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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 June 30, 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 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 August 13, 2003
Class A Common Stock ($.01 par value) 11,375,949
Class B Common Stock ($.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 June 30, 2003 and
December 31, 2002 ............................................... 3
Condensed Consolidated Statements of Income for the three and
six-month periods ended June 30, 2003 and 2002 .................. 5
Condensed Consolidated Statement of Changes in Shareholders' Equity
for the six-month period ended June 30, 2003 ..................... 6
Condensed Consolidated Statements of Cash Flows for the six-month
periods ended June 30, 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 Disclosures about Market Risk .....20
Item 4. Controls and Procedures ........................................20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ..............................................21
Item 2. Changes in Securities and Use of Proceeds ......................21
Item 3. Defaults Upon Senior Securities ................................21
Item 4. Submission of Matters to a Vote of Security Holders ............21
Item 5. Other Information ..............................................22
Item 6. Exhibits and Reports on Form 8-K ...............................22
Signature ..............................................................23
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
June 30, December 31,
2003 2002
(Unaudited)
Assets
Current assets:
Cash $102,401,000 $ 91,549,000
Due from factor 26,064,000 30,886,000
Accounts receivable, net 10,056,000 7,884,000
Inventories 47,680,000 43,724,000
Prepaid expenses and other current assets 1,095,000 1,074,000
Deferred taxes 2,900,000 2,900,000
------------ ------------
Total current assets 190,196,000 178,017,000
Property and equipment - at cost, less
accumulated depreciation 35,307,000 36,002,000
Other assets:
Deposits and deferred taxes 14,290,000 14,243,000
Deferred compensation plan assets 16,414,000 12,055,000
------------ ------------
Total other assets 30,704,000 26,298,000
------------ ------------
Total assets $256,207,000 $240,317,000
============ ============
See accompanying notes to condensed consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
June 30, December 31,
2003 2002
(Unaudited)
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 39,158,000 $ 33,634,000
Accrued expenses and other current liabilities 13,111,000 14,040,000
Income taxes payable 2,752,000 6,240,000
------------ ------------
Total current liabilities 55,021,000 53,914,000
Deferred compensation 16,414,000 12,055,000
Other 10,242,000 9,446,000
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,
14,191,470 and 13,921,817 issued
in 2003 and 2002 142,000 139,000
Class B Common Stock, par value $.01,
per share, 9,000,000 shares authorized,
8,246,497 and 8,360,497 outstanding in 2003
and 2002 82,000 84,000
Additional paid-in capital 65,679,000 63,476,000
Accumulated other comprehensive income 185,000 654,000
Retained earnings 174,663,000 162,244,000
------------ ------------
240,751,000 226,597,000
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 174,530,000 164,902,000
------------ ------------
Total liabilities and shareholders' equity $256,207,000 $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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Net sales $ 88,096,000 $ 93,245,000 $190,213,000 $180,535,000
Royalty revenue 8,832,000 6,005,000 16,839,000 11,626,000
------------ ------------ ------------ ------------
Net revenues 96,928,000 99,250,000 207,052,000 192,161,000
Cost of goods sold 52,937,000 53,157,000 115,479,000 102,304,000
------------ ------------ ------------ ------------
Gross profit 43,991,000 46,093,000 91,573,000 89,857,000
Selling, general and
administrative
expenses 34,622,000 37,823,000 72,353,000 73,090,000
------------ ------------ ------------ ------------
Operating income 9,369,000 8,270,000 19,220,000 16,767,000
Interest and other
income, net 250,000 330,000 492,000 597,000
------------ ------------ ------------ ------------
Income before
provision for
income taxes 9,619,000 8,600,000 19,712,000 17,364,000
Provision for
income taxes 3,559,000 3,182,000 7,293,000 6,425,000
------------ ------------ ------------ ------------
Net income $ 6,060,000 $ 5,418,000 $ 12,419,000 $ 10,939,000
============ ============ ============ ============
Earnings per share:
Basic $ .31 $ .28 $ .64 $ .56
Diluted $ .30 $ .26 $ .61 $ .53
Shares used to
compute earnings
per share:
Basic 19,505,000 19,670,000 19,524,000 19,656,000
Diluted 20,245,000 20,838,000 20,346,000 20,621,000
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, net
of taxes
Comprehensive income
Exercise of stock options,
and related tax benefit
of $701,000 149,785 1,000
Issuance of Class A Common
Stock for ESPP 5,868
Purchase of Class A
Common Stock
Conversion of Class B
