,000 5,785,398 58,000
131,000
Exercise of stock option,
including tax benefit from 53,797 1,000 1,000
exercise of stock options
Net income
Amortization of deferred
compensation ------------------------------------------------------------------------
Shareholders' equity,
December 31, 1996 7,353,179 $ 74,000 5,785,398 $58,000 $ 132,000
========================================================================
<CAPTION>
Additional
Paid-In Retained Deferred
Capital Earnings Compensation Total
------------------------------------------------------------
<C> <C> <C> <C>
Shareholders' equity,
December 31, 1993 $ 2,944,000 $ 5,463,000 $ 8,454,000
Deferred compensation under
stock option plan 674,000 $ (674,000)
Stock grants 154,000 154,000
Exercise of stock option 4,000 6,000
S corporation dividends (3,320,000) (9,180,000) (12,500,000)
Distribution to shareholders (789,000) (789,000)
Net proceeds from initial public
offering, net 17,036,000 17,052,000
Net income 9,827,000 9,827,000
Amortization of deferred 152,000 152,000
compensation ------------------------------------------------------------
Shareholders' equity,
December 31, 1994 17,492,000 5,321,000 (522,000) 22,356,000
Conversion of Class B to Class A
Exercise of stock option,
including tax benefit from 1,083,000 1,084,000
exercise of stock options
Net income 9,824,000 9,824,000
Amortization of deferred 225,000 225,000
compensation
Two-for-one stock split (65,000)
------------------------------------------------------------
Shareholders' equity,
December 31, 1995 18,510,000 15,145,000 (297,000) 33,489,000
Exercise of stock option,
including tax benefit from 594,000 595,000
exercise of stock options
Net income 12,287,000 12,287,000
Amortization of deferred 228,000 228,000
compensation ------------------------------------------------------------
Shareholders' equity,
December 31, 1996 $ 19,104,000 $ 27,432,000 $ (69,000) $ 46,599,000
============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income ............................................................. $ 12,287,000 $ 9,824,000 $ 9,827,000
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization ..................................... 1,109,000 794,000 477,000
Provision for doubtful accounts ................................... 35,000 35,000 91,000
Amortization of deferred compensation ............................. 228,000 225,000 152,000
Abandonment of leasehold improvements and equipment ............... 106,000
Provision (benefit) for deferred taxes ............................ 36,000 186,000 (971,000)
Changes in operating assets and liabilities:
Increase in due from factors .................................. (4,078,000) (6,105,000) (1,999,000)
Increase in accounts receivable ............................... (1,058,000) (424,000) (1,237,000)
Increase in inventories ....................................... (12,904,000) (4,585,000) (328,000)
Increase in prepaid expenses and
other current assets ........................................ (92,000) (514,000) (283,000)
Increase in deposits and sundry ............................... (786,000) (600,000) (364,000)
Increase (decrease) in income taxes payable ................... 1,497,000 (220,000) 559,000
Increase in accounts payable .................................. 5,973,000 1,129,000 1,746,000
Increase (decrease) in accrued expenses and
other current liabilities ................................... 485,000 (566,000) (2,891,000)
Increase in other non-current liabilities ..................... 747,000 551,000 108,000
----------------------------------------------------
Net cash provided by (used in) operating activities .................... 3,585,000 (270,000) 4,887,000
Cash flows from investing activities
Acquisition of property and equipment, net ............................. (4,894,000) (3,320,000) (2,263,000)
----------------------------------------------------
Net cash used in investing activities .................................. (4,894,000) (3,320,000) (2,263,000)
Cash flows from financing activities
Proceeds (repayment) of revolving line of credit, net .................. 440,000 (1,432,000)
Net proceeds from initial public offering .............................. 17,052,000
Proceeds from exercise of stock options ................................ 345,000 542,000 6,000
S corporation dividends paid ........................................... (12,500,000)
Distribution to shareholders ........................................... (789,000)
Repayment of notes payable to shareholders ............................. (209,000)
Repayment of long-term debt ............................................ (54,000) (63,000) (52,000)
----------------------------------------------------
Net cash provided by financing activities .............................. 731,000 479,000 2,076,000
Net (decrease) increase in cash ........................................ (578,000) (3,111,000) 4,700,000
Cash, beginning of year ................................................ 2,204,000 5,315,000 615,000
----------------------------------------------------
Cash, end of year ...................................................... $ 1,626,000 $ 2,204,000 $ 5,315,000
====================================================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest ............................................................ $ 119,000 $ 82,000 $ 143,000
Income taxes ........................................................ $ 5,804,000 $ 6,357,000 $ 3,378,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
1. Description of Business
Kenneth Cole Productions, Inc. and its subsidiaries (the "Company") designs
and sources a broad range of quality footwear, handbags and accessories
primarily under its Kenneth Cole, Unlisted and Kenneth Cole Reaction brand names
and markets its products for sale to more than 2,500 department stores and
specialty store locations in the United States, in several foreign countries and
through its retail and outlet store base. In addition, the Company has granted
licenses to certain third parties for a variety of accessory and apparel product
categories, including men's neckwear, briefcases, portfolios, fabric outerwear,
tailored clothing, jewelry, women's hosiery and small leather goods, and men's
and women's belts, scarves and wraps, leather outerwear, sunglasses and eyewear,
watches, and luggage. The Company produces consumer catalogues which feature a
variety of Kenneth Cole and Kenneth Cole Reaction branded products.
Organization and Initial Public Offering
The Company was incorporated in September 1982. The Company completed an
initial public offering (the "Offering") of 1,860,000 shares of Class A Common
Stock, in which the Company sold 1,613,000 shares, par value $.01 on June 9,
1994 at $12 per share. Net proceeds to the Company were approximately $17.1
million, which is net of $2.5 million of fees to underwriters and other expenses
related to the Offering.
Stock Split
On October 17, 1995, a two-for-one stock split of the Company's Common
Stock was effected in the form of a stock dividend of one share of Common Stock
for each share of Common Stock outstanding at the close of business on October
27, 1995 (the "Stock Split"). Accordingly, all applicable share and per share
data have been adjusted for the Stock Split.
F-8
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies
Management's 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 these estimates.
Principles of Consolidation
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents. Restricted
cash in the amount of $1,196,000 and $603,000 related to deferred compensation
is included in other non current assets in 1996 and 1995, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out method. All inventory is comprised of finished goods.
The Company sources each of its product lines separately, based on the
individual design, styling and quality specifications of such products. The
Company sources all of its products directly or indirectly through manufacturers
in Italy, Spain, Brazil, India, China and Korea. The Company attempts to limit
the concentration with any one manufacturer. However, approximately 14% and 28%
of the dollar value of Kenneth Cole women's footwear purchases were produced by
a single manufacturer in Spain and approximately 34% and 44% of the dollar value
of total leathergoods purchases by the Company were produced by two
manufacturers in India in 1996 and 1995, respectively. The Company believes it
has alternative manufacturing sources available to meet its current and future
production requirements in the event the Company is required to change current
manufacturers or current manufacturers are unavailable to fulfill the Comapny's
production needs.
F-9
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over estimated useful lives ranging
from five to seven years. Leasehold improvements are amortized by the
straight-line method over the term of the related lease or the estimated useful
life, whichever is less.
Licensing and Other Income
The Company has entered into various trade name license agreements which
provide revenues based on minimum royalties and additional amounts based on
percentage of defined sales. Minimum royalty revenue is recognized on a
straight-line basis over each period, as defined, in each license agreement.
Royalties exceeding the defined minimum amounts are recognized as income during
the period corresponding to the licensee sales.
Revenue Recognition
Wholesale sales are recognized upon shipment of products to the customers.
Retail sales are recognized when the payment is received from the customers.
Advertising Costs
The Company incurred advertising expense of $5.0 million, $3.5 million and
$2.7 million, before advertising contributions made by licensees, for 1996, 1995
and 1994, respectively. The Company records advertising expense concurrent with
the first time the advertising takes place.
Stock Based Compensation
The Company adopted Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" (SFAS 123), in 1996. Under the
provisions of SFAS, companies can elect to account for stock-based compensation
plans using a fair value based method or continue measuring compensation expense
for those plans using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB
25) and related Interpretations. The Company has elected to continue using the
intrinsic value method to account for stock-based compensation plans. SFAS 123
requires companies electing to continue using the intrinsic value method to make
certain pro forma disclosures (see Note 9).
F-10
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Income Taxes
The Company accounts for income taxes using the liability method. Under
this method, 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.
Earnings Per Share
Earnings per share is based upon the weighted average number of shares of
common stock outstanding during the period and the dilutive effect of stock
options.
Reclassifications
Certain amounts included in the 1995 and 1994 financial statements have
been reclassified to conform with the 1996 presentation.
3. Pro Forma Information--Unaudited
The pro forma financial information presents the effects on the historical
consolidated financial information as if the Company has been treated as a C
Corporation rather than an S Corporation throughout 1994. Prior to the Offering,
the Company had elected to be treated as an S Corporation for Federal and, where
permitted, state income tax purposes. Upon the closing of the Offering, the
Company terminated its status as an S Corporation. The pro forma adjustment
reflects increased provisions for Federal and state taxes to reflect an
effective rate of 40%.
Supplementary Pro Forma Net Income Per Share
Supplementary pro forma net income per share is based upon (i) the weighted
average shares outstanding during 1994 (12,463,360) and (ii) the assumed
exercise of options for the purchase of 222,950 and 373,900 shares of Class A
Common Stock at $2.1875 and $6.00 per share, respectively.
4. Due from Factors and Line of Credit Facility
The Company sells substantially all of its accounts receivables to factors,
without recourse, subject to credit limitations established by the factors for
each individual account. Certain accounts receivable in excess of established
limits are factored with recourse. Included in amounts due from factors at
December 31, 1996 and 1995 are accounts receivable totaling approximately
$811,000 and $606,000, respectively, subject to recourse. The agreements with
the factors provide for payment of a service fee on receivables sold.
F-11
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Due from Factors and Line of Credit Facility (continued)
At December 31, 1996 and 1995, the balance due from factors, which includes
chargebacks due from customers is net of sales allowances of approximately
$2,200,000 and $1,800,000, respectively.
On December 16, 1993, the Company entered into a Line of Credit Facility
(the "Facility"). The Facility, as amended, allows for uncommitted borrowings,
letter of credits and banker's acceptances subject to individual maximums and in
the aggregate, an amount not to exceed the lesser of $20,000,000 or a "Borrowing
Base." The Borrowing Base is calculated on a specified percentage of eligible
amounts due under factoring arrangements, eligible non-factored accounts
receivable, and eligible inventory. Borrowings under the revolving loan portion
of the Facility ("Advances") are due on demand. The Company may pay down and
re-borrow at will under the Facility. Advances bear interest at the Alternate
Base Rate (defined as the higher of the Prime Rate or the Federal Funds in
effect at borrowing date plus 1/2 of 1%) or the Note Rate (which will be agreed
upon between the lender and the Company). Outstanding advances under this
agreement were $440,000 at December 31, 1996. There were no outstanding advances
at December 31, 1995.
