SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13082
KENNETH COLE PRODUCTIONS, INC.
(Exact name of registrant as specified in its charter)
New York 13-3131650
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
603 West 50th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 265-1500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months(or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (X)
No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class August 13, 2002
Class A Common Stock ($.01 par value) 11,291,358
Class B Common Stock ($.01 par value) 8,405,497
Kenneth Cole Productions, Inc.
Index to 10-Q
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30,
2002 and December 31, 2001..................................3
Condensed Consolidated Statements of Income for the
three and six-month periods ended June 30, 2002 and
2001........................................................5
Condensed Consolidated Statement of Changes in Shareholders'
Equity for the six-month period ended June 30, 2002.........6
Condensed Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 2002 and 2001..............7
Notes to Condensed Consolidated Financial Statements........8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................13
Item 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings......................................19
Item 2. Changes in Securities and Use of Proceeds..............19
Item 3. Defaults Upon Senior Securities........................19
Item 4. Submission of Matters to a Vote of Security Holders....19
Item 5. Other Information......................................20
Item 6. Exhibits and Reports on Form 8-K.......................20
Signatures......................................................21
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
June 30, December 31,
2002 2001
(Unaudited)
Assets
Current assets:
Cash $ 76,095,000 $ 68,966,000
Due from factor 28,586,000 28,289,000
Accounts receivable, net 5,378,000 6,731,000
Inventories 50,073,000 30,753,000
Prepaid expenses and other current assets 487,000 873,000
Deferred taxes 2,765,000 2,765,000
------------ ------------
Total current assets 163,384,000 138,377,000
Property and equipment - at cost, less
accumulated depreciation 39,958,000 40,487,000
Other assets:
Deposits and deferred taxes 10,179,000 11,022,000
Deferred compensation plan assets 12,525,000 12,003,000
------------ ------------
Total other assets 22,704,000 23,025,000
------------ ------------
Total assets $226,046,000 $201,889,000
============ ============
See accompanying notes to condensed consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
June 30, December 31,
2002 2001
(Unaudited)
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 34,133,000 $ 25,932,000
Accrued expenses and other current liabilities 18,636,000 15,736,000
------------ ------------
Total current liabilities 52,769,000 41,668,000
Deferred compensation 12,525,000 12,003,000
Other 8,134,000 7,324,000
Commitments and contingencies
Shareholders' equity:
Series A Convertible Preferred Stock par value
$1.00, per share 1,000,000 shares authorized,
none outstanding
Class A Common Stock, par value $.01,per share
20,000,000 shares authorized, 13,769,094,
and 13,626,584 issued in 2002 and 2001 137,000 136,000
Class B Common Stock, par value $.01,per share
9,000,000 shares authorized, 8,405,497 and
8,498,097 outstanding in 2002 and 2001 84,000 85,000
Additional paid-in capital 62,068,000 61,273,000
Accumulated other comprehensive income 424,000 434,000
Retained earnings 147,038,000 136,099,000
------------ ------------
209,751,000 198,027,000
Class A Common Stock in treasury, at cost,
2,488,400 shares in 2002 and 2001 (57,133,000) (57,133,000)
------------ ------------
Total shareholders' equity 152,618,000 140,894,000
------------ ------------
Total liabilities and shareholders'equity $226,046,000 $201,889,000
============ ============
See accompanying notes to condensed consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Net sales $ 93,245,000 $ 82,746,000 $180,535,000 $175,044,000
Royalty revenue 6,005,000 5,954,000 11,626,000 11,078,000
------------ ------------ ------------ ------------
Net revenue 99,250,000 88,700,000 192,161,000 186,122,000
Cost of goods sold 53,157,000 47,704,000 102,304,000 101,138,000
------------ ------------ ------------ ------------
Gross profit 46,093,000 40,996,000 89,857,000 84,984,000
Selling, general and
administrative
expenses 37,823,000 35,084,000 73,090,000 72,620,000
------------ ------------ ------------ ------------
