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UNITED STATES
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 September 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 November 11, 2002
Class A Common Stock ($.01 par value) 11,202,899
Class B Common Stock ($.01 par value) 8,360,497
Kenneth Cole Productions, Inc.
Index to 10-Q
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30,2002 and
December 31, 2001........................................................... 3
Condensed Consolidated Statements of Income for the three and nine-month
periods ended September 30, 2002 and 2001................................... 5
Condensed Consolidated Statement of Changes in Shareholders'Equity for the
nine-month period ended September 30, 2002.................................. 6
Condensed Consolidated Statements of Cash Flows for the nine-month periods
ended September 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...............................................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........19
Item 4. Controls and Procedures..............................................19
Part II. OTHER INFORMATION
Item 1.Legal Proceedings.....................................................20
Item 2.Changes in Securities and Use of Proceeds.............................20
Item 3.Defaults Upon Senior Securities.......................................20
Item 4.Submission of Matters to a Vote of Security Holders...................20
Item 5.Other Information.....................................................20
Item 6.Exhibits and Reports on Form 8-K......................................20
Signatures...................................................................21
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September December
30, 31,
2002 2001
(Unaudited)
Assets
Current assets:
Cash $ 57,807,000 $ 68,966,000
Due from factor 47,563,000 28,289,000
Accounts receivable, net 9,778,000 6,731,000
Inventories 54,320,000 30,753,000
Prepaid expenses and other current assets 1,061,000 873,000
Deferred taxes 2,765,000 2,765,000
------------ ------------
Total current assets 173,294,000 138,377,000
Property and equipment - at cost, less
accumulated depreciation 36,682,000 40,487,000
Other assets:
Deposits and deferred taxes 10,172,000 11,022,000
Deferred compensation plan assets 11,223,000 12,003,000
------------ ------------
Total other assets 21,395,000 23,025,000
------------ ------------
Total assets $231,371,000 $201,889,000
============ ============
See accompanying notes to condensed consolidated financial
statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
September December
30, 31,
2002 2001
(Unaudited)
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 39,027,000 $ 25,932,000
Accrued expenses and other current liabilities 17,075,000 15,736,000
------------ ------------
Total current liabilities 56,102,000 41,668,000
Deferred compensation 11,223,000 12,003,000
Other 8,577,000 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, 13,820,183 and
13,626,584 issued in 2002 and 2001 138,000 136,000
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 62,742,000 61,273,000
Accumulated other comprehensive income 374,000 434,000
Retained earnings 153,826,000 136,099,000
------------ ------------
217,164,000 198,027,000
Class A Common Stock in treasury, at cost,
2,688,400 and 2,488,400 shares in 2002 and 2001 (61,695,000) (57,133,000)
------------ ------------
Total shareholders' equity 155,469,000 140,894,000
------------ ------------
Total liabilities and shareholders' equity $231,371,000 $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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Net sales $115,325,000 $ 95,311,000 $295,860,000 $270,355,000
Royalty revenue 8,195,000 5,916,000 19,821,000 16,994,000
------------ ------------ ------------ ------------
Net revenue 123,520,000 101,227,000 315,681,000 287,349,000
Cost of goods sold 69,299,000 56,882,000 171,603,000 158,020,000
------------ ------------ ------------ ------------
Gross profit 54,221,000 44,345,000 144,078,000 129,329,000
Selling, general and
administrative expenses 39,266,000 35,273,000 112,356,000 107,893,000
Asset impairment 4,446,000 4,446,000
------------ ------------ ------------ ------------
Operating income 10,509,000 9,072,000 27,276,000 21,436,000
Interest and other
income, net 266,000 382,000 863,000 1,908,000
------------ ------------ ------------ ------------
Income before provision
for income taxes 10,775,000 9,454,000 28,139,000 23,344,000
Provision for income taxes 3,987,000 3,592,000 10,412,000 8,945,000
------------ ------------ ------------ ------------
