| KELLWOOD CO Item 1A Risk Factors |
| 6 ITEM 1A RISK FACTORS The Companyapstas financial condition and performance are subject to various risks and uncertainties, including the risk factors described below |
| The Company may amend or supplement the risk factors from time to time by other reports that are filed with the SEC in the future |
| Risks Related to the Company - ---------------------------- INTENSE COMPETITION IN THE APPAREL INDUSTRY COULD REDUCE THE COMPANY &apos S SALES AND PROFITABILITY As an apparel company, the Company faces competition on many fronts including the following: o establishing and maintaining favorable brand recognition; o developing products that appeal to consumers; o pricing products appropriately; and o obtaining access to and sufficient floor space in retail outlets |
| Competition in the apparel industry is intense and is dominated by a number of very large brands, many of which have greater financial, technical and marketing resources, greater manufacturing capacity and more extensive and established customer relationships than the Company does |
| The competitive responses encountered from these larger, more established apparel companies may be more aggressive and comprehensive than anticipated and the Company may not be able to compete effectively |
| The aggressive and competitive nature of the apparel industry may result in lower prices for the Companyapstas products and decreased gross profit margins, either of which may materially adversely affect sales and profitability |
| THE COMPANY &apos S BUSINESS WILL SUFFER IF IT FAILS TO CONTINUALLY ANTICIPATE FASHION TRENDS AND CUSTOMER TASTES Customer tastes and fashion trends can change rapidly |
| The Company may not be able to anticipate, gauge or respond to these changes within a timely manner |
| If the Company misjudges the market for products or product groups or if it fails to identify and respond appropriately to changing consumer demands and fashion trends, it may be faced with unsold finished goods inventory, which could materially adversely affect expected operating results and decrease sales, gross margins and profitability |
| The apparel industry has relatively long lead times for the design and production of products |
| Consequently, the Company must in some cases commit to production in advance of orders based on forecasts of customer and consumer demand |
| If the Company fails to forecast demand accurately, it may under-produce or over-produce a product and encounter difficulty in filling customer orders or in liquidating excess inventory |
| Additionally, if the Company over-produces a product based on an aggressive forecast of demand, retailers may not be able to sell the product and cancel future orders or require retrospective price adjustments |
| These outcomes could have a material adverse effect on sales and brand image and seriously affect sales and profitability |
| THE COMPANY &apos S REVENUES AND PROFITS ARE SENSITIVE TO CONSUMER CONFIDENCE AND SPENDING PATTERNS The apparel industry has historically been subject to cyclical variations, recessions in the general economy or uncertainties regarding future economic prospects that affect consumer spending habits which could negatively impact the Companyapstas business overall and specifically sales, gross margins and profitability |
| The success of the Companyapstas operations depends on consumer spending |
| Consumer spending is impacted by a number of factors, including actual and perceived economic conditions affecting disposable consumer income (such as unemployment, wages, energy costs, etc), business conditions, interest rates, availability of credit and tax rates in the general economy and in the international, regional and local markets where the Companyapstas products are sold |
| Any significant deterioration in general economic conditions or increases in interest rates could reduce the level of consumer spending and inhibit consumers &apos use of credit |
| In addition, war, terrorist activity or the threat of war and terrorist activity may adversely affect consumer spending, and thereby have a material adverse effect on the Companyapstas financial condition and results of operations |
| 6 THE CONCENTRATION OF THE COMPANY &apos S CUSTOMERS COULD ADVERSELY AFFECT THE COMPANY &apos S BUSINESS The Companyapstas twenty largest customers accounted for approximately 73prca of sales in fiscal 2005, with the largest customer accounting for 9prca of total fiscal 2005 sales |
| The Company does not have long-term contracts with any customers, and sales to customers generally occur on an order-by-order basis and are subject to certain rights of cancellation and rescheduling by the customer |
| A decision by any of the Companyapstas major customers, whether motivated by competitive conditions, financial difficulties or otherwise, to decrease significantly the amount of merchandise purchased from the Company, or to change their manner of doing business with the Company, could substantially reduce revenues and materially adversely affect the Companyapstas profitability |