Operating income 8,270,000 5,912,000 16,767,000 12,364,000
Interest and other
income, net 330,000 513,000 597,000 1,526,000
------------ ------------ ------------ ------------
Income before
provision for
income taxes 8,600,000 6,425,000 17,364,000 13,890,000
Provision for
income taxes 3,182,000 2,442,000 6,425,000 5,353,000
------------ ------------ ------------- -----------
Net income $ 5,418,000 $ 3,983,000 $ 10,939,000 $ 8,537,000
============ ============ ============= ===========
Earnings per share:
Basic $.28 $.20 $.56 $.42
Diluted $.26 $.19 $.53 $.40
Shares used to compute earnings per share:
Basic 19,670,000 19,984,000 19,656,000 20,218,000
Diluted 20,838,000 20,925,000 20,621,000 21,232,000
See accompanying notes to condensed financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
Class A Class B
Common Stock Common Stock
Number Number
of shares Amount of Shares Amount
Shareholders' equity
January 1, 2002 13,626,584 $136,000 8,498,097 $85,000
Net income
Translation adjustments
foreign currency
forward contracts,
net of taxes
Comprehensive income
Exercise of stock
options, and related
tax benefits 40,856
Issuance of Class A
Common Stock for ESPP 9,054
Conversion of Class B
shares to Class A
shares 92,600 1,000 (92,600) (1,000)
----------------------------------------------------
Shareholders' equity
June 30, 2002 13,769,094 $137,000 8,405,497 $84,000
====================================================
Accumulated
Other
Additional Comprehensive Retained
Paid-in Capital Income Earnings
Shareholders' equity
January 1, 2002 $ 61,273,000 $ 434,000 $ 136,099,000
Net income 10,939,000
Translation adjustments
foreign currency (76,000)
forward contracts,
net of taxes 66,000
Comprehensive income
Exercise of stock options,
and related tax benefits 681,000
Issuance of Class A
Common Stock for ESPP 114,000
Conversion of Class B
shares to Class A shares
---------------------------------------------
Shareholders' equity
June 30, 2002 $ 62,068,000 $ 424,000 $ 147,038,000
=============================================
Treasury Stock
Number of
Shares Amount Total
Shareholders' equity
January 1, 2002 (2,488,400) $(57,133,000) $140,894,000
Net income 10,939,000
Translation adjustments
foreign currency (76,000)
forward contracts,
net of taxes 66,000
-----------
Comprehensive income 10,929,000
Exercise of stock options,
and related tax benefits 681,000
Issuance of Class A
Common Stock for ESPP 114,000
Conversion of Class B
shares to Class A shares
-----------------------------------------
Shareholders' equity
June 30, 2002 (2,488,400) $(57,133,000) $152,618,000
=========================================
See accompanying notes to condensed consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2002 2001
Cash flows from operating activities
Net income $ 10,939,000 $ 8,537,000
Adjustments to reconcile net income to net cash
provided by(used in) operating activities:
Depreciation and amortization 3,849,000 3,398,000
Unrealized loss on deferred compensation 168,000 2,000
Realized gain on marketable securities (133,000)
Provision for bad debts 112,000 369,000
Changes in assets and liabilities:
Increase in due from factors (297,000) (3,961,000)
Decrease in accounts receivable 1,241,000 4,149,000
Increase in inventories (19,254,000) (8,068,000)
Decrease (increase) in prepaid expenses &
other current assets 386,000 (2,770,000)
Decrease (increase) in other assets 153,000 (2,546,000)
Increase (decrease) in accounts payable 8,201,000 (7,479,000)
Increase (decrease) in income taxes payable 456,000 (1,526,000)
Increase (decrease) in accrued expenses
and other current liabilities 2,724,000 (1,981,000)
Increase in other non-current liabilities 1,445,000 4,197,000
------------ -----------
Net cash provided by (used in) operating
activities 10,123,000 (7,812,000)
Cash flows from investing activities
Acquisition of property and equipment, net (3,320,000) (4,186,000)
Proceeds from sale of marketable securities 1,624,000
------------ -----------
Net cash used in investing activities (3,320,000) (2,562,000)
Cash flows from financing activities
Proceeds from exercise of stock options 392,000 310,000
Proceeds from issuance of common stock 114,000 194,000
Purchase of treasury stock (15,960,000)
Principal payments on capital lease obligations (104,000) (93,000)
------------ -----------
Net cash provided by (used in) financing
activities 402,000 (15,549,000)
Effect of exchange rate changes on cash (76,000) (5,000)
------------ -----------
Net increase (decrease) in cash 7,129,000 (25,928,000)
Cash, beginning of period 68,966,000 74,608,000
------------ -----------