shares to Class A shares 114,000 2,000 (114,000) (2,000)
---------------------------------------------
Shareholders' equity
June 30, 2003 14,191,470 $ 142,000 8,246,497 $ 82,000
=============================================
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 12,419,000
Translation adjustments
foreign currency (87,000)
forward contracts, net (382,000)
of taxes
Comprehensive income
Exercise of stock options,
and related tax benefit
of $701,000 2,102,000
Issuance of Class A Common
Stock for ESPP 101,000
Purchase of Class A
Common Stock
Conversion of Class B
shares to Class A shares
---------------------------------------------
Shareholders' equity
June 30, 2003 $ 65,679,000 $ 185,000 $174,663,000
=============================================
Treasury Stock
Number of
Shares Amount Total
Shareholders' equity
January 1, 2003 (2,688,400) $(61,695,000) $164,902,000
Net income 12,419,000
Translation adjustments
foreign currency (87,000)
forward contracts, net
of taxes (382,000)
------------
Comprehensive income 11,950,000
Exercise of stock options,
and related tax benefit
of $701,000 2,103,000
Issuance of Class A Common
Stock for ESPP 101,000
Purchase of Class A
Common Stock (200,000) (4,526,000) (4,526,000)
Conversion of Class B
shares to Class A shares
---------------------------------------------
Shareholders' equity
June 30, 2003 (2,888,400) $(66,221,000) $174,530,000
=============================================
See accompanying notes to condensed consolidated financial statements
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2003 2002
Cash flows from operating activities
Net income $ 12,419,000 $ 10,939,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,798,000 3,849,000
Unrealized (gain) loss on deferred compensation (1,913,000) 168,000
Provision for bad debts 204,000 112,000
Tax benefit from exercise of stock options 701,000 289,000
Changes in assets and liabilities:
Decrease (increase) in due from factor 4,822,000 (297,000)
(Increase) decrease in accounts receivable (2,376,000) 1,241,000
Increase in inventories (4,338,000) (19,254,000)
(Increase) decrease in prepaid expenses &
other current assets (21,000) 386,000
(Increase) decrease in other assets (2,493,000) 153,000
Increase in accounts payable 5,524,000 8,201,000
(Decrease) increase in income taxes payable (3,488,000) 167,000
(Decrease) increase in accrued expenses and
other current liabilities (892,000) 2,724,000
Increase in other non-current liabilities 5,155,000 1,445,000
------------ ------------
Net cash provided by operating activities 17,102,000 10,123,000
Cash flows from investing activities
Acquisition of property and equipment, net (3,103,000) (3,320,000)
------------ ------------
Net cash used in investing activities (3,103,000) (3,320,000)
Cash flows from financing activities
Proceeds from exercise of stock options 1,402,000 392,000
Proceeds from issuance of common stock 101,000 114,000
Purchase of treasury stock (4,526,000)
Principal payments on capital lease obligations (113,000) (104,000)
------------ ------------
Net cash (used in) provided by financing activities (3,136,000) 402,000
Effect of exchange rate changes on cash (11,000) (76,000)
------------ ------------
Net increase in cash 10,852,000 7,129,000
Cash, beginning of period 91,549,000 68,966,000
------------ ------------
Cash, end of period $102,401,000 $ 76,095,000
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 23,000 $ 20,000
Income taxes $ 8,038,000 $ 6,800,000
See accompanying notes to condensed consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared by Kenneth Cole
Productions, Inc. (the "Company") in accordance with accounting
principles generally accepted in the United States for interim
financial information. Accordingly, they do not include all of
the information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements. Certain items contained in these financial
statements are based on estimates. In the opinion of the
Company's management, the accompanying unaudited condensed
consolidated financial statements reflect all significant
adjustments, consisting of only normal and recurring
adjustments, necessary for a fair presentation of the financial
position and results of operations and cash flows for the
periods presented. All significant intercompany transactions
have been eliminated.
Operating results for the six months ended June 30, 2003
are not necessarily indicative of the results that may be
expected for the year ended December 31, 2003. 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, 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. Recent Accounting Pronouncement
In April 2001, the Financial Accounting Standards Board's
Emerging Issues Task Force
("EITF") reached a consensus on Issue No. 00-25, "Vendor Income
Statement Characterization of Consideration Paid to a Reseller
of the Vendor's Products." This issue addresses the
recognition, measurement and income statement classification of
consideration from a vendor to a customer in connection with
the customer's purchase or promotion of the vendor's products.
