Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Commission File No. 1-13082
KENNETH COLE PRODUCTIONS, INC.
(Exact name of Registrant as specified in its charter)
New York 13-3131650
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
603 West 50th Street, New York, NY 10019
(Address of Principal Executive Offices)
(212) 265-1500
Registrant's telephone number
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Class A common stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act) Yes (X)
No ( )
Aggregate market value of the voting stock held by
nonaffiliates of the registrant as of the close of business on
June 30, 2003: $ 210,620,264
Number of shares of Class A Common Stock, $.01 par value,
outstanding as of the close of business on
March 10, 2004: 11,789,278
Number of shares of Class B Common Stock, $.01 par value,
outstanding as of the close of business on
March 10, 2004: 8,145,497
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Form 10-K is incorporated
herein by reference to the Registrant's definitive proxy
statement to be mailed to the shareholders of the Registrant by
April 22, 2004.
Kenneth Cole Productions, Inc.
TABLE OF CONTENTS
Page
PART I
Item 1 Business 3
Item 2 Properties 16
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 17
PART II
Item 5 Market for Registrant's Common Equity, Related
Shareholder Matters, and Issuer of Purchases of
Equity Security 18
Item 6 Selected Financial Data 19
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 7A Quantitative and Qualitative Disclosures about
Market Risk 26
Item 8 Financial Statements and Supplementary Data 27
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 27
Item 9A Controls and Procedures 27
PART III
Item 10 Directors and Executive Officers of the Registrant 28
Item 11 Executive Compensation 28
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters 28
Item 13 Certain Relationships and Related Transactions 28
Item 14 Principal Accountant Fees and Services 28
PART IV
Item 15 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 29
Item 1. Business
Important Factors Relating to Forward- Looking Statements
The Private Securities Litigation Reform Act of 1995 (the
"Act") and Section 21E of the Securities Exchange Act of 1934
provides a safe harbor for forward-looking statements made by or
on behalf of Kenneth Cole Productions, Inc. (the "Company"). The
Company and its representatives may from time to time make
written or oral statements that are "forward-looking," including
statements contained in this report and other filings with the
Securities and Exchange Commission and in reports to the
Company's shareholders. Forward-looking statements generally
refer to future plans and performance and are identified by the
words "believe," "expect," "anticipate," "plan," "intend,"
"will," or similar expressions. All statements that express
expectations and projections with respect to future matters,
including, but not limited to, the launching or prospective
development of new business initiatives, future licensee sales
growth, store expansion and openings, are forward-looking
statements within the meaning of the Act. These statements are
made on the basis of management's views and assumptions, as of
the time the statements are made, regarding future events and
business performance and are subject to certain risks and
uncertainties. Should one or more of these risks or
uncertainties materialize or should underlying assumptions prove
incorrect, actual results may vary materially from those
anticipated, estimated or projected.
There can be no assurance that management's expectations will
necessarily come to pass. A number of factors affecting the
Company's business and operations could cause actual results to
differ materially from those contemplated by the forward-looking
statements. Those factors include, but are not limited to,
changes in the domestic and economic conditions or in political,
economic or other conditions affecting foreign operations and
sourcing, demand and competition for the Company's products,
changes in consumer preferences on fashion trends, delays in
anticipated store openings and changes in the Company's
relationship with its suppliers and other resources. This list
of factors that may affect future performance and the accuracy of
forward-looking statements are illustrative, but by no means
exhaustive. Accordingly, readers of this Annual Report should
consider these facts in evaluating the information and are
cautioned not to place undue reliance on the forward-looking
statements contained herein. The Company undertakes no
obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events
or otherwise.
General
Kenneth Cole Productions, Inc., incorporated in September 1982,
designs, sources and markets a broad range of fashion footwear
and handbags and, through license agreements, designs and markets
apparel and accessories under its Kenneth Cole New York, Reaction
Kenneth Cole and Unlisted brand names. During 2003, the Company
added the Bongo trademark brand for footwear through a license
agreement. The Company's products are targeted to appeal to
fashion conscious consumers, reflecting a casual urban
perspective and a lifestyle uniquely associated with Kenneth
Cole. These products include core basics that generally remain in
demand from season to season and fashion products that are
designed to establish or capitalize on market trends. The
combination of basic products and fashion styles provides
freshness in assortments and maintains a fashion-forward image,
while a multiple brand strategy helps diversify business risk.
The Company markets its products to more than 7,500 department
and specialty store locations, as well as through its Consumer
Direct business, which includes an expanding base of retail and
outlet stores, consumer catalogs and interactive websites,
including on-line e-commerce. The Company believes the diversity
of its product offerings distinguishes the Company from its
competitors in terms of product classifications (men's, women's
and children's footwear, handbags, apparel and accessories),
prices (from ''better'' to ''moderate'') and styling. The Company
believes the diversity of its product mix provides balance to its
overall product sales and business planning and increases sales
opportunities to wholesale customers who do not carry the
Company's full range of products.
The popularity of the Kenneth Cole brand names among consumers
has enabled the Company to expand its product offerings and
channels of distribution through licensing agreements and offers
through these agreements a lifestyle collection of men's product
categories including tailored clothing, dress shirts, dress
pants, sportswear, neckwear, briefcases, portfolios, jewelry,
fragrance, belts, leather and fabric outerwear, sunglasses,
optical eyewear, watches, luggage, hosiery and small leather
goods. Women's product categories currently being sold pursuant
to license agreements include sportswear, small leather goods,
belts, scarves and wraps, hosiery, leather and fabric outerwear,
sunglasses, optical eyewear, watches, jewelry, fragrance,
swimwear, and luggage. In addition, the Company licenses boys'
apparel under the Reaction Kenneth Cole brand, which further
broadens the Kenneth Cole lifestyle collection.
Business Growth Strategies
The Company's strategy is to continue to build upon the
strength of its lifestyle brand franchise, which is comprised of
well-differentiated and distinct brands: Kenneth Cole New York,
Reaction Kenneth Cole and Unlisted. In addition, the Company
added the Bongo brand to its footwear brands through a license
agreement to further enhance its lifestyle strategy. The Company
views its lifestyle brands as a vital and significant strategic
asset and the foundation for a sustainable competitive advantage.
The Company believes that further segmentation and development of
the brands afford enormous growth potential within each of the
Company's business segments.
Wholesale. By strengthening and streamlining its department
store distribution channels, the Company continues to reinforce
the segmentation of its brands at wholesale, promoting even
greater growth capability for each of its brands in the future.
This approach will facilitate the broadening of product
offerings, attract new customers and further enable the Company
to address a wider variety of customers' needs, both domestically
and internationally. Building on its distribution channels, the
recent addition of the Bongo brand to its footwear business has
given the Company the ability to reach another distribution tier
as well as customer base. By combining retail and wholesale
merchandising functions, the Company is in a better position to
respond quickly to market changes, thereby enabling each
wholesale division to deliver appropriate fashions in a more
timely and effective manner. This approach has been effective in
maintaining the strength of the Kenneth Cole New York, Reaction
Kenneth Cole and Unlisted branded footwear businesses in a
difficult and challenging environment.
Consumer Direct. The Company's Consumer Direct segment, which
operates full price retail and outlet stores, as well as catalogs
and e-commerce websites, affords significant growth potential
while simultaneously complementing the Company's existing
Wholesale and Licensing businesses. The Company believes that
the sale of footwear, handbags and licensed products through its
consumer direct channels of distribution increases consumer
awareness of the Company's brands, reinforces the Company's image
and builds brand equity. Wholesale customers in cities with a
Kenneth Cole retail presence have consistently performed better
than wholesale customers in cities without a Kenneth Cole retail
presence.
The Company continues to pursue opportunities to expand its
retail store operations. As of December 31, 2003, the Company
operated 83 specialty retail and outlet stores as compared with
80 stores as of December 31, 2002. The Company plans to open or
expand approximately 7 to 11 stores in 2004, expanding retail
square footage by approximately 10%. This anticipated expansion
includes outlet stores, which provide opportunities for the
Company to sell excess and out-of-season merchandise. To
accommodate the Company's diversity of product offerings, the
Company continues to open stores on an opportunistic basis as
well as expand smaller current locations where retail space is
available. The Company believes that its retail stores will
generate increased sales and profitability as the stores allow
for a true cross-section of both Company and licensee products,
enabling the Company to present the broad lifestyle offering that
consumers want to see. As it expands its retail business, the
Company expects to realize certain economies in several selling
and administrative expense areas.
In an effort to capitalize on opportunities and reduce business
risk, the Company opened Reaction Kenneth Cole retail stores.
The Company currently operates two Reaction Kenneth Cole stores
as of December 31, 2003 and expects to open additional Reaction
Kenneth Cole stores. The Company believes this model provides
significant growth potential since the Reaction Kenneth Cole
brand enjoys strong consumer support as evidenced by growth at
retail through the Company's wholesale operations and expansion
of the Company's licensee product categories within the brand.
The Company continues to invest in the enhancement, visual
presentation and development of its websites to capitalize on the
growth of its e-commerce and emerging technologies. The Company
believes that web-based transactions will contribute to the
Company's future, both as a source of consumer information and as
a generator of new revenue. Among other things, the websites are
designed to create additional revenues through a new distribution
channel, build brand equity, fortify image, increase consumer
awareness, improve customer service, provide entertainment and
promote support for causes the Company believes are important to
its customers. The Company has strengths in its existing
capabilities in customer service, including telemarketing,
merchandising, catalog, fulfillment and e-commerce. Accordingly,
the Company believes it has a strategic advantage over companies
that do not support or continually improve on emerging
technologies to compliment their consumer direct businesses.
In addition to seasonal image campaigns via traditional
advertising media, the Internet has enabled the Company to
communicate directly with its customers and to have its customers
communicate directly with the Company. The Company's use of its
websites to capture and process this relevant market data on its
consumer base provides a greater understanding of its customers
and market trends. The Company believes this dynamic
relationship is invaluable for building customer loyalty.
Further, the Company's internet presence through multiple
websites has enabled the creation of a substantial e-mail
database by which the Company's marketing and customer service
departments regularly interact with its existing and new
consumers on-line.
Licensing/International. The growing strength of the Company's
three brands, Kenneth Cole New York, Reaction Kenneth Cole and
Unlisted, provides opportunities, through licensing agreements,
to expand into new product categories and broaden existing
distribution channels. Licensed product sales continued to grow
and represent about half of the Company's brand sales at retail.
Many of the existing licensee businesses are still relatively
small in their individual product classifications and the Company
believes they hold impressive growth potential.
The Company chooses its licensing partners with care,
considering many factors, including the strength of their
sourcing and distribution abilities, thereby attempting to
maintain the same value and style that Kenneth Cole customers
have come to expect. The Company continues to grow its market
share in both the men's and women's apparel businesses and has
started to penetrate new price tiers with Reaction Kenneth Cole
branded products. The Company believes that women's apparel will
further define and enhance the Company's brands, improving its
ability to deliver the product that the Company's customers seek.
Building on the continued growth in womenswear, the Company
launched women's swimwear line during 2003. Menswear has
sustained growth despite difficult retail conditions, even as the
business matures. This growth has prompted the Company to expand
its existing men's product categories to include dress pants,
which was launched in Fall 2003. Based on the Company's
successful move into the children's wholesale footwear market,
Reaction Kenneth Cole boy's apparel was launched during Fall
2002, which will be followed by infants' and toddlers' apparel.
The Company's fragrance license with Coty, Inc. (a division of
The Lancaster Group) is designed to expand consumer awareness
through Coty's global marketing group and provide an extension of
brand awareness to the Company licensees and partnerships
internationally and domestically. During the Fall 2003 season,
Coty, Inc. successfully launched Kenneth Cole Black for men,
which was one of the seasons' top performers. This will be
followed by Black for women in Spring 2004. The Company is
committed to strategically further expanding its product
classifications internationally and to continue to build growth
through brand awareness and diversity. During 2003, the Company
signed a wholesale apparel and retail distribution license
agreement in Australia, an agreement for distribution in the
Middle East and is currently exploring new markets. The Company
believes its strategic licensing relationships are essential to
the growth of the Company both domestically and abroad as a
lifestyle branded franchise.
The Company's brands are currently licensed for a range of
products consistent with the Company's image (see
"Licensing/International" in Item 1).
Products
The Company markets its products principally under its Kenneth
Cole New York, Reaction Kenneth Cole and Unlisted brand names,
along with its newly licensed brand for footwear, Bongo, each
targeted to appeal to different consumers. The Company believes
that the Kenneth Cole brand name has developed into a true
aspirational lifestyle brand, and while it has similar designer
cache as other international designer brands, it has value
credibility most do not.
Kenneth Cole New York
Kenneth Cole New York products are designed for the fashion
conscious consumer and reflect the relaxed urban sophistication
that is the hallmark of the Kenneth Cole New York image. The
distinctive hip styling of this line has established Kenneth Cole
as a fashion authority for sophisticated men and women who are
seeking a value alternative to other designer brands. As a
result of strong brand recognition and a reputation for style,
quality and value, the Company believes that Kenneth Cole New
York has become a core resource for better department and
specialty stores, and continues to provide significant growth
opportunities. The Kenneth Cole New York product offering has
evolved from a very trendy line into one with broad appeal,
including both fashion-forward styling and core basics. The
Company continues to leverage the strength of its name through
brand extensions (e.g., Kenneth Cole "Signature"), in-store shops
and the licensing of many new product categories.
Kenneth Cole New York men's footwear, primarily manufactured
through Italian factories, is designed as contemporary,
comfortable leather fashion footwear and is sold to the bridge-
designer market at retail price points ranging from approximately
$140 to $250. As versatile as it is sophisticated, Kenneth Cole
New York men's footwear may be worn to work, for special
occasions or on weekends with casual clothes.
Kenneth Cole New York women's footwear, primarily manufactured
through Italian, Spanish, and Brazilian factories, includes
sophisticated and elegant dress, casual and special occasion
(e.g., bridal) footwear that is sold to the bridge-designer
market at retail price points ranging from approximately $100 to
$250. Women's footwear is constructed by fine leather craftsmen
to allow the customer high quality designer styling with value
for the fashion conscious woman at work or in social gatherings.
Kenneth Cole New York handbags are sleek designer bags offered
at affordable prices, generally made of quality leathers and sold
to the bridge-designer market at retail price points ranging from
approximately $90 to $225. The seasonal line includes certain
updated styles that offer the customer high fashion bags, which
are accompanied by tailored career bags for the sophisticated
urban consumer.
Reaction Kenneth Cole
Reaction Kenneth Cole consists of a variety of product
classifications, which address the growing trend toward flexible
lifestyle dressing. Originally introduced as a comfort-oriented
casual line, Reaction Kenneth Cole now includes more dressy
styles. Reaction Kenneth Cole women's footwear is designed for
the workplace as well as for outside the office, with an emphasis
on comfort, versatility, contemporary styling and value. It is
targeted to compete in the largest single category of footwear
sold in department stores, women's "better", and the majority of
the line retails primarily in the $60 to $100 price range.
Reaction Kenneth Cole men's footwear combines fashionable and
versatile styling with affordable pricing and is positioned in
the fastest growing classification in the men's market as
consumer preferences lean away from athletic constructed footwear
toward regular constructed footwear. This line retails
approximately in the $80 to $135 price range.
Reaction Kenneth Cole handbags are designed to be
multifunctional with a contemporary look and are primarily made
of leather and non-leather technical fabrications, such as nylon,
microfiber and canvas. Reaction Kenneth Cole handbags have been
styled to appeal to the same young, hip customer as the Reaction
Kenneth Cole footwear line to meet the varying needs of the
Company's customers. This line generally retails at price points
ranging from approximately $30 to $90.
Reaction Kenneth Cole children's footwear, primarily
manufactured in Brazil and China, includes dress and casual
footwear sold at price points ranging from $35 to $50 and is
targeted to boys and girls ages 6 to 12, who the Company believes
are making more of their own fashion choices than ever before.
The Company believes that children's footwear is a natural
extension of its footwear business and that its use of styles
based upon successful performers in its existing men's and
women's styles, greatly enhances the likelihood of product
performance. The success of children's footwear has led the
Company to introduce Reaction Kenneth Cole toddler footwear,
which has retail price points from $30 to $50. This addition has
improved its retail presence and has further penetrated the
children's Reaction Kenneth Cole brand in the marketplace.
Unlisted
Unlisted products are designed and targeted to the younger,
trendier consumer market, the country's largest consumer base of
fashion merchandise. The Unlisted brand was developed to expand
the Company's sales into a younger, more moderately priced
business and includes men's and women's casual and dress shoes
each season.
Unlisted footwear provides the young consumer with a wide
selection of footwear with contemporary styling and quality at
affordable prices. Unlisted women's footwear includes not only
fashion styles, but also evening styles, basic pumps and loafers
that generally retail at price points ranging from $35 to $60
with approximately 60 styles per season. Unlisted men's footwear
continues brand penetration through additional door expansion,
continuing its strong growth, capitalizing on the large youth
consumer base. The line includes casual and dress assortments
with a variety of fashion styles to compliment the selection of
approximately 50 styles per season. Unlisted men's footwear is
expected to appeal to a broader young men's market with shoes
that range at retail price points from $50 to $90.
Bongo
Bongo products are designed for the junior consumer market to
be sold through mid-tier department stores. The brand brings
fashion and style at reasonable price points to the junior market
and includes children's and women's casual and dress shoes each
season.