Cash, end of period $ 76,095,000 $ 48,680,000
============ ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 20,000 $ 34,000
Income taxes $ 6,800,000 $ 9,986,000
See accompanying notes to condensed consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by Kenneth Cole Productions, Inc. (the "Company") in accordance
with accounting principles generally accepted in the United States for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the
United States for complete financial statements. Certain items contained in
these financial statements are based on estimates. In the opinion of the
Company's management, the accompanying unaudited condensed consolidated
financial statements reflect all significant adjustments, consisting of only
normal and recurring adjustments, necessary for a fair presentation of the
financial position and results of operations and cash flows for the periods
presented. All significant intercompany transactions have been eliminated.
Operating results for the six months ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 2002. These unaudited condensed consolidated financial
statements should be read in conjunction with the financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.
The consolidated balance sheet at December 31, 2001, as presented, was
derived from the audited financial statements as of December 31, 2001
included in the Company's Annual Report on Form 10-K.
2. Comprehensive Income
Comprehensive income is comprised of net income, the effect of foreign
currency translation and changes in unrealized gains and losses on forward
exchange contracts used to hedge merchandise commitments. Comprehensive
income amounted to $10,929,000 and $8,101,000 for the six-month periods ended
June 30, 2002 and 2001, respectively. Comprehensive income for the three-
month periods ended June 30, 2002 and 2001 amounted to $5,514,000 and
$3,671,000, respectively.
3. 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; therefore, the Company has classified
these contracts as cash flow hedges. The Company had outstanding forward
exchange contracts of $3,250,000 at June 30, 2002 with maturity dates
through July 2002.
No components of the Company's 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 the six months ended June 30, 2002. At
June 30, 2002 the Company's notional $3,250,000 in forward exchange contracts
resulted in an unrealized gain of approximately $117,000, net of taxes, which
was included as an addition to other comprehensive income in the Company's
Condensed Consolidated 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 two month period due to
the actual executions of foreign exchange contracts to purchase merchandise.
4. Earnings Per Share
The following is an analysis of the differences between basic and diluted
earnings per common share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share".
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Weighted average
common shares
outstanding 19,670,000 19,984,000 19,656,000 20,218,000
Effect of dilutive
securities:
Stock options 1,168,000 941,000 965,000 1,014,000
---------- ---------- ---------- ----------
Weighted average
common shares
outstanding and
common share
equivalents 20,838,000 20,925,000 20,621,000 21,232,000
=============================================
5. Segment Information
The Company has three reportable segments: Wholesale, Consumer Direct and
Licensing/International. The Company's reportable segments are business
units that offer different products and services or similar products through
different channels of distribution. The Wholesale segment is comprised of
designing, sourcing and marketing a broad range of quality footwear and
handbags for wholesale distribution. 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, catalogs and e-commerce
(at website addresses www.kennethcole.com and www.reactiononline.com). The
Licensing/International segment primarily consists of earning royalties on
licensee sales to third parties of branded sales and sourcing fees and
royalties of licensee sales to customers in foreign countries. The Company
maintains control over quality and image and allows licensees to sell
primarily to the same channels of distribution as those of the Company's
Wholesale segment. 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
on royalties earned and pretax segment profit. Intersegment sales between the
Wholesale and Consumer Direct segment include a markup, which is eliminated
in consolidation.
Revenues from international customers represent less than two percent of the
Company's consolidated revenues.