The Company's adoption of the EITF Issue No. 00-25 on January
1, 2002 impacted net revenue and expense classifications by
approximately $1,103,000 and $974,000 for the six months ended
June 30, 2003 and 2002, respectively, and did not change net
income. Prior periods have been reclassified accordingly.
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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Net Income, as reported $ 6,060,000 $ 5,418,000 $12,419,000 $10,939,000
Deduct: Stock-based employee
compensation expense
determined under fair
value method, net of
related tax effects 719,000 788,000 1,441,000 1,420,000
----------- ----------- ----------- -----------
Pro forma net income $ 5,341,000 $ 4,630,000 $10,978,000 $ 9,519,000
=========== =========== =========== ===========
Earnings per share:
Basic - as reported $ .31 $ .28 $ .64 $ .56
Basic - pro forma $ .27 $ .24 $ .56 $ .48
Diluted - as reported $ .30 $ .26 $ .61 $ .53
Diluted - pro forma $ .26 $ .22 $ .54 $ .46
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Earnings Per Share
The following is an analysis of the differences between
basic and diluted earnings per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings
Per Share".
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
Weighted average common
shares outstanding 19,505,000 19,670,000 19,524,000 19,656,000
Effect of dilutive securities:
Stock options 740,000 1,168,000 822,000 965,000
---------- ---------- ---------- ----------
Weighted average common
shares outstanding and
common share equivalents 20,245,000 20,838,000 20,346,000 20,621,000
========== ========== ========== ==========
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
$11,950,000 and $10,929,000 for the six-month periods ended
June 30, 2003 and 2002, respectively. Comprehensive income for
the three-month periods ended June 30, 2003 and 2002 amounted
to $5,777,000 and $5,514,000, 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 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 $4,750,000 at June 30, 2003 with maturity dates
through August 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 six months ended June 30, 2003. At June 30, 2003 the
Company's notional $4,750,000 in forward exchange contracts
resulted in an unrealized gain of approximately $10,000, 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.
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 on royalties earned and pretax segment profit.
Intersegment sales between the Wholesale and Consumer Direct
segment include a markup, which is eliminated in consolidation.
Revenues from international customers represent less than two
percent of the Company's consolidated revenues.
Financial information of the Company's reportable segments is
as follows (in thousands):
Three Months Ended
June 30, 2003
Consumer Licensing/
Wholesale Direct International Totals
Revenues from external
customers 48,567 39,487 8,874 96,928
Intersegment revenues 6,597 6,597
Segment income (1) 5,220 (43) 8,244 13,421
Segment assets 206,119 48,002 3,999 258,120
Three Months Ended
June 30, 2002
Consumer Licensing/
Wholesale Direct International Totals
Revenues from external
customers 53,449 39,648 6,153 99,250
Intersegment revenues 8,727 8,727
Segment income (1) 6,600 2,604 3,767 12,971
Segment assets 169,686 56,910 1,665 228,261
Six Months Ended
June 30, 2003
Consumer Licensing/
Wholesale Direct International Totals
Revenues from external
customers 117,969 72,053 17,030 207,052
Intersegment revenues 13,842 13,842
Segment income (1) 15,966 (3,159) 14,285 27,092
Six Months Ended
June 30, 2002
Consumer Licensing/
Wholesale Direct International Totals
Revenues from external
customers 107,135 73,085 11,941 192,161
Intersegment revenues 16,569 16,569
Segment income (1) 14,597 2,773 7,561 24,931
(1) Before elimination of intersegment profit, unallocated corporate overhead
and income taxes.
