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, 2001 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)
603 West 50th 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. (X)
Aggregate market value of the voting stock held by
nonaffiliates of the registrant as of the close of business on
March 27, 2002: $ 188,959,933
Number of shares of Class A Common Stock, $.01 par value,
outstanding as of the close of business on
March 27, 2002: 11,186,938
Number of shares of Class B Common Stock, $.01 par value,
outstanding as of the close of business on
March 27, 2002: 8,456,097
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 29, 2002.
Kenneth Cole Productions, Inc.
TABLE OF CONTENTS
Page
PART I
Item 1 Business 3
Item 2 Properties 16
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 16
PART ll
Item 5 Market for Registrant's Common Equity and Related Shareholder
Matters 17
Item 6 Selected Financial Data 18
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 7A Quantitative and Qualitative Disclosures about Market Risk 24
Item 8 Financial Statements and Supplementary Data 24
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 24
PART lll
Item 10 Directors and Executive Officers of the Registrant 25
Item 11 Executive Compensation 25
Item 12 Security Ownership of Certain Beneficial Owners and Management 25
Item 13 Certain Relationships and Related Transactions 25
PART lV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 26
Item 1. Business
Important Factors Relating to Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 (the
"Act") and Section 21E of the Securities Exchange Act of 1934
provides a safe harbor for forward-looking statements made by or
on behalf of Kenneth Cole Productions, Inc. (the "Company"). The
Company and its representatives may from time to time make
written or oral statements that are "forward-looking," including
statements contained in this report and other filings with the
Securities and Exchange Commission and in reports to the
Company's shareholders. Forward-looking statements generally
refer to future plans and performance and are identified by the
words "believe," "expect," "anticipate," "plan," "intend,"
"will," or similar expressions. All statements that express
expectations and projections with respect to future matters,
including, but not limited to, the launching or prospective
development of new business initiatives, future licensee sales
growth, store expansion and openings, and the introduction of the
Euro are forward-looking statements within the meaning of the
Act. These statements are made on the basis of management's
views and assumptions, as of the time the statements are made,
regarding future events and business performance and are subject
to certain risks and uncertainties. Should one or more of these
risks or uncertainties materialize or should underlying
assumptions prove incorrect actual results may vary materially
from those anticipated, estimated or projected.
There can be no assurance that management's expectations will
necessarily come to pass. 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,
changes in the domestic and economic conditions or in political,
economic or other conditions affecting foreign operations and
sourcing 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. This list
of factors that may affect future performance and the accuracy of
forward-looking statements is illustrative, but by no means
exhaustive. Accordingly, 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. The Company undertakes no
obligation to update or revise publicly any forward looking
statements, whether as a result of new information, future events
or otherwise.
General
Kenneth Cole Productions, Inc. 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,
Reaction Kenneth Cole 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
that 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 helps diversify business risk.
The Company markets its products to more than 4,100 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 interactive websites,
including an on-line store. The Company believes the diversity
of its product offerings distinguishes the Company from its
competitors in terms of product classifications (men's, women's
and children's footwear, handbags, apparel and accessories),
prices (from ''better'' to ''moderate'') and styling. The Company
believes that the diversity of its 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 popularity of the Kenneth Cole brand names among consumers
has enabled the Company to expand its product offerings and
channels of distribution through licensing agreements
selectively. 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, leather and fabric
outerwear, sunglasses, optical eyewear, watches, luggage,
hosiery, and small leather goods. During the Fall 2000 season,
the Company began selling Kenneth Cole New York women's
sportswear and presented its first collection under the Reaction
Kenneth Cole brand for the Spring 2001 season. Other women's
product categories currently being sold pursuant to license
agreements include small leather goods, belts, scarves and wraps,
hosiery, leather and fabric outerwear, sunglasses, optical
eyewear, watches, jewelry and luggage. Product categories
planned for launch during 2002 include men's and women's
fragrances and Reaction Kenneth Cole children's apparel, further
broadening the Kenneth Cole lifestyle collection.
Business Growth Strategies
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: Kenneth Cole New
York, Reaction Kenneth Cole and Unlisted. The Company views its
lifestyle brands as a vital and significant strategic asset and
the foundation for a sustainable competitive advantage. The
Company believes that further segmentation and development of the
three brands afford enormous growth potential within each of the
Company's business segments.
Wholesale. By strengthening and streamlining its department
store distribution channels, the Company continues to reinforce
the segmentation of its three brands at wholesale, promoting even
greater growth capability for each in the future. This approach
will facilitate the broadening of product offerings, attract new
customers and further enable the Company to address a wider
variety of customers' needs, both domestically and
internationally. By combining retail and wholesale merchandising
functions, the Company is in a better position to respond quickly
to market changes, thereby enabling each wholesale division to
deliver appropriate fashions in a more timely and effective
manner. This approach has been effective in maintaining the
strength of the women's Kenneth Cole New York and Reaction
Kenneth Cole branded footwear business' in a difficult and
challenging environment.
Consumer Direct. The Company's Consumer Direct segment, which
operates full price retail and outlet stores, as well as catalogs
and e-commerce websites, affords significant growth potential
while simultaneously complementing the existing Wholesale and
Licensing businesses. The Company believes that the sale of
footwear, handbags and licensed products through its consumer
direct channels of distribution increases consumer awareness of
the Company's brands, reinforces the Company's image and builds
brand equity. Wholesale customers in cities with a Kenneth Cole
retail presence have consistently performed better then wholesale
customers in cities without a Kenneth Cole retail presence.
The Company continues to pursue opportunities to expand its
retail store operations. As of December 31, 2001, the Company
operated 77 specialty retail and outlet stores as compared with
69 stores as of December 31, 2000. The Company plans to open or
expand approximately 6 to 12 stores in 2002, expanding retail
square footage by approximately 15%. This anticipated expansion
includes outlet stores, which provide opportunities for the
Company to sell excess and out-of-season merchandise, thereby
reducing the need to sell such merchandise through its regular
off-price channels of distribution or to discounters at low
prices. To accommodate the Company's diversity of product
offerings, larger format stores were opened during 1999 and 2000.
The Company believes that these larger format stores will generate
increased sales and profitability as this new retail model allows
for a true-cross section of both Company and licensee products,
enabling the Company to present the broad lifestyle offering that
consumers want to see. In addition, the Company expects to
realize certain economies in several selling and administrative
expense areas.
The Company continues to invest in the enhancement, visual
presentation and development of its websites to capitalize on the
growth of the Internet and emerging technologies. The Company
believes that e-commerce will be a meaningful contributor in the
Company's future, both as a source of consumer information and as
a generator of new revenue. Among other things, the websites are
designed to create additional revenues through a new distribution
channel, build brand equity, fortify image, increase consumer
awareness, improve customer service, provide entertainment and
promote supporting causes the Company believes are important to
its customers. The Company has strengths in its existing
capabilities in customer service, including multiple toll-free
telemarketing lines, merchandising, catalog, fulfillment and e-
commerce. Accordingly, the Company believes it has a strategic
advantage over companies that are just beginning to develop an
on-line commerce presence.
In addition to seasonal image campaigns via traditional
advertising media, the Internet has enabled the Company to
communicate directly with its customers and have its customers
communicate directly with the Company. The Company's use of its
websites to capture and process this relevant market data on its
consumers base provides a greater understanding of its customers
and market trends. The Company believes this dynamic
relationship is invaluable for building customer loyalty.
Further, the Company's internet presence through multiple
websites has enabled the creation of a substantial e-mail
database by which the Company's marketing and customer service
departments regularly interact with its existing and new
consumers on-line.
Licensing/International. The growing strength of the
Company's three brands, Kenneth Cole New York, Reaction Kenneth
Cole and Unlisted, provides opportunities, through licensing
agreements, to expand into new product categories and broaden
existing distribution channels. Licensed product sales continued
to grow and represent about half of the Company's brand sales at
retail. Many of the existing licensee businesses are still
relatively new in their individual product classifications and
the Company believes they hold impressive growth potential.
The Company chooses its licensing partners with care,
considering many factors, including the strength of their
sourcing and distribution abilities, thereby attempting to
maintain the same value and style that Kenneth Cole customers
have come to expect. Through its licensing agreements with Liz
Claiborne, Inc., the Company launched Kenneth Cole women's
sportswear during Fall 2000 and followed with the launch of
Reaction Kenneth Cole in Spring 2001. The Company believes that
women's apparel will further define and enhance the Company's
brands, improving its ability to deliver exactly what the
Company's customers seek. The Company has also entered into an
agreement to produce fragrances worldwide with a division of LVMH
Mo?t Hennessy Louis Vuitton that it believes will bring greater
consumer acceptance to its brands both domestically and
internationally. The Company believes LVMH's global marketing
strength is a strategic extension of the Company's ability to
increase brand awareness through licensing partnerships. The
first product launch is planned for the Holiday 2002 season. In
addition, the Company entered into an agreement to distribute
most product classifications of Kenneth Cole New York and
Reaction Kenneth Cole products throughout certain jurisdictions
in the Caribbean and Latin America. The Company believes its
continued efforts to expand product classification, diversify
brand awareness and enter and expand markets through strategic
licensing relationships is essential to the growth of the Company
domestically and abroad as a lifestyle branded franchise. In
addition, the Company executed an agreement during 2001 to
produce children's apparel under the Reaction Kenneth Cole brand.
The Company's brands are currently licensed for a range of
products consistent with the Company's image (see
"Licensing/International" in Item 1).
Products
The Company markets its products principally under its Kenneth
Cole New York, Reaction Kenneth Cole and Unlisted brand names;
each brand is targeted to appeal to different consumers. The
Company believes that the Kenneth Cole brand name has developed
into a true aspirational lifestyle brand, and while it has
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 the hallmark of the Kenneth Cole New York
image. The distinctive hip styling of this line has established
Kenneth Cole as a fashion authority for sophisticated men and
women who are seeking a value alternative to other designer
brands. As a result of strong brand recognition and a 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 into 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 approximately $130 to $225. As
versatile as it is sophisticated, Kenneth Cole New York men's
footwear may be worn to work, for special occasions or on
weekends with casual clothes.
Kenneth Cole New York women's footwear, primarily manufactured
in Italy, includes sophisticated and elegant dress, casual and
special occasion (e.g., bridal) footwear that is sold to the
bridge-designer market at retail price points ranging from
approximately $100 to $225. Women's footwear is generally
constructed with leather soles and linings and fabric uppers.
Kenneth Cole New York handbags are sleek designer bags offered
at affordable prices, generally made of quality leathers and sold
to the bridge-designer market at retail price points ranging from
approximately $90 to $195. Certain updated styles offer the
customer high fashion day bags, while evening bags make
sophisticated statements in satins and updated silhouettes.
Reaction Kenneth Cole
Reaction Kenneth Cole consists of a variety of product
classifications which address the growing trend toward flexible
lifestyle dressing. Originally introduced as a comfort-oriented
casual line, Reaction Kenneth Cole now includes more dressy
styles. Reaction Kenneth Cole women's footwear is designed for
the workplace as well as outside the office, with an emphasis on
comfort, versatility, contemporary styling and value. It is
targeted to compete in the largest single category of footwear
sold in department stores, women's "better", and the majority of
the line retails approximately in the $70 to $100 price range.
Reaction Kenneth Cole men's footwear combines fashionable and
versatile styling with affordable pricing and is positioned in
the fastest growing classification in the men's market as
consumer preferences lean away from athletic constructed footwear
toward regular constructed footwear. This line retails
approximately in the $90 to $140 price range.
Reaction Kenneth Cole handbags are designed to be
multifunctional with a contemporary look and are primarily made
of non-leather technical fabrications, such as nylon, microfiber
and canvas. Reaction Kenneth Cole handbags, including Sideswipe,
Top of the Line and the Reversible collections, are one of the
fastest growing product classifications and have been created to
meet the varying needs of the Company's customers. This line
generally retails at price points ranging from approximately $30
to $80.
Reaction Kenneth Cole children's footwear, primarily
manufactured in Brazil and China, includes dress and casual
footwear sold at price points ranging from $35 to $50 and is
targeted to boys and girls ages 6 to 12 who the Company believes
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 that its use
of styles based upon successful performers in its existing men's
and women's styles, greatly enhances the likelihood of product
performance. The success of children's footwear has led the
Company to introduce Reaction Kenneth Cole toddler footwear which
has retail price points around $45. This addition is expected to
further penetrate the children's marketplace and enhance the
lifestyle component of Kenneth Cole.
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 men's and women's casual and dress shoes
per season accompanied by a selection of handbag styles.
Unlisted footwear provides the junior consumer with a wide
selection of footwear with contemporary styling and quality at
affordable prices. Unlisted women's footwear includes not only
fashion styles, but also evening styles, basic pumps and loafers
that generally retail at price points ranging from $35 to $75
with approximately 60 styles per season. During 1999, the Company
launched Unlisted men's footwear and is exploring distribution
channels and licensing agreements to expand this brand further.
The line includes casual and evening assortments with a variety
of fashion styles to compliment the selection of approximately 50
styles per season. The Unlisted men's footwear is expected to
appeal to a broader young men's market with shoes that range at
retail price points from $50 to $90.