| CONSOLIDATION AND CHANGE IN THE RETAIL INDUSTRY MAY ELIMINATE EXISTING OR POTENTIAL CUSTOMERS A number of apparel retailers have experienced significant changes and difficulties over the past several years, including consolidation of ownership, increased centralization of buying decisions, restructurings, bankruptcies and liquidations |
| During past years, various apparel retailers, including some of the Companyapstas customers, have experienced financial problems that have increased the risk of extending credit to those retailers |
| Financial problems with respect to any of the Companyapstas customers could cause it to reduce or discontinue business with those customers or require it to assume more credit risk relating to those customers &apos receivables, either of which could have a material adverse effect on the Companyapstas business, results of operations and financial condition |
| There has been and continues to be merger, acquisition and consolidation activity in the retail industry |
| Future consolidation could reduce the number of the Companyapstas customers and potential customers |
| A smaller market for the Companyapstas products could have a material adverse impact on its business and results of operations |
| In addition, it is possible that the larger customers, which result from mergers or consolidations, could decide to perform many of the services that the Company currently provides |
| With increased consolidation in the retail industry, the Company is increasingly dependent upon key retailers whose bargaining strength and share of the Companyapstas business is growing |
| Accordingly, the Company faces greater pressure from these customers to provide more favorable trade terms |
| The Company could be negatively affected by changes in the policies or negotiating positions of its customers |
| The Companyapstas inability to develop satisfactory programs and systems to satisfy these customers could adversely affect operating results in any reporting period |
| LOSS OF KEY PERSONNEL COULD DISRUPT THE COMPANY &apos S OPERATIONS The Companyapstas continued success is dependent on the ability to attract, retain and motivate qualified management, administrative and sales personnel to support existing operations and future growth |
| Competition for qualified personnel in the apparel industry is intense and the Company competes for these individuals with other companies that in many cases have greater financial and other resources |
| The loss of the services of any members of senior management, or the inability to attract and retain other qualified personnel could have a material adverse effect on the Companyapstas business, results of operations and financial condition |
| THE EXTENT OF THE COMPANY &apos S FOREIGN SOURCING AND MANUFACTURING MAY ADVERSELY AFFECT THE COMPANY &apos S BUSINESS For fiscal 2005, approximately 93prca of the Companyapstas products were manufactured outside the United States |
| As a result of the magnitude of the Companyapstas foreign sourcing and manufacturing, its business is subject to the following risks: o uncertainty caused by the elimination of import quotas in China |
| Such quotas have been replaced by safeguard provisions that continue to provide limits on importation of apparel on China |
| The operation and effects of these safeguard provisions are uncertain and could result in delays in imports and supplies |
| As a result, the Company will have to monitor and manage the Companyapstas sourcing of products and develop alternative sourcing plans, if necessary, to alleviate the impact of any anticipated impact of safeguard provisions; o political and economic instability in countries, including heightened terrorism and other security concerns, which could subject imported or exported goods to additional or more frequent inspections, leading to delays in deliveries or impoundment of goods; 7 o imposition of regulations and quotas relating to imports, including quotas imposed by bilateral textile agreements between the United States and foreign countries; o imposition of duties, taxes and other charges on imports; o significant fluctuation of the value of the dollar against foreign currencies; o restrictions on the transfer of funds to or from foreign countries; o political instability, military conflict, or terrorism involving the United States, or any of the many countries where the Companyapstas products are manufactured, which could cause a delay in transportation, or an increase in transportation costs of raw materials or finished product; o disease epidemics and health related concerns, such as SARS or the mad cow or hoof and mouth disease outbreaks in recent years, which could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas; o reduced manufacturing flexibility because of geographic distance between the Company and its foreign manufacturers, increasing the risk that the Company may have to mark down unsold inventory as a result of misjudging the market for a foreign-made product; and o violations by foreign contractors of labor and wage standards and resulting adverse publicity |