In connection with the line of credit, the Company has agreed to eliminate
all the outstanding balances under the facility for at least 30 consecutive days
during each calendar year. In addition, borrowings under the line of credit are
secured by certain assets of the Company.
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
December 31,
1996 1995
-----------------------
Rent expense $ 707,000 $ 750,000
Compensation 977,000 837,000
Other 692,000 272,000
-----------------------
$2,376,000 $1,859,000
=======================
6. Other Noncurrent Liabilities
Included in other noncurrent liabilities is deferred compensation of
approximately $1,196,000 and $603,000 in 1996 and 1995, respectively and
long-term debt of $49,000 in 1995.
F-12
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Foreign Currency Transactions
The Company routinely enters into firm commitments for the purchase of
imported merchandise at future dates, payable in foreign currencies. Due to
fluctuations in foreign currency exchange rates, the Company enters into forward
exchange contracts ($2,065,000, and $3,463,000 at December 31, 1996 and 1995,
respectively) to protect the purchase price under such commitments. Gains and
losses on forward exchange contracts are deferred and accounted for as part of
the purchase price of imported merchandise. At December 31, 1996, forward
exchange contracts have maturity dates through March 1997. The unrealized loss
on these forward exchange contracts is approximately $2,000.
8. Income Taxes
Prior to the Offering, the Company had elected to be treated as a
Subchapter S Corporation for federal and, where permitted, state income tax
purposes. As an S Corporation, the Company was not responsible for the payment
of federal and certain state income taxes. On June 2, 1994, in connection with
the Offering, the Company terminated its S Corporation status and, accordingly,
has been subject to federal and state income taxes as a C Corporation since that
date. As a result of the termination of the Company's S Corporation status, net
deferred income tax assets totaling approximately $787,000 have been reinstated
as of June 2, 1994 and have been included as an income tax benefit in 1994.
Significant items comprising the Company's net deferred tax assets as of
December 31, 1996 and 1995 are:
December 31,
1996 1995
-----------------------
Current:
Inventory capitalization and reserves $ 399,000 $ 422,000
Allowance for bad debts 26,000 12,000
Rent 170,000
Other 160,000 80,000
-----------------------
$ 755,000 $ 514,000
=======================
Non-current:
Depreciation (260,000) (140,000)
Deferred compensation 633,000 311,000
Undistributed foreign earnings (358,000)
Other 130,000 251,000
-----------------------
$ 145,000 $ 422,000
=======================
F-13
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Federal $ 6,543,000 $ 5,031,000 $ 2,936,000
State and local 1,650,000 1,300,000 889,000
Foreign 22,000 32,000 40,000
------------------------------------------
8,215,000 6,363,000 3,865,000
Deferred:
Federal 32,000 163,000 (205,000)
State and local 4,000 23,000 21,000
Reinstatement of deferred income taxes (787,000)
------------------------------------------
36,000 186,000 (971,000)
------------------------------------------
$ 8,251,000 $ 6,549,000 $ 2,894,000
==========================================
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory tax
rate to the effective income tax rate for 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate 35% 35% 35%
S Corporation income (11)
State and local taxes, net of federal tax benefit 5 6 5
Deferred income taxes resulting from change in tax status (6)
Other (1)
-----------------------------------------
40% 40% 23%
=========================================
</TABLE>
F-14
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Stock Option Plans and Grants
1994 Stock Option Plan
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, in accounting for its employee stock options. Under APB 25, when
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. Had compensation cost for the stock options been determined based on
the fair value at the grant dates for awards under the plan, consistent with the
alternative method set forth under SFAS 123, net income and net income per share
would have been reduced.
The pro forma amounts are indicated below:
1996 1995
-----------------------------------------
Net income:
As reported $12,287,000 $9,824,000
Pro forma $11,916,000 $9,633,000
Net income per share
As reported $.90 $.72
Pro forma $.88 $.71
The effects of applying SFAS 123 on this pro forma disclosure may not be
indicative of future results. SFAS 123 does not apply to grants prior to 1995
and additional awards in future years are anticipated.
The Company's 1994 Incentive Stock Option Plan has authorized the grant of
options to employees for up to 1,000,000 shares of the Company's common stock.
Certain options granted under the Plan vest in one-third increments in each of
the first, second and third years following the date of grant and certain
options vest up to 10%, 30%, 60% and 100% in the second, third, fourth and fifth
years, respectively. Options granted have 10 year terms. Non employee Director
options granted have 10 year terms and vest 50% on the first anniversary of the
date of grant and become fully exercisable at the end of two years.
Pro forma information regarding net income and earnings per share is
required by Statement 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995 respectively: risk-free interest rate of 6.25%; 0%
dividend yields; expected volatility factors of .359 and .346 and expected lives
of 6.3 and 4.5 years. The weighted average of fair value of options granted was
$7.21 and $5.15 for the years ended December 31, 1996 and 1995, respectively.
F-15
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The following table summarizes all stock option transactions from the
inception of the plan through December 31, 1996.
<TABLE>
<CAPTION>
Shares Weighted-Average
Exercise Price
----------------------- ------------------------
<S> <C> <C>
Outstanding at December 31, 1993 0
Granted 403,950 $6.00
Exercised 0
Forfeited (30,050) $6.00
-----------------------
Outstanding at December 31, 1994 373,900 $6.00
Granted 420,372 $10.59
Exercised (64,780) $6.00
Forfeited (27,034) $7.52
-----------------------
Outstanding at December 31, 1995 702,458
Granted 156,583 $15.89
Exercised (53,797) $6.35
Forfeited (43,919) $9.04
-----------------------
Outstanding at December 31, 1996 761,325
=======================
</TABLE>
The following table summarizes information about stock options at December
31, 1996:
<TABLE>
<CAPTION>
Outstanding Stock Options Exercisable Stock Options
------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
------ ------ ---- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$ 6.00 to $ 9.00 230,368 7.5 years $ 6.00 123,584 $ 6.00
$ 9.01 to $14.00 342,000 8.0 years $ 9.88 666 $ 9.50
$14.01 to $21.00 188,957 6.6 years $16.37 14,098 $18.10
</TABLE>
Exercise Prices for options outstanding as of December 31, 1996 range
from $6.00 to $20.44.
F-16
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Stock Option Plans and Grants (continued)
Stock Option Grants
In 1994, the Board of Directors granted non-transferable stock options to
an officer of the Company, for the purchase of 222,950 shares of Class A Common
Stock at an exercise price of $2.1875 per share. The option vests in one-third
increments on each of the first, second and third anniversaries after grant.
During 1995, 70,000 options were exercised. At December 31, 1996, options to
purchase 152,950 shares are outstanding, of which 78,632 are exercisable.
10. 401(k) Plan
The Company's 401(k) profit-sharing plan covers all non-union eligible
employees, subject to certain minimum age and length of service requirements who
are permitted to contribute specified percentages of their salary up to the
maximum permitted by the Internal Revenue Service. The Company is obligated to
make a matching contribution and may make an additional discretionary
contribution, as defined. Contributions to the plan for the years ended December
31, 1996, 1995, and 1994 were approximately $54,000, $38,000 and $29,000,
respectively.
11. Commitments and Contingencies
Leases
The Company leases office, retail, and warehouse facilities under
non-cancelable operating leases. Future minimum lease payments for
non-cancelable leases with initial terms of one year or more consisted of the
following at December 31, 1996:
1997 $4,603,000
1998 4,702,000
1999 4,454,000
2000 4,245,000
2001 4,158,000
Thereafter 13,228,000
----------
$35,390,000
===========
F-17
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
In addition, certain of these leases contain rent escalation and percentage
rent clauses that require additional payments to be made.
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
$4,646,000 $2,782,000, and $1,331,000, respectively.
The Company is, from time to time, a party to litigation that arises in the
normal course of its business operations. The Company is not presently a party
to any such litigation that would have a material adverse effect on its business
or operations.
Letters of Credit
At December 31, 1996 and 1995, the Company was contingently liable for
approximately $4,855,000 and $4,035,000 of open letters of credit, respectively.
In addition, at December 31, 1996 and 1995, the Company was contingently liable
for approximately $278,000 of standby letters of credit.
12. Shareholders' Equity
Consolidation
Prior to the Offering, Kenneth Cole Productions, Inc. ("KCP") revised its
capital structure. As part of that revision, (i) the 1,000 authorized shares of
KCP common stock were exchanged for 20,000,000 authorized shares of Class A
Common Stock and 6,000,000 authorized shares of Class B Common Stock, (ii) a new
class of 1,000,000 shares of preferred stock was authorized, with the Board of
Directors of the Company having authority to designate the relative voting,
dividend, liquidation and other rights, preferences and limitations of the
preferred stock and (iii) the 1,000 shares of KCP common stock outstanding were
exchanged for 459,790 shares of Class A Common Stock and 3,042,692 shares of
Class B Common Stock. On May 26, 1994, an executive officer of the Company
exercised an incentive stock option issued to him in 1990 to acquire 10% of the
outstanding shares of common stock of Kenneth Cole Leathergoods ("KCLG"). In
order to consolidate the Company's wholesale operations, KCLG and Unlisted,
Inc., another affiliated corporation, were merged into KCP on May 27, 1994 and
the shareholders of KCLG and Unlisted, Inc. received an aggregate of 2,086,240
shares of Class A Common Stock and 3,594,060 shares of Class B Common Stock in
connection therewith. On May 31, 1994, certain other affiliated corporations
were merged into KCP and the sole shareholder received 400,000 shares of Class B
Common Stock in connection therewith. On June 2, 1994, KCP and the principal
shareholder of certain other affiliated corporations entered into a
Consolidation Agreement pursuant to which the shareholder contributed to KCP all
of his shares of such affiliated corporations. As consideration for his
contribution of such shares, the shareholder received an aggregate of 59,790
shares of Class B Common Stock. The foregoing events are referred to
collectively as the "Consolidation."
F-18
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Shareholders' Equity (continued)
The Consolidation, as described above, has been accounted for in a manner
similar to pooling of interests and the financial statements reflect the
consummation of the Consolidation on a retroactive basis for all periods
presented.
Common Stock
Holders of Class A Common Stock are entitled to one vote for each share
held of record, and holders of Class B Common Stock are entitled to ten votes
for each share held of record. Each share of Class B Common Stock is convertible
into one share of Class A Common Stock at the option of the Class B shareholder.