Unlisted handbags are designed for the younger price-conscious
trend-driven consumer and consist of trendy bags in vinyl, straw
and other exciting fabrics. Unlisted handbags generally retail
at price points ranging from $30 to $50.
Business Segments
The Company primarily distributes its products through
Wholesale and its own Consumer Direct distribution channels.
During the periods presented below, the percentage of net
revenues contributed by the Company's business segments were as
follows:
Year Ended
December 31,
2001 2000 1999
Wholesale 51% 58% 60%
Consumer Direct 43 36 35
Licensing/International 6 6 5
--------------------
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 a sales force
as well as 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 has increased the size of its corporate account
specialist's staff during 2001 and anticipates continued build up
in 2002, as it believes its investment in account specialists is
essential to the maintenance and growth of its wholesale
businesses.
The Company's products are distributed to more than 1,600
wholesale accounts for sale in more than 4,100 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 Target Corporation, Dillard Department Stores, Inc.,
Federated Department Stores (including Macy's, Bloomingdales, and
Burdines), and upscale specialty retailers, including Saks Fifth
Avenue and Nordstrom, Inc. In addition, the Company sells out-
of-season branded products and overruns through the Company's
outlet stores and to off-price retailers. The Company also sells
its products, directly or through distributors, to customers in
various international markets including Canada, Mexico, Hong
Kong, Taiwan, the Philippines, Singapore, Latin and parts of
South America, and the Caribbean.
The Company markets its product lines and introduces new
styles at separate industry-wide footwear and handbag tradeshows
that 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 sales force and
corporate account specialists visit customers to review the
Company's product lines and to secure purchase commitments. The
Company's products also are displayed at separate handbag and
footwear showrooms in New York.
Private Label
The Company also designs, develops and sources private label
footwear and handbags for selected retailers. These private label
customers include major retailers that do not purchase the
Company's brands. 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 customer.
Consumer Direct Operations
Retail Operations
The Company continues to pursue opportunities to enhance and
expand its retail operations. At December 31, 2001, the Company
operated 47 specialty retail stores and 29 outlet stores under
the Kenneth Cole New York name, and one specialty retail store
under the Reaction name.
The Company's specialty retail stores develop consumer
recognition of its brand names, provide a showcase for Kenneth
Cole branded products marketed by the Company and its licensees
and 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. In addition to its Kenneth Cole stores and
the success of Reaction at wholesale, the Company opened its
first Reaction stand-alone store in New York City during the
second half of 2001 to further enhance its growth opportunities.
Approximately 25% to 30% of the Company's retail store products
are sourced exclusively for such stores to differentiate the
product mix of its stores from that of its wholesale customers.
The Company opened three retail stores in 2001, and plans to open
or expand three to four new stores in 2002.
At December 31, 2001, the Company operated 29 outlet stores.
The Company's outlet stores enable it to sell a portion of its
excess wholesale, retail and catalog inventory in a manner that
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 it
will require additional outlet stores as higher levels of sales
are achieved and additional retail stores are opened. The
Company opened five outlet stores and plans to open or expand six
stores in 2002.
The success of the Company's new and existing stores 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 successfully such expansion, hire and train
personnel, the availability of desirable locations, the
negotiation of acceptable lease terms for new locations and the
expansion of the Company's management information systems to
support the growth of its retail operations. The Company
believes that its retail stores further enhance its image and
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 Reaction Kenneth Cole branded
products. Catalog order-taking and fulfillment for accessories
and apparel are performed in the Company's distribution center in
New Jersey. In-house fulfillment has enabled the Company to
react quicker to consumer demand, improve distribution response
and manage its inventory.
The Company maintains websites to provide information
regarding the Company and its products, as well as to conduct e-
commerce business. In 2000, the Company improved its e-commerce
sites Kennethcole.com, Reactiononline.com, and Unlisted.com, a
marketing site without e-commerce, targeting younger Generation Y
(ages 12 to 24) consumers. The Company plans to continue to
invest in the internet and emerging technologies and believes
that based on its existing merchandising, fulfillment and
marketing capabilities, it is well positioned to deliver an on-
line commerce solution with nonpareil customer service. The
Company also maintains two toll-free telephone numbers (1-800-
KEN-COLE and 1-800-UNLISTED) which provide customer service and
answer product-related questions.
Licensing/International
Licensing
The Company views its licensing agreements as a vehicle to
serve its customers better by extending its product offerings
thereby allowing more of its consumers to meet their fashion
accessory needs without compromising on price, value or style.
The Company considers entering into licensing, and distribution
agreements with respect to certain products if such agreements
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 that
it believes to be complementary to its existing product lines.
Licensees range from small to medium size manufacturers to
companies that 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, Reaction Kenneth Cole
and Unlisted brand images. The Company communicates its design
ideas and coordinates all marketing efforts with its licensees.
The Company generally grants licenses for three to five year
terms with renewal options, limits licensees to certain
territorial rights, and retains the right to terminate the
licenses if certain specified sales levels are not attained. Each
license provides the Company with the right to review, inspect
and approve all product designs and quality and approve any use
of its trademarks in packaging, advertising and marketing.
The Company continues to capture significant shelf space in
better department stores for its men's apparel collection as it
further rolls out tailored clothing, men's sportswear and dress
shirts. This is 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. Through its licensing agreement with Liz
Claiborne, Inc., the Company launched Kenneth Cole women's
sportswear during Fall 2000 and followed with the launch of
Reaction Kenneth Cole in Spring 2001. During 2001, the Company
further expanded its product classifications to include
children's apparel, which is expected to launch during Fall 2002.
The Company believes the addition of womenswear and children's
apparel will further define and differentiate its brands,
enabling the Company to better meet its customers' needs and
lifestyle.
The following table summarizes the Company's licensed product
categories:
Kenneth Cole Reaction
Product Category New York Kenneth Cole Unlisted
Men's Tailored Clothing X X
Men's Sportswear X X
Men's Neckwear X X
Men's Dress Shirts X X
Men's Leather & Fabric Outerwear X X
Men's Small Leather Goods X X X
Women's Sportswear X X X
Women's Small Leather Goods X X X
Women's Leather & Fabric Outerwear X X
Women's Scarves & Wraps X X
Women's Jewelry X X
Men's/Women's Hosiery X X
Men's/Women's Belts X X
Men's/Women's Watches X X
Men's/Women's Optical Frames X X
Men's/Women's Luggage/Briefcases X X
Men's/Women's Sunglasses X X X
Men's/Women's Fragrances X X X
Children's Apparel X
Boy's Leather & Fabric Outerwear X
All of the Company's licensees are required to contribute to
the Company a percentage of their net sales of licensed products,
subject to minimum amounts, for the ongoing marketing of the
Kenneth Cole brands.
International
The Company sells its products through distributors and
licensees to wholesale customers and direct retailers in markets
including Canada, Mexico, Venezuela, Ecuador, Costa Rica, Peru,
Panama, Aruba, Bahamas, Curacao, Colombia, Dominican Republic, El
Salvador, Guatemala, Haiti, Honduras, Jamaica, St. Croix, Hong
Kong, Japan, Taiwan, the Philippines and Singapore. The Company
plans to continue to expand its international licensing programs
and presence as a means of developing a truly global brand.
The Company has licensing agreements presently with Dickson
Concepts, Ltd. ("Dickson") to retail Kenneth Cole New York and
Reaction Kenneth Cole branded products through established
freestanding stores in Hong Kong, Taiwan and Singapore. Dickson
presently operates six freestanding stores in these countries as
well as several shop-in-shops. Each store carries a selection of
merchandise, which is also available in the Kenneth Cole domestic
retail stores. In Fall 2001, Dickson opened a new store in
Taiwan. The Company is anticipating the opening of additional
stores in Hong Kong, Singapore and Taiwan and is also planning to
expand the size of the existing stores to accommodate the
expanded product class.
During 2001, the Company signed an agreement with Chiel
Industries, a division of Samsung Industries, for the
distribution of the Company's products in Korea. The plan is to
open two freestanding stores and develop the business through
shop-in-shops in quality department stores.
The Company has an agreement with Store Specialists, Inc.
(Rustan's Department Store) to sell the Kenneth Cole New York and
Reaction Kenneth Cole products throughout the Philippines in
leased shop-in-shop environments as well as freestanding stores.
Currently, two freestanding stores and three shop-in-shops are
operating.
The Company, through licensing arrangements, continues to sell
and market its products in Canada. The majority of product
classifications available domestically are also available in
Canada. Currently the Company operates its Canadian market
through three licensees and the use of shop-in-shops.
During 2001, a licensing agreement was executed for Latin
America. This agreement covers Latin America, South America and
the Caribbean, with the exception of Brazil, Argentina and
Uruguay. The relationship will allow for the establishment of
flagship stores in key countries and approximately 25
freestanding stores, as well as a wholesale distribution of most
key product classifications throughout the region. In Fall 2001,
freestanding stores were opened in Margarita Island, Venezuela,
Guatemala, and Costa Rica.
During March 2001, the Company announced a license agreement
with LVMH Mo?t Hennessy Louis Vuitton's Perfumes and Cosmetics
Group's Parfums Givenchy, Inc. ("LVMH"), the world's leading
luxury products group, to create, distribute, and market Kenneth
Cole fragrance and body products. Drawing upon Kenneth Cole's
creative strength, the Company's established brands, and the
resources of LVMH, Parfums Givenchy, Inc. will orchestrate the
global development, marketing and distribution of several Kenneth
Cole fragrances worldwide. The Company's plans include the
launch of both men's and women's fragrance lines for Kenneth Cole
New York, Reaction Kenneth Cole and Unlisted brands domestically
and throughout Canada. Kenneth Cole fragrance and body products
are planned to launch for the Holiday 2002 season.
Design
Kenneth D. Cole, Chairman and Chief Executive Officer, 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 a design team to work with him in the
creation and development of new product styles. Members of each
design team work together with Mr. Cole to create designs that
they believe fits the Company's image, reflects current or
approaching trends and can be manufactured cost-effectively.
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. 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, China and Korea. The Company maintains
an office in Florence, Italy 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% and 40% of the dollar value of total handbag purchases by the
Company were sourced through one agent utilizing many different
factories in China in 2001 and 2000, respectively. In addition,
44% and 41% of men's footwear was produced by one manufacturer
utilizing several different factories in Italy in 2001 and 2000,
respectively. 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
its 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 Reaction Kenneth Cole brands is an
integral part of its long-term growth strategy. The Company
believes that its advertising campaigns, which have brought it
national recognition for their timely focus on current events and
social issues, have resulted in increased sales and consumer
awareness of its branded products. The Company's advertising
appears in magazines such as Vogue, Vanity Fair, Details, GQ,
Glamour and Marie Claire, newspapers, and outdoor and electronic
advertising media. All of the Company's licensees are required to
contribute to the Company a percentage of their net sales of
licensed products, subject to minimums, for the advertising and
promotion of the Kenneth Cole brand image. In addition, the
Company believes personal appearances by Kenneth D. Cole further
enhance the Company's brand awareness.
The Company utilizes its in-house advertising and public
relations staff for all media placement, which includes approval
of all advertising campaigns from its licensees. By retaining
control over its advertising and marketing programs, the Company
has been able to maintain the integrity of its brands while
realizing substantial cost savings when compared to outsourcing.
The Company has committed additional funding towards the
marketing of the Unlisted brand. The marketing campaign,
beginning with the Fall 2001 season, returned to co-branding,
replacing Unlisted.com with "Unlisted, A Kenneth Cole
Production." The Company believes the campaign will further
distinguish the integrity of the brand, while maintaining the
Kenneth Cole association. The focus of this association is to
emphasize the Kenneth Cole lifestyle and appeal to the fashion
conscious younger consumer.
In order to continue to strengthen brand awareness of its
products and increase sales, the Company is actively involved in
development, marketing and merchandising programs for its
customers. As part of this effort, the Company utilizes
cooperative advertising programs, sales promotions and produces
tradeshow sales tools and consumer catalogs which feature a
variety of Kenneth Cole New York and Reaction Kenneth Cole
branded products marketed by the Company and its licensees. As a
result of these internal productions, the Company believes that
there is a singular focus, a strong synergy and a consistency in
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,
the Company believes that these shop-in-shops and focus areas
encourage longer-term commitment by retailers to the Company's
products and enhance consumer brand awareness.
Distribution
To facilitate distribution, the Company's products are
inspected, bar coded, packed and shipped from manufacturers by
ocean or air to either the Company's distribution facilities
located in Secaucus, New Jersey or a public warehouse located in
California. The Company utilizes fully integrated information
systems and bar code technology 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 as well
as many fashion styles, for immediate shipment. While the open
stock program requires an increased investment in inventories,
the Company believes this program is an important service for its
wholesale customers by allowing them to manage inventory levels
more effectively. The Company expects that affording customers
improved flexibility in ordering specific SKUs in smaller
quantities will ultimately reduce the incidence of markdowns and
allowances.