Financial information of the Company's reportable segments is as follows
(in thousands):
Three Months Ended
June 30, 2002
Consumer Licensing/
Wholesale Direct International Totals
Revenues from external customers $ 53,449 $ 39,648 $ 6,153 $ 99,250
Intersegment revenues (8,727) (8,727)
Segment Income (1) 6,600 2,604 3,767 12,971
Segment Assets 169,686 56,910 1,665 228,261
Three Months Ended
June 30, 2001
Consumer Licensing/
Wholesale Direct International Totals
Revenues from external customers $ 41,564 $ 40,950 $ 6,186 $ 88,700
Intersegment revenues (8,051) (8,051)
Segment Income (1) 5,459 471 4,425 10,355
Segment Assets 144,703 54,686 1,272 200,661
Six Months Ended
June 30, 2002
Consumer Licensing/
Wholesale Direct International Totals
Revenues from external customers $ 107,135 $ 73,085 $ 11,941 $192,161
Intersegment revenues (16,569) (16,569)
Segment Income (1) 14,597 2,773 7,561 24,931
Six Months Ended
June 30, 2001
Consumer Licensing/
Wholesale Direct International Totals
Revenues from external customers $ 96,929 $ 77,529 $ 11,664 $186,122
Intersegment revenues (16,582) (16,582)
Segment Income (1) 12,869 1,234 8,081 22,184
(1) Before elimination of intersegment profit, unallocated corporate overhead
and income taxes.
The reconciliation of the Company's reportable segment revenues, profit and
loss, and assets are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30,2001
Revenues
Revenues for external
customers $ 99,250 $ 88,700 $ 192,161 $ 186,122
Intersegment revenues 8,727 8,051 16,569 16,582
Elimination of
intersegment
revenues (8,727) (8,051) (16,569) (16,582)
--------- ---------- ---------- ---------
Total consolidated
revenues $ 99,250 $ 88,700 $ 192,161 $ 186,122
========= ========== ========== =========
Income
Total profit for
reportable segments $ 12,971 $ 10,355 $ 24,931 $ 22,184
Elimination of
intersegment profit
and unallocated
corporate overhead (4,371) (3,930) (7,567) (8,294)
--------- ---------- ----------- ---------
Total income before
income taxes $ 8,600 $ 6,425 $ 17,364 $ 13,890
========= ========== =========== =========
Assets
Total assets for
reportable segments $228,261 $ 200,661
Elimination of
intersegment
inventory profit (2,215) (2,528)
--------- ----------
Total consolidated
assets $226,046 $ 198,133
========= ==========
6. New Accounting Pronouncement
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's adoption of the EITF Issue No. 00-25 on January 1, 2002
impacted net revenue and expense classifications by approximately $1,006,000
and $907,000 for the six months ended June 31, 2002 and 2001, respectively,
and did not change net income. Prior periods have been reclassified
accordingly.
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 adopted these pronouncements
on January 1, 2002, and such adoption had no impact on net income.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The Statement also extends the reporting
requirements to report separately as discontinued operations, components of
an entity that have either been disposed of or classified as held for sale.
The Company adopted the provisions of SFAS No. 144 effective January 1, 2002
and such adoption had no impact on net income.
7. 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 operations.
8. Reclassifications
Certain amounts included in the Company's 2001 financial statements have been
reclassified to conform to the June 30, 2002 presentation.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements Disclosure
The statements contained in this report which are not historical facts
including, without limitation, statements that relate to future performance
and/or statements regarding the Company's anticipated results or level of
business for 2002 or any other future period, may be deemed to constitute
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are based on current
expectations only, and actual future results might differ materially from
those projected in such statements due to a number of risks and uncertainties,
including, but not limited to, demand and competition for the Company's
products, the ability to enter into new licensee agreements and to open new
stores, dependence on certain large customers and changes in the Company's
relationships with vendors and other resources. The forward-looking statements
contained herein are also subject to other risks and uncertainties that are
described in the Company's reports and registration statements filed with the
Securities and Exchange Commission. The Company undertakes no obligation
to publicly update or revise any forward-looking statement, whether as a
result of new information, future results or otherwise.