The holders of Class A Common Stock vote together with the holders of Class B
Common Stock on all matters subject to shareholder approval, except Class A
Common Stock shareholders vote separately as a class to elect 25% of the Board
of Directors of the Company. Shares of neither class of common stock have
preemptive or cumulative voting rights.
Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of
1,000,000 shares of preferred stock. The preferred stock may be issued from time
to time as determined by the Board of Directors of the Company, without
shareholder approval. Such preferred stock may be issued in such series and with
such preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or other provisions, as may be fixed
by the Board of Directors. There are no shares of preferred stock currently
outstanding.
13. Principal Customer
The Company has a significant customer, which accounted for approximately 14.2%
and 15.6% of net sales in 1996 and 1995, respectively.
F-19
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 1996 and 1995 appear below (in
thousands, except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1996
Net sales $ 35,110 $ 35,019 $ 39,841 $ 38,288
Gross profit 14,785 14,312 16,500 15,742
Operating income 5,051 4,552 6,814 4,143
Net income 2,956 2,701 4,077 2,553
Earnings per share $ .22 $ .20 $ .30 $ .19
1995
Net sales $ 26,131 $ 25,259 $ 32,574 $ 29,863
Gross profit 10,925 10,546 13,729 11,246
Operating income 4,205 3,703 5,786 2,650
Net income 2,541 2,228 3,445 1,610
Earnings per share $ .19 $ .16 $ .25 $ .12
</TABLE>
F-20
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ KENNETH D. COLE
--------------------------------
Kenneth D. Cole
President and Chief Executive Officer
Date:
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
/S/ KENNETH D. COLE President, Chief Executive March 28, 1997
- - ------------------------------------
Kenneth D. Cole Officer and Director
/S/ STANLEY A. MAYER Executive Vice President, March 28, 1997
- - ------------------------------------
Stanley A. Mayer Chief Financial Officer,
Treasurer and Director
/S/ PAUL BLUM Executive Vice President March 28, 1997
- - ------------------------------------
Paul Blum and Director
/S/ DAVID P. EDELMAN Vice President Finance (Principal March 28, 1997
- - ------------------------------------
David P. Edelman Accounting Officer)
/S/ MARIA CUOMO COLE Director March 28, 1997
- - ------------------------------------
Maria Cuomo Cole
/S/ ROBERT C. GRAYSON Director March 28, 1997
- - ------------------------------------
Robert C. Grayson
/S/ DENIS F. KELLY Director March 28, 1997
- - ------------------------------------
Denis F. Kelly
/S/ JEFFREY G. LYNN Director March 268, 1997
- - ------------------------------------
Jeffrey G. Lynn
</TABLE>
F-21
Sublease Agreement
Sublease AGREEMENT (the "Sublease") dated as of the 17th day of June,
1996 by and between LIZ CLAIBORNE ACCESSORIES, INC., a Delaware corporation,
having an office at One Claiborne Avenue, North Bergen, New Jersey 07047 (the
"Sublandlord") and KENNETH COLE PRODUCTIONS, INC., a New York Corporation,
having an office at 85 Metro Way, Secaucus, New Jersey 07094 (the "Subtenant").
WHEREAS:
a. By a lease dated April 16, 1987, as amended by Lease Modification
Agreement dated June 30, 1987, letter agreement dated July 22, 1987, Lease
Modification Agreement dated June 5, 1991, and letter agreement dated September
15, 1995 (the "Overlease") by and between Hartz Mountain Metropolitan, a New
Jersey General Partnership, as landlord, (the "Overlandlord") and Sublandlord,
as tenant, Sublandlord has leased from Overlandlord the entire premises and
buildings more fully described in the Overlease known as Two Emerson Lane,
Secaucus, New Jersey, (the "Buildings") on the real property which is part of
the Land more fully described in Exhibit A of the Overlease (the "Land"); and
b. Subtenant desires to sublet from Sublandlord 239,000 square feet of
the warehouse and office Building (the "Sublease Premises"), and obtain
exclusive use of certain portions of the Land and those 225 parking spaces which
are identified by crosshatching and more fully described on Exhibit A annexed
hereto and made a part hereof, upon the terms and subject to the provisions and
conditions hereinafter set forth; and
NOW, THEREFORE, the parties hereto, in consideration of the mutual
covenants, conditions and agreements hereinafter contained, do hereby agree as
follows:
W I T N E S S E T H :
1. Term.
Sublandlord hereby sublets the Sublease Premises to Subtenant and
Subtenant hereby hires the Sublease Premises from Sublandlord, for a term (the
"Term") which shall commence on October 1, 1996 (the "Commencement Date") and
which shall expire on June 29, 2002, unless the Term shall be sooner terminated
in accordance with the provisions of this Sublease or the Overlease. The
Subtenant acknowledges that the Term of this Sublease shall terminate in the
event that the Overlease is terminated prior to the expiration date pursuant to
the terms set forth therein.
2. Sublease Premises Square Footage.
The Sublease Premises consists of two hundred thirty-nine thousand
(239,000) square feet of the Building. Subtenant shall also have the exclusive
use of certain portions of the Land and the two hundred twenty-five (225)
parking spaces ("Subtenant's Parking
<PAGE>
Area") as identified on Exhibit A attached hereto. Subtenant acknowledges and
agrees that its use of Subtenant's Parking Area and of any portion of the area
in which such parking spaces are located, shall not unreasonably interfere with,
impede or restrict access to or egress from any portion of the Building or any
other premises subject to the Overlease whether by Sublandlord or any person
authorized by Sublandlord.
Sublandlord acknowledges and agrees that its use of those parking
spaces and of any portion of the area in which such parking spaces are located
on the Land not permitted to be used by Subtenant hereunder (the "Sublandlord's
Parking Area") identified on Exhibit A attached hereto, access to which area may
be restricted by signs, shall not unreasonably interfere with, impede or
restrict access to or egress from any portion of the Sublease Premises or the
Subtenant's Parking Area.
Both parties agree that neither one shall not place any fence,
barricade, or other type of dividing barrier or cause any security guard to
administer same between Subtenant's Parking Area and Sublandlord's Parking Area.
Subtenant acknowledges that, to the extent parking spaces are vacant in
Subtenant's Parking Area, Sublandlord's customers may be allowed to park in same
during the weekends without penalty, restriction or any charge to Sublandlord.
3. Fixed Rent.
The annual fixed rent (the "Fixed Rent") shall be the amount set forth
below for the following periods:
Period Monthly Fixed Rent Annual Fixed Rent
------ ------------------ -----------------
October 1, 1996 - September 30, 1997 $40,000.00 $ 480,000
October 1, 1997 - September 30, 1998 $48,333.33 $ 580,000
October 1, 1998 - September 30, 1999 $56,666.66 $ 680,000
October 1, 1999 - September 30, 2000 $65,000.00 $ 780,000
October 1, 2000 - September 30, 2001 $75,416.66 $ 905,000
October 1, 2001 - June 29, 2002* $85,833.33 $1,030,000*
* Such amounts shall be prorated for less than one (1) year.
Subtenant covenants and agrees to pay the Sublandlord the annual Fixed Rent in
equal monthly installments in lawful money of the United States in advance on or
prior to the first (1st) day of each calendar month during the Term, together
with additional rent as hereinafter set forth, without any deduction, offset or
abatement whatsoever. All payments to be made by Subtenant to Sublandlord
hereunder shall be made at One Claiborne Avenue, North Bergen, New Jersey 07047,
Attn: Director - Accounts Payable, or such other place as Sublandlord may
hereinafter designate. All amounts due from Subtenant to Sublandlord under this
Sublease shall be paid by good and sufficient check (subject to collection).
Notwithstanding anything to the contrary contained herein, all Fixed Rent, Fixed
Tax Payments (as hereinafter defined) for the
<PAGE>
first month of the Term of this Lease shall be paid simultaneously with the
execution of this Sublease.
4. Use of the Sublease Premises.
Subtenant shall continuously use and occupy the Sublease Premises for
warehouse distribution, general office and ancillary retail use in accordance
with all laws and ordinances of all federal, state, county and municipal
governments and rules, regulations, orders and directives of all departments,
subdivisions, bureaus, agencies or offices thereof and any other governmental,
public or quasi public authorities having jurisdiction over the Land and the
Building ("Permitted Uses").
5. Incorporation of Overlease Terms.
a. Words or terms which are capitalized herein, shall have the meaning
ascribed to them in the Overlease unless the context clearly requires otherwise.
b. Except as herein otherwise expressly provided in Article 5(c), and
elsewhere in this Sublease, all of the terms, provisions, covenants and
conditions contained in the Overlease are hereby made a part hereof. The rights
and obligations as are contained in the Overlease are, during the Term, hereby
imposed upon the respective parties hereto, Sublandlord being substituted for
the landlord thereunder and Subtenant being substituted for the tenant
thereunder; provided, however, that Sublandlord shall not be liable to Subtenant
for any failure in performance resulting from the failure in performance by the
Overlandlord under the Overlease of the corresponding covenant of the Overlease,
and Sublandlord's obligations hereunder are accordingly conditional where such
obligations require such parallel performance by Overlandlord. The respective
terms, covenants, provisions and conditions of the Overlease on the part of
Overlandlord to be performed, which have been incorporated herein by reference
or as covenants and obligations of Sublandlord hereunder, are to be performed by
Overlandlord or its respective successors and assigns, Subtenant hereby agreeing
to look solely to Overlandlord for such performance. No representation or
warranty made by Overlandlord under the Overlease is deemed made by Sublandlord
hereunder. Sublandlord shall not be liable or responsible to Subtenant for any
failure or default on the part of Overlandlord, its successors or assigns, or
any breach of a representation or warranty made by Overlandlord, its successors
or assigns with respect to any of the terms, covenants, provisions, conditions,
warranties and representations of or in the Overlease. Sublandlord agrees,
however, to use reasonable efforts to enforce its rights (including, without
limitation, indemnity obligations of the Overlandlord) pursuant to the Overlease
for the benefit of Subtenant upon Subtenant's written request, and Subtenant
agrees to reimburse Sublandlord for any and all reasonable costs it shall incur
in expending such efforts. If such Sublandlord efforts benefit both Sublandlord
and Subtenant, the costs of such efforts shall be equitably pro-rated between
Sublandlord and Subtenant on the basis of the benefit received. A copy of the
Overlease is attached as Exhibit B hereto.
<PAGE>
c. The Overlease is modified solely for the purposes of this Sublease
as follows:
1. Article 1, Paragraph 1.01:
a. Paragraph A: Delete the word "None" and insert "Fixed Rent
and Fixed Tax Payments (as hereinafter defined), for the first month of
the Term, shall be paid simultaneously with the execution of the
Sublease;
b. Paragraphs C and D: Delete the paragraphs;
c. Paragraph E: Insert the words "warehouse and office" before
"building" and delete the words "or buildings";
d. Paragraph H: Delete the words from "244,525" to "B" and
insert "the Sublease Premises as defined in the Sublease".
e. Paragraph J: Delete the first (1st) sentence;
f. Delete paragraphs O, T, V, and FF.