Currently, Bongo footwear includes only women's and children's
footwear lines although the Company plans to provide a men's line
at some point in the future. The women's footwear line has a
wide variety of styles for casual, weekend, and special evening
events including pumps, boots, and loafers, among others. The
price points range from $30 to $50 with approximately 40 styles
per season. Children's price points range from $20 to $35 with
approximately 5 styles per season. The brand provides a market
that the Company was not previously penetrating with its branded
products.
Business Segments
The Company primarily distributes its products through
Wholesale and its own Consumer Direct distribution channels.
During the periods presented below, the percentage of net
revenues contributed by the Company's business segments were as
follows:
Year Ended
December 31,
2003 2002 2001
Wholesale 54% 55% 51%
Consumer Direct 38 38 43
Licensing/International 8 7 6
---- ---- ----
Total 100% 100% 100%
==== ==== ====
Wholesale Operations
The Company strives to provide affordable fashion footwear,
handbags and accessories with consistent marketing and management
support to its wholesale customers. The Company provides this
support by producing strong image driven advertising, offering
creative quality products and maintaining adequate inventory
levels of new products as well as products included in the
Company's open stock program. The Company employs a sales force
as well as corporate account specialists to sell its products and
to manage its relationships with its wholesale customers,
including analyzing and monitoring their selling information.
The Company has previously increased the size of its corporate
account specialist's staff and anticipates continued build up, as
it believes its investment in account specialists is essential to
the maintenance and growth of its wholesale businesses.
The Company's products are distributed to more than 1,700
wholesale accounts for sale in more than 7,500 store locations in
the United States. The Company markets its branded products to
major department stores and chains, such as the department store
divisions of Target Corporation (Marshall Fields), Dillard
Department Stores, Inc., Federated Department Stores (including
Macy's, Bloomingdales, and Burdines) and upscale specialty
retailers, including Saks Fifth Avenue and Nordstrom, Inc. In
addition, the Company sells out-of-season branded products and
overruns through the Company's outlet stores and to off-price
retailers. The Company also sells its products, directly or
through distributors, to customers in various international
markets including Australia, United Kingdom, Mexico, Hong Kong,
Taiwan, South Korea, the Philippines, Singapore, Latin and parts
of South America and the Caribbean. During 2003, the Company
ended its license for distribution in Canada. The Company
assumed the operations, which are managed from its New York City
headquarters with a sales staff and distribution center in
Canada. The Company also assumed the Canadian handbag operations
for 2004 after its license agreement ended on December 31, 2003.
The Company markets its product lines and introduces new styles
at separate industry-wide footwear and handbag tradeshows that
occur several times throughout the year in New York, Las Vegas
and at various regional shows. These shows also afford the
Company the opportunity to assess preliminary demand for its
products. After each show, the Company's sales force and
corporate account specialists visit customers to review the
Company's product lines and to secure purchase commitments. The
Company's products are also displayed at separate handbag and
footwear showrooms in New York.
Private Label
The Company also designs, develops and sources private label
footwear and handbags for selected retailers. These private label
customers include major retailers that do not purchase the
Company's brands. The Company's private label business requires
minimal overhead and capital because the Company does not
typically incur any costs related to importing, shipping or
warehousing of inventory, all of which are usually borne by the
private label customer.
Consumer Direct Operations
Retail Operations
The Company continues to pursue opportunities to enhance and
expand its retail operations. At December 31, 2003, the Company
operated 48 specialty retail stores and 33 outlet stores under
the Kenneth Cole New York name and two specialty retail stores
under the Reaction Kenneth Cole name.
The Company believes its specialty retail stores develop
consumer recognition of its brand names, provide a showcase for
Kenneth Cole branded products marketed by the Company and its
licensees and enhance the Company's overall profitability. The
Company believes that these stores complement its wholesale
business by building brand awareness. In addition, Kenneth Cole
specialty retail stores enable the Company to reach consumers who
prefer the environment of a specialty store. The Company also
has two Reaction stores, one located in New York City and one in
Florida that were opened as a result of the success of Reaction
at retail by the Company's wholesale operations. The Company
expects to expand store openings in the future after the Reaction
store concept is defined. Approximately 25% of the Company's
specialty retail store products are sourced exclusively for such
stores to differentiate the product mix of its stores from that
of its wholesale customers. The Company opened two specialty
retail stores and closed one store in 2003 and plans to open or
expand four to six new specialty retail stores in 2004.
The Company's outlet stores enable it to sell a portion of its
excess wholesale, retail and catalog inventory in a manner that
it believes does not have an adverse impact on its wholesale
customers and the Company's retail operations. The Company
generally does not make a style available in its outlet stores or
to off-price retailers until wholesale customers have taken their
first markdown on that style. The Company anticipates that it
will require additional outlet stores as higher levels of sales
are achieved and additional retail stores are opened. The
Company opened two outlet stores in 2003 and has plans to open or
expand three to five outlet stores in 2004.
The success of the Company's new and existing stores will
depend on various factors, including the ongoing political
instability, the possibility of additional terrorist attacks and
general economic and business conditions affecting consumer
spending, the acceptance by consumers of the Company's retail
concept, the ability of the Company to manage successfully such
expansion, the ability of the Company to hire and train
personnel, the availability of desirable locations, the
negotiation of acceptable lease terms for new locations and the
expansion of the Company's management information systems to
support the growth of its retail operations. The Company
believes that its retail stores further enhance its image and
represent an opportunity for revenue and earnings growth.
Catalog, Website and Customer Service
The Company produces consumer catalogs that feature a variety
of Kenneth Cole New York and Reaction Kenneth Cole branded
products. Catalog order taking and fulfillment for accessories
and apparel are performed in the Company's distribution center in
New Jersey. In-house fulfillment has enabled the Company to
react more quickly to consumer demand, improve distribution
response and manage its inventory.
The Company maintains websites to provide information regarding
the Company and its products, as well as to conduct e-commerce
business. The Company's e-commerce websites www.kennethcole.com
and www.reactiononline.com are continually enhanced to enable its
consumers to purchase directly from the Company on-line. The
Company plans to continue to invest in the Internet and emerging
technologies and believes that based on its existing
merchandising, fulfillment and marketing capabilities, it is well
positioned to deliver an on-line commerce solution with nonpareil
customer service. The Company also maintains two toll-free
telephone numbers (1-800-KEN-COLE and 1-800-UNLISTED), which
provide customer service and answer product-related questions.
Licensing/International
Licensing
The Company views its licensing agreements as a vehicle to
serve its customers better by extending its product offerings
thereby allowing more consumers to meet their fashion accessory
needs without compromising on price, value or style. The Company
considers entering into licensing and distribution agreements
with respect to certain products if such agreements provide more
effective sourcing, marketing and distribution of such products
than could be achieved internally. The Company continues to
pursue opportunities in new product categories that it believes
to be complementary to its existing product lines.
Licensees range from small to medium size manufacturers to
companies that are among the industry leaders in their respective
product categories. The Company selects licensees that it
believes can produce and service quality fashion products
consistent with the Kenneth Cole New York, Reaction Kenneth Cole
and Unlisted brand images. The Company communicates its design
ideas and coordinates all marketing efforts with its licensees.
The Company generally grants licenses for three to five year
terms with renewal options, limits licensees to certain
territorial rights, and retains the right to terminate the
licenses if certain specified sales levels are not attained. Each
license provides the Company with the right to review, inspect
and approve all product designs and quality and approve any use
of its trademarks in packaging, advertising and marketing.
The Company continues to capture shelf space in better
department stores for its men's apparel collection as it further
rolls out tailored clothing, men's sportswear, and dress shirts.
This is an important step in further defining Kenneth Cole as a
premier lifestyle brand as its distinctive image is consistently
developed across an expanding number of products, brands and
markets. Womenswear was one of the Company's most improved
categories during 2003. As a result of the continued growth in
men's and women's apparel, the Company plans to compliment its
mens and womenswear lines with the introduction of women's
swimwear and men's dress pants to the Kenneth Cole and Reaction
product lines. This will be followed by men's' and women's'
fragrances for other Company brands, whereby the Company will
draw upon Kenneth Cole's creative strength and the marketing
resources of Coty, Inc., to continue brand definition.
The following table summarizes the Company's product categories
under its licensing agreements:
Kenneth Cole Reaction
Product Category New York Kenneth Cole Unlisted
Men's Tailored Clothing X X X
Men's Sportswear X X
Men's Neckwear X X
Men's Dress Shirts X X
Men's Casual Pants X X
Men's Leather & Fabric
Outerwear X X
Men's Small Leather Goods X X X
Women's Sportswear X X X
Women's Small Leather Goods X X X
Women's Leather &
Fabric Outerwear X X
Women's Scarves & Wraps X X
Men's/Women's Jewelry X X
Men's/Women's Swimwear X X X
Men's/Women's Watches X X X
Men's/Women's Optical Frames X X
Men's/Women's
Luggage/Briefcases X X
Men's/Women's Sunglasses X X X
Men's/Women's Fragrances X X X
Children's Apparel X
All of the Company's licensees are required to contribute to
the Company a percentage of their net sales of licensed products,
subject to minimum amounts, for the ongoing marketing of the
Kenneth Cole brands.
International
The Company sells its products through distributors and
licensees to wholesale customers and direct retailers in
international markets including Canada, Australia, United
Kingdom, Mexico, Venezuela, Ecuador, Costa Rica, Peru, Panama,
the Caribbean Islands, Hong Kong, Taiwan, the Philippines, Korea,
Malaysia and Singapore.
The Company has an agreement presently with Dickson Concepts,
Ltd. ("Dickson") to retail Kenneth Cole New York and Reaction
Kenneth Cole branded products through established freestanding
stores in Hong Kong, Taiwan and Singapore. Dickson presently
operates eight freestanding stores in these countries as well as
several shop-in-shops. Each store carries a selection of the
Company's merchandise, which is also available in the Kenneth
Cole domestic retail stores. In addition, the Company's
continued focus on the Asian market included seven shop-in-shops
in Korea through its licensee, Chiel Industries, a division of
Samsung Industries, three retail stores and three shop-in-shops
in the Philippines, through the Company's Philippine licensee,
Store Specialists, Inc. (Rustan's Department Store). During
2003, the Company entered into a wholesale apparel and retail
distribution agreement for Australia. The licensee will begin
shipping in 2004 and expects to open freestanding stores in
Australia during 2005.
In North America, the Company, through licensing arrangements,
continues to sell and market its products in Canada. The
majority of product classifications available domestically are
also available in Canada. Currently, the Company operates in
Canada through two licensees and the use of shop-in-shops, as its
footwear and handbag licensee businesses have been taken in
house. The Latin American licensee agreement covers Latin
America, South America and the Caribbean, with the exception of
Brazil, Argentina and Uruguay. Currently, the Company's licensee
operates 14 freestanding stores and 19 shop-in-shops in this
region.
In Europe, the Company owns and operates one store in
Amsterdam, and through a licensing agreement, operates two stores
in London and sells footwear and handbags to department stores
within the United Kingdom. The Company continues to investigate
opportunities that impact this market as well as other new
markets throughout the globe.
The Company realizes the critical role that licensees have on
the growth and development of Kenneth Cole and its diffusion
brands; and therefore, assumes significant care to strategically
align itself with viable business partners around the world. The
Company is optimistic about the expansion of its international
licensing programs as a means of developing a truly global brand.
Design
Kenneth D. Cole, Chairman and Chief Executive Officer, founded
the Company in 1982 and its success to date is largely
attributable to his design talent, creativity and marketing
abilities. Mr. Cole selects designers to join a design team to
work with him in the creation and development of new product
styles. Members of each design team collaborate with Mr. Cole to
create designs that they believe fit the Company's image, reflect
current or approaching trends and can be manufactured cost-
effectively.
The Company's design teams constantly monitor fashion trends
and search for new inspirations. Members of the various teams
travel extensively to assess fashion trends in Europe, the United
States and Asia and work closely with retailers to monitor
consumer preferences. The process of designing and introducing a
new product takes approximately two to four months. Once the
initial design is complete, a prototype is developed, reviewed
and refined prior to commencement of production.
In order to reduce the impact of changes in fashion trends on
the Company's product sales and to increase the profitability of
the Company's products, the Company continuously seeks to develop
new core basic product styles that remain fashionable from season
to season without significant changes in design or styling.
Since these core basic products are seasonless, retailers'
inventories of core basic products tend to be maintained
throughout the year and reordered as necessary, primarily through
electronic data interchange.
Sourcing
The Company does not own or operate any manufacturing
facilities. Instead it sources its branded and private label
products directly or indirectly through independently owned
manufacturers in Italy, Spain, Brazil, China and Korea, among
others. The Company maintains an office in Florence, Italy and
generally has long-standing relationships with several
independent buying agents to monitor the production, quality and
timely distribution of the Company's products from its
manufacturers. The Company sources each of its product lines
separately based on the individual design, styling and quality
specifications of such products.
The Company attempts to limit the concentration of
manufacturing with any one manufacturer. However, approximately
32% and 54% of total handbag purchases came from one manufacturer
in China during 2003 and 2002, respectively. Approximately 36%
and 40% of Kenneth Cole and Reaction Kenneth Cole men's footwear
were produced by one manufacturer in Italy, utilizing several
different factories in Europe in 2003 and 2002, respectively.
Furthermore, approximately 37% and 38% of Kenneth Cole ladies
footwear was purchased from one manufacturer in Italy during 2003
and 2002, respectively, while 57% and 42% of Reaction Kenneth
Cole ladies footwear purchases were sourced through one
manufacturer in Italy and one agent utilizing several different
factories in Brazil in 2003 and 2002, respectively. Many of
these manufacturers, however, subcontract a portion of such
purchases to ensure the consistent and timely delivery of quality
products. The Company is a large customer of several of these
manufacturers and has established long-standing relationships
with them. While the Company believes it has alternative
manufacturing sources available to meet its current and future
production requirements, there can be no assurance that, in the
event the Company is required to change its current
manufacturers, alternative suppliers will be available on terms
comparable to the Company's existing arrangements.
In advance of the Fall and Spring selling seasons, the Company
works with its manufacturers to develop product prototypes for
industry trade shows. During this process, the Company works with
the manufacturers to determine production costs, materials, break-
even quantities and component requirements for new styles. Based
on indications from the trade shows and initial purchasing
commitments from wholesalers, the Company places production
orders with the manufacturers. In addition, the Company has a
program, "test and react", whereby prototypes are rushed to its
specialty retail stores immediately after completion to determine
initial consumer reaction. Successful styles, consumer
acceptance and demand are used to adjust factory production and
line development prior to initial season shipping. As a result
of the need to maintain in-stock inventory positions, the Company
places manufacturing orders for open stock and certain fashion
products prior to receiving firm commitments from its customers.
Once an order has been placed, the manufacturing and delivery
time ranges from three weeks to four months depending on whether
the product is new or is currently in production. Throughout the
production process, the Company monitors product quality through
inspections at both the factories and upon receipt at its
warehouses. To reduce the risk of overstocking, the Company
monitors sell-through data on a weekly basis and seeks input on
product demand from wholesale customers to adjust production as
needed.
Advertising and Marketing
The Company believes that advertising to promote and enhance
the Kenneth Cole New York and Reaction Kenneth Cole and Unlisted
brands is an integral part of its long-term growth strategy. The
Company believes that its advertising campaigns, which have
brought it national recognition for their timely focus on current
events and social issues, have resulted in increased sales and
consumer awareness of its branded products. The Company's
advertising appears in magazines such as Vogue, Vanity Fair, GQ,
and InStyle, newspapers, and outdoor and media. The majority of
the Company's licensees are required to contribute to the Company
a percentage of their net sales of licensed products, subject to
minimums, for the advertising and promotion of the Kenneth Cole
brand image. In addition, the Company believes personal
appearances by Kenneth D. Cole further enhance the Company's
brand awareness.
The Company utilizes its in-house staff for marketing,
advertising and public relations efforts enabling the Company to
maintain the integrity of its brands while realizing substantial
cost savings when compared to outsourcing.
In order to continue to strengthen brand awareness of its
products and increase sales, the Company is actively involved in
development, marketing and merchandising programs for its
customers. As part of this effort, the Company utilizes
cooperative advertising programs, sales promotions and produces
trade show sales tools and consumer catalogs which feature a
variety of branded products marketed by the Company and its
licensees. As a result of these internal productions, the
Company believes that there is a singular focus, strong synergy
and consistency in all of the Company's communications.
An additional aspect of the Company's marketing efforts is the
creation and placement of branded enhancements in key department
and specialty store locations. These focus areas create an
environment that is consistent with the Company's image and
enables the retailer to display and stock a greater volume of the
Company's products per square foot of retail space. These
enhancements are achieved through the placement of fixturing,
point of purchase displays and graphics. The Company believes
that these in-store enhancements encourage longer-term commitment
by retailers to the Company's products and heighten consumer
brand awareness.
Distribution
To facilitate distribution, the Company's products are
inspected, bar coded, packed and shipped from manufacturers by
ocean or air to the Company's distribution facilities located in
the United States of America. The Company utilizes fully
integrated information systems and bar code technology to
facilitate the receipt, processing and distribution of product
through its distribution facilities. The products are then
shipped to the Company's wholesale customers either in bulk or
under its open stock program. The Company's open stock program
allows its wholesale customers to reorder, typically via
electronic data interchange ("EDI"), core basic styles in a range
of colors and sizes as well as many fashion styles, for immediate
shipment. While the open stock program requires an increased
investment in inventories, the Company believes this program is
an important service for its wholesale customers by allowing them
to manage inventory levels more effectively. The Company expects
that affording customers improved flexibility in ordering
specific stock keeping units ("SKUs") in smaller quantities will
ultimately reduce the incidence of markdowns and allowances.
