SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13082
KENNETH COLE PRODUCTIONS, INC.
(Exact name of registrant as specified in its charter)
New York 13-3131650
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
152 West 57th Street, New York, NY
10019
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (212) 265-
1500
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares of each of the issuer's classes of
common stock, as of the latest practicable date:
Class
November 7, 1997
Class A Common Stock ( $.01 par value)
7,390,241
Class B Common Stock ( $.01 par value)
5,785,398
Kenneth Cole Productions, Inc.
Index to 10-Q
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 ............ 3
Consolidated Statements of Income for the three month and
nine month
periods ended September 30, 1997 and
1996........................................................
.............. 5
Consolidated Statement of Changes in Shareholders' Equity
for the nine
month period ended September 30, 1997
............................................................
.............. 6
Consolidated Statements of Cash Flows for the nine month
periods
ended September 30, 1997 and 1996
............................................................
.................... 7
Notes to Consolidated Financial Statements
............................................................
......... 8
Item 2.Management's Discussion and Analysis of Results of
Operations
and Financial Condition
............................................................
........................................ 9
Part II. OTHER INFORMATION
Item 1.Legal Proceedings .................................
............................................................
............. 13
Item 2.Changes in Securities..............................
............................................................
............ 13
Item 3.Defaults Upon Senior Securities....................
............................................................
..... 13
Item 4.
Submission of Matters to a Vote of Security Holders
................................................... 13
Item 5. Other
Information
............................................................
.............................................. 13
Item 6. Exhibits and Reports on Form 8-
K...........................................................
...................... 13
Signatures......................................................
............................................................
................. 14
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, December 31,
1997 1996
(Unaudited)
Assets
Current assets:
Cash $ 2,452,000 $ 1,626,000
Due from factors 27,879,000 17,976,000
Accounts receivable, net 3,790,000 3,339,000
Inventories 27,625,000 29,265,000
Prepaid expenses and other current assets 920,000 1,001,000
Deferred taxes 755,000 755,000
-----------------------
Total current assets 63,421,000 53,962,000
Property and equipment:
Furniture and fixtures 4,497,000 3,234,000
Machinery and equipment 3,596,000 2,916,000
Leasehold improvements 7,441,000 6,610,000
-----------------------
15,534,000 12,760,000
Less accumulated depreciation and amortization 4,842,000 3,428,000
-----------------------
Net property and equipment 10,692,000 9,332,000
-----------------------
Other assets:
Deferred taxes 145,000 145,000
Deposits and sundry 2,620,000 1,816,000
-----------------------
Total other assets 2,765,000 1,961,000
-----------------------
Total assets $76,878,000 $65,255,000
=======================
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, December 31,
1997 1996
(Unaudited)
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 9,792,000 $12,738,000
Accrued expenses and other current 3,993,000 2,376,000
liabilities
Advances due under revolving credit
facility and current
portion of long-term debt 1,255,000 489,000
Income taxes payable 2,933,000 1,247,000
Deferred license income 376,000 89,000
-------------------------
Total current liabilities 18,349,000 16,939,000
-------------------------
Deferred rent payable 808,000 521,000
Other non-current liabilities 1,694,000 1,196,000
Shareholders' equity:
Preferred stock, par value $1.00, 1,000,000
shares authorized, none outstanding
Class A common stock, par value $.01,
20,000,000 shares authorized, 7,390,241
and 7,353,179 outstanding in 1997 and 1996 74,000 74,000
Class B common stock, par value $.01,
6,000,000 shares authorized, 5,785,398 58,000 58,000
outstanding
Additional paid-in capital 19,487,000 19,104,000
Translation adjustments 59,000
Retained earnings 36,349,000 27,432,000
Deferred compensation (69,000)
-------------------------
Total shareholders' equity 56,027,000 46,599,000
-------------------------
Total liabilities and shareholders' equity $76,878,000 $65,255,000
=========================
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
Net sales $50,287,000 $39,841,000 $135,549,000 $109,970,000
Cost of goods sold 29,178,000 23,341,000 82,847,000 64,373,000
----------------------- -------------------------
Gross profit 21,109,000 16,500,000 52,702,000 45,597,000
Licensing and other
income 1,726,000 887,000 3,994,000 2,042,000
Selling, general and
administrative, and
shipping and