2. Article 2, Paragraph 2:01: Delete the first sentence.
3. Article 3:
a. Paragraph 3:01: Delete the first sentence;
b. Paragraph 3.05: Delete the word "ten (10)" and substitute
"seven (7)".
4. Article 5: Delete Paragraphs 5.01 and 5.02.
5. Article 6:
a. Paragraph 6.01: Delete the second and third sentences;
b. Paragraph 6.02: Delete the entire paragraph except for the
first sentence;
6. Article 9: In line 10 of Paragraph 9.01 insert a period "." after
the word "Mortgages" and delete the remainder of the sentence from the words "so
long" to "period".
7. Article 10: Delete paragraph 10.01 in its entirety.
8. Article 11: Delete the entire Article.
9. Article 13: Delete paragraph 13.04 in its entirety.
10. Article 15:
a. Paragraph 15.01: In lines four and eight delete the words
"Five Hundred Thousand and 00/100 Dollars ($500,000)" and insert "Three
Hundred Thousand and 00/100 Dollars ($300,000)".
<PAGE>
b. Paragraph 15.03: In the third line insert a period "."
after the word "consent" and delete the remainder of the sentence.
<PAGE>
11. Article 17:
a. Paragraph 17.01: In line fourteen after the word "pounds"
insert "and One Hundred Pounds and Eighty Pounds" and after the word
"foot" insert "for the mezzanine and second floors and the office area
of the Demised Premises, respectively." Delete the last sentence in the
paragraph.
b. Paragraph 17.02: Delete the last sentence in the paragraph.
12. Article 18, Paragraph 18.01 Delete the second sentence in the
paragraph.
13. Article 22:
a. Paragraph 22.03: In line twelve delete the word "ninety
(90)" and insert "ninety-five"; in line sixteen delete the word "sixty
(60)" and insert "fifty five (55)".
14. Article 25:
a. Paragraph 25.02: In the third line delete the word "ten
(10)" and insert "five (5)" therefor; in lines seven, nine and sixteen
delete the word "thirty (30)" and insert the words "twenty-five (25)"
therefor. In lines thirty-three and thirty-four delete the word "five
(5)" and insert "three (3)" therefor.
15. Article 27:
a. Paragraph 27.04: In the fifth line delete the word "five
(5)" and substitute "three (3)" therefor.
16. Article 31: Delete the entire paragraph.
17. Article 32: Delete the entire paragraph.
18. Article 35: Delete the entire paragraph.
19. Rider to Lease:
a. Delete Paragraphs R2 and R4.
20. Exhibit B: Delete in its entirety.
21. Exhibit C: Delete in its entirety.
22. Lease Modification Agreement dated June 5 1991:
a. Delete Paragraphs 1, 2, 3, 5, 6, 7, 8, 11, 13, 14 and 15.
b. Exhibit A: Delete in its entirety.
c. Wherever the Overlease refers to the Demised Premises, such
reference for the purposes hereof shall be deemed made to the Sublease
Premises.
<PAGE>
d. Wherever the Overlease refers to "Additional Charges", such
reference for the purposes hereof shall be deemed made to Additional
Rent (hereinafter defined).
e. To the extent that there are any inconsistencies between
the provisions of the Overlease and the Sublease, the provisions of
this Sublease prevails.
6. Sublease Subject to Overlease, etc..
This Sublease is expressly made subject and subordinate to all the
terms and conditions of the Overlease and to the matters to which the Overlease
is or shall be subordinate, except as specifically provided to the contrary in
this Sublease, to the extent applicable to the Sublease Premises. Subtenant
hereby assumes and covenants that it will, throughout the term hereof, observe
all of the provisions of the Overlease, to the extent applicable to the Sublease
Premises, on the part of Sublandlord to be performed as the tenant thereunder
(except for the payment of rent or additional rent and except as otherwise
expressly set forth herein), and that Subtenant will not do any act, matter or
thing which will be, result in, or constitute a violation or breach of or a
default under the Overlease; any such violation, breach or default shall
constitute the breach by Subtenant of a substantial obligation under this
Sublease. Subtenant hereby agrees that it shall indemnify, defend and hold
Sublandlord harmless from and against any and all claims, penalties and
expenses, including reasonable attorneys' fees, based upon any default by
Subtenant, during the Term hereof, in Subtenant's performance of those terms,
covenants and conditions of the Overlease which are or shall be applicable to
Subtenant, as above provided, (except to the extent such default is caused by
the negligence of Sublandlord or any of its employees or agents) and Subtenant
shall pay to Sublandlord as additional rent hereunder any and all sums which
Sublandlord is required to pay to Overlandlord, caused in whole or in part by
Subtenant's failure to perform or observe any of the terms and conditions of the
Overlease pertaining to the Sublease Premises, as above provided, or by any act
or omission described in the preceding sentence. Provided Subtenant is not in
default hereunder, Sublandlord hereby agrees that it shall indemnify, defend and
hold Subtenant harmless from and against any and all claims, penalties and
expenses, including reasonable attorneys' fees based upon any non-payment by
Sublandlord in the Rental due Overlandlord pursuant to the Overlease. In any
case where the consent or approval of Overlandlord shall be required pursuant to
the Overlease, such Overlandlord's consent and Sublandlord's consent shall also
be required hereunder.
If Subtenant shall default in the payment of rent or additional rent
hereunder or in the performance or observance of any of the terms, covenants or
conditions of this Sublease or the Overlease (to the extent applicable to the
Sublease Premises) on the part of Subtenant to be performed or observed,
Sublandlord shall have the right (but not the obligation) to exercise all
remedies available to it hereunder at law or equity. Without limiting the
preceding sentence, Sublandlord shall have the right but not the obligation to
all of the same rights and remedies provided to or reserved by Overlandlord in
the Overlease; however, the foregoing shall in no way be deemed to limit or
impair the
<PAGE>
rights and privileges of the Overlandlord under the Overlease, or to impose any
obligations or liabilities on the part of Sublandlord by reason of the exercise
by Overlandlord of any of such rights or privileges with respect to the Sublease
Premises or to the use and occupation thereof by Subtenant. Without limitation
of the foregoing, Sublandlord shall have the same rights and remedies in the
event of non-payment by Subtenant of rent or additional rent hereunder as are
available to Overlandlord under the Overlease and at law for the non-payment of
rent or of any installment thereof.
Subtenant shall, promptly after receipt thereof, notify Sublandlord of
any notice served by Overlandlord upon Subtenant pursuant to the terms,
provisions and conditions of the Overlease or with reference to the Sublease
Premises. Sublandlord shall, promptly after receipt thereof, notify Subtenant of
any notice served by Overlandlord upon Sublandlord relating in any manner to the
Sublease Premises or the services to be provided by Overlandlord to the Sublease
Premises. Wherever Overlandlord requires Sublandlord, as tenant under the
Overlease, to take any action to prevent a default or to cure any default (other
than a default in the payment of rent or additional rent pursuant to the
Overlease) applicable to the Sublease Premises within a period of time stated in
the Overlease, Subtenant shall complete such action or cure such default not
later than five (5) days prior to the expiration of such period within the time
periods set forth in the Overlease as modified by Paragraph 5(c)(14)
hereinabove, and shall immediately furnish notice of compliance to Sublandlord.
7. Sublandlord's Work/As Is Condition.
Sublandlord agrees to substantially complete the work described in the
Workletter ("Sublandlord's Work") attached hereto as Exhibit C by September 1,
1996 pursuant to the terms set forth herein. Sublandlord also agrees to deliver
certain furniture and shelving in the Sublease Premises more fully described in
Exhibit C-2 attached hereto. Title to such furniture and shelving for all
purposes shall be deemed to be transferred upon delivery to Subtenant.
Sublandlord's Work shall be deemed substantially completed notwithstanding the
fact that minor or insubstantial details of construction, mechanical adjustment
or decoration remain to be performed, the noncompletion of which does not
substantially interfere with the Subtenant's use of the Sublease Premises.
Sublandlord and Subtenant agree to cooperate with each other in the completion
of each party's respective work to the Sublease Premises as set forth herein.
The taking of possession by Subtenant of the Sublease Premises shall be
conclusive evidence as against Subtenant that the Sublease Premises were in good
and satisfactory condition at the time such possession was taken.
Subtenant expressly acknowledges and agrees that Sublandlord has not
made and is not making, and Subtenant, in executing and delivering this
Sublease, is not relying upon, any warranties, representations, promises or
statements, except to the extent that the same are expressly set forth in this
Sublease or in any other written agreement which may be made between the parties
concurrently with the execution and delivery of this Sublease and shall
expressly refer to this Sublease. This Sublease and said other written
agreement(s) made concurrently herewith are hereinafter referred to as the
"Sublease Documents". It is
<PAGE>
understood and agreed that all understandings and agreements heretofore had
between the parties relating to the Sublease Premises are merged in the Sublease
Documents, which alone fully and completely express their agreements relating to
the Sublease Premises and that the same are entered into after full
investigation, neither party relying upon any statement or representation not
embodied in this Sublease, made by the other. Except for Sublandlord's Work,
Subtenant acknowledges that Sublandlord is not required to perform any other
work of any kind, nature or description to prepare the Sublease Premises for
Subtenant's occupancy, and Subtenant hereby accepts the Sublease Premises in its
"as is" condition subject to the specific provisions of this Sublease.
8. Alterations.
Subtenant shall comply with the provisions of Article 15 of the
Overlease in connection with any changes, alterations or improvements it shall
make to the Sublease Premises (collectively "Subtenant Alterations"). No
Subtenant Alterations shall be made to the fire protection system in the
Sublease Premises unless such Subtenant Alterations are "HPR" rated and approved
in accordance with the requirements of Sublandlord's insurers. Subtenant shall
perform any desired Subtenant Alterations at its sole cost and expense.
Subtenant shall use its best efforts to minimize disruption to Sublandlord's
business in connection with the performance of any Subtenant Alterations and
shall perform such Subtenant Alterations as expeditiously as reasonably
possible.
