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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 March 31, 2003
( ) 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 (the "Exchange Act") during the preceding 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). 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 May 7, 2003
Class A Common Stock ( $.01 par value) 11,260,699
Class B Common Stock ( $.01 par value) 8,246,497
Kenneth Cole Productions, Inc.
Index to 10-Q
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002..................................................3
Condensed Consolidated Statements of Income for the three months
ended March 31, 2003 and 2002......................................5
Condensed Consolidated Statement of Changes in Shareholders'
Equity for the three months ended March 31, 2003...................6
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002...............................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 Disclosure about Market Risk.......18
Item 4. Controls and Procedures.........................................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................................................19
Item 6.Exhibits and Reports on Form 8-K.................................19
Signatures..............................................................20
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
March 31, December 31,
2003 2002
(Unaudited)
Assets
Current assets:
Cash $ 81,439,000 $ 91,549,000
Due from factor 42,481,000 30,886,000
Accounts receivable, net 6,776,000 7,884,000
Inventories 43,075,000 43,724,000
Prepaid expenses and other current assets 874,000 1,074,000
Deferred taxes 2,900,000 2,900,000
------------ ------------
Total current assets 177,545,000 178,017,000
Property and equipment - at cost, less
accumulated depreciation 35,309,000 36,002,000
Other assets:
Deposits and deferred taxes 13,842,000 14,243,000
Deferred compensation plans assets 14,539,000 12,055,000
------------ ------------
Total other assets 28,381,000 26,298,000
------------ ------------
Total assets $241,235,000 $240,317,000
============ ============
See accompanying notes to condensed consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
March 31, December 31,
2003 2002
(Unaudited)
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 33,715,000 $ 33,634,000
Accrued expenses and other current liabilities 10,475,000 14,040,000
Income taxes payable 5,563,000 6,240,000
------------ ------------
Total current liabilities 49,753,000 53,914,000
Deferred compensation 14,539,000 12,055,000
Other 9,675,000 9,446,000
Commitments and contingencies
Shareholders' equity:
Series A Convertible Preferred Stock, par value $1.00,
1,000,000 shares authorized, none outstanding
Class A Common Stock, par value $.01, 20,000,000
shares authorized, 14,038,876 and 13,921,817
issued and outstanding in 2003 and 2002 140,000 139,000
Class B Common Stock, par value $.01, 9,000,000
shares authorized, 8,291,497 and 8,360,497
issued and outstanding in 2003 and 2002 83,000 84,000
Additional paid-in capital 64,195,000 63,476,000
Accumulated other comprehensive income 468,000 654,000
Retained earnings 168,603,000 162,244,000
------------ ------------
233,489,000 226,597,000
Class A Common Stock in treasury, at cost,
2,888,400 and 2,688,400 shares in 2003 and 2002 (66,221,000) (61,695,000)
------------ ------------
Total shareholders' equity 167,268,000 164,902,000
------------ ------------
Total liabilities and shareholders' equity $241,235,000 $240,317,000
============ ============
See accompanying notes to condensed consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
2003 2002
Net sales $102,117,000 $ 87,290,000
Royalty revenue 8,007,000 5,621,000
------------ ------------
Net revenue 110,124,000 92,911,000
Cost of goods sold 62,542,000 49,147,000
------------ ------------
Gross profit 47,582,000 43,764,000
Selling, general and administrative
expenses 37,731,000 35,267,000
------------ ------------
Operating income 9,851,000 8,497,000
Interest and other income, net 242,000 267,000
------------ ------------
Income before provision for income taxes 10,093,000 8,764,000
Provision for income taxes 3,734,000 3,243,000
------------ ------------
Net income $ 6,359,000 $ 5,521,000
============ ============
Earnings per share:
Basic $.33 $.28
Diluted $.31 $.27
Shares used to compute earnings per share:
Basic 19,543,000 19,641,000
Diluted 20,448,000 20,403,000
See accompanying notes to condensed consolidated 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, 2003 13,921,817 $139,000 8,360,497 $84,000
Net income
Translation adjustments
foreign currency
forward contracts
Comprehensive income
Exercise of stock
options, including tax
benefit of $199,000 45,236
Issuance of Class A
Common Stock 2,823
Purchase of Class A
Common Stock
Conversion of Class B
to Class A shares 69,000 1,000 (69,000) (1,000)
-------------------------------------------------
Shareholders' equity
March 31, 2003 14,038,876 $140,000 8,291,497 $83,000
=================================================
Accumulated
Additional Other
Paid-in Comprehensive Retained