The Company has capitalized on its centralized distribution
facilities to provide additional support to its retail store
operations on shipments of footwear and handbag products as well
as direct shipments to its catalog and internet customers. The
Company's EDI program is also used to re-supply its retail store
on a variety of products thereby enhancing its service to the
Company's retail operations through improved inventory management
and customer response.
Management Information Systems
The Company believes that sophisticated information systems are
essential to the Company's ability to maintain its competitive
position and to support continued growth. The Company's
management information systems were designed to provide, among
other things, comprehensive order processing, production,
accounting and management information for the sourcing,
importing, distribution and marketing aspects of the Company's
business. The Company continues to update and enhance its
distribution and financial systems with newer technology that
offers greater functionality and reporting capabilities. The
Company also utilizes an EDI system that provides a computer link
between the Company and many of its wholesale customers as well
as its retail operations that enables the Company to receive on-
line orders and to accumulate sales information on its products
shipped to its wholesale customers, retail stores, catalog and
internet customers. The Company's EDI system also improves the
efficiency of responding to customer needs and allows both the
customer and the Company to monitor purchases, shipments and
invoicing. In its retail stores, the Company also uses point-of-
sale registers to capture sales data, track inventories and
generate EDI replenishment orders.
The Company regularly evaluates the adequacy of its management
information systems and upgrades such systems to support its
growth. However, any failure by the Company to continue to
upgrade its management information systems necessary to support
growth or expansion, which could arise either with its internal
systems or systems of its third parties, could have a material
adverse effect on the Company's financial condition and its
results of operations (see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations").
Trademarks
The Company, through its wholly-owned subsidiary, Kenneth Cole
Productions (LIC), Inc., owns federal registrations for its
principal trademarks Kenneth Cole, Kenneth Cole New York,
Reaction Kenneth Cole, Kenneth Cole Reaction, Reaction, Kenneth
Cole Collection and Unlisted as well as several other ancillary
and derivative trademarks. Each of the federal registrations is
currently in full force and effect and is not the subject of any
legal proceedings. In addition, the Company has several federal
applications pending in the United States Patent and Trademark
office for trademarks and service marks. Moreover, the Company
continues to expand its current international registrations in
numerous countries throughout the world. The Company regards its
trademarks and other proprietary rights as valuable assets in the
marketing and distribution of its products, and fully intends to
maintain, renew and protect the registrations, as well as
vigorously defend all of its trademarks against infringements.
Competition
Competition in the footwear and handbags industries is intense
and these product classifications are subject to rapidly changing
consumer demands. The Company competes with numerous designers,
brands and manufacturers of footwear, handbags, apparel and
accessories, some of which may be larger, have achieved greater
recognition for their brand names, have captured greater market
share and/or have substantially greater financial, distribution,
marketing and other resources than the Company. The Company also
competes for the limited shelf-space available for the display of
its products to consumers and the Company's licensed apparel and
accessories also compete with a substantial number of designer
and non-designer brands. Moreover, the general availability of
contract manufacturing capacity allows access by new market
entrants. The Company believes the success of its business
depends on its ability to stimulate and respond to changing
consumer preferences by producing innovative and attractive
products, brands and marketing, while remaining competitive in
quality and price.
Foreign Operations
The Company's business is subject to the risks of doing
business abroad, such as fluctuations in currency exchange rates,
local market conditions, labor unrest, political instability,
actions of a public enemy, military or other government
intervention, priorities, restrictions or allocations and the
imposition of additional regulations relating to imports,
including quotas, duties or taxes and other charges on imports.
There can be no assurance that these factors will not have a
material adverse effect on the Company's operations in the
future.
In order to reduce the risk of exchange rate fluctuations, the
Company routinely enters into forward exchange contracts to
protect the future purchase price of inventory denominated in
Euro. These Euro forward exchange contracts are used to reduce
the Company's exposure to changes in foreign exchange rates and
are not held for the purpose of trading or speculation (see Item
7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations").
Import Restrictions
Although the majority of the goods sourced by the Company are
not currently subject to quotas, countries in which the Company's
products are manufactured may, from time to time, impose new or
adjust prevailing quotas or other restrictions on exported
products. In addition, the United States may impose new duties,
tariffs and other restrictions on imported products, any of which
could have a material adverse effect on the Company's operations
and its ability to import its products at current or increased
quantity levels. In accordance with the Harmonized Tariff
Schedule, a fixed duty structure in effect for the United States,
the Company pays import duties on its products. The majority of
its products have import duties that range from approximately 6%
to 37.5%, depending on the category and the principal component
of the product. Other restrictions on the importation of footwear
and other products are periodically considered by the United
States government and no assurance can be given that tariffs or
duties on the Company's goods may not be raised, resulting in
higher costs to the Company, or that import quotas restricting
such goods may not be imposed or made more restrictive.
Seasonality
The Company's products are marketed primarily for Fall and
Spring seasons, with slightly higher volume of wholesale products
sold during the first and third quarters. The Company's retail
business follows the general seasonal trends that are
characteristic within the retail industry: sales and earnings are
highest in the fourth quarter and weakest in the first quarter.
Because the timing of wholesale shipments of products for any
season may vary from year to year, the results for any one
quarter may not be indicative of the results for the full year.
Customers
The Company's department store customers include major United
States retailers, several of which are under common ownership.
In 2003 and 2002, the Company had no customer or group under
common ownership account for more than 10% of sales. The
Company's ten largest customers represented 37.9% and 35.9% of
the Company's net sales for the years ended December 31, 2003 and
2002, respectively. While the Company believes that purchasing
decisions have generally been made independently by each division
within a department store group, there is a trend among
department store groups toward centralized purchasing decisions
of their divisions.
Backlog
The Company had unfilled wholesale customer orders of $60.1
million and $58.1 million, at February 26, 2004 and February 27,
2003, respectively. The Company's backlog at a particular time is
affected by a number of factors, including seasonality, timing of
market weeks, and wholesale customer purchases of its core basic
products through the Company's open stock program. Accordingly, a
comparison of backlog from period to period may not be indicative
of eventual shipments.
Employees
At December 31, 2003, the Company had approximately 2,000
employees, 115 of who are covered under a collective bargaining
agreement with a local affiliate of the International Leather
Goods, Plastics, Handbags and Novelty Workers' Union, Local 1,
Division of Local 342-50 United Food and Commercial Workers
Union. The collective bargaining agreement expires in April 2004.
The Company plans to outsource its distribution operation and
close its New Jersey distribution center at the expiration of the
collective bargaining agreement. The Company considers its
relationship with its employees and their union to be
satisfactory, however, there can be no assurance that the non-
renewal of the collective bargaining agreement will not have a
material adverse effect on the Company.
Directors and Executive Officers
Name Age Present Position
Kenneth D. Cole 49 Chief Executive Officer
Paul Blum 44 President
Stanley A. Mayer 56 Executive Vice President and Chief
Financial Officer
Jaryn Bloom 39 Terminated, Formerly Senior Vice President-
Consumer Direct
Harry Kubetz 50 Senior Vice President-Operations
Susan Q. Hudson 44 Senior Vice President-Wholesale
Robert C. Grayson 59 Director
Denis F. Kelly 54 Director
Philip B. Miller 65 Director
Kenneth D. Cole has served as the Company's Chief Executive
Officer and Chairman of the Board since its inception in 1982 and
was also President until February 2002. Mr. Cole was a founder,
and from 1976 through 1982, a senior executive of El Greco, Inc.,
a shoe manufacturing and design company which manufactured
Candie's women's shoes. Mr. Cole is on the Boards of Directors of
the American Foundation for AIDS Research (''AmFAR'') and
H.E.L.P., a New York agency that provides temporary housing for
the homeless. In addition, he is on the Board of Trustees of the
Sundance Film Festival. Mr. Cole is also a Director and
President of nearly all of the wholly owned subsidiaries of the
Company.
Paul Blum was appointed President of the Company in February
2002, and also serves as Director. He previously served as Chief
Operating Officer since February 1998. Previously, he served as
Executive Vice President of the Company since May 1996 and as
Senior Vice President from August 1992 until May 1996. Mr. Blum
joined the Company in 1990. From 1982 until 1990, Mr. Blum
served as Vice President and was a principal shareholder of The
Blum Co., a fashion accessory firm, the assets of which were
purchased in 1990 by the Company.
Stanley A. Mayer has served as Executive Vice President, Chief
Financial Officer, Treasurer, Secretary and a Director of the
Company since March 1988. From 1986 until joining the Company in
1988, Mr. Mayer held the position of Vice President-Finance and
Administration of Swatch Watch USA, Inc. Mr. Mayer was the
Controller of the Ralph Lauren and Karl Lagerfeld womenswear
divisions of Bidermann Industries, USA, Inc. from 1979 until
1986. In addition, Mr. Mayer is an officer or Director of each of
the wholly owned subsidiaries of the Company.
Jaryn Bloom has served as Senior Vice President of Consumer
Direct from September 1997 through March 2003. Prior, she served
as Divisional President Retail and in various roles with
increasing responsibility since joining the Company in 1986. Ms.
Bloom is no longer employed by the Company. Harry Kubetz has
served as Senior Vice President of Operations since joining the
Company in April 1996. Mr. Kubetz was President of "No Fear"
Footwear, Inc. from 1994 until 1996. From 1992 until 1994, Mr.
Kubetz was Executive Vice President of Asco General Supplies, a
wholly owned subsidiary of Pentland, PLC.
Susan Q. Hudson has served as Senior Vice President -
Wholesale since February 1998. Prior, Ms. Hudson served as
Divisional President - Men's Footwear since 1996 and as Vice
President in charge of men's footwear since 1990. Prior to
joining the Company, Ms. Hudson was at LA Gear, where she served
as Regional Sales Manager.
Robert C. Grayson is a partner in Berglass-Grayson, a
management consulting and executive search firm. From 1992 to
1996, Mr. Grayson served initially as an outside consultant to
Tommy Hilfiger Corp., a wholesaler and retailer of men's
sportswear and boyswear, and later accepted titles of Chairman of
Tommy Hilfiger Retail, Inc. and Vice Chairman of Tommy Hilfiger
Corp. From 1970 to 1992, Mr. Grayson served in various
capacities for Limited Inc., including President and CEO of
Lerner New York from 1985 to 1992, and President and CEO of
Limited Stores from 1982 to 1985. He also serves as a director
of Ann Taylor Corporation and Lillian August, Inc.
Denis F. Kelly is a Managing Partner of Scura, Rise & Partners,
LLC. From July 1993 to December 2000, Mr. Kelly was the head of
the Mergers and Acquisitions Department at Prudential Securities
Incorporated. From 1991 to 1993, Mr. Kelly was President of
Denbrook Capital Corp., a merchant-banking firm. Mr. Kelly was
at Merrill Lynch from 1980 to 1991, where he served as Managing
Director, Mergers & Acquisitions from 1984 to 1986, and then as a
Managing Director, Merchant Banking, from 1986 to 1991. Mr.
Kelly is a director of MSC Industrial Direct, Inc.
Philip B. Miller is the principal of Philip B. Miller
Associates, a consulting firm. Mr. Miller served as Chairman and
Chief Executive Officer at Saks Fifth Avenue from 1993 to January
2000 and continued as Chairman until July 2001. Mr. Miller was
formerly Chairman and Chief Executive Officer at Marshall Fields,
joining that company in 1983 from Neiman Marcus, where he had
been President since 1977. Prior to that he served as Vice
Chairman at Lord & Taylor and as Vice President and Merchandise
Manager at Bloomingdales. Mr. Miller serves on the Board of
Directors at Puig USA, St. John and Tri-Artisan Partners. In
addition, Mr. Miller also serves on the Board of Directors of the
New York Botanical Gardens.
Available Information
The Company files its annual, quarterly, and current reports
and other information with the Securities and Exchange
Commission. The Company's annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments
to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, are
available free of charge in the "Investor" section under the
subheading of "About Us" on the Company's website
www.kennethcole.com. These reports, and any amendments to these
reports, are made available on our website as soon as reasonably
practicable after such reports are filed with or furnished to the
Securities and Exchange Commission.
In addition, the Company's website, www.kennethcole.com, will
include, free of charge, items related to corporate governance
matters, including our Corporate Governance Guidelines, charters
of various committees of our Board of Directors and our Code of
Business Conduct and Ethics applicable to our employees, officers
and directors. A printed copy of our Corporate Governance
Guidelines and our Code of Business Conduct and Ethics will be
available no later than May 27, 2004, the date of the annual
shareholders meeting, without charge by sending a written request
to: Investor Relations, Kenneth Cole Productions, Inc., 2
Emerson Lane, Secaucus, NJ 07094.
Item 2. Properties
During 2000, the Company relocated its executive offices and
showrooms from 152 West 57th Street, New York, NY to 603 West
50th Street, New York, NY, its new worldwide corporate
headquarters. The 15-year lease that expires on May 31, 2015
gives the Company approximately 126,000 square feet of office
space and parking facilities. The Company currently occupies
119,500 square feet, excluding parking facilities. The lease for
the former executive offices and showrooms expires in December
2006 and is currently under a subtenant lease agreement.
The Company's administrative offices and distribution
facilities are located in Secaucus, New Jersey under leases that
have been terminated as of April 2004. The main facility
comprises 282,000 square feet, of which approximately 30,000
square feet is used for administrative offices and approximately
40,000 square feet is sub-leased to Liz Claiborne, Inc. for
retail space. The Company has entered into a new 10-year lease
for 51,000 square feet in Secaucus, New Jersey for its
administrative offices. The distribution facility will be moved
to a public warehouse on the East coast. In addition to these
two leases, the Company also leases a 23,500 square foot facility
in Secaucus used for outlet store space as well as an additional
distribution warehousing facility. The Company also has a
technical and administrative office in Florence, Italy. The
Company does not own or operate any manufacturing facilities.
The Company leases space for all of its 50 full price retail
stores (aggregating approximately 222,000 square feet) and 33
outlet stores (aggregating approximately 160,000 square feet).
Generally, the leases provide for an initial term of five to ten
years and certain leases provide for renewal options permitting
the Company to extend the term thereafter.
Item 3. Legal Proceedings
The Company is, from time to time, a party to litigation that
arises in the normal course of its business operations. The
Company is not presently a party to any such litigation that it
believes would have a material adverse effect on its business or
operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity, Related
Shareholder Matters, and Issuer Purchases of Equity Securities
The Company's Class A Common Stock is listed and traded
(trading symbol: KCP) on the New York Stock Exchange ("NYSE").
On March 10, 2004 the closing sale price for the Class A Common
Stock was $32.15. The following table sets forth the high and
low closing sale prices for the Class A Common Stock for each
quarterly period for 2002 and 2003, as reported on the NYSE
Composite Tape:
2002: High Low
First Quarter 22.19 15.99
Second Quarter 30.12 19.12
Third Quarter 27.94 20.30
Fourth Quarter 25.90 16.76
2003: High Low
First Quarter 26.57 21.56
Second Quarter 25.50 19.02
Third Quarter 29.21 19.25
Fourth Quarter 30.88 26.53
The number of shareholders of record of the Company's Class A
Common Stock on March 10, 2004 was 64.
There were four holders of record of the Company's Class B
Common Stock on March 10, 2004. There is no established public
trading market for the Company's Class B Common Stock.
On February 21, 2001, the Board of Directors of the Company
authorized management to repurchase, from time to time, an
additional 2,000,000 shares up to an aggregate 4,250,000 shares
of the Company's Class A Common Stock. As of December 31, 2003,
2,888,400 shares were repurchased in the open market at an
aggregate price of $66,221,000, reducing the available shares
authorized for repurchase to 1,361,600. The repurchased shares
have been recorded as treasury stock.
Dividend Policy
The payment of any future dividends will be at the discretion
of the Company's Board of Directors and will depend, among other
things, upon, future earnings, operations, capital requirements,
proposed tax legislation, the financial condition of the Company
and general business conditions.
During the third quarter 2003, the Company established a
quarterly dividend and paid a cash dividend of $0.075 per share
on September 18, 2003 to shareholders of record at the close of
business on August 28, 2003. During the fourth quarter 2003, the
Company increased the quarterly cash dividend to $0.09 per share
and paid it on December 13, 2003 to shareholders of record at the
close of business on November 25, 2003.
On February 26, 2004, the Board of Directors of the Company
declared and increased the quarterly cash dividend to $0.12 per
share payable on March 25, 2004 to shareholders of record at the
close of business on March 9, 2004.
Item 6. Selected Financial Data
The following selected financial data has been derived from the
consolidated financial statements of the Company and should be
read in conjunction with the consolidated financial statements
and notes thereto that appear elsewhere in this Annual Report and
in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" set forth in Item 7. (Amounts, except
for per share amounts, are in thousands.)
