UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________to___________
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:
Class A common stock, par value $.01 per share
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. ()
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, 2004: $396,039,713
Number of shares of Class A Common Stock, $.01 par value,
outstanding as of the close of business on
March 1, 2005: 11,719,729
Number of shares of Class B Common Stock, $.01 par value,
outstanding as of the close of business on
March 1, 2005: 8,055,497
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
May 2, 2005.
Kenneth Cole Productions, Inc.
TABLE OF CONTENTS
Page
PART I
Item 1 Business 3
Item 2 Properties 17
Item 3 Legal Proceedings 18
Item 4 Submission of Matters to a Vote of Security Holders 18
PART II
Item 5 Market for Registrant's Common Equity, Related
Stockholder Matters, and Issuer of Purchases
of Equity Security 19
Item 6 Selected Financial Data 21
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 7A Quantitative and Qualitative Disclosures about
Market Risk 29
Item 8 Financial Statements and Supplementary Data 29
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 29
Item 9a Controls and Procedures 29
Item 9b Other Information 30
PART III
Item 10 Directors and Executive Officers of the Registrant 31
Item 11 Executive Compensation 31
Item 12 Security Ownership of Certain Beneficial Owners
and Management and Related Shareholder Matters 31
Item 13 Certain Relationships and Related Transactions 31
Item 14 Principal Accountant Fees and Services 31
PART IV
Item 15 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 32
Item 1. Business
Important Factors Relating to Forward- Looking Statements
The Private Securities Litigation Reform Act of 1995 (the
"Reform 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 Reform 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.
While the Company does communicate from time to time with
securities analysts, it is against company policy to disclose to
them any material non-public information. Shareholders should
not assume that the Company agrees with any statement or report
issued by an analyst, regardless of the content of such statement
or report. To the extent that reports issued by securities
analysts contain any projections, forecasts or opinions, they are
not the responsibility of the Company.
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, Kenneth
Cole Reaction, and Unlisted brand names. In 2003, the Company
added the Bongo trademark brand for footwear through a license
agreement, while in 2004, the Company introduced Tribeca. 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 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. The
Company 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, fragrance,
swimwear, 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 Kenneth Cole Reaction 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,
Kenneth Cole Reaction, Unlisted, and, in 2004, Tribeca. In
addition, the Company added the Bongo brand to its footwear
brands through a license agreement in 2003. 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 other distribution tiers
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, Kenneth
Cole Reaction and Unlisted branded footwear businesses while
building the Company's two new brands, Tribeca and Bongo.
Consumer Direct. The Company's Consumer Direct segment, which
operates full price retail and outlet stores, as well as catalogs
and e-commerce, 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. The Company believes customers of our wholesale
accounts in cities with a Kenneth Cole retail presence have an
enhanced brand awareness compared to those in cities without a
Kenneth Cole retail presence.
The Company continues to pursue opportunities to expand its
retail store operations. As of December 31, 2004, the Company
operated 87 specialty retail and outlet stores as compared with
83 stores as of December 31, 2003. The Company plans to open or
expand approximately 8 to 13 stores in 2005, 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, as well as
unique "made for outlet products." To accommodate the Company's
diversity of product offerings, the Company continues to open
stores on an opportunistic basis and 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.
The Company believes the Kenneth Cole model provides
significant growth potential since the 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 analyze the Kenneth Cole Reaction brand model for
further growth potential in outlet stores, as well as within its
licensing and wholesale product categories.
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. The growing strength of the Company's brands,
Kenneth Cole New York, Kenneth Cole Reaction, and Unlisted,
provides opportunities, through licensing agreements, to expand
into new product categories and broaden existing distribution
channels. The Company believes its strategic licensing
relationships are essential to the growth of the Company both
domestically and abroad as a lifestyle branded franchise. 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 Kenneth Cole Reaction
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 womenswear product classification, the Company
launched women's swimwear line during 2003. The successful
menswear business spawned the expansion into men's dress pants in
Fall 2003, which demonstrated strong growth throughout 2004. 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. In the Fall 2003 season, Coty,
Inc. successfully launched Kenneth Cole Black for men, which was
one of the season's top performers. During 2004, the Company
successfully launched Reaction fragrance for men and Black for
women. In 2005, the Company expects to add Reaction fragrance for
women, as well as Kenneth Cole Signature for men. The new
fragrances are expected to replace the original Kenneth Cole
fragrances allowing for fresh, new and exciting products for
market penetration, growth and brand awareness. The Company is
committed to strategically further expanding its product
classifications internationally and to continue to build growth
through brand awareness and diversity. In 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. Also, in
2004, the Company signed an agreement with a European distributor
to distribute men's and women's footwear to certain countries in
Europe.
The Company's brands are currently licensed for a range of
products consistent with the Company's image (see "Licensing" in
Item 1).
Products
The Company markets its products principally under its Kenneth
Cole New York, Kenneth Cole Reaction and Unlisted brand names,
along with its newly licensed brand for footwear, Bongo, each
targeted to appeal to different consumers. In 2004, the Company
launched the Tribeca brand, which is specifically designed for
department store distribution. The Company believes that the
products marketed under the Kenneth Cole New York brand names
have developed into true aspirational brands, and while it has
similar designer cache as other international designer brands, it
has greater value credibility.
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
New York 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 an important 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
Signature represents the premier styling and craftsmanship of the
Kenneth Cole brands, and its distribution is limited to better
department stores.
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
$165 to $275. 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. In addition, the
Company has added "silver technology" to its line to enhance
comfort. This technology features a micro-tech midsole, a
removable gel insole, and a fiberglass shank.
Kenneth Cole New York women's footwear, primarily manufactured
through Italian, Spanish, and Brazilian factories, includes
sophisticated and elegant dress, casual and special occasion
footwear that is sold to the bridge-designer market at retail
price points ranging from approximately $130 to $300. 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,
generally made of quality leathers and sold to the bridge-
designer market at retail price points ranging from approximately
$130 to $350. 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.
Kenneth Cole Reaction
Kenneth Cole Reaction consists of a variety of product
classifications, which address the growing trend toward flexible
lifestyle dressing at affordable prices. Originally introduced
as a comfort-oriented casual line, Kenneth Cole Reaction now
includes more dressy styles. Kenneth Cole Reaction women's
footwear, primarily manufactured in China, 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 $120 price range.
Kenneth Cole Reaction men's footwear, primarily manufactured in
China and Italy, 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.
Kenneth Cole Reaction handbags, primarily manufactured in
China, 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. Kenneth Cole
Reaction handbags have been styled to appeal to the same young,
hip customer as the Kenneth Cole Reaction footwear line to meet
the varying needs of the Company's customers. This line
generally retails at price points ranging from approximately $50
to $125.
Kenneth Cole Reaction children's footwear, primarily
manufactured in China, includes dress and casual footwear sold at
price points ranging from $35 to $60 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 led the Company to introduce Kenneth Cole
Reaction toddler footwear in 2003. This has improved its retail
presence and has further penetrated the children's Kenneth Cole
Reaction 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
appeals to a broader young men's market with shoes that range at
retail price points from $50 to $80.
Bongo
Bongo products are designed for the junior consumer market to
be sold through mid-tier department and specialty 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
during 2005. 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 for
the women's line range from $30 to $50 with approximately 40
styles per season, while the price points for the men's line are
expected to range from $55 to $75. Children's price points range
from $20 to $35. The brand provides a market that the Company
was not previously penetrating with its branded products.
Tribeca
The Company introduced Tribeca footwear for women products in
the second half of 2004 while the Tribeca men's line is expected
to launch in Fall 2005. This brand was created for the very
young, trendier shopper in the department store channel of
distribution. The lines will include dress and casual styles
leaning more toward the casual customer's expectations. The
price points range from $45 to $70 for the women's line and are
expected to be approximately $60 to $90 for the men's line.
Business Segments
The Company manages its business through three segments:
Wholesale, Consumer Direct, and Licensing. During the periods
presented below, the percentage of net revenues contributed by
the Company's business segments were as follows:
Year Ended
December 31,
2004 2003 2002
Wholesale 54% 54% 55%
Consumer Direct 38 38 38
Licensing 8 8 7
---- ---- ----
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 1,750
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 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 America and parts
of South America and the Caribbean through leasing agreements.
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.
Canada
In 2003, the Company ended its footwear and handbag licenses
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 in 2004 after its license
agreement ended on December 31, 2003.
The Company markets its branded products in Canada to
independent specialty retailers and most of the countries large
department stores, including Sears Canada, Browns, Townshoe,
Sterling and Friedmans. The branded products include, Kenneth
Cole New York, Kenneth Cole Reaction, and Unlisted men's' and
women's' footwear, as well as Kenneth Cole Reaction children's
and handbags and Kenneth Cole New York handbags. The Tribeca and
Bongo footwear brands are expected for late 2005 Canadian
distribution.
Consumer Direct Operations
Retail Operations
The Company continues to pursue opportunities to enhance and
expand its retail operations. At December 31, 2004, the Company
operated 50 specialty Kenneth Cole New York retail stores, 36
outlet stores under the Kenneth Cole New York name and one store
under the Kenneth Cole Reaction name, which was closed subsequent
to December 2004.
