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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, 1997 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 III of this Form 10-K or any
amendment to this Form 10-K. (_)
Aggregate market value of the voting stock held by nonaffiliates of the
registrant as of the close of business on March 23, 1998: $155,400,871
Number of shares of Class A Common Stock, $.01 par value, outstanding as
of the close of business on March 23, 1998: 7,519,470
Number of shares of Class B Common Stock, $.01 par value, outstanding as
of the close of business on March 23, 1998: 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
shareholders of the Registrant by April 30,1998
Kenneth Cole Productions, Inc.
TABLE OF CONTENTS
PART I
Page
- --------------------------------------------------------------------------------
Item 1 Business 3
Item 2 Properties 13
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 13
PART II
Item 5 Market for Registrant's Common Equity and Related Shareholder
Matters 14
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 7A Quantitative and Qualitative Disclosure about Market Risk 20
Item 8 Financial Statements and Supplementary Data 20
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 20
PART III
Item 10 Directors and Executive Officers of the Registrant 21
Item 11 Executive Compensation 21
Item 12 Security Ownership of Certain Beneficial Owners and Management 21
Item 13 Certain Relationships and Related Transactions 21
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 22
2
Item 1. Business
General
Kenneth Cole Productions, Inc. (the "Company"), incorporated in September
1982, designs, sources and markets a broad range of fashion footwear and
handbags, and through license agreements designs and markets apparel and
accessories under its Kenneth Cole New York, Kenneth Cole Reaction and Unlisted
brand names. The Company's products are targeted to appeal to fashion conscious
consumers, reflecting a casual urban perspective and a lifestyle uniquely
associated with Kenneth Cole. These products include core basics, which
generally remain in demand from season to season, and fashion products that are
designed to establish or capitalize on market trends. The combination of basics
and fashion styles provides freshness in assortments and maintains a
fashion-forward image, while a multiple brand strategy insulates the Company
from a temporary downturn in business at any particular time. In addition to
footwear, the Company, through licensing agreements, offers a lifestyle
collection of men's product categories including tailored clothing, dress
shirts, sportswear, neckwear, briefcases, portfolios, jewelry, belts, scarves,
leather and fabric outerwear, sunglasses, eyewear, watches, luggage, underwear,
robes, loungewear and small leather goods. Aside from footwear and handbags,
women's product categories sold pursuant to license agreements include hosiery,
small leather goods, belts, scarves and wraps, leather and fabric outerwear,
sunglasses, eyewear, watches and luggage.
The Company's strategy is to continue to build upon the strength of its
lifestyle brand franchise, which is comprised of three well-differentiated and
distinct brands, the premier Kenneth Cole New York lifestyle brand, Kenneth Cole
Reaction and Unlisted. This promotes the broadening of product offerings, which
attracts new customers and further enables the Company to address a wider
variety of customers' needs domestically and abroad. The Company markets its
products to more than 2,500 department and specialty store locations, as well as
through its consumer direct business, which includes an expanding base of retail
and outlet stores, consumer catalogs and a website. The Company believes the
diversity of its product offerings distinguishes the Company from its
competitors in terms of product categories (men's, women's and children's
footwear, handbags, apparel 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 who do not carry the Company's full range
of products.
The Company continues to pursue opportunities to expand its retail
operations. As of December 31, 1997, the Company operated 46 specialty retail
and outlet stores, as compared with 35 stores as of December 31, 1996, and plans
to open approximately 8 to 10 new stores in 1998. The Company believes that the
sales of footwear, handbags and licensed products through its specialty retail
stores increase consumer awareness of the Company's brands and reinforce the
Company's image. Additionally, outlet stores provide opportunities for the
Company to sell excess and out-of-season merchandise, thereby reducing the need
to sell such merchandise through its regular channels of distribution or to
discounters at excessively low prices.
The growing strength of the Company's three brands provides opportunities,
through licensing agreements, to extend into new product categories and broader
distribution channels. The Kenneth Cole New York, Kenneth Cole Reaction and
Unlisted brands are currently licensed for a range of products consistent with
the Company's image (see "Licensing" in Item 1).
3
Products
The Company markets its products principally under its Kenneth Cole New
York, Kenneth Cole Reaction and Unlisted brand names; each are targeted to
appeal to different consumers. The Company believes that the Kenneth Cole brand
name has developed into a true aspirational lifestyle brand; while having
similar designer cache as other international designer brands, it has value
credibility most do not.
Kenneth Cole New York
Kenneth Cole New York products are generally designed for the fashion
conscious consumer and reflect the relaxed urban sophistication that is
identified with the Kenneth Cole New York image. The distinctive, hip styling of
this line has established Kenneth Cole as a fashion authority for sophisticated
urban men and women who are seeking a value alternative to other designer shoes,
handbags and accessories. As a result of strong brand name recognition and
reputation for style, quality and value, the Company believes that Kenneth Cole
New York has become a core resource for better department and specialty stores,
continuing to provide significant growth opportunities. The product offering has
evolved from a very trendy line to one with broad appeal, including both fashion
forward styling and core basics. The Company continues to leverage the strength
of the name through brand extensions (e.g., Kenneth Cole Collection), in-store
shops and the licensing of many new product categories.
Kenneth Cole New York men's footwear, primarily manufactured in Italy, is
designed as contemporary, comfortable fashion footwear and is sold to the
bridge-designer market at retail price points ranging from $130 to $175. As
versatile as it is sophisticated, Kenneth Cole New York men's footwear may be
worn to work, for a special occasion or on weekends with casual clothes.
Kenneth Cole New York women's footwear, primarily manufactured in Italy
and Spain, includes sophisticated and elegant dress, casual and special occasion
(e.g., bridal) and is sold to the bridge-designer market at retail price points
ranging from $100 to $140. Women's footwear is generally constructed with
leather soles and linings, and leather, fabric, satin or silk uppers.
Kenneth Cole New York handbags are sleek designer bags offered at
affordable prices, generally made of quality leathers and are sold to the
bridge-designer market at retail price points ranging from $100 to $200. Certain
updated styles offer the customer high fashion day bags, while evening bags make
strong sophisticated statements in satins, brocades and updated silhouettes.
Kenneth Cole Reaction
Kenneth Cole Reaction consists of a variety of product classifications,
which address the growing trend toward flexible, lifestyle dressing. Originally
introduced as a comfort-oriented casual line, Kenneth Cole Reaction now includes
more dressy styles as well. Kenneth Cole Reaction women's footwear is designed
for the workplace as well as outside the office, with an emphasis on comfort,
contemporary styling and perceived value and is targeted to compete in the
largest single category of footwear sold in department stores, "women's better
casual." The majority of the line retails in the $60 to $80 price range. Kenneth
Cole Reaction men's footwear combines fashionable and versatile styling with
affordable pricing and represents the fastest growing classification in the
men's market as consumer preferences lean away from athletic constructed
footwear and more toward regular constructed footwear. The line retails in the
$60 to $120 price range.
Kenneth Cole Reaction handbags are designed to be multi functional with a
contemporary look and are primarily made of non-leather technical fabrications,
such as nylon, microfiber and straw. Kenneth Cole Reaction handbags, including
Essentials, Itemize and the Options collections, are one of the fastest growing
product classifications and are created to meet the varying needs of the
Company's customers. The line generally retails at price points ranging from $25
to $60.