9. Subordination and Non-Disturbance.
This Sublease, and all rights of Subtenant hereunder, shall be subject
and subordinate to all ground and underlying leases (including without
limitation, the Overlease) of the Land and/or the Building and to all Mortgages
affecting the Real Property Land and/or the Building and/or any of such leases,
whether or not such Mortgages or leases shall also cover lands and/or buildings,
to each and every advance made or hereafter to be made under such Mortgages and
to all renewals, modifications, consolidations, replacements and extensions of
any such leases and such Mortgages and spreaders and consolidations of such
Mortgages. This clause shall be self-operative and no further instrument of
subordination shall be required by any ground or underlying lessor or by any
mortgagee, holding a lease or mortgage affecting the Land. In confirmation of
such subordination, Subtenant shall promptly execute, acknowledge and deliver
any instrument that Sublandlord, the Lessor under any such lease or the Mortgage
of any Mortgages, or any of their respective successors in interest may
reasonably request to evidence such subordination; and, if Subtenant fails to
execute, acknowledge or deliver any such instrument within eight (8) days after
request therefor, Subtenant hereby irrevocably constitutes and appoints
Sublandlord as Subtenant's attorney in fact, compiled with an interest to
execute and deliver any such instruments, for and on behalf of Subtenant.
Sublandlord shall use its reasonable efforts to obtain a nondisturbance
agreement from Overlandlord in favor of Subtenant. However, in no event shall
Sublandlord be required to commence
<PAGE>
legal proceedings against Overlandlord or pay any fees or charges to
Overlandlord in connection with such nondisturbance agreement.
10. Assignment, Subletting and Mortgage.
a. Subtenant will not, by operation of law or otherwise, assign,
mortgage or encumber this Sublease, nor sublet or permit the Sublease Premises
or any part thereof to be used by others, without Sublandlord's prior written
consent in each instance, which consent shall not be reasonably withheld or
delayed subject to the terms of this Article 10, provided that at the time
Subtenant requests Sublandlord's consent, Subtenant shall not be in default of
any obligations described herein beyond any applicable grace and cure periods.
Notwithstanding the foregoing and without limiting any other provisions herein
(i) Sublandlord may condition its consent to an assignment of this Sublease upon
(1) Subtenant's delivery to Sublandlord in recordable form, and within three (3)
days after its execution of (x) a duplicate original of the assignment, and (y)
an agreement wherein assignee assumes and agrees to keep, observe and perform
all of the covenants conditions and obligations to be kept performed and
observed under the Sublease and the Overlease on the part of the Subtenant, and
(2) the delivery to Sublandlord by the assignee of an amount equal to two (2)
months Fixed Rent and Fixed Tax Payment as a security deposit to ensure the
performance of the covenants, conditions and obligations to be kept, performed
and observed under the Sublease and the Overlease on the part of the Subtenant
(the "Security Deposit"); (ii) Sublandlord may condition its consent to a
sublease upon (1) The delivery of the Security Deposit by the Subtenant, and (2)
delivery to Sublandlord of a duplicate original of the Sublease Agreement. The
parties hereto agree that at no time shall there be more than one (1)
sub-sublease in effect with regard to the Sublease Premises. Any permitted
assignee or sublessee may only use the Sublease Premises for the Permitted Uses.
If this Sublease is assigned, or if the Sublease Premises or any part thereof be
sublet or occupied by anybody other than Subtenant, Sublandlord may, after
default by Subtenant, collect rent from the assignee, subtenant or occupant and
apply the net amount collected to the rent herein reserved but no such
assignment, occupancy or collection shall be deemed a waiver of this covenant or
the acceptance of the assignee, subtenant or occupant as Subtenant or a release
of Subtenant from the further performance by Subtenant of the terms, covenants
and conditions of this Sublessee on the part of Subtenant to be performed. Any
violation of any provision of this Sublease or the Overlease, whether by act or
omission, by any assignee, subtenant or similar occupant, shall be deemed a
violation of such provision by Subtenant, it being the intention and meaning of
the parties hereto that Subtenant shall assure and be liable to Sublandlord for
any and all acts and omissions of any and all assignees, subtenants and similar
occupants. The consent by Sublandlord to an assignment, encumbrance, or
subletting shall not be construed in any way to relieve Subtenant from obtaining
the express consent in writing of Landlord to any further assignment,
encumbrance or subletting.
b. If Subtenant desires to assign this lease or all or part of the
Sublease Premises, it shall submit in writing to Sublandlord, at the time it
requests such consent the following:
<PAGE>
(i) The name and address of the proposed assignee or subtenant;
(ii) A true, complete and accurate copy of the agreement between
Subtenant and a prospective subtenant or assignee;
(iii) The nature and character of the business of the proposed assignee
or subtenant.
(iv) At least one banking reference and a financial statement of the
proposed, subtenant or assignee, certified by an officer of such entity, for a
twelve (12) month period ending not earlier than six (6) months prior to the
request.
c. In the event that Subtenant desires to assign this Sublease or
sublet more than twenty-five (25%) percent of the Sublease Premises, Sublandlord
shall have the right within twenty-six (26) days after receipt of said
application (unless it has given its consent or has exercised the right it may
have to withhold its consent) to terminate the Sublease without payment or
premium therefore by giving Subtenant notice of its election to do so and unless
Subtenant withdraws its application within seven (7) days of Sublandlord's
termination notice, thereby voiding such termination, such termination shall
become effective thirty days after the giving of such notice, and the Fixed
Rent, Fixed Tax Payments, rent and all other charges payable by Subtenant shall
be so adjusted and apportioned as of the date of termination of this Sublease.
d. If Sublandlord's consent to a subletting or assignment has been
obtained, Subtenant shall pay to Sublandlord, as additional rent hereunder, if
applicable, in the event of a subletting, an amount equal to fifty (50%) percent
of the monthly sublet rent received in excess of the monthly Fixed Rent and
Fixed Tax payments payable hereunder due within five (5) days of Subtenant's
receipt of such excess amount, except that if the sublet is for less than all of
the Sublease Premises, an appropriate pro rata adjustment shall be made in
determining the excess of sublet rental over the prorated rental payable under
this Sublease and in the event of an assignment an amount equal to fifty (50%)
percent of any consideration paid on account of the assignment due within ten
(10) days of receipt thereof by Subtenant. In no event shall this paragraph be
interpreted or construed to permit Subtenant to remit less than the Fixed Rent
and Fixed Tax payments and additional rent under all other provisions of this
Sublease. The provisions of this paragraph shall survive the expiration or
earlier termination of this Sublease.
e. The parties agree that Sublandlord shall not be deemed
"unreasonable" if it withholds its consent to any subletting or assignment
because Overlandlord has not given its consent to such subletting or assignment.
f. If Sublandlord shall not have exercised any of its options described
above within the time limits set forth above, Sublandlord shall notify Subtenant
in writing if it consents to or denies a proposed assignment, or sublet or
occupancy, within thirty (30) days of its receipt of a request for such consent
together with the information described herein above.
<PAGE>
g. If a Sublandlord consents to such subletting or assignment,
Subtenant shall, following the execution of a Sublease or assignment agreement
and prior to the effectiveness of such Sublease or assignment, deliver to
Sublandlord, a duplicate, executed original of the instrument of assignment or
Sublease as the case may be, duly executed by the appropriate party and if
Subtenant assigns its interest in this Sublease, said assignee shall assure the
obligation for performance of Subtenant's obligations thereafter arising under
this Sublease and shall become jointly and severally liable with Subtenant for
the performance thereof pursuant to the instrument of assignment.
h. Each of the foregoing provisions shall apply to each and every
assignment or subletting. An assignment of the Sublease or a subletting as above
provided, shall not discharge or release from liability hereunder Subtenant or
any other person, firm or corporation which shall have previously assumed
Subtenant's obligations hereunder such liability to remain and continue for the
balance of the term with the same force and effect as though no assignment or
subletting had been made.
i. Subtenant shall pay the reasonable expenses, including, but not
limited to reasonable attorneys' fees incurred by Sublandlord in connection with
the review and/or preparation and/or execution of any documents submitted to
Sublandlord relating to a request for Sublandlord's consent to a proposed
assignment or subletting not to exceed $1000.00 in any one instance. Such $1000
limit shall be increased by $100 each calendar year during the term commencing
in 1998.
j. Any attempted assignment or subletting made contrary to the
provisions of this Article shall be null and void. No consent by Sublandlord or
Overlandlord to any assignment or subletting shall in any manner be considered
to relieve Subtenant from obtaining Sublandlord or Overlandlord's express
written consent to any further assignment or subletting.
11. Additional Rent.
a. General. In addition to the Fixed Rent, Subtenant shall pay to
Sublandlord during the Term, the charges described in Articles 6 and 18 of the
Overlease, as such share and/or charge is determined pursuant to this Sublease
and the provisions of the Overlease attached hereto as Exhibit B, in the manner
and at the times provided therein, except as modified by this Article 11 (the
"Additional Rent") and all other amounts payable by Subtenant to Sublandlord
pursuant to the provisions herein.
b. Taxes. Subtenant's Real Estate Tax payments as defined in Article 6
of the Overlease shall be the following in lieu of any Real Estate Tax payments
required under the Overlease: (i) the fixed amounts as follows: (the "Fixed Tax
Payment"):
<PAGE>
Monthly Fixed Annual Tax
Period Tax Payment Payment
------ ----------- -------
October 1, 1996 - September 30, 1997 $14,166.66 $170,000.00
October 1, 1997 - September 30, 1998 $16,250.00 $195,000.00
October 1, 1998 - September 30, 1999 $18,333.33 $220,000.00
October 1, 1999 - September 30, 2000 $20,416.66 $245,000.00
October 1, 2000 - September 30, 2001 $20,416.66 $245,000.00
October 1, 2001 - June 29, 2002 $20,416.66 $245,000.00*
* Such amounts shall be prorated for less than one (1) year.
Subtenant covenants and agrees to pay the Sublandlord the Fixed Tax Payment in
lawful money of the United States in advance on or prior to the first (1st) day
of each calendar month of the Term, without any deduction, offset or abatement
whatsoever. All such Fixed Tax Payments shall be made by Subtenant to
Sublandlord simultaneously with Fixed Rent as described hereinabove in Paragraph
3.
(ii) In addition to the above Fixed Tax Payment, commencing on
January 1,1997 and each year thereafter Subtenant shall be responsible for
paying 84.6% of any increase in the Real Estate Taxes due, above the 1995/1996
Real Estate Tax bill for the Building and the Land which 1995/1996 Real Estate
tax bill is equal to $309,450.00 (the "Additional Tax Payment"). Any such
Additional Tax Payment shall be due within twenty (20) days of Sublandlord's
invoice therefor which shall include a copy of any applicable subsequent Real
Estate tax bill for the Building and the Land.