warehousing 14,677,000 10,573,000 41,596,000 31,222,000
----------------------- ------------------------
Operating income 8,158,000 6,814,000 15,100,000 16,417,000
Interest expense, net 39,000 17,000 238,000 32,000
----------------------- ------------------------
Income before provision
for income taxes 8,119,000 6,797,000 14,862,000 16,385,000
Provision for income
taxes 3,248,000 2,720,000 5,945,000 6,651,000
----------------------- ------------------------
Net income $ 4,871,000 $ 4,077,000 $ 8,917,000 $ 9,734,000
======================= ========================
Net income per share $.36 $.30 $.66 $.72
======================= ========================
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
Class A Class B
Common Stock Common Stock Total
Number Number Common
of shares Amount of shares Amount Stock
Shareholders'equity
January 1, 1997 7,353,179 $74,000 5,785,398 $58,000 $132,000
Exercise of Stock
Options 37,062
Net Income
Translation
Adjustment
Amortization
of deferred
compensation
-------------------------------------------------
Shareholders'equity
September 30, 1997 7,390,241 $74,000 5,785,398 $58,000 $132,000
==================================================
Additional Deferred
Paid-in Translation Retained Compen-
Capital Adjustment Earnings sation Total
Shareholders'equity
January 1, 1997 $19,104,000 $27,432,000 ($69,000) $46,599,000
Exercise of Stock
Options 383,000 383,000
Net Income 8,917,000 8,917,000
Translation
Adjustment $59,000 59,000
Amortization
of deferred
compensation 69,000 69,000
---------------------------------------------------------
Shareholders'equity
September 30, 1997 $19,487,000 $59,000 $36,349,000 $69,000 $56,027,000
=========================================================
See accompanying notes to consolidated financial statements
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
1997 1996
Cash flows from operating activities
Net income $8,917,000 $9,734,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,414,000 711,000
Amortization of deferred compensation 69,000 172,000
Provision for doubtful accounts 32,000 10,000
Changes in assets and liabilities:
Increase in due from factors (9,903,000) (7,632,000)
Increase in accounts receivable (483,000) (615,000)
Decrease (increase) in inventories 1,640,000 (3,985,000)
Decrease (increase) in prepaid expenses and
other current assets 81,000 (555,000)
Increase in deposits (804,000) (627,000)
(Decrease) increase in accounts payable (2,946,000) 1,126,000
Increase in income taxes payable 1,806,000 2,421,000
Increase in accrued expenses and other 1,904,000 354,000
current liabilities
Increase in other non-current liabilities 785,000 438,000
------------------------
Net cash provided by operating activities 2,512,000 1,552,000
Cash flows from investing activities
Acquisition of property and equipment, net (2,774,000) (2,933,000)
------------------------
Net cash used in investing activities (2,774,000) (2,933,000)
Cash flows from financing activities
Proceeds from revolving line of credit, net 810,000
Proceeds from exercise of stock options 263,000 231,000
Repayment of long-term debt (44,000)
------------------------
Net cash provided by financing activities 1,029,000 231,000
Effect of exchange rate changes on cash 59,000 1,000
------------------------
Net increase (decrease) in cash 826,000 (1,149,000)
Cash, beginning of period 1,626,000 2,204,000
------------------------
Cash, end of period $2,452,000 $1,055,000
========================
Supplemental disclosures of cash flow
information
Cash paid during the period for:
Interest $ 79,000 $ 102,000
Income taxes $4,138,000 $3,485,000
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
General
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The data contained in these
financial statements are unaudited and are subject to year end adjustment,
however, in the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and nine month periods
ended September 30, 1997 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1997. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year
ended December 31, 1996.
The consolidated balance sheet at December 31, 1996 was derived from the
audited financial statements.
Earnings Per Share
The Company calculates earning per share ("EPS") in accordance with
Accounting Principles Board Opinion 15, "Earning per share" ("APB 15").
Earning per share is based on the weighted average number of shares of
common stock and common stock equivalents, if dilutive, outstanding during
each period.
In March 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 128 "Earning per Share"
("SFAS128"), which upon adoption will supersede APB 15 and is intended to
simply and harmonize the EPS calculations in the United States with those
common in other countries and to present two EPS calculations: (i) basic
earnings per common share which is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
periods presented, and (ii) diluted earnings per common share, which is
determined on the assumption that options issued to employees are exercised
and repurchased at the average price for the periods presented. SFAS 128
is effective for financial statements for the year ended December 31, 1997.