2003 2002 2001 2000 1999
Income Statement Data:
Net sales $430,101 $404,336 $365,809 $387,148 $298,262
Royalty revenue(2) 38,252 28,713 22,116 21,619 14,955
Net revenue 468,353 433,049 387,925 408,767 313,217
Cost of goods sold 258,457 235,255 217,221 217,046 169,976
Gross profit(3) 209,896 197,794 170,704 191,721 143,241
Selling and general
administrative expenses(1) 157,824 152,618 145,919 130,967 102,625
Impairment of long-
lived assets 1,153 4,446
Operating income 50,919 40,730 24,785 60,754 40,616
Interest income, net 825 1,102 2,135 3,228 1,280
Income before provision
for income taxes 51,744 41,832 26,920 63,982 41,896
Provision for income taxes 19,145 15,687 10,304 25,592 16,968
Net income 32,599 26,145 16,616 38,390 24,928
Earnings per share:
Basic $1.66 $1.33 $.83 $1.87 $1.24
Diluted $1.59 $1.27 $.80 $1.75 $1.18
Weighted average shares outstanding:
Basic 19,609 19,643 19,992 20,574 20,102
Diluted 20,486 20,590 20,745 21,892 21,059
2003 2002 2001 2000 1999
Balance Sheet Data:
Working capital $154,161 $124,103 $ 96,709 $103,768 $106,057
Cash 111,102 91,549 68,966 74,608 71,415
Inventory 44,851 43,724 30,753 42,361 39,553
Total assets 273,841 240,317 201,889 212,370 176,859
Total debt, including
current maturities 171 383 576 758
Total shareholders' equity 196,334 164,902 140,894 145,636 125,331
(1) Includes shipping and warehousing expenses.
(2) Includes one-time payments related to the transfer of the
Company's fragrance and sunglass licenses during 2003.
(3) Includes a gain of $860,000 for pricing differences
discovered during the Company's rotational license audits during
2002.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should be read in
conjunction with the consolidated financial statements and the
notes thereto that appear elsewhere in this Annual Report.
Overview
Kenneth Cole Productions, Inc., designs, sources and markets a
broad range of fashion footwear and handbags and, through license
agreements, designs and markets apparel and accessories under its
Kenneth Cole New York, Reaction Kenneth Cole and Unlisted brand
names. During 2003, the Company added the Bongo trademark brand
for footwear through a license agreement. The Company's products
are targeted to appeal to fashion conscious consumers, reflecting
a casual urban perspective and a lifestyle uniquely associated
with Kenneth Cole.
The Company markets its products to more than 7,500 department
and specialty store locations, as well as through its Consumer
Direct business, which includes an expanding base of retail and
outlet stores, consumer catalogs and interactive websites,
including on-line e-commerce.
The popularity of the Kenneth Cole brand names among consumers
has enabled the Company to expand its product offerings and
channels of distribution through licensing agreements and offers
through these agreements a lifestyle collection of men's product
categories including tailored clothing, dress shirts, dress
pants, sportswear, neckwear, briefcases, portfolios, jewelry,
fragrance, belts, leather and fabric outerwear, sunglasses,
optical eyewear, watches, luggage, hosiery and small leather
goods. Women's product categories currently being sold pursuant
to license agreements include sportswear, small leather goods,
belts, scarves and wraps, hosiery, leather and fabric outerwear,
sunglasses, optical eyewear, watches, jewelry, fragrance,
swimwear, and luggage. In addition, the Company licenses boys'
apparel under the Reaction Kenneth Cole brand.
The Company recorded record revenues of $468.4 million for
the year ended December 31, 2003 and diluted earnings per share
grew 25.2% to $1.59 from $1.27 year over year. The Company is
pleased with its Kenneth Cole New York business, strong growth
in its diffusion brands, upward trend in its Consumer Direct
business and its continued success in a wide variety of license
product classifications. The Company's Balance Sheet remains
strong with $111.1 million in cash and no debt at December 31,
2003. Additionally, the Company continues to implement cost
reduction strategies, resulting in a decrease in selling,
general and administrative expenses as a percentage of revenue
and established its quarterly cash dividend during the third
quarter of 2003. The Company is pleased with the results and
believes that it is well positioned, both in the near term and
for many years ahead.
Critical Accounting Policies and Estimates
General
The Company's management's discussion and analysis of its
financial condition and results of operations are based upon the
Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these
financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to
customer programs and incentives, product returns, bad debts,
inventories, investments, income taxes, financing operations,
contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies
affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Inventory
The Company writes down its inventory for estimated
obsolescence equal to the difference between the cost of
inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market
conditions are less favorable than those projected by management,
additional inventory write-downs may be required.
Sales Returns and Allowances
The Company's ability to collect factor chargebacks for
deductions taken from its customers for returns, discounts, and
allowances as well as potential future customer deductions is
significant to its operations. The Company reserves against
known chargebacks as well as potential future customer
deductions, based on a combination of historical activity and
current market conditions. Actual results may differ from these
estimates under different assumptions or conditions, which may
have a significant impact on the Company's results.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to
make required payments. These customers include non-factored
accounts and credit card receivables from third party service
providers. If the financial conditions of these customers were
to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
Income Taxes
The Company is routinely under audit by federal, state, or
local authorities in the areas of income taxes. These audits
include questioning the timing and amount of deductions and the
allocation of income among various tax jurisdictions. Based on
its annual evaluations of tax positions, the Company believes it
has appropriately accrued for probable exposures. To the extent
the Company is required to pay amounts in excess of recorded
income tax liabilities, the Company's effective tax rate in a
given financial statement period could be materially impacted.
Litigation
The Company is periodically involved in carious legal actions
arising in the normal course of business. Management is required
to assess the probability of any adverse judgements as well as
the potential range of any losses. Management determines the
required accruals after a careful review of the facts of each
significant legal action. The Company's accruals may change in
the future due to new developments in these matters.
Contingencies
In the ordinary course of business, the Company is involved in
and subject to compliance and regulatory reviews and audits by
numerous authorities, agencies and other governmental agents and
entities from various jurisdictions. The Company is required to
assess the likelihood of any adverse outcomes of these matters.
A determination of the amount of reserves required, if any, for
these reviews are made after careful analysis of each individual
issue. The reserves may change in the future due to new
developments or final resolution in each matter, which may have a
significant impact on the Company's results.
Results of Operations
The following table sets forth certain operating data of the
Company as a percentage of net revenues for the periods indicated
below:
2003 2002 2001
Net sales 91.8% 93.4% 94.3%
Royalty revenue 8.2 6.6 5.7
------ ------ ------
Net revenues 100.0 100.0 100.0
Cost of goods sold 55.2 54.3 56.0
------ ------ ------
Gross profit 44.8 45.7 44.0
Selling, general and administrative
expenses 33.7 35.2 37.6
Impairment of long-lived assets 0.2 1.1
Operating income 10.9 9.4 6.4
Income before provision for income
taxes 11.1 9.7 6.9
Provision for income taxes 4.1 3.7 2.6
------ ------ ------
Net income 7.0% 6.0% 4.3%
====== ====== ======
Year Ended December 31, 2003 Compared to Year Ended December 31,
2002
Net revenues increased $35.3 million, or 8.2% to $468.4 million
in 2003 from $433.0 million in 2002. This increase is due to
revenue increases in each of the Company's business segments:
Wholesale, Consumer Direct and Licensing/International.
Wholesale net sales (excluding sales to the Consumer Direct
business segment) increased $16.9 million or 7.1% to $253.5
million in 2003 from $236.6 million in 2002. This increase is
attributable to improved sales across the Company's footwear
brands: Kenneth Cole New York, Reaction Kenneth Cole and
Unlisted and the additional sales of Bongo licensed footwear,
offset by a decline in the handbag business. The footwear
business increased sales from improved sell-thrus, but were
partially offset by the tightening of inventory levels by certain
major Company customers, while the Company commenced a major
initiative to reposition its handbag business. The associated
distribution and merchandising have resulted in creating the
current short-term sales reduction. In the longer term, however,
the Company believes these initiatives will produce a stronger
business and a corner stone of the brands. The Company believes
its focus on improving product offerings, advertising campaigns,
marketing efforts, website, catalogs and growing retail presence,
combined with the marketing efforts of its licensees, will be
significant factors to strengthen and define its distinct brands,
Kenneth Cole New York, Reaction Kenneth Cole, Unlisted and Bongo
across all product classifications, thereby increasing consumer
demand for the Company's brands in the future.
Net sales in the Company's Consumer Direct segment increased
$8.5 million, or 5.1% to $175.6 million in 2003 from $167.1
million in 2002. Of the total increase, $7.5 million was
attributable to new store sales in 2003 plus that portion of 2003
sales for stores not open for all of 2002, as well as an increase
of $0.9 million or 0.6% in comparable store sales. The remaining
increase was primarily derived from additional Internet sales.
The Company believes the increase in comparable store sales was a
result of its efforts to adapt its product offerings to better
reflect current consumer demands, as well as a general
improvement in the economic climate. In an effort to maintain,
solidify, and build on the positive sales results, the Company
will continue to analyze inventory, focus on products and further
scrutinize consumer trends.
Royalty revenue increased $9.5 million, or 33.2% to $38.2
million in 2003 from $28.7 million in 2002. The increase was
primarily from incremental minimum royalties from the Company's
existing licensees, most significantly women's apparel, new
revenues from the Company's fragrance and women's jewelry
licensees and payments related to the transfer of the Company's
fragrance and sunglass licenses. Improved sales from men's
apparel offset by decreases from accessory licensees, men's
jewelry, and small leather goods, added to increased royalty
revenue. The Company believes consumers look toward brands they
know and feel are compatible with their lifestyles; therefore the
synergies from its efforts to reinforce its brand identities
through greater marketing efforts, by itself and its licensees
across all product categories, will continue to strengthen and
define its brands to improve name recognition allowing growth in
sales both domestically and internationally through license
partners.
Consolidated gross profit as a percentage of net revenues
decreased to 44.8% in 2003 from 45.7% in 2002. The decrease is
primarily due to lower margins in the Company's Wholesale
segment, offset by a greater portion of gross profit, as a
percentage of net revenues, by the licensing/international
segment. The Wholesale gross margin percentage eroded primarily
as a result of poor sell-thrus from the restructuring initiatives
in the handbag business and the weakened US dollar compared to
the Euro, while licensing revenue, which has nominal associated
cost of goods, increased as a percentage of net revenues to 8.4%
for the year ended December 31, 2003 from 6.8% for the year ended
December 31, 2002. The Wholesale segment, which operates at a
lower gross profit level than the Consumer Direct segment,
decreased its percentage of net revenue to 54.1% for the year
ended December 31, 2003 from 54.6% for the year ended December
31, 2002, while the Consumer Direct segment as a percentage of
net revenue decreased to 37.5% for the year ended December 31,
2003 from 38.6% for the year ended December 31, 2002. The
Consumer Direct margin fell slightly compared to the year ended
December 31, 2002.
Selling, general and administrative expenses, including
shipping and warehousing ("SG&A"), increased $5.2 million, or
3.4% to $157.8 million (or 33.7% of net revenues) in 2003 from
$152.6 million (or 35.2% of net revenues) in 2002. The decrease
as a percentage of net revenues is primarily from the economies
of scale over the Company's fixed base of general and
administrative costs offset by higher labor costs within all
three segments. The decrease is further attributable to the
continued focus on the Company's on going cost-containment
program.
The Company recorded an asset impairment charge of $1.2
million and $4.4 million for the year ended December 31, 2003 and
2002, respectively, for the Company's Lexington Avenue and
Rockefeller Center stores located in New York City. This asset
impairment charge equaled 0.2% of net revenues for the year end
December 31, 2003 and 1.1% of net revenues for the year end
December 31, 2002, is included within operating income.
Interest and other income decreased to $0.8 million in 2003
from $1.1 million in 2002. The decrease is due to lower average
short-term interest rates.
The Company's effective tax rate decreased to 37.0% for the
year ended December 31, 2003 from 37.5% in the corresponding
period last year. The decrease is due to the relative level of
earnings in the various state and local taxing jurisdictions to
which the Company's earnings are subject.
As a result of the foregoing, net income increased $6.5
million, or 24.7% to $32.6 million (7.0% of net revenue)
including an asset impairment charge of $1.2 million for the year
ended December 31, 2003 from $26.1 million (6.0% of net revenue)
including an asset impairment charge of $4.4 million and a gain
of $860,000 included in gross profit for the year ended December
31, 2002.
Year Ended December 31, 2002 Compared to Year Ended December 31,
2001
Net revenues increased $45.1 million, or 11.6% to $433.0
million in 2002 from $387.9 million in 2001. This increase is
due to revenue increases in each of the Company's business
segments: Wholesale, Consumer Direct and Licensing/International.
Wholesale net sales (excluding sales to the Consumer Direct
business segment) increased $37.7 million or 18.9% to $236.6
million in 2002 from $199.0 million in 2001. This increase is
attributable to improved sales across the Company's footwear and
handbag brands: Kenneth Cole New York, Reaction Kenneth Cole and
Unlisted. The highly competitive consumer environment coupled
with decreased consumer confidence has led to a continued
promotionally driven price sensitive marketplace. The Company's
primary brand, Kenneth Cole New York accompanied by its diffusion
brands, Reaction Kenneth Cole and Unlisted has limited the
Company's exposure to reductions in sales through varying price
point ranges and multiple distribution channels. The Company
believes its focus on improving product offerings, advertising
campaigns, marketing efforts, website, catalogs and growing
retail presence, combined with the marketing efforts of its
licensees, will be significant factors to strengthen its three
distinct brands, Kenneth Cole New York, Reaction Kenneth Cole and
Unlisted across all product classifications, thereby increasing
consumer demand for the Company's brands in the future.
Net sales in the Company's Consumer Direct segment increased
$1.1 million, or .7% to $167.1 million in 2002 from $166.0
million in 2001. Of the total increase, $11.3 million was
attributable to new store sales in 2002 plus that portion of 2002
sales for stores not open for all of 2001, which was offset by a
decrease of $10.2 million in comparable store sales and
comparable catalog and Internet sales. The Company believes the
decrease in comparable store sales in the Consumer Direct segment
is due to the effects of a promotionally driven and highly
competitive retail store environment and less consumer spending
due to the ongoing Middle East tension, potential additional
terrorist attacks and general economic conditions. In an effort
to overcome these challenges, the Company continues to analyze
inventory, focus on products and further scrutinize consumer
trends.
Royalty revenue increased $6.6 million, or 29.8% to $28.7
million in 2002 from $22.1 million in 2001. The increase
primarily reflects revenues from the launch of the Company's
men's and women's fragrance during the third quarter of 2002 and
the launch of the Company's children's apparel line of products.
Additional sales from mens' and womens' sportswear and accessory
categories including neckwear, watches, dress shirts and optical
wear improved revenues offset by decreases in mens' and womens'
leather outerwear. The addition of fragrance, through a
worldwide launch and the initiation of children's wear into the
market place, continued the Company's strategic plan to grow its
global business through licensing partners. The Company believes
consumers look toward brands they know and feel comfortable with
as a lifestyle; therefore the synergies from its efforts to
reinforce its brand identities through greater marketing efforts,
by itself and its licensees across all product categories, will
continue to propel licensee sales both domestically and
internationally.
Consolidated gross profit as a percentage of net revenues
increased to 45.7% in 2002 from 44.0% in 2001. The increase is
attributable to improvements across all three business segments:
Wholesale, Consumer Direct and Licensing/International. The
primary increase is attributable to the Wholesale segment volume
increase and improved gross profit percentage. The Wholesale
segment, which operates at a lower gross profit level than the
Consumer Direct segment, increased its percentage of net revenue
to 54.6% for the year ended December 31, 2002 from 51.3% for the
year ended December 31, 2001, while the Consumer Direct segment
as a percentage of net revenue decreased to 38.6% for the year
ended December 31, 2002 from 42.8% for the year ended December
31, 2001. Wholesale gross profit as a percentage of sales
increased primarily from Reaction Kenneth Cole branded footwear
and handbags from improved sell-thrus at retail and from well-
managed inventories. The increase in the Consumer Direct segment
gross profit was attributable to a reduction in markdowns
compared with the highly competitive promotionally driven retail
environment after the September 11 tragedy and a gain of $860,000
recorded in the third quarter 2002. This gain, included in gross
profit, resulted from price adjustments on certain products sold
to the Kenneth Cole retail stores, after conducting audits of
certain licensees as part of the Company's rotational licensee
audit program. Licensing revenue, which has nominal associated
cost of goods, increased as a percentage of net revenues to 6.8%
for the year ended December 31, 2002 from 5.9% for the year ended
December 31, 2001.
Selling, general and administrative expenses, including
shipping and warehousing ("SG&A"), increased $6.7 million, or
4.6% to $152.6 million (or 35.2% of net revenues) in 2002 from
$145.9 million (or 37.6% of net revenues) in 2001. The decrease
as a percentage of net revenues is primarily from the economies
of scale over the Company's fixed base of general and
administrative costs offset by rent and labor costs within the
Consumer Direct segment. The decrease is further attributable to
the continued focus on the Company's cost-containment program
implemented at the end of 2001 in response to a challenging
economic environment that continues to persist.
The Company recorded a charge of $4.4 million during the year
ended December 31, 2002 due to a write-down of the leasehold
improvements associated with the Company's flagship retail
location at Rockefeller Center in New York City. This charge,
which represented 1.1% of net revenues for the year ended
December 31, 2002, is included within operating income.
Interest and other income decreased to $1.1 million in 2002
from $2.1 million in 2001. The decrease is due to lower average
short-term interest rates.
The Company's effective tax rate decreased to 37.5% for the
year ended December 31, 2002 from 38.3% in the corresponding
period last year. The decrease is due to the relative level of
earnings in the various state and local taxing jurisdictions to
which the Company's earnings are subject.