The Company has capitalized on its centralized distribution
facilities to provide additional support to its retail store
operations on shipments of footwear and handbag products as well
as direct shipments to its catalog and internet customers. The
Company's EDI program is also used to resupply its retail store
on a variety of products thereby enhancing its service to the
Company's retail operations through improved inventory management
and customer response.
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 recently replaced its wholesale
distribution and financial systems with newer technologically
advanced systems that offer greater functionality and enhanced
reporting. The Company also utilizes an EDI system which
provides a computer link between the Company and many of its
wholesale customers as well as its retail operations that enables
the Company to receive on-line orders and to accumulate sales
information on its products shipped to its wholesale customers,
retail stores, and catalog internet customers. 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 also uses point-of-sale registers to capture sales data,
track inventories and generate EDI replenishment orders.
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, which could arise either with its internal systems or
systems of its third parties, 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, Reaction Kenneth Cole,
Kenneth Cole Reaction, Reaction, Kenneth Cole Collection and
Unlisted as well as several other ancillary and derivative
trademarks. Each of the federal registrations is currently in
full force and effect and is not the subject of any legal
proceedings. In addition, the Company has several federal
applications pending in the United States Patent and Trademark
office for trademarks and service marks, including Unlisted,
Unlisted.com and several ancillary trademarks. Moreover, the
Company continues to expand its current international
registrations in numerous countries in Asia, Central and South
America, the Middle East and Europe. 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, renew and protect the registrations, as well as
vigorously defend all of its trademarks against infringements.
Competition
Competition in the footwear and handbags industries is intense
and is subject to rapidly changing consumer demands. The Company
competes with numerous designers, brands and manufacturers of
footwear, handbags, 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
consumers and the Company's licensed apparel and accessories also
compete with a substantial number of designer and non-designer
brands. Moreover, the general availability of contract
manufacturing capacity allows access by new market entrants. The
Company believes the success of its 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 the 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 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 purchase price 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").
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. The
majority of its products have import duties that range from
approximately 6% to 37.5%, depending on the category and 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.
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
The Company's department store customers include major United
States retailers, certain of which are under common ownership.
In 2001 and 2000, the Company had no customer or group under
common ownership account for more than 10% of sales. The
Company's ten largest customers represented 35.0% and 39.7% of
the Company's net sales for the years ended December 31, 2001 and
2000, 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.
Backlog
The Company had unfilled wholesale customer orders of $57.9
million and $54.8 million, at January 26, 2002 and January 27,
2001, 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, 2001, the Company had approximately 1,600
employees, 155 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. The collective bargaining agreement expires
in April 2004. While the Company believes it will be able to
renew the agreement with similar terms and conditions, there can
be no assurance a new agreement will be reached and failure to
reach a new collective bargaining agreement could have a material
effect on the Company.
Directors and Executive Officers
Name Age Present Position
Kenneth D. Cole 48 Chief Executive Officer
Paul Blum 42 President
Stanley A. Mayer 54 Executive Vice President and Chief Financial Officer
Jaryn Bloom 37 Senior Vice President-Consumer Direct
Susan Hudson 42 Senior Vice President-Wholesale
Robert Grayson 57 Director
Denis F. Kelly 52 Director
Philip B. Miller 63 Director
Kenneth D. Cole has served as the Company's Chief Executive
Officer and Chairman of the Board since its inception in 1982 and
was also President until February 2002. 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 appointed President of the Company in
February 2002, and also serves as Director. He previously served
as Chief Operating Officer since February 1998. Prior he 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, Secretary and a Director 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 an officer of each of the wholly
owned subsidiaries of the Company.
Jaryn Bloom has served as Senior Vice President of Consumer
Direct since September 1997. Prior, she served as Divisional
President-Retail and in various roles with increasing
responsibility since joining the Company in 1986.
Susan Q. Hudson has served as Senior Vice President -
Wholesale since February 1998. Prior, Ms. Hudson 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.
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 1982 to 1985.
Denis F. Kelly is a Managing Partner of Scura, Rise &
Partners, LLC. From July 1993 to December 2000, Mr. Kelly was
the head of the Mergers and Acquisitions Department at Prudential
Securities Incorporated. From 1991 to 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.
Philip B. Miller is the principal of Philip B. Miller
Associates, a consulting firm. Mr. Miller served as Chairman and
Chief Executive Officer at Saks Fifth Avenue from 1993 to January
2000 and continued as Chairman until July 2001. Mr. Miller was
formerly Chairman and Chief Executive Officer at Marshall Fields,
joining that company in 1983 from Neiman Marcus, where he had
been President since 1977. Prior to that he served as Vice
Chairman at Lord & Taylor and as Vice President and Merchandise
Manager at Bloomingdales. Mr. Miller serves on the Board of
Directors at Saks Incorporated and Reliant Resources. In
addition, Mr. Miller serves as Senior Vice Chairman of the Board
of Directors of The Lighthouse and also serves on the Board of
Directors of the Metropolitan Opera Guild of New York and the New
York Botanical Gardens.
Item 2. Properties
During 2000, the Company relocated its executive offices and
showrooms from 152 West 57th Street, New York, NY to 603 West 50th
Street, New York, NY, its new worldwide corporate headquarters.
The 15-year lease that expires on May 31, 2015 gives the Company
approximately 126,000 square feet of office space. The Company
currently occupies approximately 66,000 square feet. The lease
for the former executive offices and showrooms expires in
December 2006 and is currently under a subtenant lease agreement.
The Company's administrative offices and distribution
facilities are located in Secaucus, New Jersey under leases that
expire in June 2002. The main facility comprises 244,000 square
feet, of which approximately 30,000 square feet is used for
administrative offices. This lease is currently being
renegotiated and is expected to extend for an additional five
years. The Company also leases 77,000 square feet for additional
distribution capacity. This lease expires simultaneously with
the other distribution facility and is not expected to be
renewed. In addition to these two leases, the Company also
leases a 23,500 square foot facility in Secaucus used for outlet
store space as well as an additional distribution warehousing
facility. The Company also utilizes a public warehouse on the
west coast and has a technical and administrative office in
Florence, Italy. The Company does not own or operate any
manufacturing facilities.
The Company leases space for all of its 48 full price retail
stores (aggregating approximately 198,000 square feet) and 29
outlet stores (aggregating approximately 126,000 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.
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 it
believes would have a material adverse effect on its business or
operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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 27, 2002 the closing sale price for the Class A Common
Stock was $ 19.99. The following table sets forth the high and
low closing sale prices for the Class A Common Stock for each
quarterly period for 2000 and 2001 (adjusted to give effect to
the Company's three-for-two Common Stock split on March 6, 2000),
as reported on the NYSE Composite Tape:
2000: High Low
First Quarter 40.88 22.08
Second Quarter 45.63 33.25
Third Quarter 48.19 34.94
Fourth Quarter 48.00 34.63
2001: High Low
First Quarter 42.88 23.35
Second Quarter 32.95 19.14
Third Quarter 20.94 11.81
Fourth Quarter 17.53 11.70
The number of shareholders of record of the Company's Class A
Common Stock on March 27, 2002 was 70.
There were four holders of record of the Company's Class B
Common Stock on March 27, 2002. There is no established public
trading market for the Company's Class B Common Stock.
On February 21, 2001, the Board of Directors of the Company
authorized management to repurchase, from time to time, an
additional 2,000,000 shares up to an aggregate 4,250,000 shares
of the Company's Class A Common Stock. As of December 31, 2001,
2,488,400 shares were repurchased in the open market at an
aggregate price of $57,133,000, reducing the available shares
authorized for repurchase to 1,761,600. The repurchased shares
have been recorded as treasury 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, among other
things upon, future earnings, operations, capital requirements,
the financial condition of the Company and general business
conditions.
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
in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" set forth in Item 7.
Year Ended December 31,
2001 2000 1999 1998 1997
(dollars and share data in thousands)
Income Statement Data:
Net sales $364,032 $384,713 $296,473 $220,405 $185,278
Licensing revenue 22,116 21,619 14,955 8,357 6,028
Net revenue 386,148 406,332 311,428 228,762 191,306
Cost of goods sold 217,221 217,046 169,976 130,027 112,183
Gross profit 168,927 189,286 141,452 98,735 79,123
Selling and general administrative
expenses(1)(2) 144,142 128,532 100,836 72,145 58,330
Operating income 24,785 60,754 40,616 26,590 20,793
Interest income (expense), net 2,135 3,228 1,280 404 (202)
Income before provision for
income taxes 26,920 63,982 41,896 26,994 20,591
Provision for income taxes 10,304 25,592 16,968 10,663 8,189
Net income 16,616 38,390 24,928 16,331 12,402
Earnings per share:
Basic $.83 $1.87 $1.24 $.82 $.63
Diluted $.80 $1.75 $1.18 $.80 $.61
Weighted average shares outstanding:
Basic 19,992 20,574 20,102 19,833 19,743
Diluted 20,745 21,892 21,059 20,456 20,408
At December 31,
2001 2000 1999 1998 1997
Balance Sheet Data:
Working capital $ 96,709 $103,768 $106,057 $ 56,644 $ 46,949
Cash 68,966 74,608 71,415 13,824 8,803
Inventory 30,753 42,361 39,553 32,957 23,365
Total assets 201,889 212,370 176,859 96,680 77,528
Total debt, including current
Maturities 383 576 758 927 0
Total shareholders' equity 140,894 145,636 125,331 73,689 59,740
(1) Includes shipping and warehousing expenses.
(2) Includes impairment loss of $182,000 in 2001 and $547,000 in 1999.
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.
Critical Accounting Policies and Estimates
General
The Company's management discussion and analysis of its
financial condition and results of operations are based upon the
Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these
financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to
customer programs and incentives, product returns, bad debts,
inventories, investments, income taxes, financing operations,
contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting
policies affect its more significant judgments and estimates used
in the preparation of its consolidated financial statements.
Inventory
The Company writes down its inventory for estimated
obsolescence equal to the difference between the cost of
inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market
conditions are less favorable than those projected by management,
additional inventory write-downs may be required.
Sales Returns and Allowances
The Company's ability to collect factor chargebacks for
deductions taken from its customers for returns, discounts, and
allowances as well as potential future customer deductions is
significant to its operations. The Company reserves against
known chargebacks as well as potential future customer
deductions, based on a combination of historical activity and
current market conditions. Actual results may differ from these
estimates under different assumptions or conditions which may
have a significant impact on the Company's results.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to
make required payments. These customers include non-factored
accounts and credit card receivables from third party service
providers. If the financial conditions of these customers were
to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
Income Taxes
The carrying value of the Company's net deferred tax assets
assumes that the Company will be able to generate sufficient
future taxable income in certain tax jurisdictions, based on
estimates and assumptions. If these estimates and related
assumptions change in the future, the Company may be required to
record valuation allowances against its deferred tax assets
resulting in additional income tax expense in the Company's
consolidated statement of income. Management evaluates the
realizability of the deferred tax assets annually and assesses
the need for valuation allowances annually. During the year
ended December 31, 2001 and 2000, the Company did not record any
valuation allowance related to its net deferred tax assets.
Contingencies
In the ordinary course of business, the Company is involved in
and subject to compliance and regulatory reviews and audits by
numerous authorities, agencies and other governmental agents and
entities from various jurisdictions. The Company is required to
assess the likelihood of any adverse outcomes of these matters.
A determination of the amount of reserves required, if any, for
these reviews are made after careful analysis of each individual
issue. The reserves may change in the future due to new
developments or final resolution in each matter, which may have a
significant impact on the Company's results.
Results of Operations
The following table sets forth certain operating data of the
Company as a percentage of net revenues for the periods indicated
below:
Year Ended December 31,
2001 2000 1999
Net sales 94.3% 94.7% 95.2%
Royalty revenue 5.7 5.3 4.8
------- ------- -------
Net revenues 100.0 100.0 100.0
Cost of goods sold 56.3 53.4 54.6
------- ------- -------
Gross profit 43.7 46.6 45.4
Selling, general and administrative expenses 37.3 31.6 32.4
Operating income 6.4 15.0 13.0
Income before provision for income taxes 7.0 15.7 13.4
Provision for income taxes 2.7 6.3 5.4
------- ------- -------
Net income 4.3% 9.4% 8.0%
======= ======= =======
Year Ended December 31,2001 Compared to Year Ended December
31,2000
Net revenues decreased to $386.1 million in 2001 compared to
$406.3 million in 2000, a decrease of 5.0%. This decrease is
primarily attributable to a decline in Wholesale net sales offset
by an increase in sales from new retail stores within the
Consumer Direct segment.
Wholesale net sales (excluding sales to its Consumer Direct
business segment) decreased $37.3 million or 15.9 % to $197.2
million in 2001 from $234.5 million in 2000. This decrease is
attributable to a decrease in sales across all branded footwear
and handbag product lines, Kenneth Cole New York, Reaction
Kenneth Cole and Unlisted. Collapsing consumer confidence led to
lessening customer demand, coupled with higher inventory levels
of outdated core product, resulted in reduced sales. Further,
the Company's decision not to participate in very aggressive
promotional activities in order to maintain the integrity of its
brands compounded constraints on distribution, placing additional
downward pressure on short-term sales volume. The Company
believes its focus on improving product offerings, advertising
campaigns, marketing efforts, website, catalogs and growing
retail presence, combined with the marketing efforts of its
licensees, will be significant factors to strengthen its three
distinct brands, Kenneth Cole New York, Reaction Kenneth Cole and
Unlisted across all product classifications, thereby increasing
consumer demand in the future.