Results of Operations
The following table sets forth the Company's condensed consolidated statements
of income in thousands of dollars and as a percentage of net revenue for the
three and six months ended June 30, 2002 and June 30, 2001.
Three Months Ended
June 30,
2002 2001
Net sales $ 93,245 93.9% $ 82,746 93.3%
Royalty revenue 6,005 6.1 5,954 6.7
-------- ----- ------- -----
Net revenue 99,250 100.0 88,700 100.0
Gross profit 46,093 46.4 40,996 46.2
Selling, general &
administrative expenses 37,823 38.1 35,084 39.6
-------- ----- ------- -----
Operating income 8,270 8.3 5,912 6.6
Interest and other income,
net 330 0.4 513 0.6
-------- ----- ------- -----
Income before income taxes 8,600 8.7 6,425 7.2
Income tax expense 3,182 3.2 2,442 2.8
-------- ----- ------- -----
Net income 5,418 5.5 3,983 4.4
======== ===== ======= =====
Six Months Ended
June 30,
2002 2001
Net sales $ 180,535 93.9% $ 175,044 94.0%
Royalty revenue 11,626 6.1 11,078 6.0
--------- ----- -------- ----
Net revenue 192,161 100.0 186,122 100.0
Gross Profit 89,857 46.8 84,984 45.7
Selling, general &
administrative expenses 73,090 38.0 72,620 39.0
--------- ----- -------- ----
Operating income 16,767 8.8 12,364 6.7
Interest and other income,
net 597 0.2 1,526 0.8
--------- ----- -------- ----
Income before income taxes 17,364 9.0 13,890 7.5
Income tax expense 6,425 3.3 5,353 2.9
--------- ----- -------- ----
Net Income 10,939 5.7 8,537 4.6
========= ===== ======== ====
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Consolidated net revenues increased $10.6 million or 11.9% to $99.3 million
for the three months ended June 30, 2002 from $88.7 million for the three
months ended June 30, 2001. This increase is attributable primarily to the
factors described below in the sections entitled "Net Sales" and
"Licensing Revenue".
NET SALES: Wholesale net sales (excluding sales to the Company's Consumer
Direct business segment) increased $11.9 million, or 28.6% for the three
months ended June 30, 2002 to $53.4 million from $41.6 million for the three
months ended June 30, 2001. This increase is attributable primarily to an
increase in sales of the Company's diffusion brands Kenneth Cole Reaction and
Unlisted, which limit the Company's exposure to any one price level or channel
of distribution. The increase in these brands' sales was offset slightly by a
decrease in sales of footwear of the Kenneth Cole New York brand. Net sales
in the Company's Consumer Direct segment decreased $1.3 million, or 3.2% to
$39.6 million for the three months ended June 30, 2002 from $41.0 million for
the three months ended June 30, 2001. The decrease in net sales is due
primarily to a decline in comparable store sales of 10.1% or $3.8 million,
partially offset by $2.9 million in sales from new stores opened in 2002 and
that portion of 2002 sales for stores not open for all of 2001. The decrease
is due in part to the economic weakness generally seen throughout the retail
and apparel industry and the effects of a promotionally driven and highly
competitive retail environment.
LICENSING REVENUE: Royalty revenue increased 0.9% to $6.0 million for the
three months ended June 30, 2002 from $5.95 million for the three months ended
June 30, 2001. This slight increase in licensing revenues primarily reflects
minimum royalties from existing licensees. The Company expects an increase in
royalty revenue in the second half of the year as licensee sales exceed their
annual contract minimums.
GROSS PROFIT: Consolidated gross profit as a percentage of net revenue
increased to 46.4% for the three months ended June 30, 2002 from 46.2%
for the three months ended June 30, 2001. The increase is attributable
to an increase in the Wholesale segment gross profit on higher sales.