4
Kenneth Cole Reaction children's footwear was launched in November 1997.
The product line includes dress and casual footwear sold at price points ranging
from $40 to $75 and is targeted to boys and girls ages 5 to 16 who are making
more of their own fashion choices than ever before. The Company believes that
the expansion into children's footwear is a natural extension of its footwear
business and by utilizing takedowns on successful performers of existing men's
and women's styles, greatly enhances the likelihood of product performance.
Unlisted
Unlisted products are designed and targeted to the younger, trendier
consumer market, the country's largest consumer base of fashion merchandise. The
Unlisted brand was developed to expand the Company's sales into a younger more
moderately priced business and includes approximately 30 styles of casual and
dress shoes and approximately 60 styles of handbags per season. Unlisted
handbags consist of strong, trendy bags in vinyl, straw and other exciting
fabrications. Unlisted handbags generally retail at price points ranging from
$25 to $60. Unlisted footwear provides the junior consumer with a wide selection
of footwear with contemporary styling and quality at affordable prices. Unlisted
footwear includes not only fashion styles, but also evening styles, basic pumps
and loafers that generally retail at price points ranging from $30 to $50.
Divisions
The Company primarily 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
------------------
1997 1996 1995
---- ---- ----
Wholesale 75% 78% 84%
Retail 25 22 16
--- --- ---
Total 100% 100% 100%
==== ==== ====
Wholesale Operations
The Company strives to provide affordable fashion footwear, handbags and
accessories with consistent marketing and management support to its wholesale
customers. The Company provides this support by producing strong image driven
advertising, offering creative, quality products and maintaining adequate
inventory levels of new products as well as products included in the Company's
open stock program. The Company employs independent wholesale agents as well as
salaried corporate account specialists 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 in 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, Taiwan, Philippines
and Singapore.
5
The Company markets its product lines and introduces new styles at
separate industry-wide footwear and leathergoods tradeshows which occur several
times throughout the year in New York, Las Vegas and at various regional shows.
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.
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., Target Stores, Edison Footwear Group and Mervyns. The
Company's private label business requires minimal overhead and capital because
the Company does not incur any costs related to importing, shipping or
warehousing of inventory, all of which are borne by the retailer.
Consumer Direct
Retail Operations
The Company continues to pursue several opportunities to enhance and
expand its retail operations. At December 31, 1997, the Company operated 32
specialty retail stores and 13 outlet stores under the Kenneth Cole New York
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, to provide a showcase for Kenneth Cole branded
products marketed by the Company and its licensees and to enhance the Company's
overall profitability. The Company believes that these stores complement 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 differentiate the product mix of
its stores from that of its wholesale customers. The Company opened eight retail
stores in 1997 and plans to open six or seven new stores in 1998.
At December 31, 1997, the Company operated 14 outlet stores. The
Company establishes its outlet stores to enable it to sell a portion of its
excess wholesale, retail and catalog inventory 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 three outlet stores in 1997
and plans to open two or three new stores in 1998.
The Company is in the process of opening a store in San Francisco
that is larger in size than the Company's existing stores and will serve as a
showcase for a significant cross section of the Company's offerings, including
apparel.
The success of its stores, and the opening and success of any stores to be
opened in 1998 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, which further enhance the Company's image, also represent an
opportunity for revenue and earnings growth.
Catalog, Website and Customer Service
The Company produces consumer catalogs that feature a variety of Kenneth
Cole New York and Kenneth Cole Reaction branded products. Catalog order taking
and fulfillment is currently performed by a third party service
6
located in Virginia. In addition, the Company maintains a website to provide
information regarding the Company and its products, as well as to present a
commercially viable opportunity as visitors to the website may order selected
products from the Company's catalog. The Company also maintains two toll-free
telephone numbers (1-800-KEN-COLE and 1-800-UNLISTED) which are used to provide
customer service and to answer product-related questions.
Licensing
The Company views its licensing agreements as a vehicle to better service
its customers, by extending its product offerings to meet more of their fashion
accessory needs without compromising on price, value or style. The Company
considers entering into licensing, joint venture and distribution agreements
with respect to certain products if such agreement 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 complementary 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 quality
fashion products consistent with the Kenneth Cole New York, Kenneth Cole
Reaction and Unlisted 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.
In 1998, for the first time, Kenneth Cole was seen on the runway during
the Menswear New York Collections. This was an important step in further
defining Kenneth Cole as a premier lifestyle brand as its distinctive image is
consistently developed across an expanding number of products, brands and
markets.
The following table summarizes the Company's licensed product categories:
Kenneth Cole Kenneth Cole
Product Category New York Reaction Unlisted
- ---------------- -------- -------- --------
Men's Tailored Clothing X
Men's Sportswear X X
Men's Neckwear X X
Men's Scarves X
Men's Underwear/Robes/Loungewear X X
Men's Dress Shirts X X
Men's Leather & Fabric Outerwear X X
Men's Small Leather Goods X X
Men's Jewelry X
Women's Hosiery X X
Women's Small Leather Goods X X X
Women's Leather & Fabric Outerwear X X
Women's Scarves & Wraps X
Men's/Women's Watches X
Men's/Women's Optical Frames X
Men's/Women's Luggage X X
Men's/Women's Sunglasses X X X
Men's/Women's Belts X X
All of the Company's licensees are required to contribute to the Company a
percentage of their net sales of licensed product, subject to minimum amounts,
for the ongoing marketing of the Kenneth Cole brand.
7
International
The Company sells its products, directly or through distributors, to
wholesale customers in Australia, Canada, Hong Kong, Japan, Taiwan, Thailand,
Philippines and Singapore. The Company plans to continue 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. The Company also operates one retail store in the Netherlands.
During 1997, the Company entered into a licensing agreement with Dickson
Concepts ("Dickson") to retail Kenneth Cole New York and Kenneth Cole Reaction
branded products throughout Hong Kong, Taiwan and Singapore through free
standing Kenneth Cole retail stores, leased departments and shop-in-shops. In
1997, six new Kenneth Cole leased stores were opened and the Company anticipates
20 similar leased stores will be opened during 1998. The Company also granted
Dickson the rights to sell its products in China, Indonesia and Malaysia. The
international stores' format and product mix are consistent with that of the
Company's Kenneth Cole New York domestic retail stores. In connection with the
Company's business strategy of enhancing and expanding its international
operations, the Company is considering other licensing and distribution
opportunities.
The Company is expanding its presence in Canada by means of a new
wholesale footwear distributor. Through license agreements the Company is
planning to feature all product classifications throughout Canada during the
second half of 1998.
Design
Kenneth D. Cole, Chief Executive Officer and President, founded the
Company and its success to date is largely attributable to his design talent,
creativity and marketing abilities. Mr. Cole selects designers to join the
Company's design teams, which are responsible for the creation, and development
of new product styles, based on their ability to originate and define fashion
trends as well as to anticipate and react to changing consumer demands. The
Company's design teams constantly monitor fashion trends and search for new
inspirations. Members of the various teams travel extensively to assess fashion
trends in Europe, the United States and Asia and work closely with retailers to
monitor consumer preferences.