The reconciliation of the Company's reportable segment revenues, profit and
loss, and assets are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
Revenues
Revenues for external
customers $ 96,928 $ 99,250 $207,052 $192,161
Intersegment revenues 6,597 8,727 13,842 16,569
Elimination of intersegment
revenues (6,597) (8,727) (13,842) (16,569)
-------- -------- -------- --------
Total consolidated revenues $ 96,928 $ 99,250 $207,052 $192,161
======== ======== ======== ========
Income
Total profit for
reportable segments $ 13,421 $ 12,971 $ 27,092 $ 24,931
Elimination of intersegment
profit and unallocated
corporate overhead (3,802) (4,371) ( 7,380) (7,567)
-------- -------- -------- --------
Total income before
income taxes $ 9,619 $ 8,600 $ 19,712 $ 17,364
======== ======== ======== ========
Assets
Total assets for
reportable segments $258,120 $228,261
Elimination of intersegment
inventory profit (1,913) (2,215)
-------- --------
Total consolidated assets $256,207 $226,046
======== ========
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
six months ended June 30, 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. Licensing Agreement
On May 1, 2003, the Company entered into an exclusive license
agreement with Candies, Inc. and its trademark holding company, IP
Holdings, LLC, ("Candies") to use the Bongo trademark in connection
with worldwide manufacture, sale and distribution of women's, men's
and children's footwear. The Chief Executive Officer and Chairman
of Candies is the brother of the Company's Chief Executive Officer
and Chairman. The initial term of the agreement is through December
31, 2007, with options to renew through December 31, 2016 based upon
the Company reaching certain sales thresholds. During these periods,
the Company is obligated to pay Candies a percentage of net sales
based upon the terms of the agreement. Sales of Bongo footwear by the
Company began during June 2003.
10. Reclassifications
Certain amounts included in the Company's 2002 financial
statements have been reclassified to conform to the June 30, 2003
presentation.
11. 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.
12. Subsequent Event
On July 29, 2003, the Board of Directors of the Company declared
a quarterly dividend of $.075 per share payable September 18, 2003 to
shareholders of record at the close of business on August 28, 2003.
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 licensee 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 revenues for the three and six months ended June 30,
2003 and June 30, 2002.
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Net sales $88,096 90.9% $93,245 93.9% $190,213 91.9% $180,535 93.9%
Royalty revenue 8,832 9.1 6,005 6.1 16,839 8.1 11,626 6.1
Net revenues 96,928 100.0 99,250 100.0 207,052 100.0 192,161 100.0
Gross profit 43,991 45.4 46,093 46.4 91,573 44.2 89,857 46.8
Selling, general
& administrative
expenses 34,622 35.7 37,823 38.1 72,353 34.9 73,090 38.0
Operating income 9,369 9.7 8,270 8.3 19,220 9.3 16,767 8.8
Interest
income, net 250 0.3 330 0.4 492 0.2 597 0.2
Income before
income taxes 9,619 10.0 8,600 8.7 19,712 9.5 17,364 9.0
Income tax
expense 3,559 3.7 3,182 3.2 7,293 3.5 6,425 3.3
Net income 6,060 6.3 5,418 5.5 12,419 6.0 10,939 5.7
Three Months Ended June 30, 2003 Compared to Three Months Ended June
30, 2002
REVENUES: Consolidated net revenues decreased $2.3 million, or 2.3%,
to $96.9 million for the three months ended June 30, 2003 from $99.3
million for the three months ended June 30, 2002. This decrease 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 Company's
Consumer Direct business segment) decreased $4.9 million, or 9.1% for
the three months ended June 30, 2003 to $48.6 million from $53.4
million for the three months ended June 30, 2002. The Company
believes this decrease is attributable primarily to tightening of
inventory levels at certain of the Company's major customers as
brought on by a difficult environment. In addition, the Company was
implementing certain distribution and merchandising initiatives in
the handbag business, which created a near term sales reduction. Net
sales in the Company's Consumer Direct segment decreased $0.2
million, or 0.4%, to $39.5 million for the three months ended June
30, 2003 from $39.6 million for the three months ended June 30, 2002.
The decrease in net sales is due primarily to a decline in comparable
store sales of 4.4% or $1.6 million, offset by $1.3 million in sales
from new stores opened in 2003 and that portion of 2003 sales for
stores not open for all of 2002 as well as $0.2 million in additional
sales from Catalog/ Internet operations. The Company believes this
decrease is due in part to the economic weakness generally seen
throughout the retail and apparel industry and to weather related
effects in the Northeast on certain seasonal product.
LICENSING/INTERNATIONAL REVENUE: Royalty revenue increased 47.1% to
$8.8 million for the three months ended June 30, 2003 from $6.0
million for the three months ended June 30, 2002. This growth in
licensing revenues was driven by new licensees such as fragrance and
women's jewelry, increases from men's and women's sportswear, and a
one time payment related to the transfer of the Company's fragrace
license.