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. Approximately 20-
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 5 specialty retail stores and closed 4 stores in 2004, and
plans to open or expand 5 to 7 new specialty retail stores in
2005.
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. In addition, the Company began its
"Made for Outlet" sourcing program, similar to exclusive sourcing
for retail during 2004 and has differentiated outlet from both
retail store and wholesale customers. 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 3 outlet stores in 2004 and has plans to open or
expand 3 to 6 outlet stores in 2005.
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 Kenneth Cole Reaction branded
products. Catalog order taking is currently performed in house
and, beginning in 2004, fulfillment for accessories and apparel
is performed by a third party distribution center in New Jersey.
This has enabled the Company to improve distribution and manage
its inventory more cost effectively.
The Company maintains websites to provide information regarding
the Company and its products, as well as to conduct online
business. The Company's websites www.kennethcole.com and
www.kennethcolereaction.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.
In 2003, the Company started a corporate gift distribution
channel, whereby corporate customers are sold Kenneth Cole items
for award and recognition programs. During 2004, the Company
printed catalogs and outsourced a small sales staff to process
orders, which are drop shipped from the Company's licensees or
its warehouse. The Company believes this is another avenue of
distribution to expand its various brands to enhance customer
awareness and strengthen market position.
Licensing
Domestic 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, Kenneth Cole Reaction
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 believes it can continue 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. As a result of the success of men's and
women's apparel, the Company introduced women's swimwear and
men's dress pants to the Kenneth Cole New York and Reaction
product lines. In addition, the Company launched Reaction
fragrance for men and Black for women in 2004. The Company plans
to continue to draw upon Kenneth Cole's creative strength and its
marketing resources to continue to build brand definition.
The following table summarizes the Company's product categories
under its licensing agreements:
Kenneth Cole Kenneth Cole
Product Category New York Reaction Unlisted
Men's Tailored Clothing X X X
Men's Sportswear 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
Men's Belts X X X
Women's Sportswear 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 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 Licensing
The Company sells its products through distributors and
licensees to wholesale customers and direct retailers in
international markets including Canada, Australia, United
Kingdom, United Arab Emirates ("UAE"), Kuwait, 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 Kenneth Cole
Reaction branded products through established freestanding stores
in Hong Kong, Taiwan and Singapore. Dickson presently operates
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 shop-in-shops in Korea through its
licensee, Chiel Industries, a division of Samsung Industries,
shop-in-shops and freestanding stores in the Philippines, through
the Company's Philippine licensee, Store Specialists, Inc.
(Rustan's Department Store). In 2003, the Company entered into a
wholesale and retail distribution agreements for Australia. The
licensee opened shop-in-shops with men's apparel during 2004, and
the Company's footwear licensee launched Kenneth Cole New York
and Kenneth Cole Reaction footwear. In addition, Apparel LLC,
the Company's Gulf Region licensee, opened freestanding stores in
the United Arab Emirates and one store in Kuwait during 2004.
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, while
its footwear and handbag licensee businesses were taken in house
and are managed from its New York City headquarters through its
Wholesale segment. 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 18 freestanding stores and 20 shop-in-
shops in this region.
In Europe, the Company owns and operates one store in
Amsterdam, and through a licensing agreement, operates stores in
London and sells footwear, luggage, small leather goods, and
handbags to department stores within the United Kingdom. The
Company also sells footwear through footwear agents in France,
the Benelux countries, Greece, Spain, and Portugal. 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. In addition, as part of its global sourcing
strategy, the Company expects to expand production in China. 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
21% and 32% of total handbag purchases came from one manufacturer
in China during 2004 and 2003, respectively. Approximately 37%
and 36% of Kenneth Cole New York and Kenneth Cole Reaction men's
footwear was produced by one manufacturer in Italy, utilizing
several different factories in Europe in 2004 and 2003,
respectively. Furthermore, approximately 33% and 37% of Kenneth
Cole New York ladies' footwear was purchased from one
manufacturer in Italy during 2004 and 2003, respectively, while
58% and 57% of Kenneth Cole Reaction ladies' footwear purchases
were sourced through one manufacturer in China in 2004 and 2003,
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 significant
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, Kenneth Cole Reaction, 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, The New Yorker,
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 third party warehouse distribution centers. The products
are then shipped to the Company's wholesale customers either in
predetermined sizes, in case packs 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. To facilitate distribution, the Company
has third-party public warehouses located on the East Coast and
West Coast to accommodate merchandise imported from Asia, Europe,
and South America.
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, Kenneth
Cole Reaction, Reaction, Kenneth Cole Collection, Tribeca 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 foreign exchange contracts to
protect the future purchase price of inventory denominated in
Euro. These Euro foreign 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 2004 and 2003, the Company had no customer or group under
common ownership account for more than 10% of sales. The
Company's ten largest customers represented 36.6% and 37.9% of
the Company's net sales for the years ended December 31, 2004 and
2003, 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 $65.0
million and $59.9 million, at February 12, 2005 and February 12,
2004, 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, 2004, the Company had approximately 1,800
employees, none of whom are covered under a collective bargaining
agreement. The Company had a collective bargaining agreement,
which expired in April 2004, at which time it outsourced its
distribution operation and closed its New Jersey distribution
center. Prior to that, the Company utilized a union, 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 "Union"). In
connection with this transition, the Company incurred
approximately $1.1 million in aggregate costs, including
severance, the write-off of unamortized leasehold improvements
and moving costs during 2004. These costs were expensed as
incurred in accordance with SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activity" within the Selling,
General and Administrative expenses caption on the face of the
Consolidated Statement of Income.
Directors and Executive Officers
Name Age Present Position
Kenneth D. Cole 50 Chief Executive Officer, Chairman
of the Board of Directors
Paul Blum 45 President and Director
Michael Newman 59 Vice Chairman
David P. Edelman 43 Chief Financial Officer
Harry Kubetz 51 Senior Vice President-Operations
Susan Q. Hudson 45 Senior Vice President-Wholesale
Carol Sharpe 50 Senior Vice President, Consumer Direct
Lori Wagner 40 Senior Vice President, Marketing
Linda Nash Merker 48 Senior Vice President, Human Resources
Michael F. Colosi 39 Corporate Vice President and
General Counsel and Secretary
Robert C. Grayson 60 Director
Denis F. Kelly 55 Director
Philip B. Miller 66 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
Candies women's shoes. Mr. Cole is the Chairman of the Board of
Directors of the American Foundation for AIDS Research
(''AmFAR''). In addition, he is on the Board of Trustees of
H.E.L.P., the Sundance Institute, and the Council of Fashion
Designers of America. 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 by the Company in 1990.
Michael Newman joined the company as Vice Chairman in March
2004. With a distinguished career in the apparel industry, Mr.
Newman has served at Polo Ralph Lauren as its Vice Chairman and
COO. Prior to his employment with Polo Ralph Lauren, Michael was
the Senior Vice President of Finance at Kaiser-Roth Apparel.
David P. Edelman was appointed as the Chief Financial Officer
in July 2004. He joined the Company in January 1995 and has
served as the Company's Senior Vice President of Finance since
April 2000. Before joining the Company, Mr. Edelman was Chief
Financial Officer of a women's suit wholesaler, and he was
employed 10 years as a CPA with Ernst & Young in various
specialty groups including E&Y's National Consulting Office and
its Retail and Apparel Audit Group.
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. Previously, 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.
Carol Sharpe joined the Company as Senior Vice President,
Consumer Direct in July 2004. Ms. Sharpe was President of Retail
at Donna Karan, Inc. from October 2002 to June 2004. From
October 1989 to May 2002, Ms. Sharpe was at J. Crew where she
held numerous positions, the last of which was Executive Vice
President of Merchandising. Prior to that, she held the position
of Divisional Merchandiser for Bloomingdale's, Chestnut Hill.
Lori Wagner has served as Senior Vice President of Marketing
since August 2001. Prior to joining the Company, Ms. Wagner
spent 10 years at J. Crew Group in various visual and creative
management marketing roles, the last of which was Senior Vice
President Brand Creative.
Linda Nash Merker joined the company as Senior Vice President
of Human Resources in May of 2004. Previously, she served as
Senior Vice President of Human Resources at Perry Ellis from
January 2002 to November 2003, and Senior Vice President of Human
Resources at Loehmann's from 1994 until 2000. While at Macy's
East from 1987 until 1994, Linda also held various positions, the
last of which was Vice President of Human Resources - Merchandise
Recruitment and Development.
Michael F. Colosi has served as Corporate Vice President and
General Counsel for the Company since July 2000 and as Corporate
Secretary since July 2004. Previously, Mr. Colosi was the
Associate General Counsel and Assistant Secretary for The Warnaco
Group, Inc. from 1996 to 2000. After clerking for Judge J.
Edward Lumbard of the U.S. Court of Appeals for the Second
Circuit, he was engaged in the private practice of law from 1992
to 1996.
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, Lillian August Inc., Urban Brands, and
Know Fat.
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 Certifications required under Section 302 of the
Sarbanes-Oxley Act of 2002 are filed as exhibits to the annual
and quarterly reports on Form 10-K and Form 10-Q, respectively.