The process of designing and introducing a new product takes approximately
three to four months. Members of each design team work together with Mr. Cole to
create a design that 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 to increase the profitability of the Company's
products, the Company continuously seeks to develop new core basic product
styles that 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 36% of men's footwear was produced by
one manufacturer in Italy in 1997, and approximately
8
20% and 34% of the dollar value of total leathergoods purchased by the Company
in 1997 and 1996, 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 New York and Kenneth Cole Reaction brands is an intricate part of its
long-term growth strategy. The Company believes that its 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 to the Company a percentage of their net sales of licensed product,
subject to minimums, for the advertising and promotion of the Kenneth Cole
trademark. In addition, selected personal appearances by Kenneth D. Cole 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, marketing
and merchandising programs for its customers. As part of this effort, the
Company utilizes cooperative advertising programs, sales promotions and produces
consumer catalogs which feature a variety of Kenneth Cole New York and Kenneth
Cole Reaction branded products marketed by the Company and its licensees. In
addition, the Company has, on a limited basis, worked with customers to develop
distinctive catalogs that market the Company's products and to develop point of
sale displays. Because all this work is done internally, there is a singular
focus, a strong synergy and a consistency to all communications.
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
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
either the Company's distribution facility located in Secaucus, New Jersey or a
public warehouse located in California. The Company utilizes fully integrated
information systems to facilitate the receipt, processing and distribution of
product through both distribution facilities. 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, typically via electronic data interchange ("EDI"), 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
9
customers by allowing them to manage inventory levels more effectively. The
Company believes that affording customers improved flexibility in ordering
specific SKUs in smaller quantities will ultimately reduce the incidence of
markdowns and allowances.
Management Information Systems
The Company believes that 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 systems were 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 is currently in
process of replacing its wholesale distribution and financial systems with newer
technologically advanced systems that also offer greater functionality and
enhanced reporting. These new systems are Year 2000 compliant and are expected
to be implemented prior to any anticipated impact on the current operating
system. The Company also utilizes an EDI system which provides a computer link
between the Company and many of its wholesale customers that enables the Company
to receive on-line orders and to accumulate sales information on its products.
The Company's EDI system also improves the efficiency of responding to customer
needs and allows both the customer and the Company to monitor purchases,
shipments and invoicing. In its retail stores, the Company uses point-of-sale
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, or to continue to timely address the Year 2000
Issue, could have a material adverse effect on the Company's financial condition
and its results of operations. (See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations").
Trademarks
The Company, through its wholly-owned subsidiary, K.C.P.L., Inc., owns
federal registrations for its principal 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, Reaction and several ancillary
trademarks. Moreover, the Company continues to expand 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 competes with numerous designers, brands and manufacturers of footwear,
leathergoods, apparel and accessories, some of which may be 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. The Company also competes for the limited
shelf-space available for the display of its products to the consumer. Moreover,
the general availability of contract manufacturing capacity allows access by new
market entrants. The Company's business depends on its ability to stimulate and
respond to changing consumer preferences by producing innovative and attractive
products, brands and marketing, while remaining competitive in quality and
price.
Foreign Operations
The Company's business is subject to risks of doing business abroad, such
as fluctuations in currency exchange rates, local market conditions, 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
10
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
routinely enters into forward exchange contracts to protect the future
purchasing prices of inventory denominated in foreign currencies. These forward
exchange contracts are used to reduce the Company's exposure to changes in
foreign exchange rates and are not held for the purpose of trading or
speculation (See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this report).
Import Restrictions
Although the majority of the goods sourced 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 37.5%, depending on the principal
component of the product. Other restrictions on the importation of footwear and
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
restricting such goods may not be imposed or made more restrictive.
A significant portion of the Company's products is 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 levels 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.
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 business follows the general seasonal
trends that are characteristic within the retail industry; sales and earnings
are highest in the fourth quarter and weakest in the first quarter. Because the
timing of wholesale shipments of products for any season may vary from year to
year, the results for any one quarter may not be indicative of the results for
the full year.
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 10.0% and 14.2% of the net
sales of the Company for the years ended 1997 and 1996, respectively. In 1997,
sales to The Marmaxx Group accounted for 12.4% of net sales due to the unusually
large amount of closeouts of Spring 1997 merchandise. The Company's ten largest
customers represented 51% of the Company's net sales for the years ended
December 31, 1997 and 1996, respectively. While the Company believes that
purchasing decisions have generally been made independently by each division
within a department store group, there is a trend among department store groups
toward centralized purchasing decisions of their divisions.
11
Backlog
At December 31, 1997 and 1996, the Company had unfilled wholesale customer
orders of $32.3 million and $28.9 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 shipments.
Employees
At December 31, 1997, the Company had approximately 650 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
Name Age Present Position
- ---- --- ----------------
Kenneth D. Cole.... 44 President and Chief Executive Officer
Paul Blum.......... 38 Executive Vice President and Chief Operating Officer
Stanley A. Mayer... 50 Executive Vice President and Chief Financial Officer
Harry Kubetz...... 45 Senior Vice President
Susan Hudson....... 38 Senior Vice President
Robert Grayson..... 53 Director
Denis F. Kelly..... 48 Director
Jeffrey G. Lynn.... 48 Director
Kenneth D. Cole 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. Mr. Cole is on the
Boards of Directors of the American Foundation for AIDS Research ("AmFAR") and
H.E.L.P., a New York agency that provides temporary housing for the homeless. In
addition, Mr. Cole is a Director and President of each of the wholly-owned
subsidiaries of the Company.
Paul Blum was promoted to Chief Operating Officer in February 1998. He
also has served as Executive Vice President of the Company since May 1996 and as
Senior Vice President from August 1992 until May 1996. Mr. Blum joined the
Company in 1990. 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 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. In addition, Mr. Mayer is the Vice President and
Secretary of each of the wholly-owned subsidiaries of the Company.
Harry Kubetz has served as Senior Vice President of Operations since
joining the Company in April 1996. Mr. Kubetz was President of "No Fear"
Footwear, Inc. from 1994 until 1996. From 1992 until 1994 Mr. Kubetz was
Executive Vice President of Asco General Supplies, a wholly owned subsidiary of
Pentland, PLC.
Susan Q. Hudson was promoted to Senior Vice President - Kenneth Cole New
York Men's and Women's footwear divisions in February 1998. Ms. Hudson has also
served as Divisional President - Men's Footwear since 1996 and 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.
12
Robert C. Grayson is President of Robert C. Grayson & Associates, Inc.
and Vice Chairman of Berglass-Grayson, consulting firms. From 1992 to 1996, Mr.
Grayson served initially as an outside consultant to Tommy Hilfiger Corp., a
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 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. Mr. Kelly is a
director of MSC Industrial Direct, Inc.
Jeffrey G. Lynn 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. Mr.
Lynn is a director of English Gardens and Fairlane Florists, Inc. and SOL
Capital Management Company.
Item 2. Properties
The Company's showrooms, sales and design staffs as well as its executive
offices are located at 152 West 57th Street, New York, N.Y., where the Company
leases approximately 30,000 square feet under a lease that expires December 31,
2006.