| If these risks limit or prevent the Company from selling or manufacturing products in any significant international market, prevent the Company from acquiring products from foreign suppliers, or significantly increase the cost of the Companyapstas products, its operations could be seriously disrupted until alternative suppliers are found or alternative markets are developed, which could negatively impact the Companyapstas business |
| THE SUCCESS OF THE COMPANY &apos S LICENSES DEPENDS ON THE VALUE OF THE LICENSED BRANDS Many of the Companyapstas products are produced under license agreements with third parties |
| Similarly, the Company licenses some of its brand names to other companies |
| The Companyapstas success depends on the value of the brands and trademarks that it licenses and sells |
| Brands that the Company licenses from third parties are integral to its business as is the implementation of its strategies for growing and expanding these brands and trademarks |
| The Company markets some of its products under the names and brands of recognized designers |
| The Companyapstas sales of these products could decline if any of those designerapstas images or reputations were to be negatively impacted |
| Additionally, the Company relies on continued good relationships with both licensees and licensors, of certain trademarks and brand names |
| Adverse actions by any of these third parties could damage the brand equity associated with these trademarks and brands, which could have a material adverse effect on the Companyapstas business, results of operations and financial condition |
| THE COMPANY &apos S PROFITABILITY AND EARNINGS COULD BE NEGATIVELY AFFECTED IF SALES OF CERTAIN PRODUCTS ARE NOT SUFFICIENT TO OFFSET THE MINIMUM ROYALTY PAYMENTS IT MUST PAY WITH RESPECT TO THESE PRODUCTS Many of the license agreements the Company has require significant minimum royalty payments |
| The Companyapstas ability to generate sufficient sales and profitability to cover these minimum royalty requirements is not guaranteed and if sales of such products are not sufficient to generate these minimum payments, it could have a material adverse effect on the Companyapstas business, results of operations and financial conditions |
| 8 THE COMPANY &apos S COMPETITIVE POSITION COULD SUFFER, IF ITS INTELLECTUAL PROPERTY RIGHTS ARE NOT PROTECTED The Company believes that its trademarks, patents, technologies and designs are of great value |
| From time to time, third parties have challenged, and may in the future try to challenge, the Companyapstas ownership of its intellectual property |
| The Company is susceptible to others imitating its products and infringing its intellectual property rights |
| The Companyapstas licensing agreements with more recognized designers may cause it to be more susceptible to infringement of its intellectual property rights, as some of the Companyapstas brands enjoy significant worldwide consumer recognition and generally higher pricing thus creating additional incentive for counterfeiters and infringers |
| Imitation or counterfeiting of the Companyapstas products or infringement of its intellectual property rights could diminish the value of its brands or otherwise adversely affect its revenues |
| The Company cannot assure the reader that the actions it has taken to establish and protect its trademarks and other intellectual property rights will be adequate to prevent imitation of its products by others or to prevent others from seeking to invalidate its trademarks or block sales of its products as a violation of the trademarks and intellectual property rights of others |
| In addition, the Company cannot assure the reader that others will not assert rights in, or ownership of, its trademarks and other intellectual property rights or in similar marks or marks that the Company licenses and/or markets or that it will be able to successfully resolve these conflicts to the Companyapstas satisfaction |
| The Company may need to resort to litigation to enforce its intellectual property rights, which could result in substantial costs and diversion of resources |
| FLUCTUATIONS IN THE PRICE, AVAILABILITY AND QUALITY OF RAW MATERIALS COULD CAUSE DELAYS AND INCREASE COSTS Fluctuations in the price, availability and quality of the fabrics or other raw materials used in the Companyapstas manufactured apparel could have a material adverse effect on cost of sales or its ability to meet customer demands |
| The prices for fabrics depend largely on the market prices for the raw materials used to produce them, particularly cotton |
| The price and availability of the raw materials and, in turn, the fabrics used in the Companyapstas apparel may fluctuate significantly, depending on many factors, including crop yields, weather patterns and changes in oil prices |
| The Company may not be able to pass higher raw materials prices and related transportation costs on to its customers |
| THE COMPANY &apos S RELIANCE ON INDEPENDENT MANUFACTURERS COULD CAUSE DELAYS AND DAMAGE CUSTOMER RELATIONSHIPS The Company uses independent manufacturers to assemble or produce a substantial portion of its products |
| The Company is dependent on the ability of these independent manufacturers to adequately finance the production of goods ordered and maintain sufficient manufacturing capacity |
