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 March 31, 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 May 14, 1997
----- ------------
Class A Common Stock ( $.01 par value) 7,363,946
Class B Common Stock ( $.01 par value) 5,785,398
Page 1
<PAGE>
Kenneth Cole Productions, Inc.
Index to 10-Q
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
<S> <C>
Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996 .................. 3
Consolidated Statements of Income for the three months
ended March 31, 1997 and 1996 ........................................................... 5
Consolidated Statement of Changes in Shareholders' Equity for the three
months ended March 31, 1997 .............................................................. 6
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 ............................................................ 7
Notes to Consolidated Financial Statements ............................................... 8
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition .................................................................. 10
Part II. OTHER INFORMATION
Item 1. Legal
Proceedings ....................................................................................... 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 ......................................................... 14
Signatures ........................................................................................ 15
</TABLE>
Page 2
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------------------------------------------
(Unaudited)
Assets
Current assets:
<S> <C> <C>
Cash $ 765,000 $ 1,626,000
Due from factors 26,671,000 17,976,000
Accounts receivable, net 2,363,000 3,339,000
Inventories 31,865,000 29,265,000
Prepaid expenses and other current assets 1,569,000 1,001,000
Deferred taxes 755,000 755,000
-------------------------------------------
Total current assets 63,988,000 53,962,000
Property and equipment
Furniture and fixtures 3,478,000 3,234,000
Machinery and equipment 3,113,000 2,916,000
Leasehold improvements 6,686,000 6,610,000
-------------------------------------------
13,277,000 12,760,000
Less accumulated depreciation and amortization 3,849,000 3,428,000
-------------------------------------------
Net property and equipment 9,428,000 9,332,000
-------------------------------------------
Other assets:
Deferred taxes 145,000 145,000
Deposits and sundry 1,883,000 1,816,000
-------------------------------------------
Total other assets 2,028,000 1,961,000
===========================================
Total assets $ 75,444,000 $ 65,255,000
===========================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31, 1996
1997
------------------------------------------
(Unaudited)
Liabilities and shareholders' equity Current liabilities:
<S> <C> <C>
Accounts payable $ 7,957,000 $ 12,738,000
Accrued expenses and other current liabilities 1,970,000 2,376,000
Advances due under revolving credit facility 10,510,000 489,000
Income taxes payable 2,483,000 1,247,000
Deferred license income 501,000 89,000
------------------------------------------
Total current liabilities 23,421,000 16,939,000
------------------------------------------
Deferred rent payable 615,000 521,000
Other non-current liabilities 1,322,000 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,
7,363,946, 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
outstanding in 1997 and 1996 58,000 58,000
Additional paid-in capital 19,238,000 19,104,000
Cumulative Translation Adjustment 45,000
Retained earnings 30,684,000 27,432,000
Deferred compensation (13,000) (69,000)
------------------------------------------
Total shareholders' equity 50,086,000 46,599,000
------------------------------------------
Total liabilities and shareholders' equity $ 75,444,000 $ 65,255,000
==========================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------------------------------
1997 1996
-------------------------------------------------
<S> <C> <C>
Net sales $ 44,910,000 $ 35,110,000
Cost of goods sold 27,294,000 20,325,000
-------------------------------------------------
Gross profit 17,616,000 14,785,000
Licensing and other income 1,056,000 516,000
Selling, general and administrative and shipping and
warehousing 13,140,000 10,250,000
-------------------------------------------------
Operating income 5,532,000 5,051,000
Interest expense, net 112,000 41,000
-------------------------------------------------
Income before provision for income taxes
5,420,000 5,010,000
Provision for income taxes 2,168,000 2,054,000
-------------------------------------------------
Net income $ 3,252,000 $ 2,956,000
=================================================
Net income per share $ .24 $ .22
=================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
------------ ------------ Total Additional Cumulative Deferred
Number Number Common Paid-in Translation Retained Compen-