(iii) If Sublandlord receives any credits or refunds on Real Estate
Taxes for past or future Real Estate Tax bills, Sublandlord shall be entitled to
receive and retain the entire amount of such credit or refund. Sublandlord
agrees that it shall file protests as to the valuation of the Land and the
Building every tax year.
c. Utilities. Modifying Article 18 of the Overlease:
(i) Subtenant shall be responsible for paying all charges for
gas, water, sewer, electricity, heat or other utility or service supplied to the
Premises, Building and the Land relating to Subtenant's use and any cost of
repair, maintenance, replacement and reading of any meters measuring
consumption, if applicable. The usage of electricity and gas are currently
separately metered for the Sublease Premises by gas meter number 2209067 and
electric meter number 598001407. Additionally, the usage of domestic and fire
protection water services are currently separately metered for the Sublease
Premises by water meter numbers 88230613 and 28606257. As of the date of
commencement of this Sublease, Subtenant shall assume the accounts corresponding
to these respective meters and pay the respective utility companies promptly for
all charges billed. Subtenant shall be responsible for paying to Sublandlord
84.6% of the sewer charges and any other utility charges attributable to the
Subtenant's usage which are incurred for the Building and the Land within twenty
(20) days of Sublandlord's delivery of a bill therefor. Provided Sublandlord
receives payment
<PAGE>
from Subtenant as described herein, Sublandlord agrees to pay such sewer and
other utility charges for which it is responsible hereunder for the Building and
Land within the time periods required by the utility companies. Provided
Sublandlord receives payment from Subtenant as described herein, Subtenant shall
not be responsible for any fines or penalties for late payments as a result of
Sublandlord's failure to pay such utility charges in a timely manner. Subtenant
expressly agrees that Sublandlord shall not be responsible for the failure of
supply to Subtenant of any of the aforesaid, or any other utility service.
Sublandlord shall not be responsible for any public or private telephone service
to be installed in the Sublease Premises, particularly conduit if required.
(ii) Subtenant's use of electric energy in the Sublease Premises shall
not at any time exceed the capacity of any of the electrical conductors and
equipment in or otherwise serving the Sublease Premises which is currently 3,000
amps, 480 volt, 3 phase. In order to insure that such capacity is not exceeded
and to avert possible adverse effect upon the Building's electric service,
Subtenant shall not, without Sublandlord's prior consent in each instance,
(which shall not be unreasonably withheld) connect any fixtures, appliances or
equipment to the Building's electric distribution system of the Sublease
Premises existing on the date hereof. Should Sublandlord grant such consent, all
additional risers or other equipment required thereof shall be provided by
Sublandlord and the cost thereof shall be paid by Subtenant to Sublandlord on
demand.
d. Operating Expenses. Modifying Article 6 of the Overlease, Subtenant
shall be responsible for paying only the following amounts for Operating
Expenses (as defined in the Overlease) pursuant to the provisions of this
Sublease:
(i) 84.6% of any Operating Expense payments due by Sublandlord to
Overlandlord pursuant to the Overlease, provided that such charges are not
incurred solely for services or facilities furnished to the Premises demised
under the Overlease other than the Sublease Premises;
(ii) 84.6% of Sublandlord's cost for the provision of the All Risk
Property Insurance in respect of the Building and other improvements on the Land
(except for such insurance described in Article 13.02 of the Overlease which
Subtenant shall be obligated to procure and maintain) and rent insurance as more
particularly described in Article 13.01 of the Overlease.
e. Pro-Rations. In the event that additional rent is due under the
Overlease with respect to any period which includes the Commencement Date or the
date of expiration of the Sublease term, Subtenant's obligations hereunder on
account of such additional rent shall be appropriately pro-rated. The provisions
of this paragraph shall survive termination of this Sublease.
f. Additional Charges under Overlease. Subtenant agrees to pay to
Sublandlord within twenty (20) days of delivery of an invoice therefor 84.6% or
an amount equal to Subtenant's actual usage, if applicable, of any additional
charges that Sublandlord may agree or be obligated, pursuant to the Overlease,
by lease
<PAGE>
amendment or otherwise, to pay to Overlandlord, provided such charges are not
incurred solely for services or facilities furnished to portions of the premises
demised under the Overlease other than the Sublease Premises (i.e., do not
discriminate against Subtenant) and, in the reasonable judgment of Sublandlord,
it is not feasible to exclude the Sublease Premises. Any such additional charges
shall be equitably pro-rated with respect to the Sublease Premises.
Notwithstanding anything to the contrary set forth herein, there shall be no
duplicate charges payable by Subtenant pursuant to this Subparagraph and
Subparagraph (d) above.
12. Repairs/Maintenance.
Modifying Article 17 of the Overlease, the exterior areas described in
the third sentence in such Article required to be repaired and maintained by
Subtenant are depicted by outline in red in Exhibit D attached hereto (the
"Exterior Sublease Premises"). The Term "Exterior Common Areas" set forth in
Article 17 of the Overlease for purposes of this Sublease shall mean the
Exterior Sublease Premises and the exterior areas of the premises demised to
Sublandlord pursuant to the Overlease.
As more particularly described in Article 17 of the Overlease,
Subtenant shall be responsible for the prompt removal of snow, ice and rubbish
(including litter) accumulation from the Exterior Sublease Premises. Subtenant
shall obtain a reputable contractor(s) to perform such service which
contractor(s) Subtenant shall advise to Sublandlord. Additionally, at
Sublandlord's election, Subtenant shall require such contractor to provide a
quote for service to the Sublandlord's Exterior Premises (defined hereinafter)
and if satisfactory to Sublandlord, such contractor shall remove snow, ice and
rubbish (including litter) accumulation in the parking areas, sidewalks and
areas immediately surrounding the Building demised to Sublandlord pursuant to
the Overlease excluding the Exterior Sublease Premises (depicted as the area
crosshatched on Exhibit D) (the "Sublandlord's Exterior Premises"). If
Subtenant's contractor provides the services described in this paragraph to both
the Exterior Sublease Premises and the Sublandlord's Exterior Premises, then in
the event that any snow or ice accumulates from Monday 8:00 a.m. to Friday at
6:00 p.m., Subtenant shall be required to contact the contractor to perform such
services for the Exterior Sublease Premises as well as the Sublandlord's
Exterior Premises (the "Snow Contract Areas"). In the event that any snow or ice
accumulates from Friday at 6:01 p.m. to Monday 7:59 a.m., Sublandlord shall be
required to contact the contractor to remove such accumulation from the Snow
Contract Areas. If Sublandlord elects to have Subtenant's contractor provide the
services described in this paragraph, Subtenant shall be required to promptly
pay its contractor for the services described herein and Sublandlord shall be
required to reimburse to the Subtenant its share of the invoices rendered
therefor for the Sublandlord's Exterior Premises.
13. Amendments to Overlease.
Subtenant agrees to be bound, for all purposes of this Sublease, by any
subsequent amendments to the Overlease. Sublandlord agrees not to amend or
modify the Overlease in any way that would discriminate against Subtenant, or
which would
<PAGE>
materially affect Subtenant's rights or obligations hereunder or which would
increase Subtenant's Fixed Rent, Fixed Tax Payments or Additional Rent
hereunder. Upon the request of Sublandlord at anytime during the
<PAGE>
term of this Sublease, Subtenant agrees to confirm in writing its agreement to
be bound by subsequent amendments to Overlease.
14. Commercial Rent or Occupancy Tax.
If any commercial rent or occupancy tax shall be levied with regard to
the Sublease Premises, Subtenant shall pay the same either to the taxing
authority, or, if appropriate, to Sublandlord, as additional rent, on or before
the due date of such payment. In the event that any such tax payment shall be
made to Sublandlord, Sublandlord shall remit the amount of such payment to the
taxing authority on Subtenant's behalf.
15. Insurance and Indemnity.
a. Notwithstanding anything to the contrary set forth herein and in the
Overlease, Sublandlord shall remain responsible for maintaining the All Risk
insurance in respect of the Building and other improvements on the Land and rent
insurance as more particularly described in the provisions of Article 13.01 of
the Overlease. Subtenant shall be responsible for paying to Sublandlord 84.6% of
such costs pursuant to Article 11 herein within twenty (20) days of a delivery
of an invoice therefor by Sublandlord.
b. All insurance required to be carried by the Subtenant pursuant to
the terms of Article 13.02 of the Overlease, shall name Sublandlord and
Overlandlord and any requested superior Lessor or mortgages as additional
insureds, as their interests may appear. Notwithstanding anything set forth
herein or in the Overlease to the contrary, neither Subtenant nor Sublandlord
shall be liable or responsible for, and each party hereby releases the other
from, all liability and responsibility to the other and any person claiming by,
through or under the other, by way of subrogation or otherwise, for any injury,
loss or damage to any person or property, in or around the Land, or Building or
to the other's business covered by insurance carried or required to be carried
hereunder irrespective of the cause of such injury, loss or damage and each
party shall require its insurers to include in all of such party's insurance
policies which could give rise to a right of subrogation against the other a
clause or endorsement whereby the insurer waives any rights of subrogation
against the other. Subtenant shall deliver a certificate of such insurance to
Sublandlord within one (1) business day prior to taking occupancy of the
Sublease Premises; and certificates of renewal policies shall be delivered at
least thirty (30) days prior to the expiration of the then current policies. If
Subtenant shall fail to obtain and deliver such policies in the manner herein
provided, Sublandlord may, upon three (3) days' prior written notice, obtain
such coverage and charge the cost thereof to Subtenant as Additional Rent
hereunder, to be paid by Subtenant, as and when billed.
c. Subtenant shall indemnify, defend and hold harmless Sublandlord,
Overlandlord and all Superior Lessors and their respective partners, joint
venturers, directors, officers, agents, servants and employees from and against
any and all claims, liabilities, demands, suits, actions, judgments, costs,
damages and recoveries for, or on account of, damage or injury (including
<PAGE>
death) to property or persons (collectively "Claims") arising from or in
connection with (1) the conduct or management of the Sublease Premises or of any
business therein, or any work or thing whatsoever done, or any condition created
(other than by Sublandlord) in the Sublease Premises, or the Subtenant's Parking
Area, or the Exterior Sublease Premises, during the Term or during the period of
time, if any, prior to the Commencement Date that subtenant may have been given
access to the Sublease Premises; (2) any act, omission or negligence of
Subtenant or any of its subtenants or licensees or its or their partners, joint
venturers, directors, officers, agents, employees or contractors; (3) any
accident, injury (including death) or damage to persons or property (except to
the extent caused by Sublandlord's negligence) occurring in the Sublease
Premises, the Subtenant's Parking Area, or the Exterior Sublease Premises; and
(4) any breach or default by Subtenant in the full and prompt payment and
performance of Subtenant's obligations under this Sublease and the Overlease,
together with all costs, expenses and liabilities incurred or in connection with
each such Claim brought thereon, including, without limitation, all attorney's
fees and expenses. In the event that any action or proceeding is brought against
Sublandlord, any Superior Lessor, or the Overlandlord and/or its or their
partners, joint venturers, directors, officers, agents, and/or employees by
reason of any such Claim, Subtenant, upon notice from Sublandlord, Superior
Lessor or Overlandlord, shall resist and defend, at Subtenant's own cost and
expense, such action or proceeding by counsel reasonably satisfactory to
Sublandlord. In the event Subtenant fails to defend such a proceeding,
Sublandlord may, at its option, retain counsel of its own choosing and the
reasonable cost thereof (including reasonable disbursements) shall be borne by
Subtenant. Any counsel retained by Subtenant pursuant to this paragraph shall
have no authority to settle, compromise or otherwise resolve any claim against
Sublandlord, any Superior Lessor or Overlandlord without such party's prior
consent, such consent not to be unreasonably withheld or delayed; provided,
however, consent may be withheld in Sublandlord's, Superior Lessor's or
Overlandlord's sole discretion if the settlement, compromise or resolution of
the Claim affects the rights and privileges of Sublandlord, Superior Lessor or
Overlandlord and requires any respective party to pay any sums of money.