GROSS PROFIT: Consolidated gross profit as a percentage of net
revenues decreased to 45.4% for the three months ended June 30, 2003
from 46.4% for the three months ended June 30, 2002. The decrease is
due to lower margins on sales in the Company's Wholesale and Consumer
Direct segments, as well as the change in mix of the Company's sales
from its Wholesale, Consumer Direct, and Licensing/International
segments, which operate at very different gross margin levels. The
Company believes the decrease in Wholesale gross margin percentage
stemmed mostly from a weakened dollar and from increased clearance of
spring merchandise. The decrease in Consumer Direct gross profit was
attributable to lower sales volume and margins in a highly
competitive, promotionally driven retail environment. The Wholesale
segment, which operates at a lower gross profit level than the
Consumer Direct segment, as a percentage of net revenues decreased to
50.1% for the three months ended June 30, 2003 from 53.9% for the
three months ended June 30, 2002, while the Consumer Direct segment
as a percentage of net revenue increased to 40.7% for the three
months ended June 30, 2003 from 39.9% for the three months ended June
30, 2002. The decrease in gross profit as a percentage of net
revenues was partially offset by the gross profit generated from the
Licensing/International segment which carries nominal associated cost
of goods sold. Licensing/International revenue increased as a
percentage of net revenues to 9.2% for the three months ended June
30, 2003 from 6.2% for the three months ended June 30, 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses, including shipping and warehousing,
decreased 8.5% to $34.6 million (or 35.7% of net revenues) for the
three months ended June 30, 2003 from $37.8 million (or 38.1% of net
revenues) for the three months ended June 30, 2002. The improvement
was the result of successful cost control strategies in payroll,
marketing, travel, and distribution, partially offset by a one time
accrual for severance.
INTEREST AND OTHER INCOME: Interest and other income decreased to
$250,000 for the three months ended June 30, 2003 from $330,000 for
the three months ended June 30, 2002. The decrease is due to lower
short-term interest rates on cash investments.
INCOME TAXES: The Company's effective tax rate has remained at 37.0%
for the three months ended June 30, 2003 and 2002.
NET INCOME: As a result of the foregoing, net income increased 11.8%
for the three months ended June 30, 2003 to $6.1 million (6.3% of net
revenues) from $5.4 million (5.5% of net revenues) for the three
months ended June 30, 2002.
Six months Ended June 30, 2003 Compared to Six Months Ended June 30,
2002
REVENUES: Consolidated net revenues increased 7.7% to $207.1 million
for the six months ended June 30, 2003 from $192.2 million for the
six months ended June 30, 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 Company's
Consumer Direct business segment) increased $10.8 million or 10.1%
for the six months ended June 30, 2003 to $118.0 million from $107.1
million for the six months ended June 30, 2002. The increase is due
primarily to increased sales from Reaction Kenneth Cole and Unlisted
brands partially offset by lower sales from Kenneth Cole New York
branded footwear and handbags, which faced increased consumer
willingness to forego purchases at regular retail prices as consumers
instead looked for promotions. Net sales in the Company's Consumer
Direct segment decreased $1.0 million or 1.4% to $72.1 million for
the six months ended June 30, 2003 compared to $73.1 million for the
six months ended June 30, 2002. The decline in net sales is due to a
decrease in comparable store sales of 5.8% or $3.9 million, partially
offset by $2.8 million in sales from new stores opened in 2003 and
that portion of 2003 sales for stores not open for all of 2002. The
Company believes the decrease in net sales in the Consumer Direct
segment is due in part to the economic weakness generally seen
throughout the retail and apparel industry, the Company's early
transition to spring and lightweight products, the impact of weather
related fluctuations in our business and the effects of a
promotionally driven and highly competitive retail environment.
LICENSING/INTERNATIONAL REVENUE: Royalty revenue increased 44.8% to
$16.8 million for the six months ended June 30, 2003 from $11.6
million for the six months ended June 30, 2002. This increase is
attributable primarily to the incremental minimum royalties from the
Company's existing licensees, most significantly from men's and
women's apparel, as well as new revenues from the Company's fragrance
licensee.
GROSS PROFIT: Consolidated gross profit as a percentage of net
revenues decreased to 44.2% for the six months ended June 30, 2003
from 46.8% for the six months ended June 30, 2002. The decrease is
primarily due to lower margins in the Company's Wholesale and
Consumer Direct segments offset by a greater portion of gross profit,
as a percentage of net revenues, by the Licensing/ International
segment, which carries nominal associated cost of goods sold.