The Wholesale segment, which operates at a lower gross margin level
than Consumer Direct, as a percentage of net revenue increased to
53.9% for the three months ended June 30, 2002 from 46.9% for the
three months ended June 30, 2001. The strong gross margin of the
Wholesale segment was the result of the Company's well managed
inventory position and good sell-through across the product lines.
The Consumer Direct segment as a percentage of net revenue decreased
to 39.9% for the three months ended June 30, 2002 from 46.2%
for the three months ended June 30, 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses, including shipping and warehousing, increased
7.8% to $37.8 million (or 38.1% of net revenues) for the three months
ended June 30, 2002 from $35.1 million (or 39.6% of net revenues) for
the three months ended June 30, 2001. As noted, these expenses decreased
as a percentage of netrevenues, however, primarily attributable to the
Company's continued cost-containment programs,initiated during 2001 in
response to the challenging economic environment.
INTEREST AND OTHER INCOME: Interest and other income decreased to
$330,000 for the three months ended June 30, 2002 from $513,000 for the
three months ended June 30, 2001. The decrease is due to lower
short-term interest rates.
INCOME TAXES: The Company's effective tax rate has decreased to 37.0% for
the three months ended June 30, 2002 from 38.0% for the three months ended
June 30, 2001. This is due to the relative level of earnings in the various
state and local taxing jurisdictions in which the Company conducts its
business.
NET INCOME: As a result of the foregoing, net income increased 36.0% for the
three months ended June 30, 2002 to $5.4 million (5.5% of net revenue) from
$4.0 million (4.4% of net revenue) for the three months ended June 30, 2001.
Six months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Consolidated net revenues increased 3.2% to $192.2 million for the six months
ended June 30, 2002 from $186.1 million for the six months ended June 30, 2001.
This increase is attributable primarily to the factors described below in the
sections entitled "Net Sales" and "Licensing Revenue".
NET SALES: Wholesale net sales (excluding sales to the Company's Consumer
Direct business segment) increased $10.2 million or 10.5% for the six months
ended June 30, 2002 to $107.1 million from $96.9 million for the six months
ended June 30, 2001. The increase is due primarily to increased sales from
Reaction Kenneth Cole and Unlisted brands partially offset by lower sales from
Kenneth Cole New York branded footwear, which faced increased consumer
willingness to forego purchases at regular retail prices as consumers instead
looked for promotions. Net sales in the Company's Consumer Direct segment
decreased $4.4 million or 5.7% to $73.1 million for the six months ended
June 30, 2002 compared to $77.5 million for the six months ended
June 30, 2001. The decline in net sales is due to a decrease in comparable
store sales of 13.1% or $9.3 million, partially offset by $6.2 million
in sales from new stores opened in 2002 and that portion of 2002 sales
for stores not open for all of 2001. The remaining decline was due to
a net decrease in catalog and internet sales. The Company believes
the decrease in net sales in the Consumer Direct segment is due to
the effects of a promotionally driven and highly competitive retail
store environment and less consumer spending due to current economic
conditions. In an effort to overcome these challenges, the Company
continues to analyze inventory, focus on product and further
scrutinize customer trends.
LICENSING REVENUE: Royalty revenue increased 4.9% to $11.6 million for the
six months ended June 30, 2002 from $11.1 million for the six months ended
June 30, 2001. This increase is attributable primarily to the incremental
revenues in sales of several of the Company's existing licensees,as well as
the Company's sales from its Latin American licensee, which opened up several
new stores in South and Central America during 2002. Royalty revenue
increased as a percentage of net revenues to 6.1% for the six months ended
June 30, 2002 from 6.0% for the six months ended June 30, 2001.