As a result of the foregoing, net income including an asset
impairment charge of $4.4 million and a gain included in gross
profit of $860,000 increased $9.5 million, or 57.3% to $26.1
million (6.0% of net revenue) for the year ended December 31,
2002 from $16.6 million (4.3% of net revenue) for the year ended
December 31, 2001.
Liquidity and Capital Resources
The Company's cash requirements are generated primarily from
working capital needs, retail expansion, enhanced technology, and
other corporate activities. The Company primarily relies upon
internally generated cash flows from operations to finance its
operations and growth; however, it also has the ability to borrow
up to $25.0 million under its line of credit facility. Cash
flows may vary from time to time as a result of seasonal
requirements of inventory, the timing of the delivery of
merchandise to customers and the level of accounts receivable and
payable balances. At December 31, 2003, working capital was
$154.2 million compared to $124.1 million at December 31, 2002.
Net cash provided by operating activities was $32.9 million in
2003 compared to $33.4 million in 2002. This increase was
primarily attributable to increased earnings offset by the timing
of various payables and receivables, as well as, the increase in
the Company's deferred rent obligations and the reduction of
amounts of long-lived impaired assets.
Net cash used in investing activities was $9.5 million in 2003
compared to $7.3 million in 2002. Capital expenditures were
approximately $9.5 million, $7.3 million and $10.6 million for
2003, 2002, 2001, respectively. Expenditures on furniture,
fixtures, and leasehold improvements for new retail store
openings and expansions were $4.6 million, $3.9 million and $8.6
million in 2003, 2002, and 2001, respectively. The remaining
expenditures were primarily for leasehold improvements for the
renovation of the Company's corporate headquarters and
information system enhancements.
Net cash used in financing activities was $3.8 million in 2003
compared to $3.5 million in 2002. This is principally
attributable to the Company's payment of cash dividends of
approximately $3.3 million to Class A and B Common Stock
shareholders offset by stock option proceeds. Proceeds from
stock-option exercised amount to $3.9 million and $1.0 million
for the year ended December 31, 2003 and 2002, respectively. In
addition, the Company purchased 200,000 shares of its Class A
Common Stock at an average price of $22.63 purchased for the year
ended December 31, 2003 compared to 200,000 shares at an average
price of $22.81 for the year ended December 31, 2002. As of
December 31, 2003, the Company has 4,250,000 shares authorized
for repurchase with 1,361,600 shares remaining from its buyback
authorization.
The Company currently sells substantially all of its accounts
receivable to two factors without recourse. In circumstances
where a customer's account cannot be factored without recourse,
the Company may take other measures to reduce its credit
exposure, which could include requiring the customer to pay in
advance, or to provide a letter of credit covering the sales
price of the merchandise ordered.
The Company's material obligations under contractual
agreements, primarily commitments for future payments under
operating lease agreements as of December 31, 2003 are summarized
as follows:
Payments Due by Period
Total 1 year 2-3 4-5 After 5
or less years years years
Operating Leases
and Other
Obligations $203,462,000 $24,197,000 $47,077,000 $41,931,000 $90,257,000
------------ ----------- ----------- ----------- -----------
Total Contractual
Obligations $203,462,000 $24,197,000 $47,077,000 $41,931,000 $90,257,000
============ =========== =========== =========== ===========
In addition, the Company will incur approximately $11.0 million
in lease payments through 2014 with the execution of its' new
administrative office lease signed in February 2004.
The Company currently has a line of credit, as amended, under
which up to $25.0 million is available to finance working capital
requirements and letters of credit to finance the Company's
inventory purchases. Borrowings available under the line of
credit are determined by a specified percentage of eligible
accounts receivable and inventories and bear interest at (i) the
higher of The Bank of New York's prime lending rate or the
Federal Funds rate plus 0.5% at the date of borrowing or (ii) a
negotiated rate. In connection with the line of credit, the
Company has agreed to eliminate all the outstanding borrowings
under the facility for at least 30 consecutive days during each
calendar year. In addition, borrowings under the line of credit
are secured by certain receivables of the Company. The Company
had no outstanding advances during 2003 and 2002 under this line
of credit, however amounts available under the line were reduced
by $2.2 million open letters of credit and $2.8 million standby
letters of credit to $20.0 million at December 31, 2003.
During 2004, the Company anticipates opening or expanding
approximately 7 to 11 retail and outlet stores. These new and
expanded stores will require approximately $3.0 million in
aggregate capital expenditures and initial inventory
requirements. . The Company also anticipates that it will require
increased capital expenditures to support its growth including an
increase in its office space and enhancements to its information
systems.
The Company has a 15-year lease expiring in 2015 for its
corporate headquarters in New York City providing approximately
119,500 square feet of office space. The Company has incurred
approximately $17.0 million in capital expenditures and expects
to expend another $3 million within the next year. During
February 2004, the Company entered into a 10-year lease for its
administrative offices located in New Jersey, for which it
expects to incur $1.0 million in capital improvements during
2004.
The Company believes that it will be able to satisfy its
current expected cash requirements for 2004, including
requirements for its retail expansion, corporate and
administrative office build-outs, enhanced information systems
and the payments of its quarterly cash dividend, primarily with
cash flow from operations.
Exchange Rates
The Company routinely enters into forward exchange contracts
for its future purchases of inventory denominated in foreign
currencies, primarily the Euro. At December 31, 2003, forward
exchange contracts with a notional value totaling $9.5 million
were outstanding with settlement dates ranging from January 2004
through March 2004. Gains and losses on forward exchange
contracts that are used for hedges are accounted for on the
balance sheet as inventory and an adjustment to equity, and are
subsequently accounted for as part of the purchase price of the
inventory upon execution of the contract. At December 31, 2003,
the unrealized gain on these outstanding forward contracts is
approximately $606,000, net of taxes. The Company expects to
continue to routinely enter into additional foreign exchange
contracts throughout the year. While the Company believes that
its current procedures with respect to the reduction of risk
associated with currency exchange rate fluctuations are adequate,
there can be no assurance that such fluctuations will not have a
material adverse effect on the results of operations of the
Company in the future.
Inventory from contract manufacturers in the Far East and
Brazil are purchased in United States dollars and the recent
changes of many of these currencies against the United States
dollar has not had any material adverse impact on the Company.
However, future purchase prices for the Company's products may be
impacted by fluctuations in the exchange rate between the United
States dollar and the local currencies of the contract
manufacturer, which may affect the Company's cost of goods in the
future. The Company does not believe the potential effects of
such fluctuations would have a material adverse effect on the
Company.
Effects of Inflation
The Company does not believe that the relatively low rates of
inflation experienced over the last few years in the United
States, where it primarily competes, have had a significant
effect on revenues or profitability.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk
The Company does not believe it has a material exposure to
market risk. The Company is primarily exposed to currency
exchange rate risks with respect to its inventory transactions
denominated in Euro. Business activities in various currencies
expose the Company to the risk that the eventual net dollar cash
flows from transactions with foreign suppliers denominated in
foreign currencies may be adversely affected by changes in
currency rates. The Company manages these risks by utilizing
foreign exchange contracts. The Company does not enter into
foreign currency transactions for speculative purposes.
At December 31, 2003, the Company had forward exchange
contracts totaling with notional values $9.5 million, which
resulted in an unrealized gain of approximately $606,000, 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. A two or less percentage point increase
in interest rates effecting the Company's credit facility would
not have had a material effect on the Company's 2003 and 2002 net
income.
Item 8. Financial Statements and Supplementary Data
See page F-1 for a listing of the consolidated financial
statements submitted as part of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
Item 9a. Controls and Procedure
The Company's chief executive officer and chief financial
officer, after evaluating the effectiveness of the Company's
"disclosure controls and procedures" (as defined in Rules 13a-
14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this Annual
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.
There were no significant changes in the Company's internal
controls or in other factors as of the end of the period covered
by this report that could significantly affect those controls
subsequent to the end of the period.
PART III
Item 10. Directors and Executive Officers of the Registrant
Except for the information regarding directors and executive
officers of the registrant, which is included in Part I, the
information required by this item will be contained in the
Company's Proxy Statement for its Annual Shareholders Meeting to
be held May 27, 2004 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2003 and is
incorporated herein by reference in response to this item.
Item 11. Executive Compensation
The information required by this item will be contained in the
Company's Proxy Statement for its Annual Shareholders Meeting to
be held May 27, 2004 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2003 and is
incorporated herein by reference in response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters
The information required by this item will be contained in the
Company's Proxy Statement for its Annual Shareholders Meeting to
be held May 27, 2004 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2003 and is
incorporated herein by reference in response to this item.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be contained in the
Company's Proxy Statement for its Annual Shareholders Meeting to
be held May 27, 2004 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2003, and is
incorporated herein by reference in response to this item.
Item 14. Principal Accountant Fees and Services
The information required by this item will be contained in the
Company's Proxy Statement for its Annual Shareholders Meeting to
be held May 27, 2004 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2003 and is
incorporated herein by reference in response to this item.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) (1) See page F-1 for a listing of consolidated financial
statements submitted as part of this report.
(a) (2) Schedule II - Valuation and Qualifying Accounts
All other schedules, for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions, are shown in the financial statements or are
inapplicable and therefore have been omitted.
(a) (3) The following exhibits are included in this report:
Exhibit
No.
Description
3.01 -Restated Certificate of Incorporation of Kenneth
Cole Productions, Inc.; Certificate of Merger of Cole Fifth
Avenue, Inc. into Kenneth Cole Productions, Inc.;
Certificate of Merger of Cole Productions, Inc. into
Kenneth Cole Productions, Inc.; Certificate of Merger of
Cole Sunset, Inc. into Kenneth Cole Productions, Inc.;
Certificate of Merger of Cole Union Street, Inc. into
Kenneth Cole Productions, Inc.; Certificate of Merger of
Cole West, Inc. into Kenneth Cole Productions, Inc.;
Certificate of Merger of Kenneth Cole Woodbury, Inc. into
Kenneth Cole Productions, Inc.; Certificate of Merger of
Kenneth Cole Leather Goods, Inc. into Kenneth Cole
Productions, Inc.; Certificate of Merger of Unlisted into
Kenneth Cole Productions, Inc. (Incorporated by reference
to Exhibit 3.01 to the Company's Registration Statement on
Form S-1, Registration No. 33-77636).
3.02 -By-laws. (Incorporated by reference to Exhibit
3.02 to the Company's Registration Statement on Form S-1,
Registration No. 33-77636).
4.01 -Specimen of Class A Common Stock Certificate.
(Incorporated by reference to Exhibit 4.01 to the Company's
Registration Statement on Form S-1, Registration No. 33-
77636).
10.01 -Tax Matters Agreement, dated as of June 1, 1994,
among Kenneth Cole Productions, Inc., Kenneth D. Cole, Paul
Blum and Stanley A. Mayer. (Incorporated by reference to
Exhibit 10.01 to the Company's Registration Statement on
Form S-1, Registration No. 33-77636).
10.02 -Term Loan Agreement, dated as of May 26, 1994, by and
among Kenneth Cole Productions, Inc., Kenneth
Cole Leather Goods, Inc., Unlisted, Inc., Cole West, Inc.,
Kenneth Cole Financial Services, Inc., Kenneth Cole Woodbury,
Inc., Cole Fifth Avenue, Inc., Cole Union Street, Inc. and The
Bank of New York; Promissory Notes, dated May 26, 1994, issued by
each of Kenneth Cole Leather Goods, Inc., Unlisted, Inc., Cole
West, Inc., Kenneth Cole Financial Services, Inc., Kenneth Cole
Woodbury, Inc., Cole Fifth Avenue, Inc., Cole Union Street, Inc.
to The Bank of New York; Shareholder Guaranty by and between
Kenneth D. Cole and The Bank of New York, dated as of May 26,
1994; Subordination Agreement by and among Kenneth D. Cole,
Kenneth Cole Productions, Inc., Kenneth Cole Leather Goods, Inc.,
Unlisted, Inc., Cole West, Inc., Kenneth Cole Financial Services,
Inc., Kenneth Cole Woodbury, Inc., Cole Fifth Avenue, Inc., Cole
Union Street, Inc. and The Bank of New York, dated as of April
13, 1994; Reinvestment Agreement by and among Kenneth D. Cole,
Kenneth Cole Productions, Inc., Unlisted, Inc., Cole West, Inc.,
Kenneth Cole Financial Services, Inc., Kenneth Cole Woodbury,
Inc., Cole Fifth Avenue, Inc., Cole Union Street, Inc. and The
Bank of New York, dated as of May 26, 1994; Amendment No. 1 to
the Term Loan Agreement and the Reinvestment Agreement by and
among Kenneth D. Cole, Kenneth Cole Productions, Inc., Cole West,
Inc., Kenneth Cole Woodbury, Inc., Cole Fifth Avenue, Inc., Cole
Union Street, Inc., Kenneth Cole Financial Services, Inc. and The
Bank of New York, dated as of May 31, 1994. (Incorporated by
reference to Exhibit 10.02 to the Company's Registration
Statement on Form S-1, Registration No. 33-77636).
10.03-Line of Credit Letter, dated January 13, 1994, from The
Bank of New York to Kenneth Cole Productions, Inc., Kenneth
Cole Leather Goods, Inc. and Unlisted, Inc.; $7,500,000
Promissory Note, dated February 1, 1994 by Kenneth Cole
Productions, Inc., Kenneth Cole Leather Goods, Inc. and
Unlisted, Inc. issued to The Bank of New York; Letter
Agreement, dated December 16, 1993, between The Bank of New
York and Kenneth Cole Productions, Inc., Unlisted, Inc.,
Kenneth Cole Leather Goods, Inc., Cole Productions, Inc.,
Cole West, Inc., Kenneth Cole Financial Services, Inc.,
Cole Woodbury, Inc., Cole Sunset, Inc. and Cole Fifth
Avenue, Inc.; General Guarantees, dated December 16, 1993,
in favor of The Bank of New York by Kenneth Cole Leather
Goods, Inc. for Unlisted, Inc., by Kenneth Cole Leather
Goods, Inc. for Kenneth Cole Productions, Inc., by
Unlisted, Inc. for Kenneth Cole Productions, Inc., by
Unlisted, Inc. for Kenneth Cole Leather Goods, Inc., by
Kenneth Cole Productions, Inc. for Kenneth Cole Leather
Goods, Inc., and by Kenneth Cole Productions, Inc. for
Unlisted, Inc.; General Loan and Security Agreements, dated
December 16, 1993, between The Bank of New York and each of
Kenneth Cole Productions, Inc., Kenneth Cole Leather Goods,
Inc. and Unlisted, Inc.; and Personal Guarantees of Mr.
Kenneth D. Cole, dated December 16, 1993, in favor of The
Bank of New York for Kenneth Cole Productions, Inc.,
Unlisted, Inc. and Kenneth Cole Leather Goods, Inc.
(Incorporated by reference to Exhibit 10.03 to the
Company's Registration Statement on Form S-1, Registration
No. 33-77636).
Line of Credit Letter, dated December 9, 1994
from The Bank of New York to Kenneth Cole Productions,
Inc.; $7,500 Promissory Note, dated December 15, 1994 by
Kenneth Cole Productions, Inc. issued to The Bank of New
York; Letter of Termination of Personal Guarantees of Mr.
Kenneth D. Cole, dated December 8, 1994, in favor of The
Bank of New York for Kenneth Cole Productions, Inc.,
Unlisted, Inc. and Kenneth Cole Leather Goods, Inc.
(Incorporated by reference to Exhibit 10.03 to the
Company's 1994 Form 10-K).
10.03A -$10,000 Promissory Note, dated July 31, 1995 by
Kenneth Cole Productions, Inc. issued to The Bank of New
York. (Previously filed as Exhibit 10.03A to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference).
*10.04 -Kenneth Cole Productions, Inc. 1994 Stock Option
Plan. (Incorporated by reference to Exhibit 10.04 to the
Company's Registration Statement on Form S-1, Registration
No. 33-77636).
*10.05 -Employment Agreement, dated as of April 30, 1994,
between Kenneth Cole Productions, Inc. and Kenneth D. Cole.
(Incorporated by reference to Exhibit 10.05 to the
Company's Registration Statement on Form S-1, Registration
No. 33-77636).
*10.06 -Employment Agreement, dated as of April 30, 1994,
between Kenneth Cole Productions, Inc. and Paul Blum.
(Incorporated by reference to Exhibit 10.06 to the
Company's Registration Statement on Form S-1, Registration
No. 33-77636).
*10.07 -Employment Agreement, dated as of April 30,
1994, between Kenneth Cole Productions, Inc. and Stanley A.
Mayer; Stock Option Agreement dated as of March 31, 1994
between Kenneth Cole Productions, Inc. and Stanley A.
Mayer. (Incorporated by reference to Exhibit 10.07 to the
Company's Registration Statement on Form S-1, Registration
No. 33-77636).
Stock Option Agreement dated as of June 1, 1994,
between Kenneth Cole Productions, Inc. and Stanley A.
Mayer; Stock Option Agreement dated as of July 7, 1994,
between Kenneth Cole Productions, Inc. and Stanley A. Mayer
(Incorporated by reference to Exhibit 10.07 to the
Company's 1994 Form 10-K).