Net income $ 6,788,000 $ 5,862,000 $ 17,727,000 $ 14,399,000
============ ============ ============ ============
Earnings per share:
Basic $ .34 $ .30 $ .90 $ .72
Diluted $ .33 $ .29 $ .86 $ .69
Shares used to compute
earnings per share:
Basic 19,690,000 19,840,000 19,667,000 20,092,000
Diluted 20,665,000 20,418,000 20,636,000 20,961,000
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
of $594,000 89,169 1,000
Issuance of Class A Common
Stock for ESPP 11,830
Purchase of Class A
Common Stock
Conversion of Class B
shares to Class A shares 92,600 1,000 (92,600) (1,000)
--------------------------------------------------
Shareholders' equity
September 30, 2002 13,820,183 $ 138,000 8,405,497 $ 84,000
==================================================
Accumulated
Additional Other
Paid-in Comprehensive Retained
Capital Income Earnings
Shareholders' equity
January 1, 2002 $ 61,273,000 $ 434,000 $ 136,099,000
Net income 17,727,000
Translation adjustments
foreign currency (104,000)
forward contracts, net
of taxes 44,000
Comprehensive income
Exercise of stock options,
and related tax benefits
of $594,000 1,308,000
Issuance of Class A Common
Stock for ESPP 161,000
Purchase of Class A
Common Stock
Conversion of Class B
shares to Class A shares
----------------------------------------------
Shareholders' equity
September 30, 2002 $ 62,742,000 $ 374,000 $ 153,826,000
==============================================
Treasury Stock
Number of
Shares Amount Total
Shareholders' equity
January 1, 2002 (2,488,400) $(57,133,000) $ 140,894,000
Net income 17,727,000
Translation adjustments
foreign currency (104,000)
forward contracts, net
of taxes 44,000
-------------
Comprehensive income 17,667,000
Exercise of stock options,
and related tax benefits
of $594,000 1,309,000
Issuance of Class A Common
Stock for ESPP 161,000
Purchase of Class A
Common Stock (200,000) (4,562,000) (4,562,000)
Conversion of Class B
shares to Class A shares
------------------------------------------
Shareholders' equity
September 30, 2002 (2,688,400) $(61,695,000) $ 155,469,000
==========================================
See accompanying notes to condensed consolidated financial statements
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2002 2001
Cash flows from operating activities
Net income $ 17,727,000 $ 14,399,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,528,000 5,372,000
Asset impairment 4,446,000
Unrealized loss on deferred compensation 1,465,000 1,573,000
Realized gain on marketable securities (133,000)
Provision for bad debts 134,000 521,000
Changes in assets and liabilities:
Increase in due from factors (19,274,000) (17,960,000)
(Increase) decrease in accounts receivable (3,181,000) 1,559,000
Increase in inventories (23,523,000) (6,708,000)
(Increase) decrease in prepaid expenses &
other current assets (188,000) 515,000
Decrease (increase) in other assets 67,000 (2,831,000)
Increase (decrease) in accounts payable 13,095,000 (7,868,000)
Increase (decrease) in income taxes payable 159,000 (1,484,000)
Increase (decrease) in accrued expenses and
other current liabilities 1,761,000 (3,188,000)
Increase in other non-current liabilities 644,000 3,467,000
------------ ------------
Net cash used in operating activities (1,140,000) (12,766,000)
Cash flows from investing activities
Acquisition of property and equipment, net (6,169,000) (7,839,000)
Proceeds from sale of marketable securities 1,624,000
------------ ------------
Net cash used in investing activities (6,169,000) (6,215,000)
Cash flows from financing activities
Proceeds from exercise of stock options 715,000 337,000
Proceeds from issuance of common stock 161,000 270,000
Purchase of treasury stock (4,562,000) (21,057,000)
Principal payments on capital lease obligations (158,000) (143,000)
------------ ------------
Net cash used in financing activities (3,844,000) (20,593,000)
Effect of exchange rate changes on cash (6,000) (28,000)
------------ ------------
Net decrease in cash (11,159,000) (39,602,000)
Cash, beginning of period 68,966,000 74,608,000
------------ ------------
Cash, end of period $ 57,807,000 $ 35,006,000
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 28,000 $ 35,000
Income taxes $ 11,579,000 $ 10,101,000
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 nine months ended September 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
$17,667,000 and $14,740,000 for the nine-month periods ended
September 30, 2002 and 2001, respectively. Comprehensive
income amounted to $6,738,000 and $6,639,000 for the three-
month periods ended September 30, 2002 and 2001, 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 $15,000,000 at September 30, 2002 with maturity
dates through April 2003.