GROSS PROFIT: Consolidated gross profit as a percentage of net revenue
increased to 46.8% for the six months ended June 30, 2002 from 45.7% for the
six months ended June 30, 2001. This increase is primarily due to higher
margins in the Company's Wholesale segment as a result of well managed
inventories and fewer markdowns. Although the Consumer Direct segment gross
profit percentage increased, net sales from the Consumer Direct segment which
operates at a higher gross margin level than the Wholesale segment were 38.0%
of net consolidated revenue for the six months ended June 30, 2002 compared to
41.7% for the six months ended June 30, 2001. Accordingly, the lower
proportion of gross profit attributable to the Consumer Direct segment
relative to the Company's total business partially offset the increases
in gross profit from the Wholesale and Licensing/International segments as
a percentage of consolidated net revenues.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses,including shipping and warehousing, increased 0.6% to
$73.1 million (or 38.0% of net revenues) for the six months ended June 30, 2002
from the $72.6 million (or 39.0% of net revenues) for the six months ended
June 30, 2001. As noted, these expenses decreased as a percentage of net
revenues, however, primarily attributable to the Company's continued focus on
its cost-containment program implemented at the end of last year in response
to a challenging economic environment.
INTEREST AND OTHER INCOME: Interest and Other Income decreased $597,000 for
the six months ended June 30, 2002 from approximately $1.5 million for the six
months ended June 30, 2001. The decrease is the result of significantly
declining interest rate returns on cash investments.
INCOME TAXES: The Company's effective tax rate decreased to 37.0% for the
six-month period ended June 30, 2002 from 38.5% for the six months ended
June 30, 2001. 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.
NET INCOME: As a result of the foregoing, net income increased 28.1% for the
six months ended June 30, 2002 to $10.9 million (5.7% of net revenue) from
$8.5 million (4.6% of net revenue) for the six months ended June 30, 2001.
Liquidity and Capital Resources
The Company uses cash from operations as the primary source of financing for
its expansion and seasonal requirements. Cash requirements vary from time to
time as a result of the timing of the receipt of merchandise from suppliers,
the delivery by the Company of merchandise to its customers, and the level of
accounts receivable and due from factors balances. At June 30, 2002 and
December 31, 2001 working capital was $110.6 million and $96.7 million,
respectively.
Cash provided by operating activities was $10.1 million for the six months
ended June 30, 2002, compared to $7.8 million used in operating
activities for the six months ended June 30, 2001. The increase in
cash flow from operations is primarily attributable to an increase in
net income of $2.4 million compared to the prior period and the timing
of payables offset by an increase in inventory.
Net cash used in investing activities increased $758,000 for the six
months ended June 30, 2002 from $2.6 million for the six months ended
June 30, 2001 to $3.3 million for the six months ended June 30, 2002.
Capital expenditures totaled approximately $3.3 million and $4.2
million for the six months ended June 30, 2002 and 2001, respectively.
Capital expenditures for new retail store openings and expansions were
approximately $2.4 million and $3.4 million for the six months ended
June 30, 2002 and June 30, 2001, respectively. The remaining
expenditures were used primarily for information technology and
corporate headquarter renovations.
During 2000, the Company relocated its corporate headquarters to a new
location in New York City. The Company completed Phase I of its renovations,
incurring approximately $12.0 million in capital expenditures and expects to
incur an additional $6.0 million over the next two to three years upon
turnover of additional space.
Net cash provided by financing activities was $402,000 for the six months
ended June 30, 2002 compared to the $15.5 million used in financing
activities for the six months ended June 30, 2001. This is primarily
attributable to the Company's purchase of 606,700 shares of Class A Common
Stock purchased during the six months ended June 30, 2001 at an average price
per share of $26.31 under its stock repurchase program compared to no
purchases of treasury stock for the six months ended June 30, 2002.
The Company currently has a line of credit, which allows for borrowings and
letters of credit up to a maximum of $25.0 million to finance working capital
requirements. The Company has no outstanding advances under this line of
credit. However, amounts available under the line of credit were reduced by
$2.9 million in standby letters of credit and $2.5 million in open letters
of credit at June 30, 2002.
The Company believes that it will be able to satisfy its cash requirements
for the next year, including requirements for its retail expansion, new
corporate office space and information systems improvements, primarily
with cash flow from operations and current cash levels.
The foregoing commentary should be considered to fall within the coverage
of the "Safe Harbor Statement" under the Private Securities Litigation
reform Act of 1995 included in this report.