In addition, the Company has provided the annual certification to
the New York Stock Exchange. 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. The
public may read and copy any materials filed by the Company with
the SEC at the SEC's Public Reference Room at 450 Fifth Street,
NW, Washington, DC 20549. The public may also obtain information
on the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. In addition, the SEC maintains an Internet
site that contains reports, proxy and information statements and
other information regarding the Company, which is available at
http://www.sec.gov.
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 is
available without charge by sending a written request to:
Investor Relations, Kenneth Cole Productions, Inc., 400 Plaza
Drive, Secaucus, NJ 07094.
Item 2. Properties
In 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 Company currently occupies 119,500 square
feet, excluding parking facilities. In April 2004, the Company
entered into an agreement to purchase this office building for
$24 million. The closing date must occur by May 2006. The
specific timing will be determined by both parties, based on the
ability of the current landlord to satisfy certain terms and
conditions. The lease for the former executive offices and
showrooms expires in December 2006, and is currently under a
subtenant lease agreement, which also expires in December 2006.
In February 2004, the Company entered into a new 10-year lease
for 51,000 square feet of office space in Secaucus, New Jersey
for its administrative offices and completed the move in June
2004. The former distribution facility was moved to a third-
party public warehouse and distribution center in New Jersey. 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.
As of December 31, 2004, the Company leased space for all of
its 51 specialty retail stores (aggregating approximately 231,000
square feet) and 36 outlet stores (aggregating approximately
179,000 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
On September 20, 2004, a purported class action lawsuit was
filed against the Company in the Superior Court of California for
the County of Los Angeles. The individual plaintiffs are current
or former store managers or assistant managers who purport to
bring suit on behalf of themselves and other similarly situated
store managers and assistant managers. Among other claims, the
plaintiffs allege that they worked hours for which they were
entitled to receive, but did not receive, overtime compensation
under California law. The lawsuit seeks damages, penalties,
restitution, reclassification and attorneys' fees and costs. The
Company denies the allegations in the complaint and plans to
defend the action vigorously.
In addition, the Company is, from time to time, a party to
other litigation that arises in the normal course of its business
operations. The Company is not presently a party to any other
litigation that it believes might have a material adverse effect
on its business 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 1, 2005 the closing sale price for the Class A Common
Stock was $29.02. The following table sets forth the high and
low closing sale prices for the Class A Common Stock for each
quarterly period for 2004 and 2003, as reported on the NYSE
Composite Tape:
2004: High Low
First Quarter 36.62 29.15
Second Quarter 36.91 31.64
Third Quarter 34.60 26.98
Fourth Quarter 31.03 25.30
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 1, 2005 was 59.
There were five holders of record of the Company's Class B
Common Stock on March 1, 2005. There is no established public
trading market for the Company's Class B Common Stock.
In December 2004, the Company repurchased shares of its own
stock from Liz Claiborne, Inc., as presented in the following
table:
Period (a) Total (b) Average (c) Total (d) Maximum
Number of Price Paid Number of Number (or
Shares (or per Share Share (or Approximate
Units) (or Unit) Units) Dollar Value) of
Purchased Purchased Shares (or
as Part of Units) that May
Publicly Yet Be Purchased
Announced Under the Plans
Plans or or Programs
Programs
December 2004 500,000 $27.87 4,250,000 861,600
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.
The Company established a quarterly dividend policy in 2003 and
made the following dividend payments to shareholders on record as
of the close of business on the dates noted:
$0.14 per share November 24, 2004
$0.14 per share August 24, 2004
$0.12 per share May 24, 2004
$0.12 per share March 9, 2004
$0.09 per share November 25, 2003
$0.075 per share August 28, 2003
On February 23, 2005, the Board of Directors declared a
quarterly cash dividend of $0.16 per share, payable on March 25,
2005 to shareholders of record at the close of business on March
9, 2005.
The Company had the following securities authorized for
issuance under equity compensation plans:
Plan Category Number of Weighted- Number of
securities to average securities
be issued upon exercise price remaining
exercise of of outstanding available for
outstanding options, future issuance
options, warrants, and under equity
warrants, and rights (b) compensation
rights (a) plans
(c)
(excluding
securities
reflected in
column (a))
Equity 2,948,936 $22.71 369,861
Compensation
plans approved
by security
holders
Equity
compensation N/A N/A N/A
plans not
approved by
security
holders
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.)
2004 2003 2002 2001 2000
Income Statement Data:
Net sales $473,438 $430,101 $404,336 $365,809 $387,148
Royalty revenue (2) 42,763 38,252 28,713 22,116 21,619
Net revenue 516,201 468,353 433,049 387,925 408,767
Cost of goods sold 284,817 258,457 235,255 217,221 217,046
Gross profit (3) (4) 231,384 209,896 197,794 170,704 191,721
Selling and general
administrative expenses (1) 174,519 157,824 152,618 145,919 130,967
Impairment of long-
lived assets 448 1,153 4,446
Operating income 56,417 50,919 40,730 24,785 60,754
Interest income, net 1,411 825 1,102 2,135 3,228
Income before provision
for income taxes 57,828 51,744 41,832 26,920 63,982
Provision for income taxes 21,976 19,145 15,687 10,304 25,592
Net income 35,852 32,599 26,145 16,616 38,390
Earnings per share:
Basic $1.79 $1.66 $1.33 $.83 $1.87
Diluted $1.74 $1.59 $1.27 $.80 $1.75
Weighted average shares outstanding:
Basic 20,050 19,609 19,643 19,992 20,574
Diluted 20,652 20,486 20,590 20,745 21,892
Cash dividends per share 0.52 0.17 -- -- --
2004 2003 2002 2001 2000
Balance Sheet Data:
Working capital $173,007 $154,161 $124,103 $ 96,709 $103,768
Cash 80,014 111,102 91,549 68,966 74,608
Inventory 47,166 44,851 43,724 30,753 42,361
Total assets 304,587 273,841 240,317 201,889 212,370
Total debt, including
current maturities 171 383 576
Total shareholders' equity 216,528 196,334 164,902 140,894 145,636
(1) Includes warehousing and receiving 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.
(4) Gross profit may not be comparable to other entities, since
some entities include the costs related to their distribution
network (receiving and warehousing) in cost of goods sold and
other entities, similar to the Company, exclude these costs from
gross profit, including them instead in a line item such as
selling, general and administrative expenses.
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, Kenneth Cole Reaction and Unlisted brand
names. In 2003, the Company added the Bongo trademark brand for
footwear through a license agreement and introduced the Tribeca
brand name during 2004. 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, swimwear,
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 Kenneth Cole Reaction brand.
The Company recorded record revenues of $516.2 million for the
year ended December 31, 2004 and diluted earnings per share grew
9.4% to $1.74 from $1.59 year over year. The Company's overall
financial results for the year have improved over the prior year,
primarily due to new product selection at retail, and continued
success in a wide variety of license product classifications.
The Company's Balance Sheet remains strong with $120.0 million in
cash and marketable securities and no debt as of December 31,
2004. Additionally, the Company expects to continue its
quarterly cash dividend.
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 by 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's income taxes are routinely under audit by
federal, state, or local authorities. 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 various 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:
2004 2003 2002
Net sales 91.7% 91.8% 93.4%
Royalty revenue 8.3 8.2 6.6
------ ------ ------
Net revenues 100.0 100.0 100.0
Cost of goods sold 55.2 55.2 54.3
------ ------ ------
Gross profit (1) 44.8 44.8 45.7
Selling, general and administrative
expenses 33.8 33.7 35.2
Impairment of long-lived assets 0.1 0.2 1.1
------ ------ ------
Operating income 10.9 10.9 9.4
Income before provision for income
taxes 11.2 11.1 9.7
Provision for income taxes 4.3 4.1 3.7
------ ------ ------
Net income 6.9% 7.0% 6.0%
====== ====== ======
(1) Gross profit may not be comparable to other entities,
since some entities include the costs related to their
distribution network (receiving and warehousing) in cost of goods
sold and other entities, similar to the Company, exclude these
costs from gross profit, including them instead in a line item
such as selling, general and administrative expenses.
Year Ended December 31, 2004 Compared to Year Ended December 31,
2003
Net revenues increased $47.8 million, or 10.2%, to $516.2
million in 2004 from $468.4 million in 2003. This increase was
due to revenue increases in each of the Company's business
segments: Wholesale, Consumer Direct and Licensing.
Wholesale net sales (excluding sales to the Consumer Direct
business segment) increased $24.8 million, or 9.7%, to $279.4
million in 2004 from $254.6 million in 2003. This increase was
attributable to improved sales across the Company's footwear
brands: Kenneth Cole New York, Kenneth Cole Reaction, Bongo
licensed footwear and the handbag businesses. This growth was
offset by a 15.6% decline in Unlisted footwear. The Company
believes that selling products under these trademark names, among
others, to multiple demographics through several distribution
channels has improved the Company's wholesale net sales. In
addition, the improvement of sell-thrus at retail from customer
acceptance also contributed to the increase, as well as the
Company's initiatives in repositioning its handbag businesses.