3. Derivative Instruments and Hedging Activities (continued)
All terms and conditions of the Company's foreign exchange
contracts are included 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 inoffsetting 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 nine months ended September 30, 2002.
At September 30, 2002, the Company's notional $15,000,000 in
forward exchange contracts resulted in an unrealized gain of
approximately $94,000, 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 Nine Months Ended
September September September September
30, 2002 30, 2001 30, 2002 30, 2001
Weighted average common
shares outstanding 19,690,000 19,840,000 19,667,000 20,092,000
Effect of dilutive securities:
Stock options 975,000 578,000 969,000 869,000
---------- ---------- ---------- ----------
Weighted average common
shares outstanding and
common share equivalents 20,665,000 20,418,000 20,636,000 20,961,000
========== ========== ========== ==========
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 products and royalties earned on the
purchase and sale of retailers or to consumers in several
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 segments include
a markup, which is eliminated in consolidation.
Revenues from international customers represent less than two
percent of the Company's consolidated revenues.
5. Segment Information (continued)
Financial information of the Company's reportable segments is
as follows (in thousands):
Three Months Ended
September 30, 2002
Consumer Licensing/
Wholesale Direct International Totals
Revenues from external customers $ 75,820 $ 39,340 $ 8,360 $ 123,520
Intersegment revenues (7,628) (7,628)
Segment income (1)(2) 11,467 (3,486) 7,141 15,122
Segment assets 176,109 55,205 2,408 233,722
Three Months Ended
September 30, 2001
Consumer Licensing/
Wholesale Direct International Totals
Revenues from external customers $ 58,574 $ 36,609 $ 6,044 $ 101,227
Intersegment revenues (7,168) (7,168)
Segment income (1)(2) 8,957 (328) 4,414 13,043
Segment assets 138,704 58,391 2,674 199,769
Nine Months Ended
September 30, 2002
Consumer Licensing/
Wholesale Direct International Totals
Revenues from external customers $ 182,955 $ 112,425 $ 20,301 $ 315,681
Intersegment revenues (24,197) (24,197)
Segment income (1)(2) 26,064 (713) 14,702 40,053
Nine Months Ended
September 30, 2001
Consumer Licensing/
Wholesale Direct International Totals
Revenues from external customers $ 155,503 $ 114,138 $17,708 $ 287,349
Intersegment revenues (23,750) (23,750)
Segment income (1)(2) 21,826 906 12,495 35,227
(1) Before elimination of intersegment profit, unallocated corporate overhead
and income taxes.
(2) Segment income for the Consumer Direct segment includes an asset
impairment charge of $4.4 million and a gain of $860,000 recorded during the
three months ended September 30, 2002.
The reconciliation of the Company's reportable segment revenues, profit and
loss, and assets are as follows (in thousands):
Three Months Ended Nine Months Ended
September September September September
30, 2002 30, 2001 30, 2002 30, 2001
Revenues
Revenues for external customers $ 123,520 $ 101,227 $ 315,681 $ 287,349
Intersegment revenues 7,628 7,168 24,197 23,750
Elimination of intersegment revenues (7,628) (7,168) (24,197) (23,750)
--------- --------- --------- ---------
Total consolidated revenues $ 123,520 $ 101,227 $ 315,681 $ 287,349
========= ========= ========= =========
Income
Total profit for
reportable segments $ 15,122 $ 13,043 $ 40,053 $ 35,227
Elimination of intersegment profit and
unallocated corporate overhead (4,347) (3,589) (11,914) (11,883)
--------- --------- --------- ---------
Total income before income taxes $ 10,775 $ 9,454 $ 28,139 $ 23,344
========= ========= ========= =========
Assets
Total assets for
reportable segments $ 233,722 $ 199,769
Elimination of intersegment
inventory profit (2,351) (2,325)
--------- ---------
Total consolidated assets $ 231,371 $ 197,444
========= =========
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. 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's adoption of the
EITF Issue No. 00-25 on January 1, 2002 impacted net revenue and
expense classifications by approximately $1,208,000 and $1,239,000
for the nine months ended September 30, 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
Statement of Financial Accounting Standards No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144
addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and 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 144 effective
January 1, 2002 and such adoption had no impact on net income (See
Note 7).