Net sales in the Company's Consumer Direct segment increased
$17.7 million or 11.9% to $166.0 million in 2001 from $148.2
million in 2000. Of the total increase, $33.6 million was
attributable to new stores in 2001 plus that portion of 2001
sales for stores not open for all of 2000 and was offset by a
decrease of $14.7 million in comparable store sales. The Company
believes that the retail stores convey the Company's image and
seamlessly showcase both Company and licensee products, and that
this comprehensive presentation reinforces the lifestyle brand,
thus increasing consumer demand across all channels of
distribution. The Company's catalog and internet sales decreased
$1.2 million in 2001 from the comparable period in 2000.
Licensing revenue increased 2.3% to $22.1 million in 2001 from
$21.6 million in 2000. The increase primarily reflects revenues
from sales of womenswear, which produced a fall and spring line
during 2001 as compared to the single fall line in 2000 for the
Company's initial launch into the womenswear market and
incremental revenues from accessory categories including luggage,
men's jewelry and women's belts and hosiery. In addition, the
Company has continued to implement its strategic plan to grow
their global business through licensing partners. The Company
believes its men's and women's apparel and the highly anticipated
debut of its fragrance collection come at an opportune time as
consumers look toward brands they know and feel comfortable with
as a lifestyle. The Company believes the synergies from its
efforts to reinforce its brand identities through greater
marketing efforts, by itself and its licensees across all product
categories, will continue to propel licensee sales both
domestically and internationally.
Gross profit as a percentage of net revenues decreased to
43.7% in 2001 from 46.6% in 2000. The decrease in gross profit is
primarily attributable to decreased gross margins in the Consumer
Direct segment as a result of higher markdowns at the Company
owned stores necessitated by the challenging economic conditions
throughout the year. In addition, the Consumer Direct segment's
proportion of total revenue was greater than the comparable
period. Sales from the Consumer Direct segment were 43.0% of
consolidated net revenue in 2001 compared with 36.5% in 2000.
Licensing revenue, which has no associated cost of goods sold,
increased as a percentage of net revenues to 6.0% in 2001 from
5.8% in 2000. The Company's wholesale gross profit decreased
across mens and ladies Kenneth Cole New York and Reaction Kenneth
Cole footwear and handbags as a result of poorer sell throughs at
retail. This was offset slightly by the improvement in gross
margin in Unlisted ladies footwear sales which experienced an
improvement in sell throughs at retail on lesser volume than the
comparable year.
Selling, general and administrative expenses, including
shipping and warehousing ("SG&A"), increased 12.1% to $144.1
million (or 37.3% of net revenues) in 2001 from $128.5 million
(or 31.6% of net revenues) in 2000. The increase in SG&A as a
percentage of net revenue is primarily attributable to the
Company achieving sales levels well below operating plans,
resulting in a reduction in the leverage over fixed operating
expenses. The increase is further attributable to the expansion
of the Company's retail and outlet stores, which operate at a
higher cost structure than its Wholesale and
Licensing/International segments. In response to the challenging
economic environment the Company heightened its focus on its
cost-reduction program. As part of this comprehensive program,
the Company continues to evaluate consolidating responsibilities
and reorganizing certain administrative functions and during the
fourth quarter of 2001 eliminated approximately ten percent of
its corporate staff.
Interest and other income decreased to $2.1 million in 2001
from $3.2 million in 2000. The decrease is due to lower average
cash balances and declines in short term interest rates.
The Company's effective tax rate decreased to 38.3% for the
year ended December 31, 2001 from 40.0% in the corresponding
period last year. The decrease is due to the relative level of
earnings in the various state and local taxing jurisdictions to
which the Company's earnings are subject.
As a result of the foregoing, net income decreased 56.7% in
2001 to $16.6 million (4.3% of net revenue) from $38.4 million
(9.4% of net revenue) in 2000.
Year Ended December 31,2000 Compared to Year Ended December
31,1999
Net revenues increased to $406.3 million in 2000 compared to
$311.4 million in 1999, an increase of 30.5%. This increase is
due to increases in each of the Company's business segments:
Wholesale, Consumer Direct and Licensing/International.
Wholesale net sales (excluding sales to its consumer direct
business segment) increased $49.0 million or 26.4 % to $234.5
million in 2000 from $185.5 million in 1999. This increase is
primarily attributable to an increase in sales of men's and
ladies Kenneth Cole New York and Reaction Kenneth Cole branded
footwear and handbags, offset slightly by Unlisted footwear
sales. The overall increase is due to increased sales to new and
existing customers due to increased brand awareness and continued
growing consumer demand of Kenneth Cole New York as a premier
lifestyle brand. The Company believes its advertising campaigns,
marketing efforts, website, catalogs and growing retail presence,
combined with the marketing efforts of its licensees, continue to
be significant factors in increasing consumer demand and the
strengthening of its three distinct brands, Kenneth Cole New
York, Reaction Kenneth Cole and Unlisted across all product
classifications.
Net sales in the Company's Consumer Direct segment increased
$38.4 million or 35.0% to $148.2 million in 2000 from $109.8
million in 1999. The increase in the number of stores, as well
as a comparable stores sales increase of approximately 11.3%
contributed to the increase in net sales. Of the total increase,
$11.1 million was attributable to the comparable store sales
increase, and $25.6 million was attributable to that portion of
2000 sales for stores not open for all of 1999 and new stores in
2000. The Company believes that the retail stores convey the
Company's image and seamlessly showcase both Company and licensee
products, and that this comprehensive presentation reinforces the
lifestyle brand, thus increasing consumer demand, not only in the
retail stores but also across all channels of distribution. The
Company's catalog and internet sales increased $1.9 million in
2000 over the comparable period in 1999.
Licensing revenue increased 44.6% to $21.6 million in 2000
from $15.0 million in 1999. The increase primarily reflects
incremental revenues from sales from existing licensees and the
launch of womenswear during the Fall 2000 season. The most
significant increases, however, were in men's apparel product
classifications including dress shirts, sportswear and tailored
clothing, and in men's and women's watches. The Company believes
its men's apparel and the recent debut into women's sportswear
comes at an opportune time as consumers look toward brands they
know and feel comfortable with as a lifestyle. The Company
believes the synergies from its efforts to reinforce its brand
identities through greater marketing efforts, by itself and its
licensees across all product categories, will continue to propel
licensee sales.
Gross profit as a percentage of net revenues increased to
46.6% in 2000 from 45.4% in 1999. This increase is due to an
increase in the proportion of revenue from the retail and
licensing divisions, each of which produces higher margins than
the Company's consolidated gross profit percentage. Sales from
the Consumer Direct segment were 36.5% of consolidated net
revenue in 2000 compared with 35.3% in 1999. Licensing revenue,
which has no associated cost of goods sold, increased as a
percentage of net revenues to 5.3% in 2000 from 4.8% in 1999.
The Company's wholesale gross profit increased across men's and
ladies Kenneth Cole New York and Reaction Kenneth Cole footwear
and handbags which experienced an improvement in its sell through
at retail.
Selling, general and administrative expenses, including
shipping and warehousing, increased 27.5% to $128.5 million (or
31.6% of net revenues) in 2000 from $100.8 million (or 32.4% of
net revenues) in 1999. The increase was primarily attributable
to investment in organizational infrastructure to support growth,
including cost incurred to relocate the Company's offices and
adding an additional warehouse facility, hiring of personnel, e-
commerce support and the expansion of the Company's Consumer
Direct operations. The decrease in SG&A as a percentage of net
revenue is primarily attributable to certain economies realized
in the Company's Wholesale segment, slightly offset by increased
expenditures in technology aimed at enhancing the Company's e-
commerce initiatives.
Interest and other income increased to $3.2 million in 2000
from $1.3 million in 1999. The increase is primarily due to
higher average cash levels due to improved cash flows and the
receipt of $29.0 million in proceeds from selling stock to Liz
Claiborne, Inc. as part of the womenswear licensing agreement in
the later half of 1999.
The Company's effective tax rate decreased to 40.0% for the
year ended December 31, 2000 from 40.5% in the corresponding
period last year. The decrease is due to the relative level of
earnings in the various state and local taxing jurisdictions to
which the Company's earnings are subject.
As a result of the foregoing, operating income increased 49.6%
in 2000 to $60.8 million (15.0% of net revenue) from $40.6
million (13.0% of net revenue) in 1999.
Liquidity and Capital Resources
The Company's cash requirements are generated primarily from
working capital needs, retail expansion, enhanced technology, and
other corporate activities. The Company primarily relies upon
internally generated cash flows from operations to finance its
operations and growth, however it also has the ability to borrow
up to $25.0 million under its line of credit facility. Cash
flows may vary from time to time as a result of seasonal
requirements of inventory, the timing of the delivery of
merchandise to customers and the level of accounts receivable and
payable balances. At December 31, 2001, working capital was
$96.7 million compared to $103.8 million at December 31, 2000.
Net cash provided by operating activities was $25.2 million in
2001 compared to $51.4 million in 2000. This decrease was
primarily attributable to decreased earnings, timing of payables,
and receivables partially offset by reduced inventory levels.
Net cash used in investing activities was $9.0 million in 2001
compared to $25.5 million in 2000. Capital expenditures were
approximately $10.6 million, $24.1 million and $8.5 million for
2001, 2000 and 1999, respectively. Expenditures on furniture,
fixtures and leasehold improvements for new retail store openings
and expansions were $8.6 million, $10.2 million and $6.7 million
in 2001, 2000 and 1999, respectively. The remaining expenditures
were primarily for leasehold improvements for the renovation of
the Company's new corporate headquarters and equipment and
information system enhancements.
Net cash used in financing activities was $21.8 million in 2001
compared to $22.9 million in 2000. This is principally
attributable to the Company's purchase of 981,700 shares of its
Class A Common Stock at an average price of $22.77 per share
compared to 782,950 shares of Class A Common Stock purchased
during 2000 at an average price of $32.46 per share under its
stock repurchase program. In February 2001, the Board of
Directors authorized the repurchase from time to time, subject to
market conditions, of an additional 2 million shares of Class A
Common Stock under the Company's repurchase program. As of
December 31, 2001, the Company has 4,250,000 shares authorized
for repurchase with 1,761,600 shares remaining from its buyback
authorization.
The Company currently sells substantially all of its account
receivables to one factor 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 borrowings
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 receivables of the Company. The Company
had no outstanding advances during 2001 under this line of
credit, however amounts available under the line were reduced by
$1.1 million open letters of credit and $2.4 million standby
letters of credit to $21.5 million.
During 2002, the Company anticipates opening or expanding
approximately 8 to 10 retail and outlet stores that will require
aggregate capital expenditures and initial inventory requirements
of these new and expanded stores of approximately $10.0 million.
The Company also anticipates that it will require increased
capital expenditures to support its growth including an increase
in its office space and enhancements to its information systems.
In December 1998, the Company entered into a 15-year lease
which, over a period of three to five years, will provide the
Company with approximately 126,000 square feet of office space.
During 2000, the Company relocated its corporate headquarters to
a larger location in New York City. The Company completed phase
I and began phase II of its renovations, incurring approximately
$11.5 million in capital expenditures. Currently, the Company
expects to incur an additional $6 million over the next two to
three years upon turnover of the additional remaining space.
The Company believes that it will be able to satisfy its cash
requirements for 2002, including requirements for its retail
expansion, corporate office build-out and information systems
improvements, primarily with cash flow from operations.
Exchange Rates
The Company routinely enters into forward exchange contracts
for its future purchases of inventory denominated in foreign
currencies, primarily the Euro. At December 31, 2001, forward
exchange contracts with a notional value totaling $8.0 million
were outstanding with settlement dates ranging from January 2002
through March 2002. Gains and losses on forward exchange
contracts that are used for hedges are accounted for on the
balance sheet as inventory and an adjustment to equity, and are
subsequently accounted for as part of the purchase price of the
inventory upon execution of the contract. Those gains and losses
on contracts that are not deemed effective hedges are immediately
adjusted through income. At December 31, 2001, the unrealized
gain on these outstanding forward contracts is approximately
$50,000. 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 are 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.
On January 1, 1999, the Euro became the official single
currency of the European Economic and Monetary Union. As of this
date, the conversion rates of the national currencies of the
union members were fixed irrevocably. During the
second half of calendar 2001, the Company converted to the Euro.
The conversion has had no impact on the financial condition or
results of operation of the Company.