The Company will continue to focus on improving product
offerings, advertising campaigns, marketing efforts, website,
catalogs and growing retail presence, combined with the marketing
efforts of its licensees, which it believes will be significant
factors to strengthen and define its distinct brands, Kenneth
Cole New York, Kenneth Cole Reaction, Unlisted and Bongo across
all product classifications, thereby increasing consumer demand
for the Company's brands in the future. In addition, the Company
believes that the launch of Tribeca will also contribute to the
Company's growth.
Net sales in the Company's Consumer Direct segment increased
$18.4 million, or 10.5%, to $194.0 million in 2004 from $175.6
million in 2003. Of the total increase, $10.7 million was
attributable to new store sales in 2004 plus that portion of 2004
sales for stores not open for all of 2003, as well as an increase
of $4.6 million or 2.8% in comparable store sales. The remaining
sales increase of $3.1 million was primarily derived from the
Company's Corporate Gift Program. The Company believes the
increase in net sales in the Consumer Direct segment is due in
part to the economic strengthening generally seen throughout the
retail and apparel industry and direct merchandising initiatives
at its outlets. 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 $4.6 million, or 12.0%, to $42.8
million in 2004 from $38.2 million in 2003. The increase was
primarily from incremental minimum royalties from the Company's
existing licensees, most significantly women's apparel and
fragrance, and from the Company's new men's casual pants
licensee. This was offset by a decrease in royalties from by the
men's sportswear licensee. 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 remained at 44.8%, as a percentage
of net revenues, in 2004 and 2003. This was primarily a result
of an increase in the percentage of revenue and higher margins
contributed by the Consumer Direct segment, offset by decreased
margins within the Wholesale segment. The Consumer Direct
segment increased as a percentage of net revenues, to 37.6%, for
the year ended December 31, 2004, from 37.5% for the year ended
December 31, 2003, while the wholesale segment, which operates at
a lower gross profit percentage, decreased as a percentage of net
revenues to 54.1% for the year ended December 31, 2004, compared
to 54.3% for the year ended December 31, 2003. Consumer Direct
segment margins increased from merchandising initiatives at its
outlet stores, new assortments, which focus on wear-now products
that limit vulnerability of the mix of products without
compromising fashion and excitement, and a reduction of point of
sale promotions. Wholesale segment margins were lower from the
impact the Euro had on the US dollar, which reduced initial mark-
ups in the segment during the first half of 2004.
Selling, general and administrative expenses, including
warehousing and receiving ("SG&A"), increased $16.7 million, or
10.6%, to $174.5 million (or 33.8% of net revenues) in 2004 from
$157.8 million (or 33.7% of net revenues) in 2003. SG&A
increased slightly as a percentage of net revenues, primarily due
to professional fees from the implementation and compliance with
the Sarbanes-Oxley Act of 2002 and higher labor costs in the
Company's Wholesale and Licensing business segments.
The Company recorded asset impairment charges of approximately
$0.5 million and $1.2 million for the years ended December 31,
2004 and 2003, respectively, for the Company's Florida Mall
store, located in Orlando, Florida and the Lexington Avenue store
located in New York City. This asset impairment charge equaled
0.1% of net revenues for the year ended December 31, 2004 and
0.2% of net revenues for the year ended December 31, 2003, and is
included as a separate item in the Consolidated Statement of
Income, within operating income. The impairment related to the
write-down of the stores' leasehold improvements, furniture, and
fixtures.
Interest and other income increased to $1.4 million for the
year ended December 31, 2004 from $0.8 million in 2003. The
increase is the result of higher average cash balances. In
addition, average short-term interest rates have increased
throughout 2004 improving investment rates of returns.
The Company's effective tax rate increased to 38.0% for the
year ended December 31, 2004 from 37.0% for the year ended
December 31, 2003. The increase was a result of changes in tax
laws from state and local jurisdictions to which the Company's
earnings are subject.
As a result of the foregoing, net income increased $3.3
million, or 10.0%, to $35.9 million (6.9% of net revenue), which
includes an asset impairment charge of $0.5 million for the year
ended December 31, 2004, from $32.6 million (7.0% of net
revenue), which included an asset impairment charge of $1.2
million, for the year ended December 31, 2003.
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 was
due to revenue increases in each of the Company's business
segments: Wholesale, Consumer Direct and Licensing.
Wholesale net sales (excluding sales to the Consumer Direct
business segment) increased $17.4 million or 7.3% to $254.6
million in 2003 from $237.2 million in 2002. This increase was
attributable to improved sales across the Company's footwear
brands: Kenneth Cole New York, Kenneth Cole Reaction and
Unlisted and the additional sales of Bongo licensed footwear,
offset by a decline in the handbag business. Footwear net sales
increased 15.3% for the year ended December 31, 2003 compared to
2002, while handbag net sales decreased 36.5% for the year ended
December 31, 2003 compared to 2002. The footwear businesses
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, Kenneth Cole Reaction, 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 and 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 was
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 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
warehousing and receiving ("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 was derived 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, was included within operating income.
Interest and other income decreased to $0.8 million in 2003
from $1.1 million in 2002. The decrease was 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 was 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.
New Accounting and Tax Developments
In December 2004, the Financial Accounting Standards Board
issued SFAS No. 123R ("SFAS 123R"), Share-Based Payment. SFAS
123R requires the Company to measure compensation cost for all
share-based payments at fair value for interim and annual periods
beginning after June 15, 2005. The Company is currently
evaluating the requirements and impact of SFAS 123R on the
Company's consolidated financial statements.
In October 2004, Internal Revenue Code Section 965 was enacted
as part of the American Job Creation Act. This is a temporary
provision that allows U.S. companies to repatriate earnings from
their foreign subsidiaries at a reduced tax rate provided that
specified conditions and restrictions are satisfied. In
addition, FASB Staff Position FAS 109-2 was issued to provide
accounting and disclosure evidence relating to the repatriation
provision. The Company believes the range of reasonably possible
amounts of unremitted earnings that is being considered for
repatriation, as a result of this provision, is between $7 and
$12 million. The related reduction in income tax expense is
expected to be $1 to $2.5 million. The Company expects to adopt
this repatriation plan in the second half of 2005.
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. 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, 2004, working capital was $173.0 million compared to
$154.2 million at December 31, 2003.
Net cash provided by operating activities was $37.9 million in
2004 compared to $32.9 million in 2003. 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.
Net cash used in investing activities was $50.0 million in
2004 compared to $9.5 million in 2003. This was primarily due to
the purchase of $40.0 million of marketable securities in 2004.
Capital expenditures were approximately $10.1 million, $9.5
million and $7.3 million for 2004, 2003, 2002, respectively.
Expenditures on furniture, fixtures, and leasehold improvements
for new retail store openings and expansions were $6.9 million,
$4.6 million and $3.9 million in 2004, 2003, and 2002,
respectively. The remaining expenditures were primarily for
leasehold improvements for the renovation of the Company's
corporate headquarters and administrative offices and information
system enhancements.
Net cash used in financing activities was $19.0 million in
2004 compared to $3.8 million in 2003. This is principally
attributable to the Company's payment of cash dividends of
approximately $10.5 million to Class A and B Common Stock
shareholders in 2004, offset by proceeds of $5.2 million received
for stock option exercises. In addition, the Company used $13.9
million to purchase 500,000 of its shares in 2004 compared to
$4.5 million it used to purchase 200,000 shares in 2003. As of
December 31, 2004, the Company has 861,600 shares available to be
repurchased.
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, 2004 are summarized
as follows:
Payments Due by Period
1 year 2-3 4-5 After 5
Total or less years years years
Operating Leases
and Other
Obligations $236,330,000 $27,173,000 $75,931,000 $44,056,000 $89,170,000
Purchase
Obligations 49,396,000 49,396,000
------------ ----------- ----------- ----------- -----------
Total Contractual
Obligations $285,726,000 $76,569,000 $75,931,000 $44,056,000 $89,170,000
============ =========== =========== =========== ===========
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 2004 and 2003 under this line
of credit, however amounts available under the line were reduced
by $0.1 million open letters of credit and $6.6 million standby
letters of credit to $18.3 million at December 31, 2004.
During 2005, the Company anticipates opening or expanding
approximately 8 to 13 retail and outlet stores. These new and
expanded stores will require approximately $10.0 million in
aggregate capital expenditures and initial inventory
requirements. The Company also anticipates that it will require
increased capital expenditures to support its information systems
over its historical spend.
In 2004, the Company entered into an agreement to purchase the
office building that it is currently leasing for its corporate
headquarters in New York City providing approximately 119,500
square feet of office space for approximately $24 million. The
closing date must occur by May 2006, the specific timing to be
determined by the parties, based on the ability of the current
landlord to satisfy certain terms and conditions. The Company
has incurred approximately $17.8 million in capital expenditures
and expects to expend another $2 million within the next year
related to this location.
Also in 2004, the Company entered into a 10-year lease for its
administrative offices located in New Jersey, for which it
incurred approximately $1.0 million in capital improvements and
furniture expenditures during 2004.