In June 2002, the Financial Accounting Standards Board issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"). SFAS 146 requires companies to recognize
costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or
disposal plan. Examples of costs covered by the standard include
lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. SFAS 146 is to be
applied prospectively to exit or disposal activities initiated after
December 31, 2002. The Company is currently evaluating the
requirements and impact of SFAS 146, however it does not expect that
the adoption of this pronouncement will have a material effect on its
consolidated results of operations or financial position.
7. Asset Impairment Charge and Gain
At September 30, 2002, the Company determined that based upon
the current performance and anticipated future outlook of its
Rockefeller Center flagship store located in New York City and in
accordance with SFAS 144, certain fixed assets are impaired. As a
result, a pre-tax charge of $4.4 million was recorded during the three
months ended September 30, 2002. In addition, the Company recognized
a gain as part of cost of goods sold on the income statement in the
amount of $860,000 relating to the audit results of its licensees.
8. Other
The Company, from time to time, is a party to litigation that
arises in the normal course of its business operations. The Company
is not presently a party to any such litigation that would have a
material adverse effect on its business operations.
9. Reclassifications
Certain amounts included in the Company's 2001 financial
statements have been reclassified to conform to the September 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 that 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 nine months ended
September 30, 2002 and September 30, 2001.
Three Months Ended
September 30,
2002 2001
Net sales $ 115,325 93.4% $ 95,311 94.2%
Royalty revenue 8,195 6.6 5,916 5.8
Net revenue 123,520 100.0 101,227 100.0
Gross Profit 54,221 43.9 44,345 43.8
Selling, general
& administrative expenses 39,266 31.8 35,273 34.8
Asset impairment 4,446 3.6
Operating income 10,509 8.5 9,072 9.0
Interest income, net 266 0.2 382 0.3
Income before income taxes 10,775 8.7 9,454 9.3
Income tax expense 3,987 3.2 3,592 3.5
Net income 6,788 5.5 5,862 5.8
Nine Months Ended
September 30,
2002 2001
Net sales $ 295,860 93.7% $ 270,355 94.1%
Royalty revenue 19,821 6.3 16,994 5.9
Net revenue 315,681 100.0 287,349 100.0
Gross Profit 144,078 45.6 129,329 45.0
Selling, general
& administrative expenses 112,356 35.6 107,893 37.5
Asset impairment 4,446 1.4
Operating income 27,276 8.6 21,436 7.5
Interest income, net 863 0.3 1,908 0.6
Income before income taxes 28,139 8.9 23,344 8.1
Income tax expense 10,412 3.3 8,945 3.1
Net income 17,727 5.6 14,399 5.0
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001
Consolidated net revenues increased $22.3 million or 22.0% to $123.5
million for the three months ended September 30, 2002 from $101.2
million for the three months ended September 30, 2001. This increase
is attributable primarily to the factors described below in the
sections entitled "Net Sales" and "Licensing/ International Revenue".