The Company's administrative offices and distribution facility are located
in Secaucus, New Jersey under a lease that expires June 29, 2002. The facility
comprises 244,000 square feet, of which, approximately 30,000 square feet is
used for administrative offices. 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.
The Company leases space for all of its 32 full price retail stores
(aggregating approximately 63,000 square feet) and 14 outlet stores (aggregating
approximately 35,000 square feet). Generally, the leases provide for an initial
term of five to ten years, with renewal options permitting the Company to extend
the term thereafter. The Company has entered into a lease agreement for a store
of approximately 8,000 square feet in San Francisco.
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
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
13
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's Class A Common Stock is listed and traded(trading symbol
KCP) on the New York Stock Exchange ("NYSE"). On March 23, 1998 the closing sale
price for the Class A Common Stock was $21.75. The following table sets forth
the high and low sale prices for the Class A Common Stock for each quarterly
period for 1996 and 1997, as reported on the NYSE Composite Tape:
1996: High Low
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
1997:
First Quarter 22 3/4 15 1/8
Second Quarter 21 1/8 14 1/4
Third Quarter 17 13/16 11 1/2
Fourth Quarter 16 15/16 13 1/8
The number of shareholders of record of the Class A Common Stock on March
23, 1998 was 36.
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.
14
Item 6. Selected Financial Data
The following selected financial data has been derived from the
consolidated financial statements of the Company and should be read in
conjunction with the consolidated financial statements and notes thereto that
appear elsewhere in this Annual Report and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" set forth in Item 7.
Year Ended December 31,
-----------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(dollars in thousands, except share data)
Income Statement Data:
Net sales .............................. $ 185,278 $ 148,258 $ 113,828 $ 84,893 $ 60,831
Cost of goods sold ..................... 112,183 86,919 67,382 50,166 36,132
Gross profit ........................... 73,095 61,339 46,446 34,727 24,699
Licensing and other income ............. 6,028 3,575 1,855 795 514
Selling and general administrative
expenses (1) ........................ 58,330 44,248 31,957 22,776 21,012
Loss on abandonment of leasehold
improvements and equipment (2) ...... 106 147
Operating income ....................... 20,793 20,560 16,344 12,746 4,054
Interest (income) expense, net ......... 202 22 (30) 25 180
Income before provision for income taxes 20,591 20,538 16,374 12,721 3,874
Provision for income taxes ............. 8,189 8,251 6,550 2,894 351
Net income ............................. 12,402 12,287 9,824 9,827 3,523
Earnings per share:
Basic ............................... $.94 $.94 $.75
Diluted ............................. $.91 $.90 $.73
Weighted average shares outstanding:
Basic ............................... 13,162,000 13,109,000 13,021,000
Diluted ............................. 13,605,000 13,578,000 13,516,000
Pro Forma Income Statement Data:(3)
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)....... 22,776 18,307
Loss on abandonment of leasehold improvements
and equipment (2)..................................... 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 basic net income per share..... $.61 $.34
Supplementary pro forma diluted net income per share... $.60 $.34
Supplementary pro forma basic shares outstanding (4)... 12,464,000 11,782,000
Supplementary pro forma diluted shares outstanding (4). 12,690,000 11,782,000
15
At December 31,
------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars in thousands)
Balance Sheet Data:
Working capital.............. $46,949 $37,023 $27,309 $18,701 $7,449
Total assets................. 77,006 65,255 43,307 31,886 20,307
Total debt, including current
maturities................ 0 489 102 166 1,858
Total shareholders' equity... 59,740 46,599 33,489 22,356 8,454
- ----------
(1) Includes shipping and warehousing expenses. Includes non-recurring charges
of approximately $950,000 in 1993 for rent expense relating to vacated
office space.
(2) Reflects losses on abandonment of leasehold improvements and equipment in
1996 and 1993 resulting from the decision to move its distribution and
administrative offices.
(3) 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%.
(4) 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.
For 1994, supplementary pro forma shares includes the weighted average
shares outstanding (12,464,000) during the period, increased by 226,280
shares from applying the treasury stock method to the exercise of options
to purchase 222,950 and 373,900 shares of Class A Common Stock at $2.1875
and $6.00 per share, respectively.
16
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 that appear
elsewhere in this Annual Report.
Results of Operations
The following table sets forth certain operating data of the Company as a
percentage of net sales for the periods indicated below.
Year Ended December 31,
-----------------------
1997 1996 1995
-----------------------------------
Net sales.......................................... 100.0% 100.0% 100.0%
Cost of goods sold................................. 60.5 58.6 59.2
Gross profit....................................... 39.5 41.4 40.8
Licensing and other income......................... 3.2 2.4 1.6
Selling, general and administrative expenses....... 31.5 29.9 28.0
Operating income................................... 11.2 13.9 14.4
Income before provision for income taxes........... 11.1 13.9 14.4
Provision for income taxes......................... 4.4 5.6 5.8
-----------------------------------
Net income......................................... 6.7 8.3 8.6
===================================
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales were $185.3 million in 1997 compared to $148.3 million in 1996,
an increase of $37.0 million or 25.0%. Net sales of the Company's wholesale
operations, excluding sales to its retail division, increased $22.4 million or
19.3% to $138.5 million in 1997 from $116.1 million in 1996. This increase
reflects improved sales of men's footwear and Unlisted women's footwear,
partially offset by a reduction in Kenneth Cole New York women's footwear, which
experienced poor sell throughs of its Spring 1997 merchandise. The Company
believes that its advertising campaigns and marketing efforts have been a
significant factor leading to increased brand awareness, continued growing
consumer acceptance and the strengthening of the Company's three distinct
brands, Kenneth Cole New York, Kenneth Cole Reaction and Unlisted, across all
product classifications.
Net sales from the Company's retail and outlet stores increased $14.6
million or 46% to $46.8 million from $32.2 million. This increase was due to
additional stores opened as well as increased sales at existing stores. Of the
total increase, $11.5 million was attributable to new retail stores and 9.9% or
$3.1 million was attributable to comparable store sales increases.
Gross margin decreased to 39.5% of net sales in 1997 from 41.4% of net
sales in 1996. The decrease in gross margin as a percentage of net sales was
primarily attributable to lower than expected sell throughs of Spring 1997
merchandise, which resulted in excess wholesale inventories, disposed of at
significant discounts during the second quarter of 1997. The decrease in gross
margin was partially offset by an increase in retail stores gross margin, as
retail gross margins maintain a higher margin percentage than wholesale gross
margins and retail sales represented a larger percentage of total sales in 1997.
Sales from retail operations were 25.3% of consolidated net sales in 1997 as
compared to 21.7% in 1996.
Licensing income increased 66.7% to $6.0 million in 1997 from $3.6 million
in 1996. This increase reflects the incremental revenues from the introduction
of new product licenses and an increase in sales from existing licensees. Of
this increase, approximately 29%, or $0.7 million was due to products introduced
under new licenses during 1997. The Company believes its efforts to reinforce
its brand identities through greater marketing efforts across all product
categories have contributed to the increase in licensee sales.