The Company believes that it will be able to satisfy its
current expected cash requirements for 2005, including
requirements for its retail expansion, corporate and
administrative office build-outs, the purchase of the New York
City corporate headquarters, 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, 2004, forward
exchange contracts with a notional value totaling $24.0 million
were outstanding with settlement dates ranging from January 2005
through August 2005. 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, 2004,
the unrealized gain on these outstanding forward contracts is
approximately $553,000, 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
fluctuations 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, 2004, the Company had forward exchange
contracts totaling with notional values $24.0 million, which
resulted in an unrealized gain of approximately $553,000, 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 2004 and 2003 net
income.
Item 8. Financial Statements and Supplementary Data
See page F-1 for an index to the consolidated financial
statements, the Report of Management and the Reports of the
Registered Public Accounting Firm 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 Procedures
Evaluation of Disclosure Controls and Procedures
As of December 31, 2004, the Company carried out an evaluation,
under the supervision and with the participation of the Company's
Management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act
of 2004, as amended) and, 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.
Management's Report on Internal Control over Financial Reporting
The Company's Management is responsible for establishing and
maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rules 13a-15(f) and 15d-
15(f). Under the supervision and with the participation of
Management, including the Chief Executive Officer and Chief
Financial Officer, the Company conducted an evaluation of the
effectiveness of our internal control over financial reporting as
of December 31, 2004 based on the framework in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, Management concluded that internal
control over financial reporting was effective as of December 31,
2004.
Management's assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2004 has been
audited by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report which is included
elsewhere herein.
Changes in Internal Control over Financial Reporting
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.
Item 9b. Other Information
None.
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 26, 2005 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2004 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 26, 2005 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2004 and is
incorporated herein by reference in response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder 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 26, 2005 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2004 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 26, 2005 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2004, 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 26, 2005 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2004 and is
incorporated herein by reference in response to this item.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) See page F-1 for an index to the consolidated financial
statements submitted as part of this Annual Report.
(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.
(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).
10.02Term 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.)
10.20 Kenneth Cole Productions, Inc. 2004 Stock
Incentive Plan (Incorporated by reference to the Company's
Registration Statement on Form S-8 Registration No. 333-
119101, filed on September 17, 2004.
+ 21.01 List of Subsidiaries
+23.01 Consent of Independent Registered Public
Accounting Firm
+31.1 Certification of Chief Executive Officer pursuant to
Securities Exchange Act Rule 13a-14 and 15d-14, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
+31.2 Certification of Chief Financial Officer pursuant
to Securities Exchange Act Rule 13a-14 and 15d-14, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
+32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
+32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
____________________________
* Management contract or compensatory plan or
arrangement required to be identified pursuant to Item
14(a) of this report.
+ Filed herewith.
(b) See Item 15(a) (3) above for a listing of the exhibits
included as a part of this report.
(c) See Items 15(a)(1) and 15(a)(2) above.
Kenneth Cole Productions, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Page
Reports of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-5
Consolidated Statements of Income for the years ended
December 31, 2004, 2003 and 2002 F-7
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2004, 2003 and 2002 F-8
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 F-9
Notes to Consolidated Financial Statements F-10
Report of Independent Registered Public Accounting Firm
To The Board of Directors and Shareholders of Kenneth Cole
Productions, Inc.
We have audited the accompanying consolidated balance sheets
of Kenneth Cole Productions, Inc. and subsidiaries (the
"Company") as of December 31, 2004 and 2003, and the related
consolidated statements of income, cash flows and changes in
shareholders' equity for each of the three years in the period
ended December 31, 2004. 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 the standards of
the Public Company Accounting Oversight Board (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, 2004 and 2003, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in conformity
with U.S. generally accepted accounting principles. 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.
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the effectiveness of Kenneth Cole Productions, Inc. and
subsidiaries internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated February 23, 2005 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
New York, New York
February 23, 2005
Report of Independent Registered Public Accounting Firm
To The Board of Directors and Shareholders of Kenneth Cole
Productions, Inc.
We have audited management's assessment, included in the
accompanying Management's Report on Internal Control over
Financial Reporting appearing in Item 9a, that Kenneth Cole
Productions, Inc. and subsidiaries (the "Company") maintained
effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Company's management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the
effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control
over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Kenneth Cole
Productions, Inc. and subsidiaries maintained effective internal
control over financial reporting as of December 31, 2004 is
fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Kenneth Cole Productions, Inc.
and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of December 31,
2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Kenneth Cole Productions, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, cash flows and changes in
shareholders' equity for each of the three years in the period
ended December 31, 2004 and our report dated February 23, 2005
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
February 23, 2005
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
2004 2003
Assets
Current assets:
Cash and cash equivalents $ 80,014,000 $111,102,000
Marketable securities 40,000,000 -
Due from factors 34,936,000 31,487,000
Accounts receivable, less allowance for
doubtful accounts of $302,000 and $475,000 16,978,000 11,254,000
Inventories 47,166,000 44,851,000
Prepaid expenses and other current assets 2,664,000 1,343,000
Deferred taxes, net 3,136,000 2,063,000
------------ ------------
Total current assets 224,894,000 202,100,000
Property and equipment-at cost, less
Accumulated depreciation and amortization 38,510,000 36,755,000
Other assets:
Deferred taxes, net 9,625,000 8,989,000
Deposits and sundry 8,826,000 7,614,000
Deferred compensation plans assets 22,732,000 18,383,000
------------ ------------
Total other assets 41,183,000 34,986,000
------------ ------------
Total Assets $304,587,000 $273,841,000
============ ============
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
December 31,
2004 2003
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 35,767,000 $ 33,847,000
Accrued expenses and other current liabilities 8,947,000 8,358,000
Deferred income 2,920,000 2,795,000
Income taxes payable 4,253,000 2,939,000
------------ ------------
Total current liabilities 51,887,000 47,939,000
Accrued rent and other long term liabilities 13,440,000 11,185,000
Deferred compensation plans liabilities 22,732,000 18,383,000
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; 15,054,845
and 14,534,791 issued and outstanding as
of December 31, 2004 and 2003, respectively 150,000 145,000
Class B Convertible Common Stock, par value
$.01, 9,000,000 shares authorized; 8,055,497
and 8,168,497 issued and outstanding as of
December 31, 2004 and 2003, respectively 81,000 82,000
Additional paid-in capital 78,417,000 69,992,000
Accumulated other comprehensive income 1,053,000 751,000
Retained Earnings 216,983,000 191,585,000
------------ ------------
296,684,000 262,555,000
Class A Common Stock in treasury, at cost,
3,388,400 and 2,888,400 shares as of
December 31, 2004 and 2003, respectively (80,156,000) (66,221,000)
------------ ------------
Total Shareholders' Equity 216,528,000 196,334,000
------------ ------------
Total Liabilities and Shareholders' Equity $304,587,000 $273,841,000
============ ============
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31,
2004 2003 2002
Net sales $473,438,000 $430,101,000 $404,336,000
Royalty revenue 42,763,000 38,252,000 28,713,000
------------ ------------ ------------
Net revenue 516,201,000 468,353,000 433,049,000
Cost of goods sold 284,817,000 258,457,000 235,255,000
------------ ------------ ------------
Gross profit 231,384,000 209,896,000 197,794,000
Selling, general, and
administrative expenses 174,519,000 157,824,000 152,618,000
Impairment of long-lived assets 448,000 1,153,000 4,446,000
------------ ------------ ------------
Operating income 56,417,000 50,919,000 40,730,000
Interest and other income, net 1,411,000 825,000 1,102,000
------------ ------------ ------------
Income before provision for
income taxes 57,828,000 51,744,000 41,832,000
Provision for income taxes 21,976,000 19,145,000 15,687,000
------------ ------------ ------------
Net income $ 35,852,000 $ 32,599,000 $ 26,145,000
============ ============ ============
Earnings per share:
Basic $1.79 $1.66 $1.33
Diluted $1.74 $1.59 $1.27
Dividends declared per share $0.52 $0.17
Shares used to compute earnings per share:
Basic 20,050,000 19,609,000 19,643,000
Diluted 20,652,000 20,486,000 20,590,000
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 12/31/01 13,626,584 $136,000 8,498,097 $85,000
Net Income
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 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
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 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
Net Income
Translation adjustment,
Foreign currency, net
of taxes $199,000
Forward contracts, net