of shares Amount of shares Amount Stock Capital Adjustment Earnings sation Total
--------- ------ --------- ------ ----- ------- ---------- -------- ------ -----
Shareholders'
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
equity 7,353,179 $74,000 5,785,398 $58,000 $132,000 $19,104,000 $27,432,000 $(69,000) $46,599,000
January 1,
1997
Exercise of
stock 10,767 134,000 134,000
options,
including
tax benefit
Net income 3,252,000 3,252,000
Translation $45,000 45,000
adjustment
Amortization of 56,000 56,000
deferred
compensation
-------------------------------------------------------------------------------------------------------------------
Shareholders'
equity 7,363,946 $74,000 5,785,398 $58,000 $132,000 $19,238,000 $45,000 $30,684,000 $(13,000) $50,086,000
March 31,
1997
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
-------------------------------------
Cash flows from operating activities
<S> <C> <C>
Net income $ 3,252,000 $ 2,956,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 421,000 226,000
Amortization of deferred compensation 56,000 59,000
Changes in assets and liabilities:
Increase in due from factors (8,695,000) (3,434,000)
Decrease in accounts receivable 976,000 766,000
Increase in inventories (2,600,000) (2,176,000)
Increase in prepaid expenses and other current assets (568,000) (75,000)
Increase in deposits (67,000) (141,000)
Decrease (increase) in accounts payable (4,781,000) 213,000
Increase in income taxes payable 1,284,000 1,113,000
Increase (decrease) in accrued expenses and other current
liabilities 6,000 (27,000)
Increase in other non-current liabilities 220,000 160,000
-------------------------------------
Net cash used in operating activities (10,496,000) (360,000)
Cash flows from investing activities
Acquisition of property and equipment, net (517,000) (568,000)
-------------------------------------
Net cash used in investing activities (517,000) (568,000)
Cash flows from financing activities
Proceeds from revolving line of credit, net 10,030,000
Proceeds from exercise of stock options 86,000 48,000
Repayment of long-term debt (9,000) (14,000)
-------------------------------------
Net cash provided by financing activities 10,107,000 34,000
Effect of exchange rate changes on cash 45,000
-------------------------------------
Net decrease in cash (861,000) (894,000)
Cash, beginning of period 1,626,000 2,204,000
-------------------------------------
Cash, end of period $ 765,000 $ 1,310,000
=====================================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 134,000 $ 57,000
Income taxes $ 883,000 $ 994,000
</TABLE>
See accompanying notes to consolidated financial statements.
Page 7
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
General
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The data contained in these financial statements are
unaudited and are subject to year end adjustment, however, in the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 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 earnings per share ("EPS") in accordance with Accounting
Principles Board Opinion 15, "Earnings per share" ("APB 15"). Earnings 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, "Earnings per Share"
("SFAS128"), which upon adoption will supersede APB 15 and is intended to
simplify 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
assumptions 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. The Company does not believe
the adoption of SFAS 128 will have a material impact to the Company's
computation of earnings per share.
Page 8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth the Company's condensed consolidated statements
of income in thousands of dollars and as a percentage of net sales for the
quarters ended March 31, 1997 and March 31, 1996.
Three Months Ended
March 31, 1997 March 31, 1996
-------------- --------------
Net Sales 44,910 100% 35,110 100%
Gross Profit 17,616 39.2 14,785 42.1
Licensing Income 1,056 2.4 516 1.5
Selling general and administrative expense 13,140 29.3 10,250 29.2
Operating income 5,532 12.3 5,051 14.4
Interest expense, net 112 .2 41 .1
Income before income taxes 5,420 12.1 5,010 14.3
Income tax expense 2,168 4.8 2,054 5.9
Net Income 3,252 7.3 2,956 8.4
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Net sales increased $9.8 million, or 27.9%, to $44.9 million for the three
months ended March 31, 1997 from net sales of $35.1 million for the three months
ended March 31, 1996. Net sales of the Company's wholesale operations, excluding
sales to its retail division, increased $6.6 million, or 22.2%, to $36.1 million
from $29.5 million. This increase was primarily due to increases in sales of
Kenneth Cole branded men's footwear, Unlisted branded women's footwear and
Unlisted and Kenneth Cole Reaction handbags as a result of greater brand
awareness, consumer acceptance and increased sales of its core basic products.