NET SALES: Net sales in the Company's Wholesale segment (excluding
sales to the Company's Consumer Direct business segment) increased
$17.2 million, or 29.4%, to $75.8 million for the three months ended
September 30, 2002 from $58.6 million for the three months ended
September 30, 2001. This increase is attributable primarily to an
increase in sales of the Company's diffusion brands Kenneth Cole
Reaction and Unlisted. The Company sells its products under these
brands at varying price ranges and through multiple distribution
channels, thereby limiting the Company's exposure to reductions in
sales at any one price level or in a particular channel of
distribution. Net sales in the Company's Consumer Direct segment
increased $2.7 million, or 7.5% to $39.3 million for the three months
ended September 30, 2002 from $36.6 million for the three months
ended September 30, 2001. The increase in net sales is due primarily
to an increase of $2.7 million in sales from new stores opened in
2002 as well as expansion stores sales and that portion of 2002 sales
for stores not open for all of 2001. Comparable store sales decreased
0.6% or $197,000 offset by an increase in internet and catalog sales
for the three months ended September 30, 2002. 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/ INTERNATIONAL REVENUE: Royalty revenue increased $2.3
million, or 38.5% to $8.2 million for the three months ended
September 30, 2002 from $5.9 million for the three months ended
September 30, 2001. Royalty revenue increased as a percentage of net
revenues to 6.6% for the three months ended September 30, 2002 from
5.8% for the three months ended September 30, 2001. This increase in
licensing revenues primarily reflects incremental sales from men's
and women's sportswear as well as the launch of the Company's men's
and women's fragrance during the third quarter 2002.
GROSS PROFIT: Consolidated gross profit as a percentage of net
revenue increased slightly to 43.9% for the three months ended
September 30, 2002 from 43.8% for the three months ended September
30, 2001. The increase is attributable to an increase in the
Wholesale segment's gross profit on higher sales offset by decreased
gross profit in the Consumer Direct segment. The Wholesale segment,
which operates at a lower gross profit level than the Consumer Direct
segment, as a percentage of net revenue increased to 61.4% for the
three months ended September 30, 2002 from 57.9% for the three months
ended September 30, 2001, while the Consumer Direct segment as a
percentage of net revenue decreased to 31.8% for the three months
ended September 30, 2002 from 36.2% for the three months ended
September 30, 2001. The strong gross profit of the Wholesale segment
resulted primarily from the Company's well-managed inventory position
and increased sales across most product lines. The decrease in
Consumer Direct gross profit was attributable to lower sales volume
in the promotionally driven, highly competitive retail environment,
partially offset by a gain of $860,000. This gain included in gross
profit resulted from price adjustments on certain products sold to
Kenneth Cole retail stores, discovered after conducting audits of
certain licensees as part of the Company's rotational licensee audit
program.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses, including shipping and warehousing,
increased $4.0 million, or 11.3%, to $39.3 million (or 31.8% of net
revenues) for the three months ended September 30, 2002 from $35.3
million (or 34.8% of net revenues) for the three months ended
September 30, 2001. Although these expenses increased in actual
dollar amount, they decreased as a percentage of net revenues,
primarily due to the Company's continued focus on its cost-
containment program implemented at the end of 2001 in response to a
challenging economic environment that continues to persist.
ASSET IMPAIRMENT: The Company recorded a charge of $4.4 million
during the three months ended September 30, 2002 due to a write-down
of the leasehold improvements associated with the Company's flagship
retail store located at Rockefeller Center in New York City. This
charge, which represented 3.6% of net revenues for the three months
ended September 30, 2002 is included within operating income.
INTEREST AND OTHER INCOME: Interest and other income decreased
$116,000, or 30.4%, to $266,000 million for the three months ended
September 30, 2002 from $382,000 for the three months ended September
30, 2001. This decrease is due to lower average short-term interest
rates.
INCOME TAXES: The Company's effective tax rate has decreased to
37.0% for the three months ended September 30, 2002 from 38.0% for
the three months ended September 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, including an
asset impairment charge of $4.4 million and a gain included in gross
profit of $860,000, increased $900,000, or 15.8%, to $6.8 million
(5.5% of net revenues) for the three months ended September 30, 2002
from $5.9 million (5.8% of net revenues) for the three months ended
September 30, 2001.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001
Consolidated net revenues increased $28.3 million, or 9.9 %, to
$315.7 million for the nine months ended September 30, 2002 from
$287.4 million for the nine months ended September 30, 2001. This
increase is attributable primarily to the factors described below in
the sections entitled "Net Sales" and "Licensing/ International
Revenue".