of taxes $(32,000)
Unrealized gain on available
for sale security, net of
taxes $18,000
Comprehensive income
Exercise of stock options
Related tax benefit $3,031,000 398,113 4,000
Issuance of Class A
Stock for ESPP 8,941
Dividends paid on
common stock
Purchase of Class A Stock
Conversion of Class B to
Class A common stock 113,000 1,000 (113,000) (1,000)
-----------------------------------------
Balance at 12/31/04 15,054,845 $150,000 8,055,497 $81,000
=========================================
Accumulated
Additional Other
Paid-In Comprehensive Retained
Capital Income Earnings
Balance at 12/31/01 $61,273,000 $ 434,000 $136,099,000
Net Income 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 common stock
-----------------------------------------
Balance at 12/31/02 63,476,000 654,000 162,244,000
Net Income 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 common stock
-----------------------------------------
Balance at 12/31/03 69,992,000 751,000 191,585,000
Net Income 35,852,000
Translation adjustment,
Foreign currency, net
of taxes $199,000 325,000
Forward contracts, net
of taxes $(32,000) (53,000)
Unrealized gain on available
for sale security, net of
taxes $18,000 30,000
Comprehensive income
Exercise of stock options
Related tax benefit $3,031,000 8,204,000
Issuance of Class A
Stock for ESPP 221,000
Dividends paid on
common stock (10,454,000)
Purchase of Class A Stock
Conversion of Class B to
Class A common stock
-----------------------------------------
Balance at 12/31/04 $78,417,000 $1,053,000 $216,983,000
=========================================
Treasury Stock
Number
of Shares Amount Total
Balance at 12/31/01 (2,488,400) $(57,133,000) $140,894,000
Net Income 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 common stock
-------------------------------------------
Balance at 12/31/02 (2,688,400) (61,695,000) 164,902,000
Net Income 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 common stock
-------------------------------------------
Balance at 12/31/03 (2,888,400) (66,221,000) 196,334,000
Net Income 35,852,000
Translation adjustment,
Foreign currency, net
of taxes $199,000 325,000
Forward contracts, net
of taxes $(32,000) (53,000)
Unrealized gain on available
for sale security, net of
taxes $18,000 30,000
-----------
Comprehensive income 36,154,000
Exercise of stock options
Related tax benefit $3,031,000 8,208,000
Issuance of Class A
Stock for ESPP 221,000
Dividends paid on
common stock (10,454,000)
Purchase of Class A Stock (500,000) (13,935,000) (13,935,000)
Conversion of Class B to
Class A common stock
-------------------------------------------
Balance at 12/31/04 (3,388,400) $(80,156,000) $216,528,000
===========================================
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31,
2004 2003 2002
Cash flows from operating
activities
Net income $ 35,852,000 $ 32,599,000 $ 26,145,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 7,844,000 7,604,000 7,307,000
Impairment of long-lived assets 448,000 1,153,000 4,446,000
Unrealized (gain) loss on deferred
compensation plans (1,127,000) (2,543,000) 1,526,000
Realized gain on sale of property
and equipment (14,000) - -
Provision for doubtful accounts 227,000 262,000 244,000
Benefit for deferred taxes (1,709,000) (399,000) (3,170,000)
Tax benefit from stock options 3,031,000 2,370,000 974,000
Changes in operating assets and liabilities:
Increase in due from factors (3,449,000) (601,000) (2,597,000)
Increase in accounts receivable (5,951,000) (3,632,000) (1,397,000)
Increase in inventories (2,368,000) (912,000) (12,630,000)
Increase in prepaid expenses and
other current assets (1,321,000) (269,000) (201,000)
Increase in other assets and deferred
compensation assets (4,404,000) (4,909,000) (1,764,000)
Increase (decrease) in income
taxes payable 1,314,000 (3,301,000) 3,991,000
Increase in accounts payable 1,920,000 213,000 7,702,000
Increase (decrease) in deferred income,
accrued expenses and other
current liabilities 1,044,000 (2,812,000) 484,000
Increase in other non-current liabilities 6,604,000 8,067,000 2,345,000
----------- ----------- -----------
Net cash provided by operating
activities 37,941,000 32,890,000 33,405,000
Cash flows from investing activities
Acquisition of property and equipment (10,101,000) (9,510,000) (7,268,000)
Proceeds from sale of property and
Equipment 68,000
Purchases of marketable securities (40,000,000) - -
----------- ----------- -----------
Net cash used in investing activities (50,033,000) (9,510,000) (7,268,000)
Cash flows from financing activities
Proceeds from exercise of stock options 5,177,000 3,938,000 1,022,000
Proceeds from issuance of stock
from employee purchase plan 221,000 212,000 209,000
Principal payments of capital
lease obligations (171,000) (212,000)
Dividends paid to shareholders (10,454,000) (3,258,000)
Purchase of treasury stock (13,935,000) (4,526,000) (4,562,000)
----------- ----------- -----------
Net cash used in financing activities (18,991,000) (3,805,000) (3,543,000)
Effect of exchange rate changes on cash (5,000) (22,000) (11,000)
----------- ----------- -----------
Net (decrease)/increase in cash
and cash equivalents (31,088,000) 19,553,000 22,583,000
Cash and cash equivalents,
beginning of year 111,102,000 91,549,000 68,966,000
----------- ----------- -----------
Cash and cash equivalents, end of year $ 80,014,000 $111,102,000 $ 91,549,000
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $27,000 $40,000 $35,000
Income taxes $19,341,000 $20,583,000 $14,757,000
See accompanying notes to consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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, Kenneth Cole Reaction, Unlisted,
and beginning in 2004, Tribeca, brands for the fashion conscious
consumer. In 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
Kenneth Cole Reaction 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. Marketable securities
During 2004, the Company began investing in auction rate
securities, which are associated with municipal bond offerings,
and have maturity dates ranging from approximately 2023 to 2038.
Beginning in the fourth quarter of 2004, the Company began
accounting for these investments as marketable securities, and
has classified them as available for sale securities under SFAS
115 "Accounting for Certain Investments in Debt and Equity
Securities"("SFAS 115"). They are recorded at fair value, and are
reset and repurchased every 7 to 35 days, based on the Company's
cash needs. The purchase of these securities is included in the
accompanying
Statement of Cash Flows as an investing activity. Interest
earned is recorded in "Interest and Other Income" in the
accompanying Consolidated Statement of Income for the year ended
December 31, 2004.
6. 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.
7. 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).
8. 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.
9. Revenue recognition
Wholesale revenues are recognized upon shipment of products to
customers since title passes upon shipment. Retail and outlet
store revenues are recognized at the time of sale. Both
wholesale and retail store revenues are shown net of returns,
discounts, and other allowances. Reserves for estimated returns
and allowances for discounts are provided when sales are
recorded. 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.
10. Advertising costs
The Company incurred advertising costs, including certain in-
house marketing expenses of $20.0 million, $16.8 million and
$18.1 million for the years ended December 31, 2004, 2003 and
2002, respectively. Advertising costs are expensed as incurred
and are included in selling, general, and administrative
expenses. Included in advertising expenses are costs associated
with cooperative advertising programs, under which the Company
generally shares the cost of a customer's advertising
expenditures.
In addition, licensee contributions toward advertising are
recognized when licensed products are sold by the Company's
licensees. Such contributions are based on contractual
percentages of sales and contain minimums. For licensees whose
sales are not expected to exceed contractual sales minimums,
contributions relating to advertising are recognized based on the
contractual minimums. In circumstances whereby licensee sales
exceed the quarterly contractual minimums, but not the annual
minimums, such contributions toward advertising are deferred on
the balance sheet. As the licensee sales exceed the annual
contractual minimums, the licensee contributions toward
advertising are recognized.
11. 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,
2004 2003 2002
Net Income, as reported $35,852,000 $32,599,000 $26,145,000
Deduct: Stock-based employee
compensation expense
determined under fair value
method, net of related
tax effects 3,429,000 2,855,000 2,506,000
----------- ----------- -----------
Pro forma net income $32,423,000 $29,744,000 $23,639,000
=========== =========== ===========
Earnings per share:
Basic - as reported $1.79 $1.66 $1.33
Basic - pro forma $1.62 $1.52 $1.20
Diluted - as reported $1.74 $1.59 $1.27
Diluted - pro forma $1.57 $1.45 $1.15
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.
12. Derivative instruments and hedging activities
The Company uses derivative instruments, typically forward
contracts, to manage its risk associated with movements in the
Euro exchange rates in purchasing inventory. In accordance with
SFAS No. 133 "Accounting for Derivative Instruments and Hedge
Activities" ("SFAS 133"), the Company recognizes all derivatives
on the Balance Sheet. Also, derivative instruments that meet
certain criteria in SFAS 133 are classified as cash flow hedges,
and changes in fair value are recognized in Other Comprehensive
Income, in the accompanying Statement of Changes in Shareholders'
Equity, until the underlying transaction is completed and the
derivative is settled. Upon settlement, any amounts remaining in
Other Comprehensive Income are reclassified to earnings. Those
derivatives that are not classified as cash flow hedges are
adjusted to fair value through earnings. The Company does not
hold derivative instruments for the purpose of trading or
speculation, and designated all hedges as Cash Flow Hedges in
2004 (See Note G).
13. Shipping and Handling Costs
In accordance with Emerging Issues Task Force Issue No. 00-10,
"Accounting for Shipping and Handling Fees," the Company has
included amounts billed to customers for shipping costs in net
sales. The related internal and external shipping and handling
costs incurred by the Company are included in the Cost of Goods
Sold line item in the accompanying Consolidated Statements of
Income. Such costs include inbound freight costs, purchasing
costs, inspection costs, internal transfer costs, and other
product procurement related charges.
14. Cost of Goods Sold and Selling, General and Administrative
Expenses
Costs associated with the production and procurement of
product are included in the Cost of Goods Sold line item in the
accompanying Consolidated Statements of Income, including inbound
freight costs, purchasing costs, inspection costs, and other
product procurement related charges. All other expenses,
excluding interest and income taxes, are included in selling,
general, and administrative expenses, including receiving,
warehousing, and distribution expenses, as the predominant
expenses associated therewith, are general and administrative in
nature.