Sales through the Company's retail and outlet stores increased $3.3 million, or
58.4%, to $8.8 million for the three months ended March 31, 1997 compared to
$5.5 million for the three months ended March 31, 1996. This increase reflects
the sales of 25 stores which generated a 17.1% comparable store sales increase,
the sales of nine retail stores open for the entire first quarter of 1997 which
were not open in the first quarter of 1996 and the sales of one retail store
which opened March 29, 1997.
Gross profit was $17.6 million for the three months ended March 31, 1997, an
increase of $2.8 million, or 1.9%, from $14.8 million for the three months ended
March 31, 1996. Gross profit was 39.2% of net sales compared to 42.1% of net
sales for the three months ended March 31, 1997 and 1996, repectively. The
decrease in gross margins as a percentage to sales was due to higher inventory
markdowns in women's footwear, as well as a higher percentage of sales of
merchandise that have lower margin levels including sales of private label
merchandise.
Page 9
<PAGE>
Selling, general and administrative expenses, including shipping and warehousing
costs, were $13.1 million (29.3% of net sales) for the three months ended March
31, 1997 compared to $10.3 million (29.2% of net sales) for the three months
ended March 31, 1996. The increase in selling, general and administrative
expenses was primarily attributable to the hiring of additional personnel to
support the Company's growth, and to the additional retail and outlet stores,
which carry a higher expense level as a percentage of sales than the wholesale
division.
The Company continues to expand its licensing efforts, resulting in an increase
in licensing income of 105% to $1.0 million for the three months ended March 31,
1997 compared to licensing income of $0.5 million for the three months ended
March 31, 1996.
As a result of the foregoing, operating income increased 9.5% to $5.5 million
(12.3% of net sales) from $5.1 million (14.4% of net sales) for the three months
ended March 31, 1997 and March 31, 1996 respectively.
Liquidity and Capital Resources
The Company uses cash flows from operations and borrowings under its 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 used by operating
activities was $10.5 million for the three months ended March 31, 1997, compared
to $0.4 million used in operating activities for the three months ended March
31, 1996. The decrease in cash flow from operations is attributable, in part, to
the timing of the payment of trade accounts payable and increased sales during
March, resulting in a higher due from factor balance. At March 31, 1997 and
December 31, 1996 working capital was $40.6 million and 37.0 million,
respectively.
The Company currently has a 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 $517,000 and $568,000 in the three months ended
March 31, 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.
Page 10
<PAGE>
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 operation. 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.
Page 11
<PAGE>
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 March 31, 1997.
Page 12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Kenneth Cole Productions, Inc.
------------------------------
Registrant
May 14, 1997 /s/ STANLEY A. MAYER
--------------------
Stanley A. Mayer
Executive Vice President and
Chief Financial Officer
Page 13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
KENNETH COLE PRODUCTIONS, INC. CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997,
AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 765
<SECURITIES> 0
<RECEIVABLES> 29,099
<ALLOWANCES> (65)
<INVENTORY> 31,865
<CURRENT-ASSETS> 63,988
<PP&E> 13,277
<DEPRECIATION> 421
<TOTAL-ASSETS> 75,444
<CURRENT-LIABILITIES> 23,421
<BONDS> 0
0
0
<COMMON> 132
<OTHER-SE> 49,954
<TOTAL-LIABILITY-AND-EQUITY> 75,444
<SALES> 44,910
<TOTAL-REVENUES> 45,966
<CGS> 27,294
<TOTAL-COSTS> 27,294
<OTHER-EXPENSES> 13,140
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112
<INCOME-PRETAX> 5,420
<INCOME-TAX> 2,168
<INCOME-CONTINUING> 3,252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,252
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