Capital Income Earnings
Shareholders' equity
January 1, 2003 $63,476,000 $654,000 $162,244,000
Net income 6,359,000
Translation adjustments
foreign currency (17,000)
forward contracts (169,000)
Comprehensive income
Exercise of stock
options, including tax
benefit of $199,000 670,000
Issuance of Class A
Common Stock 49,000
Purchase of Class A
Common Stock
Conversion of Class B
to Class A shares
-------------------------------------------------
Shareholders' equity
March 31, 2003 $64,195,000 $468,000 $168,603,000
=================================================
Treasury Stock
Number of
Shares Amount Total
Shareholders' equity
January 1, 2003 (2,688,400) $(61,695,000) $164,902,000
Net income 6,359,000
Translation adjustments
foreign currency (17,000)
forward contracts (169,000)
------------
Comprehensive income 6,173,000
Exercise of stock
options, including tax
benefit of $199,000 670,000
Issuance of Class A
Common Stock 49,000
Purchase of Class A
Common Stock (200,000) (4,526,000) (4,526,000)
Conversion of Class B
to Class A shares
----------------------------------------------
Shareholders' equity
March 31, 2003 (2,888,400) $(66,221,000) $167,268,000
==============================================
See accompanying notes to condensed consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2003 2002
Cash flows from operating activities
Net income $ 6,359,000 $ 5,521,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 1,834,000 1,831,000
Unrealized loss on deferred compensation plans 54,000 476,000
Provision for bad debts 70,000 89,000
Tax benefit from exercise of stock options 199,000 5,000
Changes in assets and liabilities:
Increase in due from factor (11,595,000) (8,279,000)
Decrease in accounts receivable 1,038,000 3,975,000
Decrease (increase) in inventories 480,000 (9,571,000)
Decrease in prepaid expenses and other
current assets 200,000 367,000
Increase in other assets (2,137,000) (921,000)
Increase in accounts payable 81,000 5,300,000
(Decrease) increase in income taxes payable (677,000) 3,087,000
Decrease in accrued expenses and other
current liabilities (3,523,000) (1,970,000)
Increase in other non-current liabilities 2,713,000 1,083,000
----------- -----------
Net cash (used in) provided by operating activities (4,904,000) 993,000
Cash flows from investing activities
Acquisition of property and equipment, net (1,141,000) (1,489,000)
----------- -----------
Net cash used in investing activities (1,141,000) (1,489,000)
Cash flows from financing activities
Proceeds from exercise of stock options 471,000 14,000
Proceeds from issuance of common stock 49,000 56,000
Purchases of treasury stock (4,526,000)
Principal payments on capital lease obligations (56,000) (51,000)
----------- -----------
Net cash (used in) provided by financing activities (4,062,000) 19,000
Effect of exchange rate changes on cash (3,000) (44,000)
----------- -----------
Net decrease in cash (10,110,000) (521,000)
Cash, beginning of period 91,549,000 68,966,000
----------- -----------
Cash, end of period $81,439,000 $68,445,000
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 16,000 $ 8,000
Income taxes $ 4,169,000 $ 495,000
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 generally accepted accounting
principles in the United States for interim financial information.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles in the United
States for complete financial statements. Certain items contained in
these financial statements are based on estimates. In the opinion of
management, the accompanying unaudited financial statements reflect
all 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 three months ended March 31, 2003 are
not necessarily indicative of the results that may be expected for
the year ended December 31, 2003. These unaudited 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, 2002.
The consolidated balance sheet at December 31, 2002, as
presented, was derived from the audited financial statements as of
December 31, 2002 included in the Company's annual report on Form 10-
K.
2. 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
increased both revenue and expense classifications by approximately
$488,000 and $378,000 for the three months ended March 31, 2003 and
2002, respectively, and did not change net income.
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 SFAS 146 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 has adopted the provisions of SFAS
No. 146 effective January 1, 2003 and such adoption had no impact on
net income.
3. Stock-Based Compensation
The Company measures compensation expense for its stock-
based compensation plans using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25") and related Interpretations. The
Company has adopted disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
Pro forma disclosures, as required by Statement of
Financial Accounting Standard No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", are computed as if the
Company recorded compensation expense based on the fair value for
stock-based awards or grants. The following pro forma information
includes the effects of the options discussed above.