Inventory purchases from contract manufacturers in the Far
East and Brazil 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 adverse 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 affect 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 low rates of
inflation experienced over the last few years in the United
States, where it primarily competes, have had a significant
effect on revenues or profitability.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk
The Company does not believe it has a material exposure to
market risk. The Company is primarily exposed to currency
exchange rate risks with respect to its inventory transactions
denominated in Euro. During the second half of 2001, the Company
converted all of its Lira transactions to the Euro and
effectively ceased conducting business with the Italian Lira
currency. Business activities in various currencies expose the
Company to the risk that the eventual net dollar cash flows from
transactions with foreign suppliers denominated in foreign
currencies may be adversely affected by changes in currency
rates. The Company manages these risks by utilizing foreign
exchange contracts. The Company does not enter into foreign
currency transactions for speculative purposes.
At December 31, 2001, the Company had forward exchange
contracts totaling with notional values $8.0 million which
resulted in an unrealized gain of approximately $50,000. The
Company's earnings may also be affected by changes in short-term
interest rates as a result of borrowings under its line of credit
facility. A two or less percentage point increase in interest
rates affecting the Company's credit facility would not have had
a material effect on the Company's 2001 and 2000 net income.
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.
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 23, 2002 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2001 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 23, 2002 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2001 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 23, 2002 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2001 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 23, 2002 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2001, and is
incorporated herein by reference in response to this item.
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).
10.02.1-Term Loan Agreement, dated as of May 26, 1994, by and
among Kenneth Cole Productions, Inc., Kenneth
Cole Leather Goods, Inc., Unlisted, Inc., Cole West, Inc.,
Kenneth Cole Financial Services, Inc., Kenneth Cole
Woodbury, Inc., Cole Fifth Avenue, Inc., Cole Union Street,
Inc. and The Bank of New York; Promissory Notes, dated May
26, 1994, issued by each of Kenneth Cole Leather Goods,
Inc., Unlisted, Inc., Cole West, Inc., Kenneth Cole
Financial Services, Inc., Kenneth Cole Woodbury, Inc., Cole
Fifth Avenue, Inc., Cole Union Street, Inc. to The Bank of
New York; Shareholder Guaranty by and between Kenneth D.
Cole and The Bank of New York, dated as of May 26, 1994;
Subordination Agreement by and among Kenneth D. Cole,
Kenneth Cole Productions, Inc., Kenneth Cole Leather Goods,
Inc., Unlisted, Inc., Cole West, Inc., Kenneth Cole
Financial Services, Inc., Kenneth Cole Woodbury, Inc., Cole
Fifth Avenue, Inc., Cole Union Street, Inc. and The Bank of
New York, dated as of April 13, 1994; Reinvestment
Agreement by and among Kenneth D. Cole, Kenneth Cole
Productions, Inc., Unlisted, Inc., Cole West, Inc., Kenneth
Cole Financial Services, Inc., Kenneth Cole Woodbury, Inc.,
Cole Fifth Avenue, Inc., Cole Union Street, Inc. and The
Bank of New York, dated as of May 26, 1994; Amendment No. 1
to the Term Loan Agreement and the Reinvestment Agreement
by and among Kenneth D. Cole, Kenneth Cole Productions,
Inc., Cole West, Inc., Kenneth Cole Woodbury, Inc., Cole
Fifth Avenue, Inc., Cole Union Street, Inc., Kenneth Cole
Financial Services, Inc. and The Bank of New York, dated as
of May 31, 1994. (Incorporated by reference to Exhibit
10.02 to the Company's Registration Statement on Form S-1,
Registration No. 33-77636).
10.03 -Line of Credit Letter, dated January 13, 1994, from The
Bank of New York to Kenneth Cole Productions, Inc., Kenneth
Cole Leather Goods, Inc. and Unlisted, Inc.; $7,500,000
Promissory Note, dated February 1, 1994 by Kenneth Cole
Productions, Inc., Kenneth Cole Leather Goods, Inc. and
Unlisted, Inc. issued to The Bank of New York; Letter
Agreement, dated December 16, 1993, between The Bank of New
York and Kenneth Cole Productions, Inc., Unlisted, Inc.,
Kenneth Cole Leather Goods, Inc., Cole Productions, Inc.,
Cole West, Inc., Kenneth Cole Financial Services, Inc.,
Cole Woodbury, Inc., Cole Sunset, Inc. and Cole Fifth
Avenue, Inc.; General Guarantees, dated December 16, 1993,
in favor of The Bank of New York by Kenneth Cole Leather
Goods, Inc. for Unlisted, Inc., by Kenneth Cole Leather
Goods, Inc. for Kenneth Cole Productions, Inc., by
Unlisted, Inc. for Kenneth Cole Productions, Inc., by
Unlisted, Inc. for Kenneth Cole Leather Goods, Inc., by
Kenneth Cole Productions, Inc. for Kenneth Cole Leather
Goods, Inc., and by Kenneth Cole Productions, Inc. for
Unlisted, Inc.; General Loan and Security Agreements, dated
December 16, 1993, between The Bank of New York and each of
Kenneth Cole Productions, Inc., Kenneth Cole Leather Goods,
Inc. and Unlisted, Inc.; and Personal Guarantees of Mr.
Kenneth D. Cole, dated December 16, 1993, in favor of The
Bank of New York for Kenneth Cole Productions, Inc.,
Unlisted, Inc. and Kenneth Cole Leather Goods, Inc.
(Incorporated by reference to Exhibit 10.03 to the
Company's Registration Statement on Form S-1, Registration
No. 33-77636).
Line of Credit Letter, dated December 9, 1994 from The Bank
of New York to Kenneth Cole Productions, Inc.; $7,500
Promissory Note, dated December 15, 1994 by Kenneth Cole
Productions, Inc. issued to The Bank of New York; Letter of
Termination of Personal Guarantees of Mr. Kenneth D. Cole,
dated December 8, 1994, in favor of The Bank of New York
for Kenneth Cole Productions, Inc., Unlisted, Inc. and
Kenneth Cole Leather Goods, Inc. (Incorporated by reference
to Exhibit 10.03 to the Company's 1994 Form 10-K).
10.03A -$10,000 Promissory Note, dated July 31, 1995 by
Kenneth Cole Productions, Inc. issued to The Bank of New
York. (Previously filed as Exhibit 10.03A to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference).
*10.04-Kenneth Cole Productions, Inc. 1994 Stock Option Plan.
(Incorporated by reference to Exhibit 10.04 to the
Company's Registration Statement on Form S-1, Registration
No. 33-77636).
*10.05-Employment Agreement, dated as of April 30, 1994,
between Kenneth Cole Productions, Inc. and Kenneth D. Cole.
(Incorporated by reference to Exhibit 10.05 to the
Company's Registration Statement on Form S-1, Registration
No. 33-77636).
*10.06-Employment Agreement, dated as of April 30, 1994,
between Kenneth Cole Productions, Inc. and Paul Blum.
(Incorporated by reference to Exhibit 10.06 to the
Company's Registration Statement on Form S-1, Registration
No. 33-77636).
*10.07-Employment Agreement, dated as of April 30, 1994,
between Kenneth Cole Productions, Inc. and Stanley A.
Mayer; Stock Option Agreement dated as of March 31, 1994
between Kenneth Cole Productions, Inc. and Stanley A.
Mayer. (Incorporated by reference to Exhibit 10.07 to the
Company's Registration Statement on Form S-1, Registration
No. 33-77636).
Stock Option Agreement dated as of June 1, 1994, between
Kenneth Cole Productions, Inc. and Stanley A. Mayer; Stock
Option Agreement dated as of July 7, 1994, between Kenneth
Cole Productions, Inc. and Stanley A. Mayer (Incorporated
by reference to Exhibit 10.07 to the Company's 1994 Form
10-K).
10.08 -Collective Bargaining Agreement by and between the New
York Industrial Council of the National Fashion Accessories
Association, Inc. and Leather Goods, Plastics, Handbags and
Novelty Workers' Union, Local 1, dated as of April 25,
1987; Memorandum of Agreement by and between the New York
Industrial Council of the National Fashion Accessories
Association, Inc. and Leather Goods, Plastics, Handbags and
Novelty Workers' Union, Local 1, Division of Local 342-50
United Food and Commercial Workers Union, dated as of June
16, 1993. (Incorporated by reference to Exhibit 10.08 to
the Company's Registration Statement on Form S-1,
Registration No. 33-77636).
10.09 -Memorandum of Agreement between the New York Industrial
Council of the National Fashion Accessories Association
Inc. and Local 1 Leather Goods, Plastics, Handbags, and
Novelty Workers Union, Division of Local 342-50 United Food
and Commercial Workers Union (Previously filed as Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1996 and incorporated
herein by reference).
*10.10Employment Agreement between Kenneth Cole
Productions, Inc., and Paul Blum. (Previously filed as
Exhibit 10.6 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).
*10.12Amended 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 (Previously filed as an
Exhibit to the Company's 1997 Form 10-K).
10.14 Lease Agreement, dated December 17, 1998, between
Kenneth Cole Productions, Inc. and SAAR Company, LLC.
(Previously filed as Exhibit 10.14 to the Registrants
Annual Report on Form 10-K for the year ended December 31,
1998 and incorporated by reference).
10.15 Common Stock Purchase Agreement, dated July 20, 1999,
between Liz Claiborne, Inc. and Kenneth Cole Productions,
Inc. (Previously filed as Exhibit 10.01 to the Registrants
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999).
10.16 Registration Rights Agreement, dated July 20, 1999,
between Liz Claiborne, Inc. and Kenneth Cole Productions,
Inc. (Previously filed as Exhibit 10.02 to the Registrants
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999).
10.17 License Agreement, dated July 20, 1999, by and between
L.C.K.L., LLC and K.C.P.L., Inc. (Portions of this exhibit
have been omitted pursuant to a request for confidential
treatment and been filed separately with the Securities and
Exchange Commission. Such portions are designated by a
"*". (Previously filed as Exhibit 10.03 to the Registrants
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999).
+10.18 Amended and Restated Employment Agreement, dated
as of September 1, 2000, between Kenneth Cole Productions,
Inc. and Paul Blum (Previously filed as Exhibit 10.10 to
the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996 and incorporated
herein by reference).
10.19 Kenneth Cole Productions, Inc. Employee Stock
Purchase Plan (Incorporated by reference to the Company's
Registration Statement on Form S-8, Registration No. 33-31868
filed on March 7, 2000.)
+21.01 List of Subsidiaries
+23.01 Consent of Independent Auditors
____________________________
* 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.
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, 2001 and 2000 F-3
Consolidated Statements of Income for the years ended
December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2001, 2000 and 1999 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 F-7
Notes to Consolidated Financial Statements F-8
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, 2001 and 2000, 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, 2001. Our
audits also included the financial statement schedule listed in
the index at Item 14(a). These financial statements and 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 auditing
standards generally accepted in the United States. 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, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material
respects the information set forth therein.