Item 3. 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 Euros. 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 forward contracts to hedge its cost in future purchases. The
Company does not enter into foreign currency transactions for speculative
purposes. At June 30, 2002, the Company had foreign exchange contracts
totaling $3.3 million in notional value with an unrealized gain of $117,000,
net of taxes. 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. At the Company's borrowing levels; a two percent increase in
interest rates affecting the Company's credit facility would not have
a material effect on the Company's year-to-date and projected 2002 and
actual 2001 net income.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities and Use of Proceeds. None
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders.
(a)Kenneth Cole Productions, Inc. Annual Meeting of Shareholders
was held on May 23, 2002.
(b)Election of Directors- All nominees were elected through proxies
solicited pursuant to Regulation 14A under the Securities and
Exchange Act of 1934, as amended. There was no solicitation in
opposition to management's nominees as listed in the Proxy Statement,
and each of the nominees were elected to hold office until the next
Annual Meeting of Shareholders.
(c)Matters voted on at the Annual Meeting of Shareholders included,
(i) the election of directors, (ii) amendment to the Stock Option
Plan to increase the number of shares authorized for issuance
by 1,000,000 and (iii) the ratification of the selection of
the independent public accountants for the 2002 fiscal year.
The results of the election of directors were as follows:
FOR AGAINST/ABSTAIN BROKER NON-VOTE
Paul Blum 87,744,246 2,433,798 0
Kenneth D. Cole 87,823,491 2,354,553 0
Robert C. Grayson 8,505,675 317,399 0
Denis F. Kelly 8,525,226 297,848 0
Philip B. Miller 89,880,611 297,433 0
Stanley A. Mayer 87,743,604 2,434,440 0
Holders of 11,196,338 shares of Class A Common Stock, and 8,450,497
shares of Class B Common Stock, constituting approximately 94.23%
of the shares entitled to vote, were present in person or by proxy
at the Annual Meeting of Shareholders. Each record holder of Class A
Common Stock is entitled to one vote per share, and each record holder
of Class B Common Stock is entitled to 10 votes per share. Holders of
Class A Common Stock voted separately to elect Robert C. Grayson
and Denis Kelly.
With regard to the amendment of the Kenneth Cole 1994 Stock Option
Plan to increase the number of shares authorized, the results were
as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTE
83,411,913 4,829,424 30,602 0
With regard to the ratification of the appointment of Ernst & Young LLP
as the Company's independent certified public accountants, the
results were as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTE
89,889,210 287,297 1,537 0
Item 5.Other Information. None
Item 6.Exhibits and Reports on Form 8-K.
(a)Exhibits:
99.1 Certification: Pursuant to 10 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002- Chief Executive Officer
99.2 Certification: Pursuant to 10 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002- Chief Financial Officer
(b)Reports on Form 8-K: The Company did not file any reports on Form
8-K during the three months ended June 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Kenneth Cole Productions, Inc.
Registrant
August 13, 2002 /s/STANLEY A. MAYER
Stanley A. Mayer
Executive Vice President and
Chief Financial Officer
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Kenneth Cole Productions, Inc.
(the "Company") on Form 10-Q for the period ending June 30, 2002, as
filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Kenneth D. Cole, Chairman and Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1)The Report fully complies with the requirements of Section
13(a) or 15(d) of the Security Exchange Act of 1934, as amended; and
(2)The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/Kenneth D. Cole
Kenneth D. Cole
Chairman and Chief Executive Officer
Kenneth Cole Productions, Inc
August 13, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Kenneth Cole Productions, Inc.
(the "Company") on Form 10-Q for the period ending June 30, 2002, as filed
with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Stanley A. Mayer, Executive Vice President and Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1)The Report fully complies with the requirements of Section 13(a)
or 15(d)of the Security Exchange Act of 1934, as amended; and
(2)The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/Stanley A. Mayer
Stanley A. Mayer
Executive Vice President and
Chief Financial Officer
Kenneth Cole Productions, Inc
August 13, 2002