d. Subject to the provisions of Paragraphs (a) and (b) above,
Sublandlord shall indemnify, defend and save Subtenant harmless from and against
any and all Claims resulting from (1) the conduct or management of the
Sublandlord's Premises (defined in Paragraph 27 below) or of any business
therein, or any work or thing whatsoever done or any condition created (other
than by Subtenant) in the Sublandlord's Premises during the Term; (2) any
accident, injury (including death) or damage to persons or property (except to
the extent caused by Subtenant's negligence) occuring in the Sublandlord's
Premises, and (3) any act, omission or negligence of Sublandlord or any of its
subtenants or licensees (other than Subtenant) or its or their partners, joint
venturers, directors, officers, agents, employees or contractors. In the event
that any action or proceeding is brought against Subtenant and/or its partners,
joint venturers, directors, officers, agents and/or employees by reason of any
such Claim, Sublandlord, upon notice from Subtenant, shall resist and defend, at
Sublandlord's own cost and expense such action or proceeding by counsel
reasonably
<PAGE>
satisfactory to Subtenant. In the event Sublandlord fails to defend such a
proceeding, Subtenant may, at its option, retain counsel of its own choosing and
the reasonable cost thereof (including reasonable disbursements) shall be borne
by Sublandlord. Any counsel retained by Sublandlord pursuant to this paragraph
shall have no authority to settle, compromise or otherwise resolve any claim
against Subtenant, without its prior consent, such consent not to be
unreasonably withheld or delayed; provided, however, consent may be withheld in
Subtenant's sole discretion if the settlement, compromise or resolutions of the
Claim affects the rights and privileges of Subtenant and requires Subtenant to
pay any sums of money.
Subtenant's and Sublandlord's obligations under this Article 15 shall
survive the expiration or other termination of this Sublease.
16. Brokerage.
Sublandlord and Subtenant each represents that it has dealt with no
broker other than Charles Klatskin Company, Inc. (the "Broker") in connection
with this Sublease and Sublandlord agrees to pay the Broker its fee pursuant to
a separate agreement. Each party agrees to indemnify, defend and hold harmless
the other against any claim, including reasonable attorneys' fees by any person
or entity claiming to have dealt with the indemnifying party with respect to
this Sublease. The provisions of this Article 16, shall survive the expiration
or earlier termination of this Sublease.
17. Assignment of Overlease.
The term "Sublandlord" as used in this Sublease means only the tenant
under the Overlease at the time in question, so that if the Overlease is
assigned by the tenant thereunder, the assignor shall be thereupon released and
discharged from all covenants, conditions and agreements of Sublandlord
hereunder accruing from and after the date of such assignment, but such
covenants, conditions and agreements shall be binding on the assignee until
thereafter assigned and, provided, however that such assignee assumes the
obligations of the Sublandlord as set forth herein.
18. Payments.
Notwithstanding anything contained elsewhere herein to the contrary,
unless directed in writing by Sublandlord to make payments directly to
Overlandlord, Subtenant shall make all payments hereunder to Sublandlord. The
due date of each such payment shall be as set forth in this Sublease or if no
due date is set forth herein, twenty (20) business days after Subtenant has
received from Sublandlord a statement for such amounts due.
19. Binding Effect.
The covenants, conditions and agreements contained in this Sublease
shall bind and inure to the benefit of the parties hereto and their respective
legal representatives, successors and assigns (to the extent permitted
hereunder).
<PAGE>
20. Modification, Waiver, etc.
No modification or waiver of any of the terms hereof shall be valid or
binding on either party, unless in writing duly executed by both of the parties
hereto. No waiver by either party hereto of any breach hereof or default or
delinquency hereunder by the other and no failure by either party hereto to
require performance or satisfaction of any provision of this Sublease, shall be
deemed a waiver of any subsequent breach, default or delinquency of the same or
similar nature by the other, or as a waiver of the provision itself or of the
full right of the claiming party to require such performance or satisfaction at
any time thereafter. No failure of either party hereto to exercise any right,
privilege, discretion or power given it hereunder, or to insist upon strict
compliance by the other party with any obligation in this Sublease, and no
custom or practice of either party hereto (or otherwise) at variance with the
terms hereof shall constitute a waiver or modification of its right to demand
exact compliance with the terms hereof.
21. Right of Sublandlord to Perform Subtenant's Covenants, etc.
If Subtenant shall have defaulted in the observance or performance of
any term or covenant on Subtenant's part to be observed or performed under or by
virtue of any of the terms or provisions of this Sublease, then, unless
otherwise provided elsewhere in this Sublease, if, after notice of default,
Subtenant has not itself cured the default at least three (3) days prior to the
date that Overlandlord has the right to cure such default under Article 25 of
the Overlease, then Sublandlord may at any time thereafter and without further
notice perform the same for the account of Subtenant, and if Sublandlord makes
any expenditures or incurs any obligations for the payment of money in
connection therewith including, but not limited to, reasonable attorneys' fees
in instituting, prosecuting or defending any action or proceeding, such sums
paid or obligations incurred with interest and costs shall be deemed to be
additional rent hereunder and shall be paid by Subtenant to Sublandlord within
five (5) days of rendition of any bill or statement to Subtenant therefor.
22. Acceptance of Rent; Surrender.
The receipt by Sublandlord of rent with knowledge of the breach of any
covenant of this Sublease shall not be deemed a waiver of such breach and no
provision of this Sublease shall be deemed to have been waived by Sublandlord
unless such waiver is in writing signed by Sublandlord. No payment by Subtenant
or receipt by Sublandlord of a lesser amount than the monthly rent herein
stipulated shall be deemed to be other than on account of the earliest
stipulated rent, nor shall any endorsement or statement of any check or any
letter accompanying any check or payment as rent be deemed an accord and
satisfaction, and Sublandlord may accept such check or payment without prejudice
to Sublandlord's right to recover the balance of such rent or pursue any other
remedy provided in this Sublease. No act or thing done by Sublandlord or
Sublandlord's agents during the term hereof shall be deemed an acceptance of a
surrender of the Sublease Premises and no agreement to accept such surrender
shall be valid unless in writing signed by Sublandlord. No employee of
Sublandlord or Sublandlord's agent shall have any power to accept the keys to
<PAGE>
the Sublease Premises prior to the termination of this Sublease, and the
delivery of keys to any such agent or employee shall not operate as a
termination of this Sublease or a surrender of the Sublease Premises.
23. Waiver of Jury Trial; Counterclaims.
It is agreed by Sublandlord and Subtenant that they shall and hereby do
waive trial by jury in any action, proceeding or counterclaim brought by either
of them against the other (except for personal injury or property damage) on any
matter whatsoever arising out of or in any way connected with this Sublease, the
relationship of Sublandlord and Subtenant, Subtenant's use or occupancy of the
Sublease Premises, and any emergency statutory or any other statutory remedy. It
is further mutually agreed that in the event Sublandlord commences any summary
proceeding, Subtenant will not interpose any counterclaim of whatever nature or
description in any such proceeding, except for any counterclaim which would by
virtue of not being interposed by Subtenant in any such proceeding, be deemed
permanently waived in any other or future action or proceeding.
24. At End of Term.
Upon the expiration or sooner termination of the Term, Subtenant shall
vacate and surrender the Sublease Premises in broom-clean condition, restore the
Sublease Premises as may be required under the provisions of the Overlease as
herein incorporated including, without limitation, removing the shelving and
furniture transferred to Subtenant at the commencement of this Sublease and
repair any damage to the Sublease Premises caused by any permitted removal
therefrom except for ordinary wear and tear and such damage or destruction as
Overlandlord is required to repair or restore under the provisions of the
Overlease.
25. Notices.
Any notice or demand which under the terms of this Sublease or under
any statute must or may be given or made by the parties hereto, shall be in
writing, and shall only be effective if given or made by personal delivery or
recognized overnight courier, delivery receipt requested, or by mailing the same
by registered or certified mail, return receipt requested, postage prepaid,
addressed to the parties at the following addresses:
If to Sublandlord: Liz Claiborne Accessories, Inc.
One Claiborne Avenue
North Bergen, NJ 07047
Attn: Legal Department
If to Subtenant: Kenneth Cole Productions, Inc.
85 Metro Way
Secaucus, NJ 07094
Attn: Chief Financial Officer
with a copy to: Kenneth Cole Productions
85 Metro Way
Secaucus, NJ 07094
Attn: General Counsel
<PAGE>
After the Commencement Date any notices delivered to Subtenant shall be
addressed to the Sublease Premises. Either party, however, may designate in
writing such new or other address to which such notice or demand shall
thereafter be so given, made or mailed. Any notice given hereunder shall only be
deemed delivered three (3) days after being deposited in a post office or
earlier, as noted on a signed delivery receipt, maintained by the United States
Government, enclosed in a registered or certified prepaid wrapper addressed as
hereinbefore provided, or when hand delivered or upon the next business day when
delivered by recognized overnight courier (as evidenced by a delivery receipt).
26. Miscellaneous.
This Sublease is made in the State of New Jersey and shall be governed
by and construed under the laws thereof. The headings in this Sublease are for
purposes of reference only and shall not limit or otherwise affect the meaning
hereof. This Sublease shall not be binding upon Sublandlord for any purpose
whatsoever unless and until Sublandlord has delivered to Subtenant a fully
executed copy hereof.
27. Access to Sublease Premises and Reservation by Sublandlord.
Sublandlord, Sublandlord's agents, employees and contractors,
Overlandlord and Overlandlord's agents, employees and contractor shall have the
right to enter the Sublease Premises (in an emergency at any time without prior
notice), during reasonable business hours, upon reasonable notice to obtain
access to Sublandlord's Premises (defined below), Sublandlord's cable and other
wiring associated with its telephone and data communications services and to
examine the Sublease Premises and to make such repairs, replacements,
improvements and alterations as Sublandlord or Overlandlord may be required to
make hereunder or pursuant to the provisions of the Overlease and to enforce its
rights herein.