New York, New York ERNST & YOUNG LLP
February 22, 2002
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
2001 2000
Assets
Current assets:
Cash and cash equivalents $ 68,966,000 $ 74,608,000
Due from factor 28,289,000 26,066,000
Accounts receivable, less allowance for doubtful
accounts of $675,000 in 2001, and $550,000 in 2000 6,731,000 9,117,000
Inventories 30,753,000 42,361,000
Prepaid expenses and other current assets 873,000 2,747,000
Deferred taxes, net 2,765,000 1,486,000
------------ ------------
Total current assets 138,377,000 156,385,000
Property and equipment-at cost, less accumulated
depreciation and amortization 40,487,000 38,202,000
Other assets:
Deferred taxes, net 4,718,000 3,198,000
Deposits and sundry 6,304,000 5,875,000
Deferred compensation plan assets 12,003,000 8,710,000
------------ ------------
Total other assets 23,025,000 17,783,000
------------ ------------
Total assets $201,889,000 $212,370,000
============ ============
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
December 31,
2001 2000
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 25,932,000 $ 34,688,000
Accrued expenses and other current liabilities 13,487,000 14,716,000
Income taxes payable 2,249,000 3,213,000
------------ ------------
Total current liabilities 41,668,000 52,617,000
Accrued rent and other long term liabilities 7,153,000 5,027,000
Deferred compensation plan liabilities 12,003,000 8,710,000
Obligations under capital lease 171,000 380,000
Commitments and contingencies
Shareholders' equity:
Series A Convertible 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, 13,626,584 and 13,479,088 issued
in 2001 and 2000 136,000 135,000
Class B Convertible Common Stock, par value $.01,
9,000,000 shares authorized, 8,498,097 and
8,588,097 outstanding in 2001 and 2000 85,000 86,000
Additional paid-in capital 61,273,000 60,300,000
Cumulative other comprehensive income 434,000 403,000
Retained earnings 136,099,000 119,483,000
------------ ------------
198,027,000 180,407,000
Class A Common Stock in treasury, at cost,
2,488,400 and 1,506,700 shares in 2001 and 2000 (57,133,000) (34,771,000)
------------ ------------
Total shareholders' equity 140,894,000 145,636,000
------------ ------------
Total liabilities and shareholders' equity $201,889,000 $212,370,000
============ ============
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31,
2001 2000 1999
Net sales $364,032,000 $384,713,000 $296,473,000
Licensing revenue 22,116,000 21,619,000 14,955,000
------------ ------------ ------------
Net revenue 386,148,000 406,332,000 311,428,000
Cost of goods sold 217,221,000 217,046,000 169,976,000
------------ ------------ ------------
Gross profit 168,927,000 189,286,000 141,452,000
Selling, general, and
administrative expenses 144,142,000 128,532,000 100,836,000
------------ ------------ ------------
Operating income 24,785,000 60,754,000 40,616,000
Interest and other income, net 2,135,000 3,228,000 1,280,000
------------ ------------ ------------
Income before provision
for income taxes 26,920,000 63,982,000 41,896,000
Provision for income taxes 10,304,000 25,592,000 16,968,000
------------ ------------ ------------
Net income $ 16,616,000 $ 38,390,000 $ 24,928,000
============ ============ ============
Earnings per share:
Basic $.83 $1.87 $1.24
Diluted $.80 $1.75 $1.18
Shares used to compute earnings per share:
Basic 19,992,000 20,574,000 20,102,000
Diluted 20,745,000 21,892,000 21,059,000
See accompanying notes to consolidated financial statements
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Class A Common Stock Class B Common Stock
Number Number
of Shares Amount of Shares Amount
Balance at 1/1/99 11,414,546 $ 114,000 5,785,398 $ 58,000
Net income
Translation adjustment
foreign currency
Comprehensive income
Exercise of stock options
and related tax benefits 143,511 2,000
Purchase of Class A
Common Stock
Stock Issuance 1,500,000 15,000
--------------------------------------------------
Balance at 12/31/99 13,058,057 131,000 5,785,398 58,000
Net income
Translation adjustment
foreign currency
Comprehensive income
Exercise of stock options
and related tax benefits 324,379 3,000
Issuance of Class A
Common Stock for ESPP 6,652
Conversion of Preferred
Stock to Class B
Common Stock 2,892,699 29,000
Purchase of Class A
Common Stock
Conversion of Class B to
Class A shares 90,000 1,000 (90,000) (1,000)
--------------------------------------------------
Balance at 12/31/00 13,479,088 135,000 8,588,097 86,000
Transition adjustment
forward contracts
Net income
Translation adjustment
foreign currency
Forward contracts
Comprehensive income
Exercise of stock options
and related tax benefits 37,422
Issuance of Class A
Common Stock for ESPP 20,074
Purchase of Class A
Common Stock
Conversion of Class B to
Class A shares 90,000 1,000 (90,000) (1,000)
--------------------------------------------------
Balance at 12/31/01 13,626,584 $ 136,000 8,498,097 $ 85,000
==================================================
Series A Convertible Accumulated
Preferred Stock Additional Other
Number Paid-In Comprehensive
of Shares Amount Capital Income
Balance at 1/1/99 28,927 $ 29,000 $ 22,217,000 $ 74,000
Net income
Translation adjustment
foreign currency 161,000
Comprehensive income
Exercise of stock options
and related tax benefits 1,938,000
Purchase of Class A
Common Stock
Stock Issuance 28,985,000
----------------------------------------------------
Balance at 12/31/99 28,927 29,000 53,140,000 235,000
Net income
Translation adjustment
foreign currency 168,000
Comprehensive income
Exercise of stock options
and related tax benefits 6,951,000
Issuance of Class A
Common Stock for ESPP 209,000
Conversion of Preferred
Stock to Class B
Common Stock (28,927) (29,000)
Purchase of Class A
Common Stock
Conversion of Class B to
Class A shares
----------------------------------------------------
Balance at 12/31/00 60,300,000 403,000
Transition adjustment
forward contracts 1,122,000
Net income
Translation adjustment
foreign currency (19,000)
Forward contracts (1,072,000)
Comprehensive income
Exercise of stock options
and related tax benefits 619,000
Issuance of Class A
Common Stock for ESPP 354,000
Purchase of Class A
Common Stock
Conversion of Class B to
Class A shares
----------------------------------------------------
Balance at 12/31/01 $ 61,273,000 $ 434,000
====================================================
Treasury Stock
Retained Number
Earnings of Shares Amount Total
Balance at 1/1/99 $ 56,165,000 (525,000) $ (4,968,000) $ 73,689,000
Net income 24,928,000 24,928,000
Translation adjustment
foreign currency 161,000
------------
Comprehensive income 25,089,000
Exercise of stock options
and related tax benefits 1,940,000
Purchase of Class A
Common Stock (198,750) (4,387,000) (4,387,000)
Stock Issuance 29,000,000
----------------------------------------------------
Balance at 12/31/99 81,093,000 (723,750) (9,355,000) 125,331,000
Net income 38,390,000 38,390,000
Translation adjustment
foreign currency 168,000
------------
Comprehensive income 38,558,000
Exercise of stock options
and related tax benefits 6,954,000
Issuance of Class A
Common Stock for ESPP 209,000
Conversion of Preferred
Stock to Class B
Common Stock
Purchase of Class A
Common Stock (782,950) (25,416,000) (25,416,000)
Conversion of Class B to
Class A shares
----------------------------------------------------
Balance at 12/31/00 119,483,000 (1,506,700) (34,771,000) 145,636,000
Transition adjustment
forward contracts 1,122,000
Net income 16,616,000 16,616,000
Translation adjustment
foreign currency (19,000)
Forward contracts (1,072,000)
------------
Comprehensive income 16,647,000
Exercise of stock options
and related tax benefits 619,000
Issuance of Class A
Common Stock for ESPP 354,000
Purchase of Class A
Common Stock (981,700) (22,362,000) (22,362,000)
Conversion of Class B to
Class A shares
----------------------------------------------------
Balance at 12/31/01 $136,099,000 (2,488,400) $(57,133,000) $140,894,000
====================================================
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
2001 2000 1999
Cash flows from operating activities
Net income $16,616,000 $38,390,000 $24,928,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 8,131,000 5,308,000 4,698,000
Impairment of long-lived assets 182,000 547,000
Unrealized loss (gain) on deferred
compensation plan 147,000 1,066,000 (1,096,000)
Realized/Unrealized gain on
marketable securities (133,000) (49,000)
Provision for doubtful accounts 808,000 270,000 1,344,000
Benefit for deferred taxes (2,799,000) (1,434,000) (2,129,000)
Changes in operating assets and liabilities:
(Increase) decrease in due from factors (2,223,000) 859,000 (7,373,000)
Decrease (increase)in accounts receivable 1,578,000 (2,397,000) (3,460,000)
Decrease (increase)in inventories 11,658,000 (2,808,000) (6,596,000)
Decrease (increase)in prepaid expenses
and other current assets 383,000 (881,000) 1,360,000
Increase in deposits and deferred
compensation assets (3,869,000) (6,731,000) (1,378,000)
(Decrease) increase in income taxes payable (732,000) 4,389,000 2,286,000
(Decrease) increase in accounts payable (8,756,000) 7,365,000 16,679,000
(Decrease) increase in accrued expenses
and other current liabilities (1,245,000) 4,329,000 5,724,000
Increase in other non-current liabilities 5,419,000 3,753,000 4,769,000
----------- ----------- -----------
Net cash provided by operating activities 25,165,000 51,429,000 40,303,000
Cash flows from investing activities
Acquisition of property and equipment, net (10,598,000)(24,079,000) (8,505,000)
Proceeds from sale and purchase
of marketable securities 1,624,000 (1,442,000)
----------- ----------- -----------
Net cash used in investing activities (8,974,000)(25,521,000) (8,505,000)
Cash flows from financing activities
Proceeds from exercise of stock options 387,000 2,505,000 1,188,000
Proceeds from issuance of stock
from purchase plan 354,000 209,000
Proceeds from issuance of stock 29,000,000
Principle payments of capital
lease obligations (193,000) (182,000) (169,000)
Purchase of treasury stock (22,362,000)(25,416,000) (4,387,000)
----------- ----------- -----------
Net cash (used in) provided by
financing activities (21,814,000)(22,884,000) 25,632,000
Effect of exchange rate changes on cash (19,000) 169,000 161,000
----------- ----------- -----------
Net (decrease) increase in cash (5,642,000) 3,193,000 57,591,000
Cash, beginning of year 74,608,000 71,415,000 13,824,000
----------- ----------- -----------
Cash, end of year $68,966,000 $74,608,000 $71,415,000
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 50,000 $ 80,000 $ 109,000
Income taxes $13,467,000 $22,569,000 $16,812,000
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
Note A - Summary of Significant Accounting Policies
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 men's and women's apparel and accessories under its
Kenneth Cole New York, Reaction Kenneth Cole and Unlisted brands
for the fashion conscious consumer. The Company markets its
products for sale to more than 4,100 department stores and
specialty store locations in the United States and in several
foreign countries, through its retail and outlet store base, and
its interactive website. The Company also distributes consumer
catalogs that feature a variety of Kenneth Cole New York and
Reaction Kenneth Cole branded products.
2. Principles of consolidation
The consolidated financial statements include the accounts of
Kenneth Cole Productions, Inc. and its wholly owned subsidiaries.
Intercompany transactions and balances have been eliminated in
consolidation.
3. Use of estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
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.
4. Cash and cash equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less at the time of purchase
to be cash equivalents.
5. Marketable Securities
The Company records marketable securities as an equity
investment which is classified as "trading", and accordingly, is
carried on the balance sheet at fair market value. (See Note C)
6. Inventories
Inventories, which consist of finished goods, are stated at
the lower of cost or market. Cost is determined by the first-in,
first-out method.
7. Property and equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization is
computed using the estimated useful lives of the related assets
ranging from three to seven years on a straight-line basis.
Leasehold improvements are amortized using the straight-line
method over the term of the related lease or the estimated useful
life, whichever is less.
The Company reviews long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable as measured by
comparing the undiscounted future cash flows to the asset's net
book value. Impaired assets are recorded at the lesser of their
carrying value or fair value. The Company recorded a non-cash
charge of $182,000 for the year ended December 31, 2001 and
$547,000 for the year ended December 31, 1999 related to the
write down of asset values at the Company's retail stores.
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.
9. Revenue recognition
Wholesale revenues are recognized at the time merchandise is
shipped to customers. Retail store revenues are recognized at
the time of sale. Both wholesale and retail store revenues are
shown net of returns, discount, and other allowances. The
Company has also 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 licensee's net sales.
10. Advertising costs
The Company incurred advertising costs, including certain in-
house marketing expenses, of $16.7 million, $16.8 million and
$12.4 million for 2001, 2000 and 1999, respectively. The Company
records advertising expense concurrent with the first time the
advertising takes place.
11. Stock-based compensation
The Company measures 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 No. 25") and related Interpretations.
The Company has adopted disclosure only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123") (see Note I). Dilutive
earnings per share includes the effects of employee stock
options.
12. Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and for Hedging Activities" ("SFAS
133"), which as amended, the Company adopted on January 1, 2001.
The Statement requires the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the
fair value of derivatives are either offset against the change in
fair value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the
hedged item is recognized in earnings. The ineffective portion of
a derivative's change in fair value will be immediately recognized
in earnings. (See Note G).
13. Shipping Costs
In accordance with Emerging Issues Task Force Issue No. 00-10,
"Accounting for Shipping and Handling Fees," the Company has
included in sales amounts billed to customers for shipping costs.
The related cost incurred by the Company has been included in the
cost of goods line item on the face of the income statement. Prior
periods have been reclassified accordingly.
14. New Accounting Pronouncements
In April 2001, the Financial Accounting Standards Board's
Emerging Issues Task Force ("EITF") reached a consensus on Issue
No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a
Reseller of the Vendor's Products." This issue addresses the
recognition, measurement and income statement classification of
consideration from a vendor to a customer in connection with the
customer's purchase or promotion of the vendor's products. The
Company expects the adoption of this EITF Consensus to only impact
revenue and expense classifications and not change reported net
income. The Company will adopt this EITF on January 1, 2002.
In June 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15,
2001. Under the new guidelines, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized, but
will be subject to annual impairment tests in accordance with these
Statements. Other intangible assets will continue to be amortized
over their useful lives. The Company will begin applying these
pronouncements on January 1, 2002. The adoption of these new
pronouncements will not have a material impact on net income.
15. Reclassifications
Certain amounts included in the 2000 and 1999 financial
statements have been reclassified to conform with the year end
2001 presentation.
Note B - Due from Factors and Line of Credit Facility
The Company sells substantially all of its accounts receivable
to a factor, without recourse, subject to credit limitations
established by the factor 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, 2001 and 2000 are accounts receivable subject to recourse
totaling approximately $339,000 and $895,000, respectively. The
agreements with the factors provide for payment of a service fee
on receivables sold.
At December 31, 2001 and 2000, the balance due from factor,
which includes chargebacks, is net of allowances for returns,
discounts, and other deductions of approximately $9,165,000 and
$7,780,000, respectively. The allowances are provided for known
chargebacks reserved for, but not written off the Company's
financial records and for potential future customer deductions
based on management's estimates.
The Company has entered into a Line of Credit Facility (the
"Facility") that, 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, 2001 or 2000. Amounts available under
the Facility at December 31, 2001 were reduced by $3,587,000 to
$21,413,000 for open letters of credit.
In connection with the line of credit, the Company has
agreed to eliminate all the outstanding advances 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.