10.08 -Collective Bargaining Agreement by and between
the New York Industrial Council of the National Fashion
Accessories Association, Inc. and Leather Goods, Plastics,
Handbags and Novelty Workers' Union, Local 1, dated as of
April 25, 1987; Memorandum of Agreement by and between the
New York Industrial Council of the National Fashion
Accessories Association, Inc. and Leather Goods, Plastics,
Handbags and Novelty Workers' Union, Local 1, Division of
Local 342-50 United Food and Commercial Workers Union,
dated as of June 16, 1993. (Incorporated by reference to
Exhibit 10.08 to the Company's Registration Statement on
Form S-1, Registration No. 33-77636).
10.09-Memorandum of Agreement between the New York Industrial
Council of the National Fashion Accessories Association
Inc. and Local 1 Leather Goods, Plastics, Handbags, and
Novelty Workers Union, Division of Local 342-50 United Food
and Commercial Workers Union (Previously filed as Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1996 and incorporated
herein by reference).
*10.10 Employment Agreement between Kenneth Cole
Productions, Inc., and Paul Blum. (Previously filed as
Exhibit 10.6 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1996 and
incorporated herein by reference).
10.11 Sublease Agreement, dated June 17, 1996, between
Kenneth Cole Productions, Inc. and Liz Claiborne
Accessories, Inc. (Incorporated by reference to Exhibit
10.11 to the Company's 1996 Form 10-K).
*10.12 Amended and Restated Kenneth Cole Productions,
Inc. 1994 Stock Option Plan (Previously filed as an Exhibit
to the Registrant's Proxy Statement filed on April 22, 1997
and incorporated herein by reference).
*10.13 Employment Agreement between Kenneth Cole
Productions, Inc. and Susan Hudson (Previously filed as an
Exhibit to the Company's 1997 Form 10-K).
10.14 Lease Agreement, dated December 17, 1998, between
Kenneth Cole Productions, Inc. and SAAR Company, LLC.
(Previously filed as Exhibit 10.14 to the Registrants Annual
Report on Form 10-K for the year ended December 31, 1998 and
incorporated by reference).
10.15 Common Stock Purchase Agreement, dated July 20,
1999, between Liz Claiborne, Inc. and Kenneth Cole Productions,
Inc. (Previously filed as Exhibit 10.01 to the Registrants
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999).
10.16 Registration Rights Agreement, dated July 20,
1999, between Liz Claiborne, Inc. and Kenneth Cole Productions,
Inc. (Previously filed as Exhibit 10.02 to the Registrants
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999).
10.17 License Agreement, dated July 20, 1999, by and
between L.C.K.L., LLC and K.C.P.L., Inc. (Portions of this
exhibit have been omitted pursuant to a request for confidential
treatment and been filed separately with the Securities and
Exchange Commission. Such portions are designated by a "*".
(Previously filed as Exhibit 10.03 to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
1999).
10.18 Amended and Restated Employment Agreement, dated as of
September 1, 2000, between Kenneth Cole Productions, Inc.
and Paul Blum (Previously filed as Exhibit 10.10 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996 and incorporated
herein by reference).
10.19 Kenneth Cole Productions, Inc. Employee Stock
Purchase Plan (Incorporated by reference to the Company's
Registration Statement on Form S-8 Registration No. 33-
31868, filed on March 7, 2000.)
+ 21.01 List of Subsidiaries
+23.01 Consent of Independent Auditors
+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 18 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 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002- Chief Financial Officer
____________________________
* Management contract or compensatory plan or
arrangement required to be identified pursuant to Item
14(a) of this report.
+ Filed herewith.
(b) Reports on Form 8-K
(1) Form 8-K dated July 30, 2003
Item 5. Results of Operations and Financial Condition
Furnishing the press release announcing Kenneth Cole
Productions, Inc.'s financial results for the quarter ended
June 30, 2003.
(2) Form 8-K dated October 29, 2003
Item 5. Results of Operations and Financial Condition
Furnishing the press release announcing Kenneth Cole
Productions, Inc.'s financial results for the quarter ended
September 30, 2003.
(3) Form 8-K dated February 26, 2004
Item 12. Results of Operations and Financial Condition
Furnishing the press release announcing Kenneth Cole
Productions, Inc.'s financial results for the quarter ended
December 31, 2003.
(c) See (a) (3) above for a listing of the exhibits included as
a part of this report.
Kenneth Cole Productions, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Page
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-3
Consolidated Statements of Income for the years ended
December 31, 2003, 2002 and 2001 F-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2003, 2002 and 2001 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 F-7
Notes to Consolidated Financial Statements F-8
Report of Independent Auditors
Board of Directors and Shareholders
Kenneth Cole Productions, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets
of Kenneth Cole Productions, Inc. and subsidiaries as of December
31, 2003 and 2002, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2003. Our
audits also included the financial statement schedule listed in
the index at Item 15(a). These financial statements and schedule
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Kenneth Cole Productions, Inc. and
subsidiaries at December 31, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
New York, New York
February 20, 2004
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
2003 2002
Assets
Current assets:
Cash and cash equivalents $111,102,000 $ 91,549,000
Due from factors 31,487,000 30,886,000
Accounts receivable, less allowance for doubtful
accounts of $475,000 in 2003 and 2002 11,254,000 7,884,000
Inventories 44,851,000 43,724,000
Prepaid expenses and other current assets 1,343,000 1,074,000
Deferred taxes, net 2,063,000 2,900,000
------------ ------------
Total current assets 202,100,000 178,017,000
Property and equipment-at cost, less accumulated
depreciation and amortization 36,755,000 36,002,000
Other assets:
Deferred taxes, net 8,989,000 7,753,000
Deposits and sundry 7,614,000 6,490,000
Deferred compensation plans assets 18,383,000 12,055,000
------------ ------------
Total other assets 34,986,000 26,298,000
------------ ------------
Total assets $273,841,000 $240,317,000
============ ============
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
December 31,
2003 2002
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 33,847,000 $ 33,634,000
Accrued expenses and other current liabilities 11,153,000 14,040,000
Income taxes payable 2,939,000 6,240,000
------------ ------------
Total current liabilities 47,939,000 53,914,000
Accrued rent and other long term liabilities 11,185,000 9,446,000
Deferred compensation plans liabilities 18,383,000 12,055,000
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, 14,534,791
and 13,921,817 issued in 2003 and 2002 145,000 139,000
Class B Convertible Common Stock, par value
$.01, 9,000,000 shares authorized, 8,168,497
and 8,360,497 outstanding in 2003 and 2002 82,000 84,000
Additional paid-in capital 69,992,000 63,476,000
Accumulated other comprehensive income 751,000 654,000
Retained Earnings 191,585,000 162,244,000
------------ ------------
262,555,000 226,597,000
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 196,334,000 164,902,000
------------ ------------
Total liabilities and shareholders' equity $273,841,000 $240,317,000
============ ============
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31,
2003 2002 2001
Net sales $430,101,000 $404,336,000 $365,809,000
Royalty revenue 38,252,000 28,713,000 22,116,000
------------ ------------ ------------
Net revenue 468,353,000 433,049,000 387,925,000
Cost of goods sold 258,457,000 235,255,000 217,221,000
------------ ------------ ------------
Gross profit 209,896,000 197,794,000 170,704,000
Selling, general, and
administrative expenses 157,824,000 152,618,000 145,919,000
Impairment of long-lived assets 1,153,000 4,446,000
------------ ------------ ------------
Operating income 50,919,000 40,730,000 24,785,000
Interest and other income, net 825,000 1,102,000 2,135,000
------------ ------------ ------------
Income before provision for
income taxes 51,744,000 41,832,000 26,920,000
Provision for income taxes 19,145,000 15,687,000 10,304,000
------------ ------------ ------------
Net income $ 32,599,000 $ 26,145,000 $ 16,616,000
============ ============ ============
Earnings per share:
Basic $1.66 $1.33 $.83
Diluted $1.59 $1.27 $.80
Shares used to compute earnings per share:
Basic 19,609,000 19,643,000 19,992,000
Diluted 20,486,000 20,590,000 20,745,000
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Class A Class B
Common Stock Common Stock
Number Number
of Shares Amount of Shares Amount
Balance at 12/31/00 13,479,088 $135,000 8,588,097 $86,000
Translation adjustment
Forward contracts, net of
taxes $696,000
Net Income, net of
taxes $10,304,000
Translation adjustment,
Foreign currency, net of
taxes $(12,000)
Forward contracts, net of
taxes $(665,000)
Comprehensive income
Exercise of stock options
Related tax benefit $232,000 37,422
Issuance of Class A Stock
for ESPP 20,074
Purchase of Class A Stock
Conversion of Class B to
Class A shares common stock 90,000 1,000 (90,000) (1,000)
--------------------------------------------
Balance at 12/31/01 13,626,584 136,000 8,498,097 85,000
Net Income, net of
taxes $15,687,000
Translation adjustment,
Foreign currency, net of
taxes $(73,000)
Forward contracts, net of
taxes $205,000
Comprehensive income
Exercise of stock options
Related tax benefit $974,000 142,952 2,000
Issuance of Class A Stock
for ESPP 14,681
Purchase of Class A Stock
Conversion of Class B to
Class A shares common stock 137,600 1,000 (137,600) (1,000)
--------------------------------------------
Balance at 12/31/02 13,921,817 139,000 8,360,497 84,000
Net Income, net of
taxes $19,145,000
Translation adjustment,
Foreign currency, net of
taxes $(69,000)
Forward contracts, net of
taxes $126,000
Comprehensive income
Exercise of stock options
Related tax benefit $2,370,000 408,368 4,000
Issuance of Class A Stock
for ESPP 12,606
Dividends paid on common stock
Purchase of Class A Stock
Conversion of Class B to
Class A shares common stock 192,000 2,000 (192,000) (2,000)
--------------------------------------------
Balance at 12/31/03 14,534,791 $145,000 8,168,497 $82,000
============================================
Accumulated
Additional Other
Paid-In Comprehensive Retained
Capital Income Earnings
Balance at 12/31/00 $60,300,000 $ 403,000 $119,483,000
Translation adjustment
Forward contracts, net of
taxes $696,000 1,122,000
Net Income, net of
taxes $10,304,000 16,616,000
Translation adjustment,
Foreign currency, net of
taxes $(12,000) (19,000)
Forward contracts, net of
taxes $(665,000) (1,072,000)
Comprehensive income
Exercise of stock options
Related tax benefit $232,000 619,000
Issuance of Class A Stock
for ESPP 354,000
Purchase of Class A Stock
Conversion of Class B to
Class A shares common stock
---------------------------------------------
Balance at 12/31/01 61,273,000 434,000 136,099,000
Net Income, net of
taxes $15,687,000 26,145,000
Translation adjustment,
Foreign currency, net of
taxes $(73,000) (121,000)
Forward contracts, net of
taxes $205,000 341,000
Comprehensive income
Exercise of stock options
Related tax benefit $974,000 1,994,000
Issuance of Class A Stock
for ESPP 209,000
Purchase of Class A Stock
Conversion of Class B to
Class A shares common stock
---------------------------------------------
Balance at 12/31/02 63,476,000 654,000 162,244,000
Net Income, net of
taxes $19,145,000 32,599,000
Translation adjustment,
Foreign currency, net of
taxes $(69,000) (118,000)
Forward contracts, net of
taxes $126,000 215,000
Comprehensive income
Exercise of stock options
Related tax benefit $2,370,000 6,304,000
Issuance of Class A Stock
for ESPP 212,000
Dividends paid on common stock (3,258,000)
Purchase of Class A Stock
Conversion of Class B to
Class A shares common stock
---------------------------------------------
Balance at 12/31/03 $69,992,000 $ 751,000 $191,585,000
=============================================
Treasury Stock
Number
of shares Amount Total
Balance at 12/31/00 (1,506,700) $(34,771,000) $145,636,000
Translation adjustment
Forward contracts, net of
taxes $696,000 1,122,000
Net Income, net of
taxes $10,304,000 16,616,000
Translation adjustment,
Foreign currency, net of
taxes $(12,000) (19,000)
Forward contracts, net of
taxes $(665,000) (1,072,000)
-------------
Comprehensive income 16,647,000
Exercise of stock options
Related tax benefit $232,000 619,000
Issuance of Class A Stock
for ESPP 354,000
Purchase of Class A Stock (981,700) (22,362,000) (22,362,000)
Conversion of Class B to
Class A shares common stock
---------------------------------------------
Balance at 12/31/01 (2,488,400) (57,133,000) 140,894,000
Net Income, net of
taxes $15,687,000 26,145,000
Translation adjustment,
Foreign currency, net of
taxes $(73,000) (121,000)
Forward contracts, net of
taxes $205,000 341,000
-------------
Comprehensive income 26,365,000
Exercise of stock options
Related tax benefit $974,000 1,996,000
Issuance of Class A Stock
for ESPP 209,000
Purchase of Class A Stock (200,000) (4,562,000) (4,562,000)
Conversion of Class B to
Class A shares common stock
---------------------------------------------
Balance at 12/31/02 (2,688,400) (61,695,000) 164,902,000
Net Income, net of
taxes $19,145,000 32,599,000
Translation adjustment,
Foreign currency, net of
taxes $(69,000) (118,000)
Forward contracts, net of
taxes $126,000 215,000
-------------
Comprehensive income 32,696,000
Exercise of stock options
Related tax benefit $2,370,000 6,308,000
Issuance of Class A Stock
for ESPP 212,000
Dividends paid on common stock (3,258,000)
Purchase of Class A Stock (200,000) (4,526,000) (4,526,000)
Conversion of Class B to
Class A shares common stock
---------------------------------------------
Balance at 12/31/03 (2,888,400) $(66,221,000) $196,334,000
=============================================
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
2003 2002 2001
Cash flows from operating
activities
Net income $ 32,599,000 $ 26,145,000 $ 16,616,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,604,000 7,307,000 8,313,000
Impairment of long-lived assets 1,153,000 4,446,000
Unrealized (gain) loss on deferred
compensation plans (2,543,000) 1,526,000 519,000
Realized/Unrealized gain on
marketable securities (133,000)
Provision for doubtful accounts 262,000 244,000 808,000
Benefit for deferred taxes (399,000) (3,170,000) (2,799,000)
Tax benefit from stock options 2,370,000 974,000 232,000
Changes in operating assets and liabilities:
Increase in due from factors (601,000) (2,597,000) (2,223,000)
(Increase) decrease in accounts
receivable (3,632,000) (1,397,000) 1,578,000
(Increase) decrease in inventories (912,000) (12,630,000) 11,658,000
(Increase) decrease in prepaid expenses
and other current assets (269,000) (201,000) 383,000
Increase in other assets and deferred
compensation assets (4,909,000) (1,764,000) (4,241,000)
(Decrease) increase in income
taxes payable (3,301,000) 3,991,000 (964,000)
Increase (decrease) in accounts payable 213,000 7,702,000 (8,756,000)
(Decrease) increase in accrued expenses
and other current liabilities (2,812,000) 484,000 (1,245,000)
Increase in other non-current
liabilities 8,067,000 2,345,000 5,419,000
------------ ------------ ------------
Net cash provided by operating
activities 32,890,000 33,405,000 25,165,000
Cash flows from investing activities
Acquisition of property and
equipment, net (9,510,000) (7,268,000) (10,598,000)
Proceeds from sale and purchase of
marketable securities 1,624,000
------------ ------------ ------------
Net cash used in investing activities (9,510,000) (7,268,000) (8,974,000)
Cash flows from financing activities
Proceeds from exercise of stock options 3,938,000 1,022,000 387,000
Proceeds from issuance of stock
from employee purchase plan 212,000 209,000 354,000
Principal payments of capital
lease obligations (171,000) (212,000) (193,000)
Dividends paid to shareholders (3,258,000)
Purchase of treasury stock (4,526,000) (4,562,000) (22,362,000)
------------ ------------ ------------
Net cash used in financing activities (3,805,000) (3,543,000) (21,814,000)
Effect of exchange rate changes on cash (22,000) (11,000) (19,000)
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents 19,553,000 22,583,000 (5,642,000)
Cash and cash equivalents,
beginning of year 91,549,000 68,966,000 74,608,000
------------ ------------ ------------
Cash and cash equivalents, end of year $111,102,000 $ 91,549,000 $ 68,966,000
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 40,000 $ 35,000 $ 50,000
Income taxes $ 20,583,000 $ 14,757,000 $ 13,467,000
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003
Note A - Summary of Significant Accounting Policies
1. Description of business
Kenneth Cole Productions, Inc. and its subsidiaries (the
"Company") designs, sources and markets a broad range of quality
footwear and handbags, and through license agreements, designs
and markets men's, women's and children's apparel and accessories
under its Kenneth Cole New York, Reaction Kenneth Cole and
Unlisted brands for the fashion conscious consumer. During 2003,
the Company added the Bongo trademark for footwear through a
license agreement. The Company markets its products for sale to
more than 7,500 department stores and specialty store locations
in the United States and in several foreign countries, through
its retail and outlet store base, and its interactive website.
The Company also distributes consumer catalogs that feature a
variety of Kenneth Cole New York and Reaction Kenneth Cole
branded products.
2. Principles of consolidation
The consolidated financial statements include the accounts of
Kenneth Cole Productions, Inc. and its wholly owned subsidiaries.
Intercompany transactions and balances have been eliminated in
consolidation.
3. Use of estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that effect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
4. Cash and cash equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less at the time of purchase
to be cash equivalents.
5. Inventories
Inventories, which consist of finished goods, are stated at the
lower of cost or fair market value. Cost is determined by the
first-in, first-out method.