| The use of independent manufacturers to produce finished goods and the resulting lack of direct control could subject the Company to difficulty in obtaining timely delivery of products of acceptable quality |
| The Company generally does not have long-term contracts with any independent manufacturers |
| Alternative manufacturers, if available, may not be able to provide the Company with products or services of a comparable quality, at an acceptable price or on a timely basis |
| There can be no assurance that there will not be a disruption in the supply of the Companyapstas products from independent manufacturers or, in the event of a disruption, that it would be able to substitute suitable alternative manufacturers in a timely manner |
| The failure of any independent manufacturer to perform or the loss of any independent manufacturer could have a material adverse effect on the Companyapstas business, results of operations and financial condition |
| Additionally, the Company requires its manufacturers to operate in compliance with applicable laws, rules and regulations regarding working conditions, employment practices and environmental compliance |
| The Company also sometimes imposes upon its business partners operating guidelines that require additional obligations in those areas in order to promote ethical business practices, and the Companyapstas staff periodically visits and monitors the operations of its independent manufacturers to determine compliance |
| However, the Company does not control its independent manufacturers or their labor and other business practices |
| If one of the Companyapstas manufacturers violates labor or other laws or implements labor or other business practices that are generally regarded as unethical in the United States, the shipment of finished products could be interrupted, orders could be cancelled, relationships could be terminated and the Companyapstas reputation could be damaged |
| Any of these events could have a material adverse effect on the Companyapstas revenues and, consequently, its results of operations |
| 9 ACQUISITIONS HAVE ACCOUNTED FOR A SIGNIFICANT PORTION OF THE COMPANY &apos S PAST SALES GROWTH AND IT MAY NOT FIND SUITABLE ACQUISITION CANDIDATES IN THE FUTURE Acquisitions have accounted for a significant portion of the Companyapstas sales growth in the past, and it expects to continue to generate a significant portion of its sales growth through acquisitions in the future |
| The Companyapstas sales growth may be adversely affected if it is unable to find suitable acquisition candidates at reasonable prices, it is not successful in integrating any acquired businesses in a timely manner, or such acquisitions do not achieve anticipated results |
| In addition, future acquisitions could use substantial portions of the Companyapstas available cash for all or a portion of the purchase price |
| The Company could also issue additional securities as consideration for these acquisitions, which could cause its stockholders to suffer significant dilution |
| ACQUISITIONS MAY CREATE TRANSITIONAL CHALLENGES The Companyapstas business strategy includes growth through strategic acquisitions |
| That strategy depends on the availability of suitable acquisition candidates at reasonable prices and the Companyapstas ability to quickly resolve challenges associated with integrating these acquired businesses into its existing business |
| These challenges include: o integration of product lines, sales forces and manufacturing facilities; o decisions regarding divestitures, inventory write-offs and other charges; o employee turnover, including key management and creative personnel of the acquired businesses; o disruption in product cycles; o loss of sales momentum; o maintenance of acceptable standards, controls, procedures and policies; o potential disruption of ongoing business and distraction of management; o impairment of relationships with employees and customers, as a result of integrating new personnel; o inability to maintain relationships with customers of the acquired business; o failure to achieve the expected benefits of the acquisition; o expenses of the acquisition; and o potential unknown liabilities and unanticipated expenses associated with the acquired businesses |
| SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW MAY DELAY, DEFER OR PREVENT A CHANGE IN CONTROL THAT THE COMPANY &apos S STOCKHOLDERS MIGHT CONSIDER TO BE IN THEIR BEST INTERESTS The Company is subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prohibits "e business combinations "e between a publicly-held Delaware corporation and an "e interested stockholder "e which is generally defined as a stockholder who becomes a beneficial owner of 15prca or more of a Delaware corporationapstas voting stock during the three-year period following the date that such stockholder became an interested stockholder |
| Section 203 could have the effect of delaying, deferring or preventing a change in control of the Company that its stockholders might consider to be in their best interests |