17
Selling, general and administrative expenses, including shipping and
warehousing, increased $13.9 million to $58.3 million in 1997 from $44.4 million
in 1996. The increase is primarily a result of increased volume-related expenses
to support the higher revenue and incremental marketing and advertising
expenses. As a percentage of net sales, selling, general and administrative
expenses increased from 29.9% to 31.5% primarily 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 to $20.8 million
in 1997 from $20.6 million in 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 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 New York, Kenneth Cole Reaction and Unlisted. 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 gain 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. Gross margin increased to 41.4% in 1996 from
40.8% in 1995. The increase in gross margin 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 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 from $16.3 million in 1995.
Liquidity and Capital Resources
The Company's primary funding requirements are to finance working capital
and the continued growth of the business. These include the purchase of
wholesale and retail inventories in anticipation of increased wholesale sales
and new store openings and capital expenditures related to the expansion of
retail operations. The Company relies primarily upon internally generated cash
flows from operations and borrowings under its line of credit facility to
finance its operations and growth. Net cash provided by operating activities
totaled $12.0 million and $3.6 million in 1997 and 1996, respectively. Cash used
in operations in 1995 was $0.2 million. At December 31, 1997, working capital
was $46.9 million compared to $37.0 million at December 31, 1996. Cash flows may
vary from time to time as a result of seasonal requirements, the timing of the
receipt of merchandise from suppliers, the Company's open stock inventory
program which requires increased inventory levels and the level of accounts
receivable balances.
During 1997, cash provided by operations was principally from net income
before depreciation and amortization and a reduction in inventory levels, offset
by increases in accounts receivable balances. During 1996, cash provided from
operations was principally from net income before depreciation and amortization
and increases in accounts payable, offset by increases in inventory and accounts
receivable. The $8.4 million increase in cash provided by operations in 1997
over 1996 was primarily attributable to a $5.9 million reduction in inventory as
compared to a $12.9 million increase in 1996, partially offset by a $2.9 million
decrease in accounts payable compared to a $6.0 million increase in 1996. The
Company's ongoing focus on inventory management resulted in a 30% reduction in
wholesale inventories.
18
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, under which up to
$25.0 million is available to finance working capital requirements and letters
of credit to finance the Company's inventory 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 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. At December 31, 1997 amounts available under the line of credit
were $22.6 million.
Capital expenditures, which were primarily for leasehold improvements and
furniture and fixtures associated with new store openings, were approximately
$4.8 million, $4.9 million and $3.3 million for 1997, 1996 and 1995,
respectively. In 1998, the Company anticipates opening approximately 8-10 retail
and outlet stores that will require aggregate capital expenditures of
approximately $4.0 million. The Company also expects to spend approximately $2.0
million for the initial inventory requirements of these new stores.
The Company also anticipates that it will require increased capital
expenditures to support its continued growth including an increase in its office
space and enhancements to its management information systems, particularly in
response to the Year 2000 Issue.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Since the Company's
older computer software programs recognize only the last two digits in the year
of any date (e.g., "97" for "1997"), some software may fail to operate properly
in 1999 or 2000 if the software is not reprogrammed or replaced. This could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company determined that it would benefit more by replacing, rather
than reprogramming, its wholesale distribution and financial systems with newer
technologically advanced systems that offer greater functionality and enhanced
reporting. The Company has purchased and installed the new systems and is in the
process of implementation. The Company will utilize both internal and external
resources to perform the implementation and anticipates completing the project
on or about December 31, 1998, which is prior to any anticipated impact on its
operating systems. However, there can be no guarantee that the data and systems
will be converted timely and if such conversions are not made, the Year 2000
Issue could have a material impact on the Company's operations. In addition, the
Company believes that many of its customers also have Year 2000 Issues which, if
not timely addressed, could adversely affect the Company. The total cost of the
implementation including Year 2000 Issue is estimated at approximately $2.0
million, which is being funded through both leasing arrangements and operating
cash flows.
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 believes that it will be able to satisfy its cash requirements
for 1998, including requirements for its retail expansion, additional office
space and information systems improvements, primarily with cash flow from
operations, supplemented by borrowings under its line of credit.
19
Exchange Rates
The Company routinely enters into forward exchange contracts in
anticipation of future purchases of inventory denominated in foreign currencies,
primarily the Italian lira and Spanish peseta. At December 31, 1997, forward
exchange contracts totaling $18.2 million were outstanding with settlement dates
ranging from January 1998 through July 1998. Gains and losses on forward
exchange contracts are deferred and accounted for as part of the purchase price
of imported merchandise. At December 31, 1997, the unrealized loss on these
forward exchange contracts is approximately $1,140,000. The Company expects to
continue to routinely 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.
Inventory purchases from contract manufacturers in the far east are denominated
in United States dollars and the recent devaluation of many of these currencies
against the United States dollar has not had any material impact on the Company.
However, future purchase prices for the Company's products may be impacted by
fluctuations in the exchange rate between the United States dollar and the local
currencies of the contract manufacturer, which may effect the Company's cost of
goods in the future. The Company does not believe the potential effects of such
fluctuations would have a material adverse affect on the Company.
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.
Important Factors Relating to Forward Looking Statements
Statements contained herein that relate to the Company's future
performance, including, without limitation, statements with respect to the
Company's anticipated results for any portion of fiscal 1998, shall be deemed
forward-looking statements within the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. A number of factors affecting the
Company's business and operations could cause actual results to differ
materially from those contemplated by the forward-looking statements. Those
factors include, but are not limited to, demand and competition for the
Company's products, changes in consumer preferences on fashion trends, delays in
anticipated store openings, and changes in the Company's relationship with its
suppliers and other resources. The forward-looking statements contained in this
Annual Report were prepared by management and 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 and are cautioned not to place undue reliance on the forward-looking
statements contained herein.
Item 7A. Quantitive and Qualitative Disclosures about Market Risk
Pursuant to the general instructions to Rule 305 of Regulation S-K, the
quantitive and qualitative disclosures called for by this Item 7A and by Rule
305 of Regulation S-K are inapplicable to the Company at this time.
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.
20
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 28, 1998 to be filed with the Securities and
Exchange Commission within 120 days after December 31, 1997 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 28, 1998 to
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1997 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 28, 1998 to
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1997 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 28, 1998 to
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1997 and is incorporated herein by reference in response to this
item.
21
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) Schedule II - Valuation and Qualifying Accounts
All other 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
22
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 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).
23
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
incorporated herein by reference).
10.11 Sublease Agreement, dated June 17, 1996, between Kenneth Cole
Productions, Inc. and Liz Claiborne Accessories, Inc. (Incorporated by
reference to Exhibit 10.11 to the Company's 1996 Form 10-K).
*10.12 Amended and Restated Kenneth Cole Productions, Inc. 1994 Stock Option
Plan (Previously filed as an Exhibit to the Registrant's Proxy
Statement filed on April 22, 1997 and incorporated herein by
reference).
+10.13 Employment Agreement between Kenneth Cole Productions, Inc. and Susan
Hudson.
+21.01 --List of Subsidiaries
+23.01 Consent of Ernst & Young LLP
+27.01 Financial Data Schedule
+27.02 Restated Financial Data Schedule for the six months ended June 30,
1996.
+27.03 Restated Financial Data Schedule for the year ended December 31, 1996.
+27.04 Restated Financial Data Schedule for the three months ended March 31,
1997.