Note C - Marketable Securities
At December 31, 2000, marketable securities in the amount of
$1,491,000 are included in prepaid expenses and other current
assets on the face of the Balance Sheet. The Company recorded
unrealized gains of $44,000 and realized gains of $5,500 during
the year ended December 31, 2000, which are included in other
income. In 2001, the Company received $1.6 million in proceeds
from the sale of all of its remaining marketable securities,
which resulted in realized gains of $133,000.
Note D - Property and Equipment
Property and equipment consist of the following:
December 31,
2001 2000
Property and equipment-at cost:
Furniture and fixtures $16,831,000 $12,606,000
Machinery and equipment 10,780,000 9,038,000
Leasehold improvements 35,631,000 31,831,000
Leased equipment under capital lease 967,000 967,000
----------- -----------
64,209,000 54,442,000
Less accumulated depreciation and amortization 23,722,000 16,240,000
----------- -----------
Net property and equipment $40,487,000 $38,202,000
=========== ===========
Note E - Accrued Expenses and Other Liabilities
Accrued expenses and other current liabilities consist of the
following:
December 31,
2001 2000
Rent $ 1,143,000 $ 481,000
Compensation 4,417,000 7,076,000
Customer credits 987,000 729,000
Deferred licensing income 4,144,000 3,520,000
Other 2,796,000 2,910,000
----------- -----------
$13,487,000 $14,716,000
=========== ===========
Note F - Segment Reporting
Kenneth Cole Productions, Inc. has three reportable segments:
Wholesale, Consumer Direct, and Licensing/International. The
Wholesale segment designs and sources a broad range of fashion
footwear, handbags and accessories and markets its products for
sale to more than 4,100 department and specialty store locations
and to the Company's Consumer Direct segment. The Consumer
Direct segment markets the broad selection of the Company's
branded products, including licensee products, for sale directly
to the consumer through its own channels of distribution, which
include full price retail stores, outlet stores, e-commerce (at
website address www.kennethcole.com and www.reactiononline.com) and
catalogs. The Licensing/International segment, through third
party licensee agreements, has evolved the Company from a
footwear resource to a diverse lifestyle brand competing
effectively in about 30 apparel and accessories categories for
both men and women. The Company maintains control over quality,
image and distribution of the licensees to sell to the same
channels as those of the Company's Wholesale division. The
Company earns royalties on the licensee's sales of branded
product.
The Company evaluates performance and allocates resources
based on profit or loss from each segment. The Wholesale segment
is evaluated on income from operations before income taxes. The
Consumer Direct segment is evaluated on profit or loss from
operations before unallocated corporate overhead and income
taxes. The Licensing/International segment is evaluated based on
royalties earned and pretax segment profit. The accounting
policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
Intersegment sales between the Wholesale and Consumer Direct
segment include a markup, which is eliminated in consolidation.
The Company's reportable segments are business units that
offer products to overlapping consumers through different
channels of distribution. Each segment is managed separately as
well as planning, implementation and results are reviewed
internally by the executive management committee.
Financial information of the Company's reportable segments is as
follows:
Consumer Licensing/
Wholesale Direct International Totals
Year Ended December 31, 2001
Revenues $197,181 $165,950 $ 23,017 $386,148
Intersegment revenues 31,470 31,470
Interest income, net 2,135 2,135
Depreciation expense 2,958 5,165 8 8,131
Segment income before
elimination of intersegment profit,
unallocated corporate overhead and
provision for income taxes 22,478 4,352 16,270 43,100
Segment assets 147,834 52,374 3,394 203,602
Expenditures for long-lived assets 2,002 8,592 4 10,598
Year Ended December 31, 2000
Revenues $234,509 $148,239 $23,584 $406,332
Intersegment revenues 29,952 29,952
Interest income, net 3,228 3,228
Depreciation expense 1,719 3,581 8 5,308
Segment income before
elimination of intersegment profit,
unallocated corporate overhead and
provision for income taxes 42,253 22,088 16,976 81,317
Segment assets 155,018 57,336 2,852 215,206
Expenditures for long-lived assets 11,621 12,455 3 24,079
Year Ended December 31, 1999
Revenues $185,511 $109,800 $16,117 $311,428
Intersegment revenues 23,559 23,559
Interest income, net 1,280 1,280
Depreciation expense 1,690 2,999 9 4,698
Segment income before
elimination of intersegment profit,
unallocated corporate overhead and
provision for income taxes 23,799 19,120 12,266 55,185
Segment assets 143,552 32,415 2,720 178,687
Expenditures for long-lived assets 1,269 6,688 1 7,958
The reconciliation of the Company's reportable segment revenues,
profit and loss, and assets are as follows:
2001 2000 1999
Revenues
Revenues for reportable segments $386,148 $406,332 $311,428
Intersegment revenues for reportable segments 31,470 29,952 23,559
Elimination of intersegment revenues (31,470) (29,952) (23,559)
-------- -------- --------
Total consolidated revenues $386,148 $406,332 $311,428
======== ======== ========
Income
Total profit for reportable segments $ 43,100 $ 81,317 $ 55,185
Elimination of intersegment profit (7,863) (9,919) (7,808)
Unallocated corporate overhead (8,317) (7,416) (5,481)
-------- -------- --------
Total income before provision for income taxes $ 26,920 $ 63,982 $ 41,896
======== ======== ========
Assets
Total assets for reportable segments $203,602 $215,206 $178,687
Elimination of inventory profit in consolidation (1,713) (2,836) (1,828)
-------- -------- --------
Total consolidated assets $201,889 $212,370 $176,859
======== ======== ========
Revenues from international customers are less than two percent
of the Company's consolidated revenues.
Note G - Foreign Currency Transactions, Derivative Instruments
and Hedging Activities
The Company in the normal course of business, routinely
enters into forward exchange contracts in anticipation of future
purchases of inventory denominated in foreign currencies. These
forward exchange contracts are used to hedge against the
Company's exposure to changes in foreign exchange rates to
protect the purchase price of merchandise under such commitments
and are not held for the purpose of trading or speculation. The
Company has therefore classified these contracts as cash flow
hedges. The Company had forward exchange contracts of $8,000,000
and $16,000,000 at December 31, 2001 and 2000, respectively. At
December 31, 2001, forward exchange contracts have maturity dates
through March 2002.
The Company recorded a transition adjustment gain of
approximately $1,122,000 in other comprehensive income to
recognize at fair value the derivatives that were designated as
cash flow hedging instruments upon adoption of SFAS 133. No
components of the contracts are excluded in the measurement of
the related hedge effectiveness. The critical terms of the
foreign exchange contracts are the same as the underlying
forecasted transactions, therefore changes in the fair value of
the contracts should be highly effective in offsetting changes in
the expected cash flows from the forecasted transactions. No
gains or losses related to ineffectiveness of cash flow hedges
were recognized in earnings during 2001. At December 31, 2001,
the Company's notional $8,000,000 in forward exchange contracts
resulted in an unrealized gain of approximately $50,000 which was
included as an addition to other comprehensive income in the
statement of changes in shareholders' equity and an increase to
inventory, the underlying exposure on the balance sheet. The
Company expects to reclassify all of the unrealized gain from
other comprehensive income into earnings within the next four
month period due to the actual executions of foreign exchange
contracts to purchase merchandise.
Note H - Income Taxes
Significant items comprising the Company's deferred tax assets
and liabilities are as follows:
December 31,
2001 2000
Deferred tax assets:
Inventory allowances and capitalization $ 605,000 $ 631,000
Allowance for doubtful accounts and
sales allowances 1,755,000 677,000
Deferred rent 2,653,000 1,836,000
Deferred compensation 4,487,000 3,399,000
Other 229,000 160,000
---------- ----------
9,729,000 6,703,000
Deferred tax liabilities:
Depreciation (1,022,000) (431,000)
Undistributed foreign earnings (1,224,000) (1,588,000)
---------- ----------
(2,246,000) (2,019,000)
---------- ----------
Net deferred tax assets $7,483,000 $4,684,000
========== ==========
The provision (benefits) for income taxes consists of the
following:
December 31,
2001 2000 1999
Current:
Federal $12,172,000 $23,322,000 $16,202,000
State and local 1,000,000 3,475,000 2,810,000
Foreign 117,000 69,000 85,000
----------- ----------- -----------
13,289,000 26,866,000 19,097,000
Deferred:
Federal (2,750,000) (1,115,000) (1,840,000)
State and local (235,000) (159,000) (289,000)
----------- ----------- -----------
(2,985,000) (1,274,000) (2,129,000)
----------- ----------- -----------
$10,304,000 $25,592,000 $16,968,000
=========== =========== ===========
The reconciliation of income tax computed at the U.S. federal
statutory tax rate to the effective income tax rate for 2001,
2000 and 1999 is as follows:
2001 2000 1999
Federal income tax at statutory rate 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit 3.3% 5.0% 5.5%
----- ----- -----
38.3% 40.0% 40.5%
===== ===== =====
Note I - Stock Options Plans and Grants
1. 1994 stock option plan
The Company's 1994 Incentive Stock Option Plan, as amended,
authorizes the grant of options to employees for up to 3,800,000
shares of the Company's Class A 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, while
certain other options vest over five years. Options granted have
ten year terms. Non-employee Director options granted have ten
year terms and vest 50% on the first anniversary of the date of
grant and become fully exercisable at the end of two years.
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
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements (continued)
Note I - Stock Options Plans and Grants (continued)
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 earnings per
share would have been reduced by approximately $2,485,000 and
$.12, $2,051,000 and $.09 and $1,136,000 and $.06 in 2001, 2000
and 1999, 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.
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 2001, 2000 and 1999, respectively: risk-free
interest rate of 5.0%, 5.8% and 5.55%; 0% dividend yields;
expected volatility factors of 65.5%, 54.6% and 48.5% and
expected lives of 5.1, 4.2 and 4.7 years. The weighted-average
fair value of options granted during 2001, 2000 and 1999 were
$10.85, $15.12 and $13.47.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. As a
result of the Company's employee stock options having
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, 1998 through December 31, 2001.
Weighted-Average
Shares Exercise Price
Outstanding at December 31, 1998 1,538,157
Granted 431,400 $18.93
Exercised (143,511) $ 8.24
Forfeited (95,348) $10.37
---------
Outstanding at December 31, 1999 1,730,698
Granted 433,750 $31.10
Exercised (274,380) $ 8.52
Forfeited (79,023) $18.41
---------
Outstanding at December 31, 2000 1,811,045
Granted 1,083,550 $18.18
Exercised (37,503) $10.38
Forfeited (34,301) $20.68
---------
Outstanding at December 31, 2001 2,822,791
=========
The following table summarizes information concerning
currently outstanding and exercisable stock options at December
31, 2001:
Outstanding Stock Options Exercisable Stock Options
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Price Shares Life Price Shares Price
$ 4.00 to $12.00 808,266 4.65 years $ 9.36 651,516 $ 8.89
$12.01 to $24.00 1,085,800 8.19 years $14.48 252,725 $15.77
$24.01 to $36.00 928,725 8.49 years $27.44 95,244 $30.01
2. Stock option grants
In 1994, the Board of Directors granted non-transferable stock
options to an officer of the Company, for the purchase of 334,425
shares of Class A Common Stock at an exercise price of $1.4583
per share. In 2000, 50,000 options were exercised and at
December 31, 2001 and 2000, 130,000 options were outstanding and
exercisable.
Note J - Benefit Plans
1. 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. During 2000, the Company amended the
plan's matching contribution of 25% of the participant's
contribution, up to a maximum of 6% from 4% of the participant's
base pay. Contributions to the plan for the years ended December
31, 2001, 2000 and 1999 were approximately $267,000, $200,000 and
$120,000, respectively.
2. Deferred compensation plan
The Kenneth Cole Productions, Inc. Deferred Compensation Plan is
a non-qualified plan maintained primarily to provide deferred
compensation benefits for a select group of "highly compensated
employees." The Company accounts for the investments in the
deferred compensation plan in accordance with SFAS 115, "Accounting
for Certain Investments in Debt and Equity Securities," and such
investments have been classified as trading.
3. Supplemental Employee Retirement Plan
In 2001 and 2000, the Company deposited $1,374,000 and
$1,308,000, respectively into Supplemental Executive Retirement
Plans ("SERP") for certain key executives. The amounts have been
recorded in deposits and sundry on the face of the balance sheet.
These plans are nonqualified deferred compensation plans. Benefits
payable under these plans are based upon the performance of the
individual directed investments from the Company's initial and
future contributions. Benefits earned under the SERP begin vesting
after 3 years, and become 75% vested after 10 years and fully
vested upon the participant retiring at age 60 or later. In
addition, SERP participants are covered by life insurance through a
portion of the Company's contribution. The value of these
investments
at December 31, 2001 was $2,234,000 which is included in "Deposits
and sundry". The unrealized loss on the investments was recorded
as Selling, general and administrative expense within the
accompanying statements of income as a general operating expense.
In addition, the Company recorded a long term vested benefit
obligation of approximately $324,000 within the accompanying
balance sheets.