Licensing/ International revenues increased as a percentage of net
revenues to 8.2% for the six months ended June 30, 2003 from 6.2% for
the six months ended June 30, 2002. The Wholesale segment as a
percentage of net revenues increased to 57.0% for the six months
ended June 30, 2003 from 55.8% for the six months ended June 30,
2002, while the Consumer Direct segment which operates at a higher
gross profit percentage decreased as a percentage of net revenues to
34.8%, for the six months ended June 30, 2003 from 38.0% for the six
months ended June 30, 2002. In addition, the wholesale margin
percentage eroded as a result of the weakened US dollar compared to
the Euro and the growing promotionally driven retail environment.
The Company believes the decrease in Consumer Direct gross profit
percentage was attributable to a highly competitive, promotionally
driven retail environment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses, including shipping and warehousing,
decreased 1.0% to $72.4 million (or 34.9% of net revenues) for the
six months ended June 30, 2003 from the $73.1 million (or 38.0% of
net revenues) for the six months ended June 30, 2002. The decrease
as a percentage of revenue is attributable to the Company's ongoing
cost control strategies in payroll, marketing, travel, operations and
distribution.
INTEREST AND OTHER INCOME: Interest and other income decreased to
$492,000 for the six months ended June 30, 2003 from approximately
$597,000 for the six months ended June 30, 2002. The decrease is the
result of declining short-term interest rate returns on cash
investments.
INCOME TAXES: The Company's effective tax rate remained at 37.0% for
the six-month period ended June 30, 2003 and 2002.
NET INCOME: As a result of the foregoing, net income increased 13.5%
for the six months ended June 30, 2003 to $12.4 million (6.0% of net
revenues) from $10.9 million (5.7% of net revenues) for the six
months ended June 30, 2002.
Liquidity and Capital Resources
The Company uses cash from operations as the primary source of
financing for its expansion and seasonal requirements. Cash
requirements vary from time to time as a result of the timing of the
receipt of merchandise from suppliers, the delivery by the Company of
merchandise to its customers, and the level of accounts receivable
and due from factors balances. At June 30, 2003 and December 31,
2002 working capital was $135.2 million and $124.1 million,
respectively.
Cash provided by operating activities was $17.1 million for the
six months ended June 30, 2003, compared to $10.1 million provided by
operating activities for the six months ended June 30, 2002. The
increase in cash flow from operations is primarily attributable to an
increase in net income of approximately $1.5 million compared to the
prior period and the timing of payables and receivables which was
offset by an increase in inventory.
Net cash used in investing activities decreased $217,000 for the
six months ended June 30, 2003 from $3.3 million for the six months
ended June 30, 2002 to $3.1 million for the six months ended June 30,
2003. Investing activities for the six months ended June 30, 2003
and 2002 were for capital expenditures. Capital expenditures for new
retail store openings and expansions were approximately $1.4 million
and $2.4 million for the six months ended June 30, 2003 and June 30,
2002, respectively. The remaining expenditures were used primarily
for information technology and corporate headquarter renovations.
During 2000, the Company relocated its corporate headquarters to
a larger location in New York City. The Company completed
renovations, incurring approximately $15.5 million in capital
expenditures and expects to incur approximately an additional $6.5
million within the next two years.
Net cash used in financing activities was $3.1 million for the
six months ended June 30, 2003 compared to the $402,000 provided by
financing activities for the six months ended June 30, 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 $4.5 million during the first quarter 2003. The
Company did not repurchase shares of Class A Common Stock during the
six months ended June 30, 2002. The repurchase of shares was offset
by approximately $1.4 million in proceeds from stock options
exercised during the six months ended June 30, 2003.
The Company's material obligations under contractual agreements,
including commitments for future payments under operating lease
agreements and contractual agreements as of June 30, 2003 are
summarized as follows:
Payments Due by Period
1 year or 2-3 4-5 After 5
less years years years Total
Leases and other
contractual
obligations $23,207,000 $45,164,000 $40,473,000 $90,098,000 $198,942,000
----------- ----------- ----------- ----------- ------------
Total contractual
obligations $23,207,000 $45,164,000 $40,473,000 $90,098,000 $198,942,000
=========== =========== =========== =========== ============
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 $0.8 million in open letters of credit
to $21.4 million at June 30, 2003.
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 build-out, dividend payments and
enhancements to its information systems, primarily with cash flow
from operations and current cash levels.