Under SFAS 128, basic earnings per share for the three and nine month
period ended September 30, 1997 would be $.37 and $.68 per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth the Company's condensed consolidated
statements of income in thousands of dollars and as percentage of net sales
for the quarter ended September 30, 1997 and September 30, 1996 as well as
for the nine months ended September 30, 1997 and September 30, 1996.
Three Months ended
September 30, 1997 September 30, 1996
(in thousands)
Net sales $50,287 100.0% $39,841 100.0%
Gross Profit 21,109 42.0 16,500 41.4
Licensing income 1,726 3.4 887 2.2
Selling, general and
administrative expenses 14,677 29.2 10,573 26.6
Operating income 8,158 16.2 6,814 17.0
Interest income, net 39 0.0 17 0.0
Income before income taxes 8,119 16.2 6,797 17.1
Income tax expense 3,248 6.5 2,720 6.8
Net income 4,871 9.7 4,077 10.2
Nine Months ended
September 30, 1997 September 30, 1996
(in thousands)
Net sales $135,549 100.0% $109,970 100.0%
Gross Profit 52,702 38.9 45,597 41.5
Licensing income 3,994 2.9 2,042 1.9
Selling, general and
administrative expenses 41,596 30.7 31,222 28.4
Operating income 15,100 11.1 16,417 14.9
Interest expense, net 238 .2 32 0.0
Income before income taxes 14,862 10.9 16,385 14.9
Income tax expense 5,945 4.4 6,651 6.0
Net income 8,917 6.5 9,734 8.9
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
Net sales increased $10.5 million, or 26.3%, to $50.3 million for the three
months ended September 30, 1997 compared to net sales of $39.8 million for
the three months ended September 30, 1996. Net sales of the Company's
wholesale operations (excluding sales to the Company's retail stores)
increased $7.2 million, or 22.2%, to $39.6 million from $32.4 million.
This increase was primarily due to increases in sales of Kenneth Cole
branded men's footwear and Unlisted branded women's footwear. Sales
through the Company's retail and outlet stores increased $3.3 million, or
44.5%, to $10.7 million for the three months ended September 30, 1997
compared to $7.4 million for the three months ended September 30, 1996.
This increase was the result of the sales of thirty-one stores which
generated a 6.8% comparable store sales increase, the sales of seven retail
and outlet stores open in the third quarter of 1997 which were not open in
the third quarter of 1996 and the sales of four stores which opened during
the third quarter of 1997.
Gross profit was $21.1 million or 42.0% of net sales for the three months
ended September 30, 1997, an increase of $4.6 million, or 27.9%, from $16.5
million or 41.4% of net sales for the three months ended September 30,
1996. This increase in gross profit percentage is attributed, in part, to
the increase in retail store sales as a percentage of total sales (retail
stores carry higher gross margins than wholesale gross margins).
The Company continues to expand its licensing efforts, resulting in an
increase in licensing income of $839,000, or 94.6% for the three months
ended September 30, 1997 compared to the three months ended September 30,
1996. The increase reflects both incremental revenues from newly licensed
products and the continued sales growth experienced by existing licensees.
Selling, general and administrative expenses, including shipping and
warehousing costs, were $14.7 million, or 29.2% of net sales for the three
months ended September 30, 1997, compared to $10.6 million or 26.6% of net
sales for the three months ended September 30, 1996. The increase in
selling, general and administrative expenses as a percentage of net sales
is primarily due to the additional retail stores (which carry a higher
expense level than wholesale) and additional administrative costs to
support the Company's growth.
As a result of the above, operating income increased 19.7% to $8.2 million
(16.2% of net sales) from $6.8 million (17.0% of net sales) for the three
months ended September 30, 1997 and 1996, respectively.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Net sales were $135.5 million in the first nine months of 1997 compared to
$110.0 million in the prior year's period, an increase of $25.5 million or
23.2%. Net sales of the Company's wholesale operations (excluding sales to
the Company's retail stores) increased $15.2 million or 17.0% to $104.6
million in the nine months from $89.4 million in last year's same period.
This increase was primarily due to increases in sales of the Kenneth Cole
branded men's footwear and Unlisted branded women's footwear. Sales
through the Company's retail and outlet stores increased $10.3 million or
50.3% to $30.9 million. This increase reflects a 10.0% comparable store
sales increase on sales of thirty-one stores ,the sales of four stores
open for the entire first nine months of 1997 which were not open in the
first nine months of 1996, and the sales of seven stores opened during the
first nine months of 1997.