4. Employee Stock Purchase Plan
During 2000, the Company established a qualified employee stock
purchase plan ("ESPP"), the terms of which allow for qualified
employees (as defined) to participate in the purchase of designated
shares of the Company's Class A Common Stock at a price equal to
85% of the lower of the closing price at the beginning or end of
each quarterly stock purchase period. On March 7, 2000, the
Company filed with the Securities and Exchange Commission Form S-8
registering 150,000 shares of Class A Common Stock for the ESPP.
For the year ended December 31, 2001 and 2000, employees purchased
20,074 and 6,652 shares, respectively. Total shares purchased
through December 31, 2001 were 26,726.
Note K - Commitments and Contingencies
1. Capital lease
Included in property and equipment are assets held under a
capital lease of $967,000 less accumulated amortization of
$628,000. At December 31, 2001, future minimum lease payments
consist of the following:
2002 $235,000
2003 177,000
2004 0
2005 0
--------
Total minimum lease payments $412,000
Less amounts representing interest (29,000)
--------
Present value of minimum lease payments 383,000
Less current maturities (212,000)
--------
Capital lease obligation, less current maturities $171,000
========
2. Operating leases
The Company leases office, retail, and warehouse facilities
under non-cancelable operating leases between 5 and 20 years with
options to renew at varying terms. Future minimum lease payments
for non-cancelable leases with initial terms of one year or more
consisted of the following at December 31, 2001:
2002 $ 20,927,000
2003 20,337,000
2004 20,410,000
2005 19,453,000
2006 18,459,000
Thereafter 108,623,000
------------
Total minimum cash payments $208,209,000
============
In addition, certain of these leases contain rent escalation and
require additional percentage rent payments to be made.
Rent expense for the years ended December 31, 2001, 2000 and
1999 was $26,999,000, $18,477,000 and $13,530,000, respectively.
Sub-tenant rental income for 2001 was $708,000. Future minimum
rental income from a subtenant is approximately $711,000 a year
for each of the next five years.
3. Letters of credit
At December 31, 2001 and 2000, the Company was contingently
liable for approximately $1,104,000 and $2,029,000 of open
letters of credit, respectively. In addition, at December 31,
2001 and 2000, the Company was contingently liable for
approximately $2,483,000 of standby letters of credit.
4. Concentrations
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. In 2001 and 2000, the Company had no customer account
for more than 10% of net sales.
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 36% and 40% of the dollar value of total
handbag purchases by the Company were sourced through one agent
utilizing many different factories in China, during 2001 and
2000, respectively. Approximately 44% and 41% of Kenneth Cole
and Reaction Kenneth Cole men's footwear purchases were from one
manufacturer in Italy utilizing many different factories during
2001 and 2000, respectively. Furthermore, approximately 33% of
Kenneth Cole ladies footwear was purchased from one manufacturer
in Italy during 2001. 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.
At December 31, 2001, the Company had approximately 10% of its
employees covered under a collective bargaining agreement with a
local union.
5. Other
The Company, from time to time, is a party to litigation that
arises in the normal course of its business operations. The
Company presently is not a party to any such litigation that would
have a material adverse effect on its business or operations.
Note L - Shareholders' Equity
1. 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.
2. 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
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements (continued)
Note L - Shareholders' Equity (continued)
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.
3. Common Stock repurchase
On Februray 21, 2001, the Board of Directors of the Company
authorized management to repurchase, from time to time, an
additional 2,000,000 shares up to an aggregate 4,250,000 shares
of the Company's Class A Common Stock. As of December 31, 2001,
2,488,400 shares were repurchased in the open market at an
aggregate price of $57,133,000 reducing the available shares
authorized for repurchase to 1,761,600. The repurchased shares
have been recorded as treasury stock..
Note M - Licensing Agreements
1. Womenswear
On July 1, 1999, the Company and Liz Claiborne Inc. (along
with its subsidiaries and affiliates collectively "Liz
Claiborne") entered into a multi-brand initiative to launch
Kenneth Cole Productions, Inc. into
the women's apparel market under an exclusive womenswear license
agreement. The agreement granted Liz Claiborne rights to
manufacture, distribute and sell women's sportswear under the
licensed marks of Kenneth
Cole, Kenneth Cole New York, Reaction Kenneth Cole and Unlisted.
The initial term is through December 31, 2004, with options to
renew through December 31, 2019 based upon Liz Claiborne reaching
certain sales
thresholds. During these periods, Liz Claiborne is obligated to
pay the Company a percentage of net sales based upon the terms of
the agreement. Simultaneously with the licensing agreement, Liz
Claiborne purchased 1.5 million shares of Kenneth Cole
Productions, Inc. Class A Common Stock par value $.01 per share
at a price of $19.33 the fair market value at the date of the
agreement.
2. Fragrance
On March 14, 2001, the Company and American Luxury Brands LLC,
a division of Givenchy, Inc., which is a wholly owned subsidiary
of LVMH Moet Hennessey Louis Vuitton, Inc. (collectively with
its subsidiaries and affiliates, "LVMH") entered into a multi-
brand initiative to create, distribute and market fragrance and
body products worldwide. The agreement covers the trademarks
Kenneth Cole New York, Reaction Kenneth Cole, and Unlisted. The
initial term is through December 31, 2007 with options to renew
through December 2022 based on LVMH reaching certain sales
thresholds during these periods. LVMH is obligated to pay the
Company a percentage of net sales based upon the terms of the
agreement. The launch is expected for the holiday 2002 season.
3. Children's Apparel
On May 4, 2001, the Company signed an agreement with Wear Me
Apparel Corporation, doing business as Kids Headquarters, to
produce boys' and girls' sportswear under the Reaction Kenneth
Cole trademark. The initial term of the agreement is through
December 31, 2004 with options to renew through December 31, 2007
based upon certain sales thresholds being met. The Company
receives a percentage of net sales from Kids Headquarters. The
initial launch is expected for the fall 2002 season.
Note N - Related Party Transaction
During 2000, the Company contributed $500,000 to the Kenneth
Cole Foundation. The Kenneth Cole Foundation, a not for profit
organization, fosters programs to aid primarily in the fields of
arts and culture, education, and medical research. In addition,
the Board of Directors authorized a $500,000 contribution payable
to the Kenneth Cole Productions, Inc. Foundation.
Note O - Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 2001 and 2000 appear
below (in thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
2001
Net sales $ 92,066 $ 82,071 $ 94,979 $ 94,916
Licensing revenue 5,124 5,954 5,916 5,122
Net revenues 97,190 88,025 100,895 100,038
Gross profit 43,756 40,321 44,013 40,837
Operating income 6,452 5,912 9,072 3,349
Net income 4,554 3,983 5,862 2,217
Earnings per share basic $0.22 $0.20 $0.30 $0.11
Earnings per share diluted $0.21 $0.19 $0.29 $0.11
2000
Net sales $ 90,627 $85,480 $104,609 $103,997
Licensing revenue 4,036 5,339 6,343 5,901
Net revenues 94,663 90,819 110,952 109,898
Gross profit 43,257 40,292 52,770 52,967
Operating income 12,154 10,140 20,564 17,896
Net income 7,774 6,411 12,926 11,279
Earnings per share basic $0.37 $0.31 $0.63 $0.55
Earnings per share diluted $0.35 $0.29 $0.59 $0.52
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
Chief Executive Officer
Date: March 27, 2002
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 Chief Executive Officer and Director March 27, 2002
Kenneth D. Cole
/PAUL BLUM Executive Vice President, March 27, 2002
Paul Blum President and Director
/S/STANLEY A. MAYER Executive Vice President, March 27,2002
Stanley A. Mayer Chief Financial Officer, Treasurer and Director
/S/DAVID P. EDELMAN Senior Vice President Finance March 27, 2002
David P. Edelman (Principal Accounting Officer)
/S/ROBERT C. GRAYSON Director March 27, 2002
Robert C. Grayson
/S/DENIS F. KELLY Director March 27, 2002
Denis F. Kelly
/S/PHILLIP B. MILLER Director March 27, 2002
Phillip B. Miller
Kenneth Cole Productions, Inc.
Schedule II
Valuation and Qualifying Accounts
For the Years Ended December 31, 2001, 2000, and 1999
Balance at Charged to Balance
Beginning Cost and at End
of Period Expense Deductions of Period
Year ended December 31,2001
Allowance for doubtful accounts $ (550,000) $ (808,000) $683,000 $ (675,000)
Reserve for returns
and sales allowances (7,780,000) (1,385,000) (9,165,000)
----------- ----------- -------- -----------
$(8,330,000) $(2,193,000) $683,000 $(9,840,000)
=========== =========== ======== ===========
Year ended December 31,2000
Allowance for doubtful accounts $ (554,000) $ (270,000) $274,000 $ (550,000)
Reserve for returns
and sales allowances (8,357,000) 577,000 (7,780,000)
----------- ----------- -------- -----------
$(8,911,000) $ (270,000) $851,000 $(8,330,000)
=========== =========== ======== ===========
Year ended December 31,2001
Allowance for doubtful accounts $ (125,000) $(1,344,000) $915,000 $ (554,000)
Reserve for returns
and sales allowances (3,300,000) (5,057,000) (8,357,000)
----------- ----------- -------- -----------
$(3,425,000) $(6,401,000) $915,000 $(8,911,000)
=========== =========== ======== ===========
Kenneth Cole Productions, Inc.
Exhibit 21.01
List of Subsidiaries State of Incorporation
Cole 57th. St., LLC Delaware
Cole 610 Fifth Avenue, LLC Delaware
Cole Amsterdam, B.V. Amsterdam
Cole Amsterdam, Inc. Delaware
Cole Aspen, Inc. Delaware
Cole Broadway, Inc. New York
Cole Cabazon, Inc. California
Cole Camarillo, LLC Delaware
Cole Carlsbad, Inc. Delaware
Cole Century City, Inc. California
Cole Chestnut, Inc. Delaware
Cole Clinton, Inc. Connecticut
Cole Copley, Inc. Massachusetts
Cole Dawsonville, Inc. Delaware
Cole Fashion Valley, Inc. Delaware
Cole Forum, Inc. Delaware
Cole Franklin, Inc. Delaware
Cole Galleria, Inc. Delaware
Cole Garden State, Inc. Delaware
Cole Georgetown, Inc. District of Columbia
Cole Grand Central, Inc. Delaware
Cole Grant, Inc. Delaware
Cole Honolulu, Inc. Delaware
Cole Houston, Inc. Delaware
Cole Jersey Gardens, LLC Delaware
Cole Katy, LLC Delaware
Cole Las Vegas, Inc. Delaware
Cole Leesburg, Inc. Delaware
Cole Michigan Avenue, Inc. Delaware
Cole Napa, Inc. California
Cole New Orleans, Inc. Delaware
Cole Newbury, Inc. Massachusetts
Cole Northpark, Inc Texas
Cole Oakbrook, Inc. Delaware
Cole Orlando, LLC Delaware
Cole Pentagon, Inc. Virginia
Cole Phipps, Inc. Georgia
Cole Pike, Inc. Delaware
Cole Productions, Inc. Delaware
Cole Reading Outlet, Inc. Pennsylvania
Cole Riverhead, Inc. Delaware
Cole Roosevelt, Inc. New York
Cole Santa Moncia, Inc. Delaware
Cole Scottsdale, Inc. Delaware
Cole SFC, LLC Delaware
Cole Short Hills, Inc. New Jersey
Cole Somerset, Inc. Michigan
Cole South Beach, Inc. Florida
Cole Stanford, Inc. California
Cole Tempe, LLC Delaware
Cole Tyson, Inc. Virginia
Cole Venetian, LLC Delaware
Cole Viejo, LLC Delaware
Cole Waikele, Inc. New York
Cole Walnut Street, Inc. Delaware
Cole West Palm Beach, LLC Delaware
Cole Westchester, Inc. New York
K.C.P.L., Inc. Delaware
Kenneth Cole (BVI) Company Limited British Virgin Islands
Kenneth Cole (BVI) Company, Ltd. British Virgin Islands
Kenneth Cole Catalog, Inc. Virginia
Kenneth Cole Financial Services, Inc. New Jersey
Kenneth Cole Gilroy, Inc. California
Kenneth Cole Productions (LIC), Inc. Bahamas
Kenneth Cole Productions, LP Delaware
Kenneth Cole Services, Inc. Delaware
Kenneth Cole Trading, Inc. Delaware
Kenneth Cole Woodbury, Inc. Delaware
Kenneth Cole, Inc. New York
Kenneth Productions, Inc. Delaware
Kenth Ltd. Hong Kong
Riveria Holding, LLC Delaware
Exhibit 23.01
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration
Statement (Form S-8 No. 33-92094) pertaining to the Kenneth Cole
Productions, Inc. 1994 Stock Option Plan and Registration
Statement (Form S-8 No. 33-31868) pertaining to the Kenneth Cole
Productions, Inc. Employee Stock Purchase Plan of our report
dated February 22, 2002, with respect to the consolidated
financial statements and schedule of Kenneth Cole Productions,
Inc., included in the Annual Report (Form 10-K) for the year
ended December 31, 2001.
/s/ ERNST & YOUNG LLP
New York, New York
March 27, 2002