The foregoing commentary should be considered to fall
within the coverage of the "Safe Harbor Statement" under the Private
Securities Litigation reform Act of 1995 included in this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not believe it has a material exposure to
market risk. The Company is primarily exposed to currency exchange-
rate risks with respect to its inventory transactions denominated in
Euros. Business activities in various currencies expose the Company
to the risk that the eventual net dollar cash flows from transactions
with foreign suppliers denominated in foreign currencies may be
adversely affected by changes in currency rates. The Company manages
these risks by utilizing foreign exchange forward contracts to hedge
its cost in future purchases. The Company does not enter into
foreign currency transactions for speculative purposes. At June 30,
2003, the Company had foreign exchange contracts totaling $4.8
million in notional value with an unrealized gain of $10,000, 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-15(e)
or 15d-15(e) of the Securities Exchange Act of 1934, as amended) as
of the end of the period covered by this quarterly report, have
concluded that 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 most recent evaluation of the Company's
disclosure controls and procedures.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities and Use of Proceeds. None
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Kenneth Cole Productions, Inc. Annual Meeting of
Shareholders was held on May 22, 2003.
(b)Election of Directors - All nominees were elected through
proxies solicited pursuant to Regulation 14A under the
Securities and Exchange Act of 1934, as amended. There was
no solicitation in opposition to management's nominees as
listed in the Proxy Statement, and each of the nominees were
elected to hold office until the next Annual Meeting of
Shareholders.
(c) Matters voted on at the Annual Meeting of Shareholders
included, (i) the election of directors and (ii) the
ratification of the selection of the independent public
accountants for the 2003 fiscal year.
The results of the election of directors were as follows:
FOR AGAINST/ABSTAIN BROKER NON-VOTE
Paul Blum 90,442,634 2,600,928 0
Kenneth D. Cole 90,402,993 2,640,569 0
Robert C. Grayson 7,631,723 2,496,869 0
Denis F. Kelly 9,919,576 209,016 0
Stanley A. Mayer 90,293,469 2,750,093 0
Philip B. Miller 92,833,946 209,616 0
Holders of 11,150,476 shares of Class A Common Stock, and
8,291,497 shares of Class B Common Stock, constituting
approximately 98.91% of the shares entitled to vote, were pr
esent in person or by proxy at the Annual Meeting of
Shareholders. Each record holder of Class A Common Stock is
entitled to one vote per share, and each record holder of Class
B Common Stock is entitled to 10 votes per share. Holders of
Class A Common Stock voted separately to elect Robert C. Grayson
and Denis Kelly.
With regard to the ratification of the appointment of Ernst & Young
LLP as the Company's independent
certified public accountants, the results were as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTE
90,238,538 208,516 2,596,508 0
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
31.1 Certification pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002-
Chief Executive Officer
31.2 Certification pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002-
Chief Financial Officer
32.1 Certification: Pursuant to 10 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002- Chief Executive Officer
32.2 Certification: Pursuant to 10 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002- Chief Financial Officer
(b) Reports on Form 8-K: The Company did not file any reports on
Form 8-K during the three months ended June 30, 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
August 13, 2003 /s/ STANLEY A. MAYER
Stanley A. Mayer
Executive Vice President and
Chief Financial Officer
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Kenneth D. Cole, certify that:
1. I have reviewed this quarterly report on Form 10Q being filed by
Kenneth Cole Productions, Inc.;
2. Based on my knowledge, the 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 the 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
the 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-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act
Rules 15(f) and 15d-15(f)) for the registrant and have:
i. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision 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;
ii. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principals;
iii. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
iv. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
i. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
ii. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
By: /s/ Kenneth D. Cole
--------------------------
Kenneth D. Cole
Chief Executive Officer
Date: August 13, 2003
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Stanley A. Mayer, certify that:
1. I have reviewed this quarterly report on Form 10Q being filed by
Kenneth Cole Productions, Inc.;
2. Based on my knowledge, the 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 the 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
the 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-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act
Rules 15(f) and 15d-15(f)) for the registrant and have:
i. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision 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;
ii. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principals;
iii. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
iv. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
i. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
ii. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
By: /s/ Stanley A. Mayer
-------------------------
Stanley A. Mayer
Chief Financial Officer
Date: August 13, 2003
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Kenneth Cole Productions,
Inc. (the "Company") on Form 10-Q for the period ending June 30, 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.
August 13, 2003
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Kenneth Cole Productions,
Inc. (the "Company") on Form 10-Q for the period ending June 30, 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.
August 13, 2003