6. Property and equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization is
computed using the estimated useful lives of the related assets
ranging from three to seven years on a straight-line basis.
Leasehold improvements are amortized using the straight-line
method over the term of the related lease or the estimated useful
life, whichever is less.
The Company reviews long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable as measured by
comparing the undiscounted future cash flows to the asset's net
book value. Impaired assets are recorded at the lesser of their
carrying value or fair value (See Note D).
7. Income taxes
The Company accounts for income taxes using the liability
method. Under this method, deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
8. Revenue recognition
Wholesale revenues are recognized at the time merchandise is
shipped to customers. Retail store revenues are recognized at
the time of sale. Both wholesale and retail store revenues are
shown net of returns, discounts, and other allowances. The
Company has also entered into various trade name license
agreements that provide revenues based on minimum royalties and
additional revenues based on percentage of defined sales. Minimum
royalty revenue is recognized on a straight-line basis over each
period, as defined in each license agreement. Royalties exceeding
the defined annual minimum amounts are recognized as income
during the period corresponding to the licensee's net sales as
such amounts are exceeded.
9. Advertising costs
The Company incurred advertising costs, including certain in-
house marketing expenses of $16.8 million, $18.1 million and
$16.7 million for 2003, 2002 and 2001, respectively. The Company
records advertising expense concurrent with the first time the
advertising takes place.
10. 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.
Year Ended December 31,
2003 2002 2001
Net Income, as reported $ 32,599,000 $ 26,145,000 $ 16,616,000
Deduct: Stock-based employee
compensation expense determined
under fair value method, net
of related tax effects 2,855,000 2,506,000 2,485,000
------------ ------------ ------------
Pro forma net income $ 29,744,000 $ 23,639,000 $ 14,131,000
Earnings per share:
Basic - as reported $ 1.66 $ 1.33 $ .83
Basic - pro forma $ 1.52 $ 1.20 $ .71
Diluted - as reported $ 1.59 $ 1.27 $ .80
Diluted - pro forma $ 1.45 $ 1.15 $ .68
The effects of applying SFAS 123 on this pro forma disclosure
may not be indicative of future results. SFAS 123 does not apply
to grants prior to 1995, and additional awards in future years
may or may not be granted.
11. Derivative instruments and hedging activities
The Company uses derivative financial instruments to manage
its risk associated with movements in the Euro exchange rates
through forward exchange contracts to purchase inventory. The
Company recognizes all derivatives in inventory on the face of
the balance sheet. Those derivatives that are not hedges are
adjusted to fair value through earnings. Hedged derivatives,
depending on their nature, are adjusted to inventory through an
offset to earnings or recognized in accumulated other
comprehensive income until the hedged inventory commitment is
recognized in earnings through the settlement of the Euro
contract to complete the purchase of the inventory and the
Company's ultimate sale of that inventory (See Note G).
12. Shipping costs
In accordance with Emerging Issues Task Force Issue No. 00-10,
"Accounting for Shipping and Handling Fees," the Company has
included in sales amounts billed to customers for shipping costs.
The related cost incurred by the Company has been included in the
cost of goods line item on the face of the income statement.
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
adopted SFAS 146 on January 1, 2003, which had no effect on its
consolidated results of operations or financial position.
13. Reclassifications
Certain amounts included in the 2002 and 2001 financial
statements have been reclassified to conform to the year-end 2003
presentation.
Note B - Due from Factors, Line of Credit Facility and
Accounts Receivable
The Company sells substantially all of its accounts receivable
to its factors, without recourse, subject to credit limitations
established by the factor for each individual account. Certain
accounts receivable in excess of established limits are factored
with recourse. Included in amounts due from factor at December
31, 2003 and 2002 is accounts receivable subject to recourse
totaling approximately $494,000 and $286,000, respectively. The
agreements with the factors provide for payment of a service fee
on receivables sold.
At December 31, 2003 and 2002, the balance due from factor,
which includes chargebacks, is net of allowances for returns,
discounts, and other deductions of approximately $9,425,000 and
$9,400,000, respectively. The allowances are provided for known
chargebacks reserved for, but not written off the Company's
financial records and for potential future customer deductions
based on management's estimates.
The Company has entered into a Line of Credit Facility (the
"Facility") that, as amended, allows for uncommitted borrowings,
letters of credit and banker's acceptances subject to individual
maximums and in the aggregate, an amount not to exceed the lesser
of $25,000,000 or a "Borrowing Base." The Borrowing Base is
calculated on a specified percentage of eligible amounts due
under factoring arrangements, eligible non-factored accounts
receivable, and eligible inventory. Borrowings under the
revolving loan portion of the Facility ("Advances") are due on
demand. The Company may pay down and re-borrow at will under the
Facility. Advances bear interest at the Alternate Base Rate
(defined as the higher of the Prime Rate or the Federal Funds in
effect at borrowing date plus 1/2 of 1%) or the Note Rate (which
will be agreed upon between the lender and the Company). There
were no outstanding advances under this agreement at December 31,
2003, 2002 and 2001. Amounts available under the Facility at
December 31, 2003 were reduced by $2,779,000 of standby letters
of credit and $2,237,000 in open letters of credit to
$19,984,000.
In connection with the line of credit, the Company has agreed to
eliminate all the outstanding advances under the Facility for at
least 30 consecutive days during each calendar year. In addition,
borrowings under the line of credit are secured by certain assets
of the Company.
In the ordinary course of business, the Company has accounts
receivable that are non-factored and are at the Company's risk.
At December 31, 2003 and 2002, the accounts receivable balance
includes allowance for doubtful accounts and consumer direct
sales returns of approximately $ 1,260,000 and $ 1,275,000. The
allowance for doubtful accounts is provided for estimated losses
resulting from the inability of its customers to make required
payments. These customers include non-factored accounts and
credit card receivables from third party service providers. The
allowances provided for sales returns are for potential future
retail customer merchandise returns based on management's
estimates.
Note C - Property and Equipment
Property and equipment consist of the following:
December 31,
2003 2002
Property and equipment-at cost:
Furniture and fixtures $21,488,000 $19,015,000
Machinery and equipment 13,766,000 11,894,000
Leasehold improvements 42,815,000 38,430,000
Leased equipment under capital lease 967,000 967,000
----------- -----------
79,036,000 70,306,000
Less accumulated depreciation and amortization 42,281,000 34,304,000
----------- -----------
Net property and equipment $36,755,000 $36,002,000
=========== ===========
Note D - Impairment of Long-Lived Assets
Based upon current performance and the anticipated future
outlook of one of the Company's retail stores, the Company
recorded a non-cash asset impairment charge of $1,153,000 during
the quarter ended December 2003. The Company's management
reviewed the store's estimated undiscounted future cash flows and
determined that the store's current value was not in excess of
expected cash flows and therefore a write-down to current value
was required. The write-down of $1,153,000 of the store's
leasehold improvements and furniture and fixtures to current
value was separately disclosed on the face of the consolidated
statement of income. The Company reviewed, recorded, and
accounted for a similar write-down of assets of approximately
$4,446,000 to its Rockefeller Center Flagship store located in
New York City during the 3 months ended September 30, 2002.
Note E - Accrued Expenses and Other Liabilities
Accrued expenses and other current liabilities consist of the
following:
December 31,
2003 2002
Rent $ 485,000 $ 487,000
Compensation 4,964,000 7,061,000
Customer credits 1,933,000 1,825,000
Deferred licensing income 2,795,000 2,299,000
Other 976,000 2,368,000
----------- -----------
$11,153,000 $14,040,000
=========== ===========
Note F - Segment Reporting
Kenneth Cole Productions, Inc. has three reportable segments:
Wholesale, Consumer Direct, and Licensing/International. The
Wholesale segment designs and sources a broad range of fashion
footwear, handbags and accessories and markets its products for
sale to more than 7,500 department and specialty store locations
and to the Company's Consumer Direct segment. The Consumer
Direct segment markets a 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,
through third party licensee agreements, has evolved the Company
from a footwear resource to a diverse lifestyle brand competing
effectively in approximately 30 apparel and accessories
categories for both men and women. The Company maintains control
over quality, image and distribution of the licensees. This
segment primarily consists of royalties earned 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's reportable segments are business units that
offer products to overlapping consumers through different
channels of distribution. Each segment is managed separately,
although planning, implementation and results are reviewed
internally by the executive management committee.
The Company evaluates performance and allocates resources
based on profit or loss from each segment. The Wholesale segment
is evaluated on income from operations before income taxes. The
Consumer Direct segment is evaluated on profit or loss from
operations before unallocated corporate overhead and income
taxes. The Licensing/International segment is evaluated based on
royalties earned and pretax segment profit. The accounting
policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
Intersegment sales between the Wholesale and Consumer Direct
segment include a markup, which is eliminated in consolidation.
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note F - Segment Reporting (continued)
Financial information of the Company's reportable segments is as
follows:
Consumer Licensing/
Wholesale Direct International Totals
Year Ended December 31, 2003
Revenues $253,519 $175,577 $39,257 $468,353
Intersegment revenues 32,671 32,671
Interest income, net 825 825
Depreciation and
amortization expense 2,696 4,893 15 7,604
Impairment of long-lived
Assets 1,153 1,153
Segment income (1) (3) 31,053 6,843 31,147 69,043
Segment assets 217,806 48,454 9,719 275,979
Expenditures for long-
lived assets 4,854 4,584 72 9,510
Year Ended December 31, 2002
Revenues $236,615 $167,096 $29,338 $433,049
Intersegment revenues 30,525 30,525
Interest income, net 1,102 1,102
Depreciation and
amortization expense 2,307 4,985 15 7,307
Impairment of long-lived
assets 4,446 4,446
Segment income (1)(2) 30,713 5,430 21,663 57,806
Segment assets 188,807 49,017 4,459 242,283
Expenditures for long-
lived assets 3,389 3,853 26 7,268
Year Ended December 31, 2001
Revenues $198,958 $165,950 $23,017 $387,925
Intersegment revenues 31,470 31,470
Interest income, net 2,135 2,135
Depreciation and
amortization expense 2,958 5,165 8 8,131
Segment income (1) 22,478 4,352 16,270 43,100
Segment assets 147,834 52,374 3,394 203,602
Expenditures for long-
lived assets 2,002 8,592 4 10,598
(1) Before elimination of intersegment profit, unallocated
corporate overhead and provision for income taxes
(2) Segment income for the Consumer Direct segment includes a
gain of $860,000 from price adjustments on certain products sold
to Kenneth Cole retail stores, discovered during rotational
licensee audits.
(3) Segment income for the Licensing/International segment
includes one-time payments for the transfer of the Company's
fragrance and sunglass license
The reconciliation of the Company's reportable segment revenues,
profit and loss, and assets are as follows:
2003 2002 2001
Revenues
Revenues for reportable segments $468,353 $433,049 $387,925
Intersegment revenues for reportable
segments 32,671 30,525 31,470
Elimination of intersegment revenues (32,671) (30,525) (31,470)
-------- -------- --------
Total consolidated revenues $468,353 $433,049 $387,925
======== ======== ========
Income
Total profit for reportable segments $ 69,043 $ 57,806 $ 43,100
Elimination of intersegment profit (8,524) (7,615) (7,863)
Unallocated corporate overhead (8,775) (8,359) (8,317)
-------- -------- --------
Total income before provision
for income taxes $ 51,744 $ 41,832 $ 26,920
======== ======== ========
Assets
Total assets for reportable segments $275,979 $242,283 $203,602
Elimination of inventory profit in
consolidation (2,138) (1,966) (1,713)
-------- -------- --------
Total consolidated assets $273,841 $240,317 $201,889
======== ======== ========
Revenues from international customers are less than two
percent of the Company's consolidated revenues.
Note G - Foreign Currency Transactions, Derivative Instruments
and Hedging Activities
The Company, in the normal course of business, routinely
enters into forward exchange contracts in anticipation of future
purchases of inventory denominated in foreign currencies. These
forward exchange contracts are used to hedge against the
Company's exposure to changes in foreign exchange rates to
protect the purchase price of merchandise under such commitments
and are not held for the purpose of trading or speculation. The
Company has therefore classified these contracts as cash flow
hedges. The Company had forward exchange contracts of
$9,500,000, $7,750,000 and $8,000,000 at December 31, 2003, 2002
and 2001, respectively. At December 31, 2003, forward exchange
contracts have maturity dates through March 2004.
The Company recorded a transition adjustment gain of
approximately $1,122,000 in other comprehensive income to
recognize at fair value the derivatives that were designated as
cash flow hedging instruments upon adoption of SFAS 133 on
January 1, 2001. All components of the 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 2003 and
2002. At December 31, 2003, the Company's notional $9,500,000 in
forward exchange contracts resulted in an unrealized gain of
approximately $606,000, net of taxes, which was included as an
addition to other comprehensive income in the statement of
changes in shareholders' equity and an increase to inventory, the
underlying exposure on the balance sheet. The Company expects to
reclassify all of the unrealized gain from other comprehensive
income into earnings within the next three month period due to
the actual executions of foreign exchange contracts to purchase
merchandise and the Company's ultimate sale of that merchandise.
Note H - Income Taxes
Significant items comprising the Company's deferred tax assets
and liabilities are as follows:
December 31,
2003 2002
Deferred tax assets:
Inventory allowances and capitalization $ 1,352,000 $ 932,000
Allowance for doubtful accounts and
sales allowances 696,000 1,569,000
Deferred rent 3,771,000 3,223,000
Deferred compensation 7,244,000 5,671,000
Asset impairment 1,966,000 1,668,000
Other 38,000 356,000
----------- -----------
15,067,000 13,419,000
Deferred tax liabilities:
Depreciation (2,068,000) (1,459,000)
Undistributed foreign earnings (1,947,000) (1,307,000)
----------- -----------
(4,015,000) (2,766,000)
----------- -----------
Net deferred tax assets $11,052,000 $10,653,000
=========== ===========
The provision (benefit) for income taxes consists of the
following:
December 31,
2003 2002 2001
Current:
Federal $16,816,000 $16,850,000 $12,172,000
State and local 2,587,000 1,900,000 1,000,000
Foreign 141,000 107,000 117,000
----------- ----------- -----------
19,544,000 18,857,000 13,289,000
Deferred:
Federal (368,000) (2,999,000) (2,750,000)
State and local (31,000) (171,000) (235,000)
----------- ----------- -----------
(399,000) (3,170,000) (2,985,000)
----------- ----------- -----------
$19,145,000 $15,687,000 $10,304,000
=========== =========== ===========
The reconciliation of income tax computed at the U.S. federal
statutory tax rate to the effective income tax rate for 2003,
2002 and 2001 is as follows:
2003 2002 2001
Federal income tax at statutory rate 35.0% 35.0% 35.0%
State and local taxes, net of
federal tax benefit 2.0% 2.5% 3.3%
----- ----- -----
37.0% 37.5% 38.3%
===== ===== =====
Note I - Stock Options Plans and Grants
1. 1994 stock option plan
The Company's 1994 Incentive Stock Option Plan, as amended (the
"Plan"), authorizes the grant of options to employees for up to
4,800,000 shares of the Company's Class A Common Stock. Certain
options granted under the Plan vest in one-third increments in
each of the first, second and third years following the date of
grant, while certain other options vest over five years. Options
granted under the "Plan" have ten-year terms. Non-employee
Director options granted have ten-year terms and vest 50% on the
first anniversary of the date of grant and become fully
exercisable at the end of two years.
The Company has elected to continue to follow Accounting
Principles Board Opinion No. 25 ("APB 25"), in accounting for its
employee stock options. Under APB 25, when the exercise price of
the Company's employee stock options equals the market price of
the underlying stock on the date of grant, no compensation
expense is recognized.
The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 2003, 2002 and 2001,
respectively: risk-free interest rate of 4.0%, 4.5% and 5.0%;
expected volatility factors of 64.5%, 72.4% and 65.5% and
expected lives of 5.0, 4.4 and 5.1 years. Dividend yield
assumptions were 1.38% for 2003 and 0.0% for 2002 and 2001. The
weighted-average fair value of options granted during 2003, 2002
and 2001 were $14.48, $16.31 and $10.85, respectively.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. As a
result of the Company's employee stock options having
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
The following table summarizes all stock option transactions
from December 31, 2000 through December 31, 2003.
Weighted-Average
Shares Exercise Price
Outstanding at December 31, 2000 1,811,045
Granted 1,083,550 $18.18
Exercised (37,503) $10.38
Forfeited (34,301 $20.68
---------
Outstanding at December 31, 2001 2,822,791
Granted 73,650 $24.33
Exercised (97,952) $ 9.75
Forfeited (166,509) $22.18
---------
Outstanding at December 31, 2002 2,631,980
Granted 657,500 $23.33
Exercised (317,632) $11.68
Forfeited (41,929) $19.87
---------
Outstanding at December 31, 2003 2,929,919
=========
The following table summarizes information concerning
currently outstanding and exercisable stock options at December
31, 2003:
Outstanding Stock Options Exercisable Stock Options
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices Shares Life Price Shares Price
$ 4.00 to $12.00 531,496 2.89 years $ 10.06 531,496 $ 10.06
$12.01 to $24.00 1,588,457 7.36 years $ 18.28 557,795 $ 14.85
$24.01 to $36.00 809,966 6.59 years $ 27.56 431,560 $ 28.38
2. Stock option grants
In 1994, the Board of Directors granted non-transferable stock
options to an officer of the Company, for the purchase of 334,425
shares of Class A Common Stock at an exercise price of $1.4583
per share. In 2000, 50,000 options were exercised and at
December 31, 2001 and 2000, 130,000 options were outstanding and
exercisable. During 2002, an additional 45,000 options were
exercised leaving 85,000 options outstanding and exercisable at
December 31, 2002. The remaining 85,000 options were fully
exercised during 2003.