Three Months Ended March 31,
2002 2003
Net Income, as reported $ 6,359,000 $ 5,521,000
Deduct: Stock-based employee compensation
expense determined under fair value method,
net of related tax effects 722,000 632,000
----------- -----------
Pro forma net income 5,637,000 4,889,000
Earnings per share:
Basic - as reported $ .33 $ .28
Basic - pro forma $ .29 $ .25
Diluted - as reported $ .31 $ .27
Diluted - pro forma $ .28 $ .24
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".
March 31, March 31,
2003 2002
Weighted average common
shares outstanding 19,543,000 19,641,000
Effect of dilutive securities:
Stock options 905,000 762,000
Weighted average common shares
outstanding and common share ---------- ----------
equivalents 20,448,000 20,403,000
========== ==========
5. 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 $6,173,000 and
$5,415,000 for the three-month periods ended March 31, 2003 and 2002,
respectively.
6. 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 Euros. 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 $8,250,000 at March 31, 2003 with maturity dates through
June 2003.
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
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 period ended March
31, 2003. At March 31, 2003 the Company's notional $8,250,000 in
forward exchange contracts resulted in an unrealized gain of
approximately $222,000, net of taxes, which was included as an
addition to other comprehensive income in the
6. Derivative Instruments and Hedging Activities (continued)
Company's Statement of Changes in Shareholders' Equity and a decrease
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 three month period
due to the actual executions of foreign exchange contracts to
purchase merchandise.
7. 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 the Company's branded
products and royalties earned on the purchase and sale to foreign
retailers or to consumers 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 based 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.
7. Segment Information (continued)
Financial information of the Company's reportable segments is as
follows (in thousands):
Three Months Ended
March 31, 2003
Consumer Licensing/
Wholesale Direct International Totals
Revenues from external customers $ 69,402 $ 32,566 $ 8,156 $110,124
Intersegment revenues (7,245) (7,245)
Segment income (1) 10,746 (3,116) 6,041 13,671
Segment assets 187,884 50,672 4,592 243,148
Three Months Ended
March 31, 2002
Consumer Licensing/
Wholesale Direct International Totals
Revenues from external customers $ 53,686 $ 33,437 $ 5,788 $ 92,911
Intersegment revenues (7,842) (7,842)
Segment income (1) 7,997 169 3,794 11,960
Segment assets 158,683 56,661 1,414 216,758
(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
March 31, March 31,
2003 2002
Revenues
Revenues for external customers $110,124 $ 92,911
Intersegment revenues 7,245 7,842
Elimination of intersegment revenues (7,245) (7,842)
-------- --------
Total consolidated revenues $110,124 $ 92,911
======== ========
Income
Total profit for reportable segments $ 13,671 $ 11,960
Elimination of intersegment profit
And unallocated corporate overhead (3,578) (3,196)
-------- --------
Total income before income taxes $ 10,093 $ 8,764
======== ========
Assets
Total assets for reportable segments $243,148 $216,758
Elimination of inventory profit in
consolidation (1,913) (1,930)
-------- --------
Total consolidated assets $241,235 $214,828
======== ========
8. Common Stock Repurchase
The Board of Directors of the Company has authorized
management to repurchase, from time to time, up to an aggregate
4,250,000 shares of the Company's Class A Common Stock. During the
three months ended March 31, 2003, 200,000 shares were repurchased in
the open market at an average price per share of $22.63 reducing the
available shares authorized for repurchase to 1,361,600. The
repurchased shares have been recorded as Treasury Stock.
9. Reclassifications
Certain amounts included in the Company's 2002 financial
statements have been reclassified to conform with the March 31, 2003
presentation.
10. 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.
11. Subsequent Event
On May 1, 2003 the Company entered into an exclusive license
agreement with Candies, Inc. and its trademark holding company, IP
Holdings, LLC, to use the Bongo trademark in connection with the
worldwide manufacture, sale and distribution of women's, men's and
children's footwear.
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 2003 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 license agreements, to maintain and
renew existing licensing 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.
Update on Critical Accounting Policies
The Company's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the
United States, which require the Company to make estimates in the
application of its accounting policies based on the best assumptions,
judgements, and opinions of management. For a description of a
summary of the Company's significant accounting policies, see Note A
to the Company's consolidated financial statements included in the
Company's annual report on Form 10-K for the year ended December 31,
2002.