NET SALES: Net Sales in the Company's Wholesale segment (excluding
sales to the Company's Consumer Direct business segment) increased
$27.5 million or 17.7%, to $183.0 million for the nine months ended
September 30, 2002 from $155.5 million for the nine months ended
September 30, 2001. The increase is due primarily to increased
sales from Reaction Kenneth Cole and Unlisted diffusion brands. The
Company sells its products under these brands at varying price ranges
and through multiple distribution channels, thereby limiting the
Company's exposure to reductions in sales at any one price level or
in a particular channel of distribution. Net sales in the Company's
Consumer Direct segment decreased $1.7 million or 1.5% to $112.4
million for the nine months ended September 30, 2002 from $114.1
million for the nine months ended September 30, 2001. This decline in
net sales is due to a decrease in comparable store sales of $9.5
million, or 9.2%, partially offset by a increase of $8.8 million in
sales generated by new stores opened in 2002 as well as expansions
store sales 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/ INTERNATIONAL REVENUE: Royalty revenue increased $2.8
million, or 16.6% to $19.8 million for the nine months ended
September 30, 2002 from $17.0 million for the nine months ended
September 30, 2001. This increase is attributable primarily to the
incremental revenues in sales of several of the Company's existing
licensees, the Company's sales from its Latin American licensee,
which opened up several new stores in South and Central America
during 2002 and the launch of its fragrance line of products by the
Company's new licensee during the third quarter 2002. Royalty
revenue increased as a percentage of net revenues to 6.3% for the
nine months ended September 30, 2002 from 5.9% for the nine months
ended September 30, 2001.
GROSS PROFIT: Consolidated gross profit as a percentage of net
revenue increased to 45.6% for the nine months ended September 30,
2002 from 45.0% for the nine months ended September 30, 2001. This
increase is primarily due to higher margins in the Company's
Wholesale segment as a result of well managed inventories. The
increase in the Wholesale segment gross profit was offset by the
decrease in the Consumer Direct segment's gross profit. Net sales
from the Consumer Direct segment, which operates at a higher gross
profit level than the Wholesale segment, decreased to 35.6% of net
revenue for the nine months ended September 30, 2002 from 39.7% for
the nine months ended September 30, 2001. Accordingly, the lower
proportion of gross profit attributable to the Consumer Direct
segment relative to the Company's total business and the segment's
decrease in gross profit percentage partially offset the increases in
gross profit from the Wholesale and Licensing/International segments
as a percentage of net revenue. The decrease in the Consumer Direct
segment's gross profit and its gross profit as a percentage of sales
was partially offset by a gain of $860,000 recorded during the three
months ended September 30, 2002. This gain, included in gross
profit, resulted from price adjustments on certain products sold to
Kenneth Cole retail stores, discovered after conducting audits of
certain licensees as part of the Company's rotational licensee audit
program.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses, including shipping and warehousing,
increased $4.5 million, or 4.1%, to $112.4 million (or 35.6% of net
revenues) for the nine months ended September 30, 2002 from $107.9
million (or 37.5% of net revenues)for the nine months ended September
30, 2001. As noted, these expenses decreased as a percentage of net
revenue, primarily resulting from the Company's continued focus on
its cost-containment program implemented at the end of last year in
response to a challenging economic environment.
ASSET IMPAIRMENT: The Company recorded a charge of $4.4 million
(1.4% of net revenue) for the nine months ended September 30, 2002
for a write-down of the lease hold improvements associated with the
Company's flagship retail store located at Rockefeller Center New
York City. The charge is included within operating income.