+27.05 Restated Financial Data Schedule for the nine months ended September
30, 1996.
+27.06 Restated Financial Data Schedule for the six months ended June 30,
1997.
+27.07 Restated Financial Data Schedule for the nine months ended September
30, 1997.
- ----------
* 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.
(b) See (a) (3) above for a listing of the exhibits included as a part of this
report.
24
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, 1997 and 1996............. F-3
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995...................................... F-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995.................. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995...................................... F-7
Notes to Consolidated Financial Statements............................... F-8
F-1
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, 1997 and 1996, 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,
1997. Our audits also included the financial statement schedule listed at item
14(a). These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 25, 1998
F-2
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
1997 1996
---------------------------
Assets
Current assets:
Cash $ 8,803,000 $ 1,626,000
Due from factors 23,292,000 17,976,000
Accounts receivable, less allowance for doubtful accounts
of $80,000 in 1997, and $65,000 in 1996 3,864,000 3,339,000
Inventories 23,365,000 29,265,000
Prepaid expenses and other current assets 1,420,000 1,001,000
Deferred income taxes 1,135,000 755,000
---------------------------
Total current assets 61,879,000 53,962,000
---------------------------
Property and equipment--at cost:
Furniture and fixtures 5,513,000 3,234,000
Machinery and equipment 3,862,000 2,916,000
Leasehold improvements 8,217,000 6,610,000
---------------------------
17,592,000 12,760,000
Less accumulated depreciation and amortization 5,381,000 3,428,000
---------------------------
Net property and equipment 12,211,000 9,332,000
Deposits, sundry and deferred income taxes 3,825,000 1,961,000
---------------------------
Total assets $77,915,000 $65,255,000
===========================
See accompanying notes to consolidated financial statements.
F-3
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
December 31,
1997 1996
------------------------------
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 9,837,000 $12,738,000
Accrued expenses and other current liabilities 3,147,000 2,376,000
Advances due under revolving credit facility 489,000
Income taxes payable 1,694,000 1,247,000
Deferred license income 252,000 89,000
------------------------------
Total current liabilities 14,930,000 16,939,000
Accrued rent 909,000 521,000
Deferred income taxes 387,000
Other non-current liabilities 1,949,000 1,196,000
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, 7,410,160 and 7,353,179
outstanding in 1997 and 1996 74,000 74,000
Class B Convertible 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 19,684,000 19,104,000
Cumulative translation adjustments 90,000
Retained earnings 39,834,000 27,432,000
Deferred compensation--stock options (69,000)
------------------------------
Total shareholders' equity 59,740,000 46,599,000
------------------------------
Total liabilities and shareholders' equity $77,915,000 $65,255,000
==============================
See accompanying notes to consolidated financial statements.
F-4
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31,
1997 1996 1995
--------------------------------------------------------
Net sales $185,278,000 $148,258,000 $113,828,000
Cost of goods sold 112,183,000 86,919,000 67,382,000
--------------------------------------------------------
Gross profit 73,095,000 61,339,000 46,446,000
Licensing and other income 6,028,000 3,575,000 1,855,000
Selling, general and administrative and shipping and
warehousing expenses 58,330,000 44,354,000 31,957,000
--------------------------------------------------------
Operating income 20,793,000 20,560,000 16,344,000
Interest expense (income), net 202,000 22,000 (30,000)
--------------------------------------------------------
Income before provision for income taxes 20,591,000 20,538,000 16,374,000
Provision for income taxes 8,189,000 8,251,000 6,550,000
--------------------------------------------------------
Net income $ 12,402,000 $ 12,287,000 $ 9,824,000
========================================================
Earnings per share:
Basic $.94 $.94 $.75
Diluted $.91 $.90 $.73
Shares used to compute earnings per share:
Basic 13,162,000 13,109,000 13,021,000
Diluted 13,605,000 13,578,000 13,516,000
See accompanying notes to consolidated financial statements.
F-5
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Class A Common Stock Class B Common Stock
----------------------------- ---------------------------- Total Additional
Number Number Common Paid-In
of Shares Amount of Shares Amount Stock Capital
-----------------------------------------------------------------------------------------
Shareholders' equity,
December 31, 1994 2,926,729 $29,000 3,548,271 $36,000 $65,000 $17,492,000
Conversion of Class B to Class A 655,572 7,000 (655,572) (7,000)
Exercise of stock options,
including tax benefit from
exercise of stock options 67,390 1,000 1,000 1,083,000
Net income
Amortization of deferred
compensation
Two-for-one stock split 3,649,691 36,000 2,892,699 29,000 65,000 (65,000)
-----------------------------------------------------------------------------------------
Shareholders' equity,
December 31, 1995 7,299,382 73,000 5,785,398 58,000 131,000 18,510,000
Exercise of stock options,
including tax benefit from
exercise of stock options 53,797 1,000 1,000 594,000
Net income
Amortization of deferred
compensation
-----------------------------------------------------------------------------------------
Shareholders' equity,
December 31, 1996 7,353,179 74,000 5,785,398 58,000 132,000 19,104,000
Exercise of stock options,
including tax benefit from
exercise of stock options 56,981 580,000
Translation adjustment
Net income
Amortization of deferred
compensation
-----------------------------------------------------------------------------------------
Shareholders' equity,
December 31, 1997 7,410,160 $74,000 5,785,398 $58,000 $132,000 $19,684,000
=========================================================================================
Cumulative
Translation Retained Deferred
Adjustments Earnings Compensation Total
-----------------------------------------------------------
Shareholders' equity,
December 31, 1994 $5,321,000 $(522,000) $22,356,000
Conversion of Class B to Class A
Exercise of stock options,
including tax benefit from
exercise of stock options 1,084,000
Net income 9,824,000 9,824,000
Amortization of deferred
compensation 225,000 225,000
Two-for-one stock split
-----------------------------------------------------------
Shareholders' equity,
December 31, 1995 15,145,000 (297,000) 33,489,000
Exercise of stock options,
including tax benefit from
exercise of stock options 595,000
Net income 12,287,000 12,287,000
Amortization of deferred
compensation 228,000 228,000
-----------------------------------------------------------
Shareholders' equity,
December 31, 1996 27,432,000 (69,000) 46,599,000
Exercise of stock options,
including tax benefit from
exercise of stock options 580,000
Translation adjustment $90,000 90,000
Net income 12,402,000 12,402,000
Amortization of deferred
compensation 69,000 69,000
-----------------------------------------------------------
Shareholders' equity,
December 31, 1997 $90,000 $39,834,000 - $59,740,000
===========================================================
See accompanying notes to onsolidated financial statements.