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 months ended March 31, 2003
and 2002, respectively.
Three Months Ended March 31,
2003 2002
Net sales $102,117 92.7% $ 87,290 94.0%
Royalty revenue 8,007 7.3 5,621 6.0
-------- ------ -------- ------
Net revenue 110,124 100.0 92,911 100.0
Gross profit 47,582 43.2 43,764 47.1
Selling, general &
Administrative expenses 37,731 34.3 35,267 38.0
-------- ------ -------- ------
Operating income 9,851 8.9 8,497 9.1
Interest and other income, net 242 0.3 267 0.3
-------- ------ -------- ------
Income before income taxes 10,093 9.2 8,764 9.4
Income tax expense 3,734 3.4 3,243 3.5
-------- ------ -------- ------
Net income $ 6,359 5.8% $ 5,521 5.9%
======== ====== ======== ======
Three Months Ended March 31, 2003 Compared to Three Months Ended
March 31, 2002
Consolidated net revenues increased $17.2 million, or 18.5%, to
$110.1 million for the three months ended March 31, 2003 from $92.9
million for the three months ended March 31, 2002. This increase is
attributable primarily to the factors described below in the sections
entitled "Net Sales" and "Licensing/International Revenue".
NET SALES: Wholesale net sales (excluding sales to the Consumer
Direct business segment) increased $15.7 million, or 29.3%, to $69.4
million for the three months ended March 31, 2003 from $53.7 million
for the three months ended March 31, 2002. This increase is
primarily attributable to an increase in sales of the Company's
diffusion brands Reaction Kenneth Cole and Unlisted branded footwear,
which continued to demonstrate strong sell-thrus at retail. 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. The increase in branded
footwear net sales is slightly offset by a decrease in net sales of
handbags. Net sales in the Company's Consumer Direct segment
decreased $0.9 million, or 2.6%, to $32.6 million for the three
months ended March 31, 2003, from $33.4 million for the three months
ended March 31, 2002. The decrease in net sales is due to a decline
in comparable store sales of 7.3%, or $2.2 million partially offset
by net sales of $1.6 million from new stores opened for 2003, as well
as expansion store sales and that portion of 2003 net sales from
stores not open for all of 2002. The decrease is due in part to the
economic weakness generally seen throughout the retail and apparel
industry, the Company's transition too early to spring and
lightweight products and the effects of a promotionally driven and
highly competitive retail environment.
LICENSING/INTERNATIONAL REVENUE: Royalty revenue increased 42.4%
to $8.0 million for the three months ended March 31, 2003 from $5.6
million for the three months ended March 31, 2002. The increase
primarily reflects incremental revenues from existing licensees with
the most significant increases derived from men's and women's apparel
and luggage. In addition, the Company's fragrance licensee added new
revenues as the licensee is in its first year of sales, while the
Company's Latin American licensee continues to expand its store
rollouts in Central and South America.
GROSS PROFIT: Consolidated gross profit as a percentage of net
revenue decreased to 43.2% for the three months ended March 31, 2003
from 47.1% for the comparable period last year. The decrease is due
to lower margins on sales in the Company's Wholesale and Consumer
Direct segments. The Wholesale segment, which operates at a lower
gross profit level than the Consumer Direct segment, as a percentage
of net revenue increased to 63.0% for the three months ended March
31, 2003 from 57.8% for the three months March 31, 2002, while the
Consumer Direct segment as a percentage of net revenue decreased to
29.6% for the three months ended March 31, 2003 from 36.0% for the
three months ended March 31, 2002. The decrease in gross profit as a
percentage of net revenue was slightly offset by the gross profit
generated from the Licensing/International segment which carries
nominal associated cost of goods sold. Royalty revenue increased as
a percentage of net revenues to 7.3% for the three months ended March
31, 2003 from 6.0% for the three months ended March 31, 2002. In
addition, the Wholesale margin percentage eroded as a result of the
weakened U.S. Dollar compared to the Euro, and an increasingly
promotionally driven retail environment. The decrease in Consumer
Direct gross profit was attributable to lower sales volume and
margins in a highly competitive, promotionally driven retail
environment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general
and administrative expenses, including shipping and warehousing,
increased 7.0% to $37.7 million (or 34.3% of net revenue) for the
three months ended March 31, 2003 from $35.3 million (or 38.0% of net
revenue) for the three months ended March 31, 2002. The decrease as
a percentage of revenue is attributable primarily from economies of
scale over the Company's base fixed general and administrative costs.