INTEREST AND OTHER INCOME: Interest and other income decreased
approximately $1.0 million, or 54.8%, to $863,000 for the nine months
ended September 30, 2002 from approximately $1.9 million for the nine
months ended September 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 nine months ended September 30, 2002 from 38.3% for the nine
months ended September 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, including an
asset impairment charge of $4.4 million and a gain of $860,000
included in gross profit, increased $3.3 million, or 23.1%, to $17.7
million (5.6% of net revenue) for the nine months ended September 30,
2002 from $14.4 million (5.0% of net revenue) for the nine months
ended September 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 factor balances. At September 30, 2002 and December 31,
2001 working capital was $117.2 million and $96.7 million,
respectively.
Cash used in operating activities was $1.0 million for the nine
months ended September 30, 2002, compared to $12.8 million used in
operating activities for the nine months ended September 30, 2001.
The increase in cash flow from operations is primarily attributable
to an increase in net income compared to the prior period, and the
timing of payables offset by an increase in inventory.
Net cash used in investing activities decreased $46,000 to $6.2
million for the nine months ended September 30, 2002. The decrease
in net cash used in investing activities for the nine months ended
September 30, 2002 was reduced by approximately $1.6 million of
proceeds from the sale of marketable securities. Capital
expenditures totaled approximately $6.2 million and $7.8 million for
the nine months ended September 30, 2002 and 2001, respectively.
Capital expenditures for new retail store openings and expansions
were approximately $3.1 million and $5.9 million for the nine months
ended September 30, 2002 and September 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 and
began Phase II of its renovations, incurring in total approximately
$14.0 million in capital expenditures and expects to incur an
additional $6.0 million over the next one to two years upon turnover
of additional space.
Net cash used in financing activities was $3.8 million for the
nine months ended September 30, 2002 compared to the $20.6 million
used in financing activities for the nine months ended September 30,
2001. This is primarily attributable to the Company's purchase of
200,000 shares of Class A Common Stock purchased during the nine
months ended September 30, 2002 at an average price per share of
$22.81 under its stock repurchase program compared to the purchase of
881,700 shares of treasury stock at a purchase price of $23.88 per
share for the nine months ended September 30, 2001.
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 $2.8 million in
standby letters of credit and by $2.0 million in open letters of
credit at September 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
September 30, 2002, the Company had foreign exchange forward
contracts totaling $15.0 million in notional value with an unrealized
gain of $94,000, 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 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.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
The Company's chief executive officer and chief financial officer,
after evaluating the effectiveness of the Company's "disclosure
controls and procedures" (as defined in Rules 13a-14(c) and 15d-
14(c) of the Securities Exchange Act of 1934, as amended) as of a
date (the "Evaluation Date") within 90 days before the filing date of
this quarterly report, have concluded that, as of the Evaluation
Date, the Company's disclosure controls and procedures were effective
and designed to ensure that material information relating to the
Company and the Company's consolidated subsidiaries would be made
known to them by others within those entities to allow timely
decisions regarding required disclosures.
Changes in internal controls
There were no significant changes in the Company's internal
controls or in other factors that could significantly affect those
controls subsequent to the Evaluation Date.
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. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
99.1 Certification: Pursuant to 18 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 18 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 September 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
November 13, 2002 /s/ STANLEY A. MAYER
Stanley A. Mayer
Executive Vice President and
Chief Financial Officer
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Kenneth D. Cole, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Kenneth
Cole Productions, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in the report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function) :
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial date and
have identified for the registrant's auditors and material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date
of our most recent evaluation, including the corrective actions with
regard to significant deficiencies and material weaknesses.
By: /s/ Kenneth D. Cole
------------------------------
Kenneth D. Cole
Chief Executive Officer
Date: November 13, 2002
CERTIFICATION
I, Stanley A. Mayer, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Kenneth
Cole Productions, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in the report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function) :
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial date and
have identified for the registrant's auditors and material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date
of our most recent evaluation, including the corrective actions with
regard to significant deficiencies and material weaknesses.
By: /s/ Stanley A. Mayer
------------------------------
Kenneth D. Cole
Chief Financial Officer
Date: November 13, 2002
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 September 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.
1350, as adopted pursuant to 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 Securities 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.
November 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 September 29,
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. 1350, as adopted pursuant to 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 Securities 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.
November 13, 2002