15. Research and Development Costs
The Company does not incur research and development costs.
16. Reclassifications
Certain amounts included in the Company's previous
consolidated financial statements have been reclassified to
conform to the 2004 presentation.
Note B - Due from Factors, Accounts Receivable and Line of
Credit Facility
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, 2004 and 2003 is accounts receivable subject to recourse
totaling approximately $1,132,000 and $494,000, respectively. The
agreements with the factors provide for payment of a service fee
on receivables sold.
At December 31, 2004 and 2003, the balance due from factor,
which includes chargebacks, is net of allowances for returns,
discounts, and other deductions of approximately $8,377,000 and
$9,425,000,
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.
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, 2004 and 2003, the accounts receivable balance
includes allowance for doubtful accounts and consumer direct
sales returns of approximately $1,002,000 and $1,260,000.
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. The
allowance for doubtful accounts is provided for estimated losses
resulting from the inability of its customers to make required
payments.
The Company has 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,
2004, and 2003.
Amounts available under the Facility at December 31, 2004 were
reduced by $6,576,000 of standby letters of credit and $91,000
in open letters of credit to $18,333,000. 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, which the Company has
complied with. In addition, borrowings under the line of credit
are secured by certain assets of the Company.
Note C - Property and Equipment
Property and equipment consist of the following:
December 31,
2004 2003
Property and equipment-at cost:
Furniture and fixtures $24,861,000 $21,488,000
Machinery and equipment 14,311,000 13,776,000
Leasehold improvements 44,661,000 42,805,000
Leased equipment under capital lease 967,000 967,000
----------- -----------
84,800,000 79,036,000
Less accumulated depreciation 46,290,000 42,281,000
----------- -----------
Net property and equipment $38,510,000 $36,755,000
=========== ===========
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 $448,000 in
December 2004. 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 $448,000 of the store's leasehold improvements and
furniture and fixtures to current value was separately disclosed
in the accompanying Consolidated Statement of Income.
The Company recorded similar write-downs in the amounts of
$1,153,000 and $4,446,000 in 2003 and 2002, respectively, for
impairments of certain leasehold improvements and furniture and
fixtures located at certain retail stores. These impairments are
also disclosed in the accompanying Consolidated Statements of
Income.
Note E - Accrued Expenses and Other Liabilities
Accrued expenses and other current liabilities consist of the
following:
December 31,
2004 2003
Rent $ 448,000 $ 485,000
Compensation 5,454,000 4,964,000
Customer credits 1,989,000 1,933,000
Other 1,056,000 976,000
---------- ----------
$8,947,000 $8,358,000
========== ==========
Note F - Segment Reporting
Kenneth Cole Productions, Inc. has three reportable segments:
Wholesale, Consumer Direct, and Licensing. 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.kennethcolereaction.com). The Licensing 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 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.
Financial information of the Company's reportable segments is as
follows (dollars in thousands):
Consumer
Wholesale Direct Licensing Totals
Year Ended December 31, 2004
Revenues $279,440 $193,998 $42,763 $516,201
Intersegment revenues 35,133 35,133
Interest income, net 1,411 1,411
Depreciation expense 2,745 5,087 12 7,844
Impairment of long-lived assets 448 448
Segment income (1) 29,135 12,232 35,454 76,821
Segment assets 249,226 49,929 8,190 307,345
Expenditures for long-
lived assets 3,150 6,949 2 10,101
Year Ended December 31, 2003
Revenues $254,524 $175,577 $38,252 $468,353
Intersegment revenues 32,671 32,671
Interest income, net 825 825
Depreciation expense 2,698 4,893 13 7,604
Impairment of long-lived assets 1,153 1,153
Segment income (1)(3) 30,644 6,843 31,556 69,043
Segment assets 219,111 48,454 8,414 275,979
Expenditures for long-
lived assets 4,924 4,584 2 9,510
Year Ended December 31, 2002
Revenues $237,241 $167,096 $28,712 $433,049
Intersegment revenues 30,525 30,525
Interest income, net 1,102 1,102
Depreciation expense 2,311 4,985 11 7,307
Impairment of long-lived assets 4,446 4,446
Segment income (1)(2) 30,275 5,430 22,101 57,806
Segment assets 188,807 49,017 4,459 242,283
Expenditures for long-
lived assets 3,389 3,853 26 7,268
(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 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 (dollars in
thousands):
Revenues 2004 2003 2002
Revenues for reportable segments $516,201 $468,353 $433,049
Intersegment revenues for reportable
segments 35,133 32,671 30,525
Elimination of intersegment revenues (35,133) (32,671) (30,525)
-------- -------- --------
Total consolidated revenues $516,201 $468,353 $433,049
======== ======== ========
Income
Total profit for reportable segments $ 76,821 $ 69,043 $ 57,806
Elimination of intersegment profit (9,303) (8,524) (7,615)
Unallocated corporate overhead (9,690) (8,775) (8,359)
-------- -------- --------
Total income before provision for
income taxes $ 57,828 $ 51,744 $ 41,832
======== ======== ========
Assets
Total assets for reportable segments $307,345 $275,979 $242,283
Elimination of inventory profit in
consolidation (2,758) (2,138) (1,966)
-------- -------- --------
Total consolidated assets $304,587 $273,841 $240,317
======== ======== ========
Revenues from international customers are approximately 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 contracts in anticipation of future purchases
of inventory denominated in foreign currencies. These forward
contracts are used to hedge against the Company's exposure to
changes in Euro exchange rates to protect the purchase price of
merchandise under such commitments. The Company has classified
these contracts as Cash Flow Hedges under SFAS 133. The Company
had forward contracts of $24,000,000, $9,500,000 and $7,750,000
at December 31, 2004, 2003 and 2002, respectively. At December
31, 2004, forward contracts have maturity dates through August
2005.
All terms and conditions of the forward contracts are included
in the measurement of the related hedge effectiveness. The
critical terms of the forward 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 2004, 2003, and 2002.
At December 31, 2004, the Company's notional $24,000,000 in
forward exchange contracts resulted in an unrealized gain of
approximately $553,000, 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,
which is the underlying exposure on the Consolidated Balance
Sheet. The Company expects to reclassify all of the unrealized
gain from Other Comprehensive Income into earnings within the
next eight month period due to the actual executions of forward
contracts to purchase merchandise and the Company's ultimate sale
of that merchandise.
Note H - Income Taxes
The components of income before provision for income taxes are as
follows:
Years Ended December 31 2004 2003 2002
Domestic $54,460,000 $51,063,000 $39,796,000
International 3,368,000 681,000 2,036,000
----------- ----------- -----------
$57,828,000 $51,744,000 $41,832,000
=========== =========== ===========
Significant items comprising the Company's deferred tax assets
and liabilities are as follows:
December 31,
2004 2003
Deferred tax assets:
Inventory allowances and capitalization $ 2,105,000 $ 1,352,000
Allowance for doubtful accounts and
sales allowances 1,031,000 696,000
Deferred rent 4,379,000 3,771,000
Deferred compensation 8,406,000 7,244,000
Asset impairment 1,879,000 1,966,000
Other 531,000 38,000
----------- -----------
$18,331,000 $15,067,000
Deferred tax liabilities:
Depreciation (2,680,000) (2,068,000)
Undistributed foreign earnings (2,890,000) (1,947,000)
----------- -----------
(5,570,000) (4,015,000)
----------- -----------
Net deferred tax assets $12,761,000 $11,052,000
=========== ===========
The provision (benefit) for income taxes consists of the
following:
December 31,
2004 2003 2002
Current:
Federal $21,005,000 $16,816,000 $16,850,000
State and local 2,483,000 2,587,000 1,900,000
Foreign 197,000 141,000 107,000
----------- ----------- -----------
23,685,000 19,544,000 18,857,000
Deferred:
Federal (1,574,000) (368,000) (2,999,000)
State and local (135,000) (31,000) (171,000)
----------- ----------- -----------
(1,709,000) (399,000) (3,170,000)
----------- ----------- -----------
$21,976,000 $19,145,000 $15,687,000
=========== =========== ===========
The reconciliation of income tax computed at the U.S. federal
statutory tax rate to the effective income tax rate for 2004,
2003 and 2002 is as follows:
2004 2003 2002
Federal income tax at statutory rate 35.0% 35.0% 35.0%
State and local taxes, net of
federal tax benefit 3.0% 2.0% 2.5%
----- ----- -----
38.0% 37.0% 37.5%
===== ===== =====
Note I - Stock Options Plans and Grants
1994 Stock Option Plan
The Company's 1994 Incentive Stock Option Plan, as amended by
the 2004 Stock Incentive Plan (the "Plan"), authorizes the grant
of options to employees for up to 5,320,162 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 2004, 2003 and 2002,
respectively: risk-free interest rate of 3.2%, 4.0% and 4.5%;
expected volatility factors of 59.7%, 64.5% and 72.4% and
expected lives of 5.2, 5.0 and 4.4 years. Dividend yield
assumptions were 1.68%, 1.38% and 0.0% for 2004, 2003 and 2002,
respectively. The weighted-average fair value of options granted
during 2004, 2003 and 2002 were $15.63, $14.48 and $16.31,
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, 2001 through December 31, 2004.