F-6
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
1997 1996 1995
--------------------------------------------
Cash flows from operating activities
Net income $ 12,402,000 $ 12,287,000 $ 9,824,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,953,000 1,109,000 794,000
Provision for doubtful accounts 157,000 35,000 35,000
Amortization of deferred compensation 69,000 228,000 225,000
Abandonment of leasehold improvements and equipment 106,000
Provision for deferred taxes 152,000 36,000 186,000
Changes in operating assets and liabilities:
Increase in due from factors (5,316,000) (4,078,000) (6,105,000)
Increase in accounts receivable (682,000) (1,058,000) (424,000)
Decrease (increase) in inventories 5,900,000 (12,904,000) (4,585,000)
Increase in prepaid expenses and
other current assets (419,000) (92,000) (514,000)
Increase in deposits and sundry (2,009,000) (786,000) (600,000)
Increase (decrease) in income taxes payable 632,000 1,497,000 (220,000)
(Decrease) increase in accounts payable (2,901,000) 5,973,000 1,129,000
Increase (decrease) in accrued expenses and
other current liabilities 934,000 485,000 (566,000)
Increase in other non-current liabilities 1,141,000 747,000 551,000
--------------------------------------------
Net cash provided by (used in) operating activities 12,013,000 3,585,000 (270,000)
Cash flows from investing activities
Acquisition of property and equipment, net (4,832,000) (4,894,000) (3,320,000)
--------------------------------------------
Net cash used in investing activities (4,832,000) (4,894,000) (3,320,000)
Cash flows from financing activities
(Repayment) proceeds of revolving line of credit, net (440,000) 440,000
Proceeds from exercise of stock options 395,000 345,000 542,000
Repayment of long-term debt (49,000) (54,000) (63,000)
--------------------------------------------
Net cash (used in) provided by financing activities (94,000) 731,000 479,000
Effect of exchange rate changes on cash 90,000
Net increase (decrease) in cash 7,177,000 (578,000) (3,111,000)
--------------------------------------------
Cash, beginning of year 1,626,000 2,204,000 5,315,000
--------------------------------------------
Cash, end of year $ 8,803,000 $ 1,626,000 $ 2,204,000
============================================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 323,000 $ 119,000 $ 82,000
Income taxes $ 7,396,000 $ 5,804,000 $ 6,357,000
See accompanying notes to consolidated financial statements.
F-7
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
1. Description of Business
Kenneth Cole Productions, Inc. and its subsidiaries (the "Company")
designs, sources and markets a broad range of quality footwear and handbags, and
through license agreements designs and markets apparel and accessories under its
Kenneth Cole New York, Kenneth Cole Reaction and Unlisted brands for the fashion
conscious consumer. The Company 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. The Company has
granted licenses for a variety of accessory and apparel product categories,
including men's tailored clothing, dress shirts, sportswear, neckwear,
briefcases, portfolios, fabric outerwear, underwear, robes, loungewear, hosiery,
jewelry, women's hosiery and small leather goods, and men's and women's belts,
scarves and wraps, leather outerwear, sunglasses, eyewear, watches, and luggage.
The Company also distributes consumer catalogues that feature a variety of
Kenneth Cole New York and Kenneth Cole Reaction branded products.
Organization
The Company was incorporated in September 1982 and completed an initial
public offering on June 9, 1994. 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.
Accordingly, all applicable share and per share data have been adjusted for the
stock split.
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, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Kenneth Cole
Productions, Inc. and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.
F-8
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
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.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by 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 primarily sources 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 20% and 34% of the dollar value of total leathergoods purchases by
the Company were produced by two manufacturers in India in 1997 and 1996,
respectively. In addition 36% of Kenneth Cole men's footwear purchases were from
one manufacturer in Italy during 1997. 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 Company's
production needs.
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 three 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.
F-9
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Licensing and Other Income
The Company has entered into various trade name license agreements that
provide revenues based on minimum royalties and additional revenues 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 licensees sales.
Revenue Recognition
Wholesale sales are recognized upon shipment of products to the customer.
Retail sales are recognized when the payment is received from the customer.
Advertising Costs
The Company incurred advertising expense of $6.8 million, $5.0 million and
$3.5 million for 1997, 1996 and 1995, respectively. The Company records
advertising expense concurrent with the first time the advertising takes place.
Advertising contributions received from licensees are netted against advertising
expenses.
Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company elected to
continue measuring compensation expense for its stock-based compensation 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. SFAS 123 requires companies electing to continue using the
intrinsic value method to make certain pro forma and other disclosures (see Note
8).
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.
F-10
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS 128"), effective December 31, 1997, which superseded
Accounting Principles Board Opinion 15, "Earnings Per Share" ("APB 15"). SFAS
128 requires the Company to report: (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. The difference between the number of shares used to compute basic and
diluted earnings per share relates to outstanding stock options for all periods
presented. The Company has restated prior period calculations in accordance with
SFAS 128. The impact of adopting SFAS 128 did not result in material adjustments
to previously reported amounts.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information," which is
effective for years beginning after January 1, 1998. SFAS 131 establishes new
standards for reporting information about operating segments through a
"management approach." The Company has not completed its review of SFAS 131, and
has not yet determined the impact the new requirements will have on reportable
segments.
Reclassifications
Certain amounts included in the 1996 and 1995 financial statements have
been reclassified to conform with the 1997 presentation.
F-11
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements (continued)
3. 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, 1997 and 1996 are accounts receivable, subject to
recourse, totaling approximately $674,000 and $811,000, respectively. The
agreements with the factors provide for payment of a service fee on receivables
sold.
At December 31, 1997 and 1996, the balance due from factors, which
includes chargebacks due from customers is net of sales allowances of
approximately $2,900,000 and $2,200,000, 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 $25,000,000 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). There were no outstanding advances
under this agreement at December 31, 1997 and $440,000 at December 31, 1996.
Amounts available under the Facility at December 31, 1997 were $22,600,000.
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.
F-12
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements (continued)
4. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
December 31,
1997 1996
---------------------------------
Rent expense $ 438,000 $ 707,000
Compensation 1,822,000 977,000
Other 887,000 692,000
---------------------------------
$3,147,000 $2,376,000
=================================
5. Other Non-current Liabilities
Other non-current liabilities represents deferred compensation of
approximately $1,949,000 and $1,196,000 in 1997 and 1996, respectively.
6. Foreign Currency Transactions
The Company routinely enters into forward exchange contracts in
anticipation of future purchases of inventory denominated in foreign currencies.
These forward exchange contracts are used to reduce the Company's exposure to
changes in foreign exchange rates and are not held for the purpose of trading or
speculation. The Company had forward exchange contracts of $18,175,000 and
$2,065,000 at December 31, 1997 and 1996, respectively to protect the purchase
price of merchandise 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, 1997, forward exchange contracts have
maturity dates through July 1998. The unrealized loss on these forward exchange
contracts is approximately $1,140,000.