Gross profit was $52.7 million for the nine month period ended September
30, 1997, an increase of $7.1 million, or 15.6%, from $45.6 million in the
comparable period last year. As a percentage of sales, gross profit
decreased to 38.9% from 41.5%. The decrease was primarily due to lower
than expected sell-throughs during the first six months of the year at
retail, which resulted in excess wholesale inventories, that were disposed
of at significant discounts.
Selling, general and administrative expenses including shipping and
warehousing costs were $41.6 million or 30.7% of net sales for the nine
month period ended September 30, 1997, and $31.2 million or 28.4% of net
sales in the comparable period last year. The increase is attributable
to additional retail stores, which carry a higher expense level than
wholesale and to higher costs associated with operating and moving from a
63,000 square foot office and distribution facility to a 244,000 square
foot facility.
As a result of the above, operating income decreased 8.0% for the nine-
month period ended September 30, 1997 to 15.1 million (11.1% of net sales)
from 16.4 million (14.9% of net sales) for the same period last year.
Liquidity and Capital Resources
The Company uses cash from operations and borrowings under its revolving
line of credit as the primary sources of financing for its expansion and
seasonal requirements. Cash requirements vary from time to time as a
result of the timing of the receipt of merchandise from suppliers, the
delivery by the Company of merchandise to its customers, the level of
accounts receivable and due from factors balances and the Company's
inventory levels. Cash provided by operating activities was $2.5 million
for the nine months ended September 30, 1997, compared to $1.6 million used
in operating activities for the nine months ended September 30, 1996. The
increase in cash flow from operations is attributable, in part, to the
timing of the payment of accrued expenses and the decrease in the Company's
inventories. At September 30, 1997 and December 31, 1996, working capital
was $45.1 million and $37.0 million, respectively.
At September 30, 1997 the Company had $22.0 million available under its
line of credit, which allows for borrowings, letter of credits and bankers
acceptances up to a maximum of $25.0 million to finance working capital
requirements.
Capital expenditures totaled $2.8 million and $2.9 million in the nine
months ended September 30, 1997 and 1996, respectively. Capital
expenditures relate primarily to the Company's retail and outlet store
expansion and to the further development and enhancement of the Company's
management information systems.
The Company believes that cash flows from operations and borrowings under
its existing credit facilities will be sufficient to satisfy the Company's
working capital requirements for the next twelve months.
Inflation and Currency Fluctuations
The Company believes that inflation and foreign currency fluctuations have
not had a material effect on the Company's results of operations. The
Company enters into forward exchange contracts to hedge the purchase price
of those inventories purchased in foreign currencies.
Important Factors Relating to Forward Looking Statements
This report contains certain forward looking statements, as defined in The
Private Securities Litigation Reform Act of 1994, with respect to cash
flows from operations. The forward-looking statements contained in the
Form 10-Q were prepared by management and are qualified by, and subject to,
significant business, economic, competitive, regulatory and other
uncertainties and contingencies, all of which are difficult or impossible
to predict and many of which are beyond the control of the Company.
Accordingly, there can be no assurance that the forward-looking statements
contained in this Form 10-Q will be realized or that actual results will
not be significantly higher or lower.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4.Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K: The Company did not file any reports on
Form 8-K during the three months ended
September 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Kenneth Cole Productions, Inc.
Registrant
November 13, 1997 /S/ STANLEY A. MAYER
Stanley A. Mayer
Executive Vice President and
Chief Financial Officer
INDEX OF EXHIBITS
Sequential
Exhibit Number: Description Page
No.
27 Financial Data Schedule 17
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,452
<SECURITIES> 0
<RECEIVABLES> 31,734
<ALLOWANCES> (65)
<INVENTORY> 31,734
<CURRENT-ASSETS> 63,421
<PP&E> 15,534
<DEPRECIATION> 4,842
<TOTAL-ASSETS> 76,878
<CURRENT-LIABILITIES> 18,349
<BONDS> 0
0
0
<COMMON> 132
<OTHER-SE> 55,895
<TOTAL-LIABILITY-AND-EQUITY> 76,878
<SALES> 135,549
<TOTAL-REVENUES> 139,549
<CGS> 82,847
<TOTAL-COSTS> 82,847
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 238
<INCOME-PRETAX> 14,862
<INCOME-TAX> 5,945
<INCOME-CONTINUING> 8,917
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,917
<EPS-PRIMARY> .66
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