Such amounts were partially offset by increased payroll.
INTEREST AND OTHER INCOME: Interest and other income, net
decreased to $0.2 million for the three months ended March 31, 2003
from $0.3 million for the three months ended March 31, 2002. The
decrease is due to significant declines in short term interest rates.
INCOME TAXES: The Company's effective tax rate remained at 37.0%
for the three months ended March 31, 2003 and 2002.
NET INCOME: As a result of the foregoing, net income increased
15.2% for the three months ended March 31, 2003 to $6.4 million (5.8%
of net revenue) from $5.5 million (5.9% of net revenue) for the three
months ended March 31, 2002.
Liquidity and Capital Resources
The Company uses cash from operations as the primary sources of
financing for its expansion and seasonal requirements. Cash
requirements vary from time to time as a result of the timing of
merchandise receipts from suppliers, the delivery of merchandise to
its customers, and the level of accounts receivable and due from
factor balances. At March 31, 2003 and December 31, 2002, working
capital was $127.8 million and $124.1 million, respectively.
Cash used in operating activities was $4.9 million for the three
months ended March 31, 2003, compared to cash provided by operating
activities of $1.0 million for the three months ended March 31, 2002.
The increase in cash flows used in operating activities is primarily
attributable to the timing of payables and receivables from increased
sales and purchasing during the ordinary course of business.
Net cash used in investing activities decreased to $1.1 million
for the three months ended March 31, 2003 from $1.5 million for the
three months ended March 31, 2002. Capital expenditures totaled
approximately $1.1 million and $1.5 million for the three months
ended March 31, 2003 and 2002, respectively. Capital expenditures
relate primarily to the Company's retail and outlet store expansion
and corporate office renovation.
During 2000, the Company relocated its corporate headquarters to
a larger location in New York City. The Company completed
renovations incurring approximately $14.9 million in capital
expenditures through March 31, 2003 and expects to incur
approximately an additional $7.0 million within the next two years.
Net cash used in financing activities was $4.1 million for the
three months ended March 31, 2003 compared to net cash provided by
financing activities of $19,000 for the three months ended March 31,
2002. This is primarily attributable to the Company's repurchase of
200,000 shares of Class A Common Stock under its buyback program for
an aggregate purchase price of $4.6 million during the first quarter
of 2003. The Company did not repurchase shares of Class A Common
Stock during the first quarter of 2002.
The Company's material obligations under contractual agreements,
including commitments for future payments under capital lease and
operating lease agreements as of March 31, 2003 are summarized as
follows:
Payments Due by Period
Contractual Total 1 year 2-3 4-5 After 5
Obligations or less years years years
Capital Lease $ 115,000 $ 115,000
Operating Leases 198,031,000 22,487,000 $43,143,000 $38,558,000 $93,843,000
------------------------------------------------------------
Total Contractual
Obligations $198,146,000 $22,602,000 $43,143,000 $38,558,000 $93,843,000
============================================================
The Company currently has a line of credit, which allows for
borrowings and letters of credit up to a maximum of $25 million to
finance working capital requirements. The Company has no outstanding
advances under this line of credit; however, amounts available under
the line were reduced by $0.8 million in open letters of credit and
$2.8 million standby letters of credit to $21.4 million at March 31,
2003.
The Company believes that it will be able to satisfy its cash
requirements for the next year, including requirements for its retail
store expansion, corporate office build-out, and enhancements to its
information systems, primarily with cash flow from operations, and
current cash levels.
The foregoing commentary should be considered to fall with 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 costs on future purchases. The Company does not enter into
foreign currency transactions for speculative purposes. At March 31,
2003, the Company had forward exchange contracts totaling $8.3
million with an unrealized gain of approximately $222,000, 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 2003 and actual 2002 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)
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 March 31, 2003.
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
May 12, 2003 /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: May 12, 2003
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
--------------------------
Stanley A. Mayer
Chief Financial Officer
Date: May 12, 2003
Exhibit 99.01
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 Annual Report of Kenneth Cole Productions,
Inc. (the "Company") on Form 10-Q for the period ended March 31, 2003
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.
May 12, 2003
Exhibit 99.02
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 Annual Report of Kenneth Cole Productions,
Inc. (the "Company") on Form 10-Q for the period ended March 31, 2003
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.
May 12, 2003