F-13
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements (continued)
7. Income Taxes
Significant items comprising the Company's net deferred tax assets and
liabilities as of December 31, 1997 and 1996 are as follows:
December 31,
1997 1996
---------------------------
Deferred tax assets:
Inventory allowances and capitalization $ 590,000 $ 399,000
Allowance for doubtful accounts and
sales allowances 457,000 186,000
Deferred rent 88,000 170,000
Deferred compensation 965,000 633,000
Other 40,000 130,000
---------------------------
2,140,000 1,518,000
---------------------------
Deferred tax liabilities:
Depreciation (633,000) (260,000)
Undistributed foreign earnings (759,000) (358,000)
---------------------------
(1,392,000) (618,000)
---------------------------
Net deferred tax assets $ 748,000 $ 900,000
===========================
The provision for income taxes consists of the following:
December 31,
1997 1996 1995
-------------------------------------------
Current:
Federal $6,385,000 $6,543,000 $5,032,000
State and local 1,628,000 1,650,000 1,300,000
Foreign 24,000 22,000 32,000
-------------------------------------------
8,037,000 8,215,000 6,364,000
Deferred:
Federal 133,000 32,000 163,000
State and local 19,000 4,000 23,000
-------------------------------------------
152,000 36,000 186,000
-------------------------------------------
$8,189,000 $8,251,000 $6,550,000
===========================================
F-14
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
The reconciliation of income tax computed at the U.S. federal statutory
tax rate to the effective income tax rate for 1997, 1996 and 1995 is as follows:
1997 1996 1995
------------------------
Federal income tax at statutory rate 35% 35% 35%
State and local taxes, net of federal tax benefit 5 5 6
Other (1)
------------------------
40% 40% 40%
========================
8. 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 by approximately $441,000 and $.03, $371,000 and $.02,
and $191,000 and $.02 in 1997, 1996 and 1995, respectively.
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 may be granted.
The Company's 1994 Incentive Stock Option Plan, as amended on May 29,
1997, has authorized the grant of options to employees for up to 1,500,000
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.
F-15
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements (continued)
8. Stock Option Plans and Grants (continued)
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 1997, 1996 and 1995, respectively: risk-free interest rate of
5.50%, 6.25% and 6.25%; 0% dividend yields; expected volatility factors of .346,
.359, and .346 and expected lives of 5.8, 6.3 and 4.5 years. The weighted-
average fair value of options granted during 1997, 1996 and 1995 were $6.63,
$7.21 and $5.15, respectively.
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
fvolatility. 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 December
31, 1994 through December 31, 1997.
Weighted-Average
Shares Exercise Price
---------------------------
Outstanding at December 31, 1994 373,900
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
Granted 325,725 $ 15.60
Exercised (56,981) $ 6.94
Forfeited (74,856) $ 14.04
--------
Outstanding at December 31, 1997 955,213
========
F-16
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements (continued)
8. Stock Option Plans and Grants (continued)
The following table summarizes information concerning currently
outstanding and exercisable stock options at December 31, 1997:
Outstanding Stock Options Exercisable Stock Options
------------------------- -------------------------
Weighted Average Weighted
Range of Outstanding Remaining Weighted Average Exercisable Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
----------------------- ------------------- -------------------- ----------------- ---------------- ----------------
$ 6.00 to $ 9.00 181,914 6.5 years $ 6.00 181,914 $6.00
$ 9.01 to $14.00 508,175 7.9 years $11.41 27,833 $9.75
$14.01 to $21.00 265,124 8.6 years $17.35 41,077 $17.35
Exercise prices for options outstanding as of December 31, 1997 range from $6.00
to $20.44.
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. In 1995, 70,000 options were
exercised. At December 31, 1997, all options outstanding are exercisable.
9. 401(k) Plan
The Company's 401(k) profit-sharing plan covers all non-union 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, 1997, 1996
and 1995 were approximately $71,000, $54,000 and $38,000, respectively.
F-17
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements (continued)
10. 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, 1997:
1998 $ 6,310,000
1999 6,153,000
2000 6,105,000
2001 5,986,000
2002 5,490,000
Thereafter 16,808,000
-----------
$46,852,000
===========
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, 1997, 1996 and 1995 was
$6,903,000, $4,646,000 and $2,782,000, 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, 1997 and 1996, the Company was contingently liable for
approximately $1,957,000 and $4,855,000 of open letters of credit, respectively.
In addition, at December 31, 1997 and 1996, the Company was contingently liable
for approximately $400,000 and $278,000 of standby letters of credit.
F-18
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements (continued)
11. Shareholders' Equity
Common Stock
Class A Common Shareholders are entitled to one vote for each share held
of record, and Class B Common Shareholders 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
Class A Common Shareholders vote together with Class B Common Shareholders on
all matters subject to shareholder approval, except Class A Common 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.
12. Significant Customers and Concentration of Credit Risk
In 1997, the Company had sales to two customers that accounted for 12.4%
and 10.0% of net sales, respectively. In 1996, the Company had sales to one
customer that accounted for 14.2% of net sales. In the normal course of
business, the Company sells to major department stores and specialty retailers
and believes that its broad customer base will mitigate the impact that
financial difficulties of any such retailers might have on the Company's
operations.
F-19
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements (continued)
13. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 1997 and 1996 appear below (in
thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
1997
Net sales $44,910 $40,352 $50,287 $49,729
Gross profit 17,616 13,977 21,109 20,393
Operating income 5,532 1,410 8,158 5,693
Net income 3,252 794 4,871 3,485
Earnings per share basic $ .25 $ .06 $ .37 $ .26
Earnings per share diluted $ .24 $ .06 $ .36 $ .26
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 basic $ .23 $ .21 $ .31 $ .19
Earnings per share diluted $ .22 $ .20 $ .30 $ .19
F-20
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: March 30, 1998
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.
Signature Title Date
- --------------------------------------------------------------------------------
/S/ KENNETH D. COLE President, Chief Executive March 30, 1998
- --------------------------- Officer and Director
Kenneth D. Cole
/S/ STANLEY A. MAYER Executive Vice President, March 30, 1998
- --------------------------- Chief Financial Officer,
Stanley A. Mayer Treasurer and Director
/S/ PAUL BLUM Executive Vice President, March 30, 1998
- --------------------------- Chief Operating Officer
Paul Blum and Director
/S/ DAVID P. EDELMAN Vice President Finance (Principal March 30, 1998
- --------------------------- Accounting Officer)
David P. Edelman
/S/ ROBERT C. GRAYSON Director March 30, 1998
- ---------------------------
Robert C. Grayson
/S/ DENIS F. KELLY Director March 30, 1998
- ---------------------------
Denis F. Kelly
/S/ JEFFREY G. LYNN Director March 30, 1998
- ---------------------------
Jeffrey G. Lynn
F-21
Kenneth Cole Productions, Inc.
Schedule II
Valuation and Qualifying Accounts
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
Charged
Balance at to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
--------- -------- ---------- ------
Year ended December 31, 1997
Allowance for doubtful accounts $ (65,000) $ (157,000) $ 142,000(a) $ (80,000)
Reserve for allowances (2,200,000) (700,000) (2,900,000)
----------- ----------- ----------- -----------
$(2,265,000) $ (857,000) $ 142,000 $(2,980,000)
=========== =========== =========== ===========
Year ended December 31, 1996
Allowance for doubtful accounts $ (30,000) $ (70,000) $ 35,000(a) $ (65,000)
Reserve for allowances (1,800,000) (400,000) (2,200,000)
----------- ----------- ----------- -----------
$(1,830,000) $ (470,000) $ 35,000 $(2,265,000)
=========== =========== =========== ===========
Year ended December 31, 1995
Allowance for doubtful accounts $ (41,000) $ (24,000) $ 35,000(a) $ (30,000)
Reserve for allowances (1,795,000) (5,000) (1,800,000)
----------- ----------- ----------- -----------
$(1,836,000) $ (29,000) $ 35,000 $(1,830,000)
=========== =========== =========== ===========
(a) represents direct write-offs during the year