Note J - Benefit Plans
1. 401(k) Plan
The Company's 401(k) profit-sharing plan covers all non-union
employees, subject to certain minimum age and length of service
requirements who are permitted to contribute specified
percentages of their salary up to the maximum permitted by the
Internal Revenue Service. The Company is obligated to make a
matching contribution and may make an additional discretionary
contribution, as defined. Contributions to the plan for the
years ended December 31, 2003, 2002 and 2001 were approximately
$268,000, $241,000 and $267,000, respectively.
2. Deferred compensation plans
The Kenneth Cole Productions, Inc. Deferred Compensation Plan
is a non-qualified plan maintained primarily to provide deferred
compensation benefits for a select group of "highly compensated
employees." During 2002, the Company added a second plan
expanding the definition of "highly compensated employees" to
include additional Company management. The Company accounts for
the investments in the deferred compensation plans in accordance
with SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities," and such investments have been classified as
trading.
In 2003, 2002 and 2001, the Company deposited $247,000,
$1,408,000 and $1,374,000, respectively, into Supplemental
Executive Retirement Plans ("SERP") for certain key executives.
The amounts have been recorded in deposits and sundry on the face
of the consolidated balance sheets. These plans are non-
qualified deferred compensation plans. Benefits payable under
these plans are based upon the performance of the individual
directed investments from the Company's initial and future
contributions. Benefits earned under the SERP begin vesting
after 3 years from issuance, and become 75% vested after 10 years
and fully vested
upon the participant retiring at age 60 or later. In addition,
SERP participants are covered by life insurance through a portion
of the Company's contribution. The value of these investments at
December 31, 2003 and 2002 were $4,102,000 and $2,897,000,
respectively, which the Company accounts for in accordance with
SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities", and such investments have been classified as
trading. The unrealized gains and losses on the investments were
recorded as selling, general and administrative expense within
the accompanying statements of income as a general operating
expense. In addition, the Company has recorded an accumulated
long-term vested benefit obligation of approximately $1,200,000
and $965,000 at December 31, 2003 and 2002, respectively, within
the accompanying Consolidated Balance Sheets.
3. Employee Stock Purchase Plan
During 2000, the Company established a qualified employee
stock purchase plan ("ESPP"), the terms of which allow for
qualified employees (as defined) to participate in the purchase
of designated shares of the Company's Class A Common Stock at a
price equal to 85% of the lower of the closing price at the
beginning or end of each quarterly stock purchase period. On
March 7, 2000, the Company filed with the Securities and Exchange
Commission Form S-8 registering 150,000 shares of Class A Common
Stock for the ESPP. For the year ended December 31, 2003, 2002,
and 2001 employees purchased 12,606, 14,681, and 20,074 shares,
respectively. Total shares purchased through December 31, 2003
were 54,013.
Note K - Commitments and Contingencies
1. Operating leases
The Company leases office, retail and warehouse facilities
under non-cancelable operating leases between 5 and 20 years with
options to renew at varying terms. Future minimum lease payments
for non-cancelable leases with initial terms of one year or more
consisted of the following at December 31, 2003:
2004 $ 23,627,000
2005 22,794,000
2006 21,623,000
2007 20,520,000
2008 19,891,000
Thereafter 90,257,000
------------
Total minimum cash payments $198,712,000
============
In addition, certain of these leases contain rent escalation
provisions and require additional percentage rent payments to be
made.
Rent expense for the years ended December 31, 2003, 2002 and
2001 was $31,168,000, $29,062,000 and $26,999,000, respectively.
Sub-tenants rental income for 2003, 2002, and 2001 was
$1,225,000, $967,000, and $708,000, respectively. Future minimum
rental income from sub-tenants consists of the following:
2004 847,000
2005 696,000
2006 696,000
Thereafter 0
----------
Total minimum cash proceeds $2,239,000
==========
Future minimum rental income from sub-tenants does not include
rent escalation and other charges that are subsequently passed
through to the sub-tenant.
2. Letters of credit
At December 31, 2003 and 2002, the Company was contingently
liable for approximately $2,237,000 and $1,345,000 of open
letters of credit, respectively. In addition, at December 31,
2003 and 2002, the Company was contingently liable for
approximately $2,779,000 and $2,779,000 of standby letters of
credit, respectively.
3. Concentrations
In the normal course of business, the Company sells to major
department stores and specialty retailers and believes that its
broad customer base will mitigate the impact that financial
difficulties of any such retailers might have on the Company's
operations. In 2003, 2002 and 2001, the Company had no customer
account for more than 10% of consolidated net sales.
The Company sources each of its product lines separately, based
on the individual design, styling and quality specifications of
such products. The Company primarily sources its products
directly or indirectly through manufacturers in Italy, Spain,
Brazil, China and South Korea. The Company attempts to limit the
concentration with any one manufacturer. However, approximately
32% and 54% of total handbag purchases came from one manufacturer
in China during 2003 and 2002, respectively. Approximately 36%
and 40% of Kenneth Cole and Reaction Kenneth Cole men's footwear
purchases were from one manufacturer in Italy utilizing many
different factories during 2003 and 2002, respectively.
Furthermore, approximately 37% and 38% of Kenneth Cole ladies'
footwear was purchased from one manufacturer in Italy during 2003
and 2002, respectively, while 57% and 42% of Reaction Kenneth
Cole ladies' footwear purchases were sourced through one
manufacturer in Italy during 2003 and one agent utilizing several
different factories in Brazil in 2002, respectively. The Company
believes it has alternative manufacturing sources available to
meet its current and future production requirements in the event
the Company is required to change current manufacturers or
current manufacturers are unavailable to fulfill the Company's
production needs.
At December 31, 2003, the Company had approximately 6% of its
employees covered under a collective bargaining agreement with a
local union.
4. Other
The Company, from time to time, is a party to litigation
that arises in the normal course of its business operations.
The Company presently is not a party to any such litigation that
would have a material adverse effect on its business or
operations.
Note L - Shareholders' Equity
1. Common stock
Class A Common Shareholders are entitled to one vote for each
share held of record and Class B Common Shareholders are entitled
to ten votes for each share held of record. Each share of Class B
Common Stock is convertible into one share of Class A Common
Stock at the option of the Class B Shareholder. The
Class A Common Shareholders vote together with Class B Common
Shareholders on all matters subject to shareholder approval,
except that Class A Common Shareholders vote separately as a
class to elect 25% of the Board of Directors of the Company.
Shares of neither class of common stock have preemptive or
cumulative voting rights.
2. Preferred stock
The Company's Certificate of Incorporation authorizes the
issuance of 1,000,000 shares of preferred stock. The preferred
stock may be issued from time to time as determined by the Board
of Directors of the Company, without shareholder approval. Such
preferred stock may be issued in such series and with such
preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or
other provisions, as may be fixed by the Board of Directors.
3. Common Stock repurchase
On February 21, 2001, the Board of Directors of the Company
authorized management to repurchase, from time to time, an
additional 2,000,000 shares up to an aggregate 4,250,000 shares
of the Company's Class A Common Stock. As of December 31, 2003,
2,888,400 shares were repurchased in the open market at an
aggregate price of $66,221,000, reducing the available shares
authorized for repurchase to 1,361,600. The repurchased shares
have been recorded as treasury stock..
4. Dividends
On July 29, 2003, the Board of Directors of the Company declared
a quarterly cash dividend of $0.075 per share payable September
18, 2003 to shareholders of record at the close of business on
August 28, 2003. Aggregate dividends in the amount of
$1,476,000 were paid out, approximately $861,000 and $615,000 to
Class A and Class B shareholders, respectively.
On October 28, 2003, the Board of Directors of the Company
declared a quarterly cash dividend of $0.09 per share payable on
December 17, 2003 to shareholders of record at the close of
business on November 25, 2003. Aggregate dividends in the
amount of $1,782,000 were paid out, approximately $1,047,000 and
$735,000 to Class A and Class B shareholders, respectively.
Note M - 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".
For the Year Ended December 31,
2003 2002 2001
Weighted average common
shares outstanding 19,609,000 19,643,000 19,992,000
Effect of dilutive securities:
Stock options 877,000 947,000 753,000
---------- ---------- ----------
Weighted average common shares
outstanding and common
share equivalents 20,486,000 20,590,000 20,745,000
========== ========== ==========
Dilutive securities, stock options, are determined under the
treasury stock method by calculating the assumed proceeds
available to repurchase stock using the weighted average shares
outstanding for the period. The calculation includes anti-
dilutive shares.
Note N - Licensing Agreements
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. The Company recorded approximately $632,000 in
royalty and advertising expense to Candies for the year ended
December 31, 2003.
Note O - Related Party Transactions
During 2002, the Board of Directors authorized a $600,000
contribution payable to the Kenneth Cole Productions, Inc.
Foundation, which was subsequently paid during the three months
ended June 30, 2003. The Kenneth Cole Productions, Inc.
Foundation is a not for profit organization that fosters programs
to aid primarily in the fields of arts and culture, education,
and medical research.
Note P- Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 2003 and 2002 appear
below (in thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
2003
Net sales $102,117 $ 88,096 $121,179 $118,709
Licensing revenue 8,007 8,832 10,887 10,526
Net revenues 110,124 96,928 132,066 129,235
Gross profit 47,582 43,991 57,624 60,699
Operating income 9,851 9,369 15,769 15,930
Net income 6,359 6,060 10,034 10,146
Earnings per share basic $0.33 $0.31 $0.51 $0.51
Earnings per share diluted $0.31 $0.30 $0.49 $0.49
2002
Net sales $ 87,290 $ 93,245 $115,325 $108,476
Licensing revenue 5,621 6,005 8,195 8,892
Net revenues 92,911 99,250 123,520 117,368
Gross profit 43,764 46,093 54,221 53,716
Operating income 8,497 8,270 10,509 13,454
Net income 5,521 5,418 6,788 8,418
Earnings per share basic $0.28 $0.28 $0.34 $0.43
Earnings per share diluted $0.27 $0.26 $0.33 $0.41
Note R- Subsequent Event
1. Dividend
On February 26, 2004, the Board of Directors of the Company
declared a quarterly cash dividend of $0.12 per share payable
March 25, 2004 to shareholders of record at the close of
business on March 9, 2004.
2. Lease
On February 24, 2004, the Company entered into a ten-year lease
that provided the Company with approximately 51,000 square feet
of office space. The Company expects to move its administrative
offices into this new location during the second calendar quarter
of 2004.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
KENNETH COLE PRODUCTIONS, INC.
By /s/ KENNETH D. COLE
Kenneth D. Cole
Chief Executive Officer
Date: March 10, 2004
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
/S/KENNETH D.COLE Chief Executive Officer March 10, 2004
Kenneth D. Cole and Director
/S/PAUL BLUM President and Director March 10, 2004
Paul Blum
/S/STANLEY A. MAYER Executive Vice President, March 10, 2004
Stanley A. Mayer Chief Financial Officer,
Treasurer and Director
/S/DAVID P. EDELMAN Senior Vice President Finance March 10, 2004
David P. Edelman (Principal Accounting Officer)
/S/ROBERT C. GRAYSON Director March 10, 2004
Robert C. Grayson
/S/DENIS F. KELLY Director March 10, 2004
Denis F. Kelly
/S/PHILLIP B. MILLER Director March 10, 2004
Phillip B. Miller
Kenneth Cole Productions, Inc.
Schedule II
Valuation and Qualifying Accounts
For the Years Ended December 31, 2003, 2002, and 2001
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions of Period
Year ended December 31, 2003
Allowance for doubtful accounts $ (475,000)$ (262,000)$ 262,000 $ (475,000)
Reserve for returns and sales
allowances (9,400,000) (25,000) (9,425,000)
----------- ----------- --------- -----------
$(9,875,000)$ (287,000)$ 262,000 $(9,900,000)
=========== =========== ========= ===========
Year ended December 31, 2002
Allowance for doubtful accounts $ (675,000)$ (244,000)$ 444,000 $ (475,000)
Reserve for returns and sales
allowances (9,165,000) (235,000) (9,400,000)
----------- ----------- --------- -----------
$(9,840,000)$ (479,000)$ 444,000 $(9,875,000)
=========== =========== ========= ===========
Year ended December 31, 2001
Allowance for doubtful accounts $ (550,000)$ (808,000)$ 683,000 $ (675,000)
Reserve for returns and sales
allowances (7,780,000) (1,385,000) (9,165,000)
----------- ----------- --------- -----------
$(8,330,000)$(2,193,000)$ 683,000 $(9,840,000)
=========== =========== ========= ===========
Kenneth Cole Productions, Inc.
Exhibit 21.01
List of Subsidiaries State of
Incorporation
Cole 57th. St., LLC Delaware
Cole 610 Fifth Avenue, LLC Delaware
Cole Amsterdam, B.V. Amsterdam
Cole Amsterdam, Inc. Delaware
Cole Aspen, Inc. Delaware
Cole Broadway, Inc. New York
Cole Cabazon, Inc. California
Cole Camarillo, LLC Delaware
Cole Carlsbad, Inc. Delaware
Cole Century City, Inc. California
Cole Clinton, Inc. Connecticut
Cole Dawsonville, Inc. Delaware
Cole Fashion Valley, Inc. Delaware
Cole Forum, Inc. Delaware
Cole Galleria, Inc. Delaware
Cole Garden State, Inc. Delaware
Cole Georgetown, Inc. District of Columbia
Cole Grand Central, Inc. Delaware
Cole Grant, Inc. Delaware
Cole Jersey Gardens, LLC Delaware
Cole Las Vegas, Inc. Delaware
Cole Michigan Avenue, Inc. Delaware
Cole Napa, Inc. California
Cole New Orleans, Inc. Delaware
Cole Newbury, Inc. Massachusetts
Cole Northpark, Inc. Texas
Cole Oakbrook, Inc. Delaware
Cole Orlando, LLC Delaware
Cole Phipps, Inc. Georgia
Cole Pike, Inc. Delaware
Cole Productions, Inc. Delaware
Cole Reading Outlet, Inc. Pennsylvania
Cole Riverhead, Inc. Delaware
Cole Santa Moncia, Inc. Delaware
Cole Scottsdale, Inc. Delaware
Cole SFC, LLC Delaware
Cole Short Hills, Inc. New Jersey
Cole Somerset, Inc. Michigan
Cole South Beach, Inc. Florida
Cole Stanford, Inc. California
Cole Tempe, LLC Delaware
Cole Tyson, Inc. Virginia
Cole Venetian, LLC Delaware
Cole Viejo, LLC Delaware
Cole Waikele, Inc. New York
Cole Westchester, Inc. New York
K.C.P.L., Inc. Delaware
Kenneth Cole (BVI) Company Limited British Virgin Islands
Kenneth Cole (BVI) Company, Ltd. British Virgin Islands
Kenneth Cole Catalog, Inc. Virginia
Kenneth Cole Financial Services, Inc. New Jersey
Kenneth Cole Gilroy, Inc. California
Kenneth Cole Productions (LIC), Inc. Bahamas
Kenneth Cole Productions, LP Delaware
Kenneth Cole Services, Inc. Delaware
Kenneth Cole Trading, Inc. Delaware
Kenneth Cole Woodbury, Inc. Delaware
Kenneth Cole, Inc. New York
Kenneth Productions, Inc. Delaware
Kenth Ltd. Hong Kong
Riveria Holding, LLC Delaware
Exhibit 23.01
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration
Statement (Form S-8 No. 33-92094) pertaining to the Kenneth
Cole Productions, Inc. 1994 Stock Option Plan and
Registration Statement (Form S-8 No. 33-31868) pertaining to
the Kenneth Cole Productions, Inc. Employee Stock Purchase
Plan of our report dated February 20, 2004, with respect to
the consolidated financial statements and schedule of Kenneth
Cole Productions, Inc., included in the Annual Report (Form
10-K) for the year ended December 31, 2003.
New York, New York
March 10, 2004
Exhibit 31.1
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Kenneth D. Cole, certify that:
1. I have reviewed this annual report on Form 10-K
of Kenneth Cole Productions, Inc.;
2. Based on my knowledge, this annual 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 annual 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 annual 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
13(a)-15(e) and 15(d)-15(e)) for the registrant and have:
a. 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 report
is being prepared;
b. "Intentionally Omitted"
c. 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
d. 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 function):
a. 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
b. 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: March 10, 2004
Exhibit 31.2
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Stanley A. Mayer, certify that:
1. I have reviewed this annual report on Form 10-K of
Kenneth Cole Productions, Inc.;
2. Based on my knowledge, this annual 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 annual 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 annual 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
13(a)-15(e) and 15(d)-15(e)) for the registrant and have:
a. 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 report
is being prepared;
b. "Intentionally Omitted"
c. 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
d. 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 function):
a. 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
b. 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: March 10, 2004
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 Annual Report of Kenneth Cole
Productions, Inc. (the "Company") on Form 10-K for the period
ending December 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.
March 10, 2004
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 Annual Report of Kenneth Cole
Productions, Inc. (the "Company") on Form 10-K for the period
ending December 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.
March 10, 2004