Sublandlord reserves the right to place, maintain, repair and replace
such telephone and data communications cables and wiring in and through the
Sublease Premises as is necessary to service Sublandlord's business. Such cables
and wiring shall not unreasonably interfere with Subtenant's operations in the
Sublease Premises.
For purposes of this Sublease, "Sublandlord's Premises" shall be deemed
those portions of the Building and Land demised to and permitted to be used by
Sublandlord under the Overlease which Subtenant is not demising hereunder or
exclusively using pursuant to the terms hereof.
28. Status of Landlord/Tenant Under Overlease.
Sublandlord hereby represents to Subtenant that to its knowledge, as of
the date hereof, (a) the Overlease is in full force and effect subject to the
bankruptcy laws and other equitable remedies, (b) it, as the tenant under the
Overlease, is not in violation of any of the terms or provisions of the
Overlease, and (c) the Overlandlord, as the Landlord under the Overlease, is not
in violation of any of the terms or provisions of the Overlease.
<PAGE>
29. Overlandlord Consent/HMDC Approval.
This Sublease is conditional upon (i) the approval of the Overlandlord,
and (ii) the approval of and issuance of an occupancy certificate by the
Hackensack Meadowland Development Commission (HMDC). Sublandlord shall use its
reasonable efforts to obtain the Overlandlord's consent which shall not include
any obligation to institute legal proceedings or the payment of any monetary
sum. Subtenant shall submit the required application and fee to the HMDC and
Subtenant shall be required to promptly complete all information necessary for
such application. In addition the Subtenant shall be required to obtain any
applicable approvals and/or any occupancy certificates from the Town of
Secaucus. In the event that the approvals set forth in subparagraphs (i) and
(ii) are not received within ninety (90) days after the execution date hereof
either party has the right to terminate this Sublease upon ten (10) days prior
written notice to the other. In the event of termination pursuant to the
provisions of this paragraph, title to the furniture and shelving described in
Paragraph 7 above shall revert to Sublandlord. Sublandlord shall return the
Fixed Rent and Fixed Tax Payment for the first month of the term of this lease
paid by Subtenant upon the execution hereof within five (5) days of such
termination.
30. Quiet Enjoyment.
Sublandlord covenants and agrees with Subtenant that upon Subtenant's
paying the Fixed Rent, the Fixed Tax Payment, Additional Tax Payment and
additional rent in accordance with the terms of this Sublease and observing and
performing all the terms, covenants and conditions on Subtenant's part to be
observed and performed under the Sublease and the Overlease. Subtenant may
peaceably and quietly enjoy the Sublease Premises subject, nevertheless, to the
terms and conditions of this Sublease, and the Overlease and to the matters to
which the Sublease or the Overlease is or shall be subordinate.
31. Hazardous Materials.
Sublandlord hereby represents that to its knowledge, Sublandlord has
not placed or stored materials, substances or waste including, without
limitation, asbestos, deemed hazardous, dangerous, toxic or a pollutant pursuant
to Applicable Environmental Laws (defined below) (collectively "Hazardous
Waste"), on, in or about the Sublease Premises in violation of applicable
federal, state or local laws, rules and regulations ("Applicable Environmental
Laws"). Sublandlord and Subtenant agree that neither shall cause or permit to be
brought upon, released, stored, treated, disposed of, generated or used in, on
or about the Building, the Sublease Premises or the Land, any Hazardous Waste in
violation of Applicable Environmental Laws except such deminimus quantities
normally used in the operation of their respective businesses provided same is
in compliance with all Applicable Environmental Laws. Subtenant shall promptly
notify Sublandlord of any activity or operation to be conducted by Subtenant at
the Sublease Premises which involves the use, release, handling, generation,
treatment, storage or disposal of any Hazardous Waste.
<PAGE>
If at any time any Hazardous Waste is found in or on the Building, the
Sublease Premises or the Land which was caused by or is the result of actions of
Sublandlord, Sublandlord at its sole cost and expense, shall remediate same to
the extent required by and in accordance with all Applicable Environmental Laws.
Sublandlord shall indemnify, defend and hold harmless Subtenant its officers,
directors, agents and employees from and against all claims, obligations,
demands, actions, proceedings, judgments, loss, damages, liability and all costs
(including reasonable attorney fees) that Subtenant may sustain or incur as a
result of or on account of the noncompliance of the Sublease Premises with
Applicable Environmental Laws caused by Sublandlord's actions.
If at any time any Hazardous Waste is found on the Sublease Premises,
the Building or the Land, which was caused by or is the result of the actions of
Subtenant, Subtenant, at its sole cost and expense, shall promptly remove same
in accordance with all Applicable Environmental Laws and shall indemnify and
hold harmless Sublandlord, its officers, directors, agents and employees from
and against all claims, obligations, demands, actions, proceedings and
judgments, loss, damages and liability and any and all costs (including
reasonable attorneys fees) which may be imposed or which Sublandlord may incur
as a result of or on account of the noncompliance of the Sublease Premises with
Applicable Environmental Laws caused by the actions of Subtenant, its employees,
agents or contractors or the use, treatment, generation, production,
manufacture, storage, sale or release or disposal of Hazardous Waste on the
Sublease Premises on or after the Subtenant's possession of the Premises or the
breach of the covenants contained herein.
Notwithstanding anything set forth herein to the contrary, Subtenant
shall not be obligated to remove or remediate any Hazardous Waste found on the
Sublease Premises, the Building, or the Land which existed prior to its
possession of the Sublease Premises.
It is Sublandlord's understanding that the Overlandlord removed one
10,000 gallon No. 2 heating oil underground storage tank the ("UST") from the
Land on or about 1988. Sublandlord makes no representations with respect to such
UST. Without limiting the immediately preceding sentence, Sublandlord makes no
representations with respect to the UST removal procedure, any remediation which
Overlandlord may have performed or the condition of the area surrounding the
previous location of the UST.
The provisions of this Paragraph 31 shall survive the expiration or
earlier termination of this Sublease.
IN WITNESS WHEREOF, Sublandlord and Subtenant have duly executed this
Sublease as of the day and year first written above.
SUBLANDLORD:
Liz Claiborne Accessories, Inc.
By: _____________________________
Title: Vice President General Counsel
<PAGE>
SUBTENANT:
Kenneth Cole Productions, Inc.
By:
Title:
<PAGE>
EXHIBIT A
Depiction of the Sublease Premises and Sublandlord's and Subtenant's Parking
Spaces and Access Driveways to Sublease Premises
<PAGE>
EXHIBIT B
Overlease
EXHIBIT C
Workletter/Inventory of Furniture
Sublandlord shall complete the following work in the Sublease Premises by
September 1, 1996:
(i) Sublandlord shall paint and carpet the office area including
repairing all baseboards and plastering all holes in the walls
(depicted in the Exhibit C-1 attached hereto) at a cost not to
exceed $80,000.
(ii) Sublandlord shall deliver to HVAC system, sprinkler system,
electrical system, plumbing and mechanical systems for the
Sublease Premises in working order.
(iii) Replace water damaged ceiling tiles;
(iv) Repair floor in kitchen area; and
(v) Repair floor in bathroom area.
<PAGE>
EXHIBIT C-1
Outline of Office Area to be Painted and Carpeted
<PAGE>
EXHIBIT C-2
Inventory of Furniture and Shelving
<PAGE>
EXHIBIT D
Depiction of Exterior Area that Subtenant is Required to Repair and Maintain
Exhibit 21.01
Kenneth Cole Productions, Inc.
List of Subsidiaries
Name State of Incorporation
1. Kenneth Cole Productions, Inc. New York
2. Kenneth Cole Financial Services, Inc. New Jersey
3. Cole Carnegie, Inc. New York
4. Kenth Ltd. Hong Kong
5. Kenneth Cole Catalog, Inc. Virginia
6. Kenneth Cole Services, Inc. Delaware
7. K.C.P.L., Inc. Delaware
8. Cole South Beach, Inc. Florida
9. Cole Somerset, Inc. Michigan
10. Kenneth Cole Gilroy, Inc. California
11. Cole NorthPark, Inc. Texas
12. Cole Phipps, Inc. Georgia
13. Cole Westchester, Inc. New York
14. Cole Tyson, Inc. Virginia
15. Cole Napa, Inc. California
16. Cole Destin, Inc. Florida
17. Cole Prussia, Inc. Pennsylvania
18. Cole Pentagon, Inc. Virginia
19. Cole Sawgrass, Inc. Florida
20. Kenneth Cole, Inc. (Secaucus Outlet) New York
21. Cole Short Hills, Inc. New Jersey
22. Cole Cabazon, Inc. California
23. Cole Copley, Inc. Massachusetts
24. Cole Stanford, Inc. California
25. Cole Roosevelt, Inc. New York
26. Cole Newbury, Inc. Massachusetts
27. Cole Waikele, Inc. (Hawaii) New York
28. Cole Reading Outlet, Inc. Pennsylvania
29. Cole Broadway, Inc. New York
30. Cole Amsterdam, B.V. Amsterdam
Cole Amsterdam, Inc. Delaware
31. Cole Clinton, Inc. Connecticut
<PAGE>
32. Cole Boca, Inc. Florida
33. Cole Century City, Inc. California
34. Cole Georgetown, Inc. District of Columbia
35. Cole Dadeland, Inc. Florida
36. Cole Aspen, Inc. Delaware
37. Cole Houston, Inc. Delaware
38. Cole Fashion Valley, Inc. Delaware
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement (Form
S-8) pertaining to the 1994 Stock Option Plan of Kenneth Cole Productions, Inc.
of our report dated February 25, 1997, with respect to the consolidated
financial statements of Kenneth Cole Productions, Inc., included its Annual
Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
New York, New York
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
KENNETH COLE PRODUCTIONS, INC. CONSOLIDATED BALANCE SHEET AS OF
DECEMBER 31, 1996 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE
TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,626
<SECURITIES> 0
<RECEIVABLES> 21,380
<ALLOWANCES> (65)
<INVENTORY> 29,265
<CURRENT-ASSETS> 53,962
<PP&E> 12,760
<DEPRECIATION> 1,109
<TOTAL-ASSETS> 65,255
<CURRENT-LIABILITIES> 16,939
<BONDS> 0
0
0
<COMMON> 132
<OTHER-SE> 46,467
<TOTAL-LIABILITY-AND-EQUITY> 65,255
<SALES> 148,258
<TOTAL-REVENUES> 151,833
<CGS> 86,919
<TOTAL-COSTS> 86,919
<OTHER-EXPENSES> 44,354
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> 20,538
<INCOME-TAX> 8,251
<INCOME-CONTINUING> 12,287
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,287
<EPS-PRIMARY> .90
<EPS-DILUTED> .90
</TABLE>