Weighted-Average
Shares Exercise Price
Outstanding at December 31, 2001 2,822,791 $17.28
Granted 73,650 $24.33
Exercised (97,952) $ 9.75
Forfeited (166,509) $22.18
---------
Outstanding at December 31, 2002 2,631,980 $17.44
Granted 657,500 $23.33
Exercised (316,216) $11.68
Forfeited (41,929) $19.87
---------
Outstanding at December 31, 2003 2,931,335 $19.36
Granted 574,900 $32.97
Exercised (398,113) $12.97
Forfeited (159,186) $22.20
---------
Outstanding at December 31, 2004 2,948,936 $22.71
=========
The following table summarizes information concerning
currently outstanding and exercisable stock options at December
31, 2004:
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 $12.00 348,356 2.44 years $11.25 348,356 $11.25
$12.01 to $24.00 1,325,540 6.50 years $18.63 652,122 $24.55
$24.01 to $36.00 1,275,040 7.34 years $30.09 502,709 $30.55
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, 2004, 2003 and 2002 were approximately
$395,000, $268,000 and $241,000, 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 as trading
securities in accordance with SFAS 115.
In 2004, 2003 and 2002, the Company deposited $1,516,000,
$247,000 and $1,408,000, respectively, into Supplemental
Executive Retirement Plans ("SERP") for certain key executives.
The amounts have been recorded in Deposits and Sundry in the
accompanying 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 60% vested after 9 years
of service, 75% vested
upon the participant retiring at age 60 or later, and 100% vested
if the employee dies while in the Company's employment. 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, 2004 and 2003 were $5,206,000 and
$4,102,000, respectively, which the Company accounts for as
trading securities in accordance with SFAS 115. The unrealized
gains and losses on the investments were recorded in Selling,
General and Administrative Expenses in the accompanying
Consolidated Statements of Income. In addition, the Company has
recorded an accumulated long-term vested benefit obligation of
approximately $1,814,000 and $1,200,000 at December 31, 2004 and
2003, respectively, within the Deferred Compensation Plans
Liabilities caption in 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. For
the year ended December 31, 2004, 2003, and 2002, employees
purchased 8,941, 12,606, and 14,681 shares, respectively. Total
shares purchased through December 31, 2004 were 62,954.
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, 2004:
2005 $ 25,913,000
2006 24,994,000
2007 24,016,000
2008 23,524,000
2009 20,532,000
Thereafter 89,170,000
------------
Total minimum cash payments $208,149,000
============
In addition, certain of these leases contain rent escalation
provisions and require additional percentage rent payments to be
made. Step rent provisions and escalation clauses are taken into
account in computing the minimum lease payments recognized on a
straight-line basis over the minimum lease term. The Company may
also receive capital improvement funding from landlords,
primarily as an incentive for the Company to lease retail and
outlet store space from the landlords. Such amounts are
amortized as a reduction of rent expenses over the life of the
related lease.
Rent expense is as follows:
for the years ended December 31,
2004 2003 2002
Minimum Rent $24,340,000 $23,173,000 $21,681,000
Contingent Rent
and other 7,530,000 7,995,000 7,381,000
----------- ----------- -----------
Total Rent Expense $31,870,000 $31,168,000 $29,062,000
=========== =========== ===========
Sub-tenants rental income for 2004, 2003, and 2002 was
$1,073,000, $1,225,000, and $967,000, respectively. Future
minimum rental income from sub-tenants is $689,000 for both 2005
and 2006, totaling $1,378,000 in minimum cash proceeds.
Future minimum rental income from sub-tenants does not include
rent escalation and other charges that are subsequently passed
through to the sub-tenant.
In April 2004, the Company entered into an agreement to
purchase the office building that it is currently leasing for its
New York City worldwide headquarters for approximately $24
million. The closing date must occur by May 2006, the specific
timing to be determined by the parties, based on the ability of
the current landlord to satisfy certain terms and conditions of
the agreement.
In February 2004, the Company entered into a new 10-year lease
for 51,000 square feet in Secaucus, New Jersey for its
administrative offices and completed the move in June 2004. The
distribution facility moved to a third-party public warehouse and
distribution center in New Jersey. 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 51 specialty retail
stores (aggregating approximately 231,000 square feet) and 36
outlet stores (aggregating approximately 179,000 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.
2. Letters of credit
At December 31, 2004 and 2003, the Company was contingently
liable for approximately $91,000 and $2,237,000 of open letters
of credit, respectively. In addition, at December 31, 2004 and
2003, the Company was contingently liable for approximately
$6,576,000 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. The Company had no customer account for more than
10% of consolidated net sales for the years ended December 31,
2004, 2003, and 2002.
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
21% and 32% of total handbag purchases came from one manufacturer
in China during the years ended December 31, 2004 and 2003,
respectively. Approximately 37% and 36% of Kenneth Cole and
Kenneth Cole Reaction men's footwear purchases were from one
manufacturer in Italy utilizing many different factories during
the years ended December 31, 2004 and 2003, respectively.
Furthermore, approximately 33% and 37% of Kenneth Cole ladies'
footwear was purchased from one manufacturer in Italy during the
years ended December 31, 2004 and 2003, respectively, while 58%
and 57% of Kenneth Cole Reaction ladies' footwear purchases were
sourced through one manufacturer in Italy during the year ended
December 31, 2004 and December 31, 2003, 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.
In conjunction with the Company's decision to close its east
coast distribution center and transfer the operation to a third-
party service provider, the Company entered into a shutdown
agreement during April 2004, with a local affiliate of the
International Leather Goods, Plastics, Handbags and Novelty
Workers Union, Local I Division of Local 342-50 United Food and
Commercial Workers Union, which provided for, among other things,
severance payments for employees covered by the expiring
collective bargaining agreement. In connection with this
transition, the Company incurred approximately $1.1 million in
aggregate costs, including severance from the aforementioned
agreement, the write-off of unamortized leasehold improvements
and moving costs. These costs were expensed as incurred in
accordance with SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activity" and recorded in Selling, General
and Administrative expenses in the Consolidated Statement of
Income.
As of December 31, 2004, the Company did not have any employees
covered under a collective bargaining agreement with a local
union. As of December 31, 2003, the Company had approximately 6%
of its employees covered under a collective bargaining agreement
with a local union.
4. Other
On September 20, 2004, a purported class action lawsuit was
filed against the Company in the Superior Court of California for
the County of Los Angeles. The individual plaintiffs are current
or former store managers or assistant managers who purport to
bring suit on behalf of themselves and other similarly situated
store managers and assistant managers. Among other claims, the
plaintiffs allege that they worked hours for which they were
entitled to receive, but did not receive, overtime compensation
under California law. The lawsuit seeks damages, penalties,
restitution, reclassification and attorneys' fees and costs. The
Company denies the allegations in the complaint and plans to
defend the action vigorously.
In addition, the Company is, from time to time, a party to
other litigation that arises in the normal course of its business
operations. The Company is not presently a party to any other
litigation that it believes might have a material adverse effect
on its business 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
In December 2004, the Company repurchased 500,000 of its
shares from Liz Claiborne, Inc. at an aggregate price of $13.9
million, which were originally acquired by Liz Claiborne, Inc. in
connection with its licensing agreement with the Company. In
December 2003, 2,888,400 shares were repurchased in the open
market at an aggregate price of $66,221,000 pursuant to the
Company's stock purchase plan, which provided for the repurchase
of up to 4,250,000 of shares of Class A common stock. The
Company has 861,600 shares available for repurchase as of
December 31, 2004 under the repurchase plan.
Note M - Earnings Per Share
The Company calculates earnings per share in accordance with
SFAS No. 128, "Earnings Per Share." Basic earnings per share is
calculated by dividing net income by weighted average common
shares outstanding. Diluted earnings per share is calculated
similarly, except that it includes the dilutive effect of the
assumed exercise of securities under the Company's stock
incentive plans. Dilutive securities, which include 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.
Stock options amounting to 1,773,645, 3,130,384, and 3,106,308,
as of December 31, 2004, 2003, and 2002, respectively, have been
excluded from the diluted per share calculations, since their
effect would be antidilutive.
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,
2004 2003 2002
Weighted average common
shares outstanding 20,050,000 19,609,000 19,643,000
Effect of dilutive securities:
Stock options 602,000 877,000 947,000
Weighted average common
shares outstanding and ---------- ---------- ----------
common share equivalents 20,652,000 20,486,000 20,590,000
========== ========== ==========
Note N - Licensing Agreements
In May 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 $1,070,000 and
$632,000 in royalty and advertising expense to Candies for the
years ended December 31, 2004 and December 31, 2003,
respectively.
In November 2004, the Company entered into a licensing
agreement with G-III Apparel Group, LTD ("G-III"), in connection
with worldwide manufacturer, sale, and distribution of women's
and men's outerwear. The agreement commenced on January 1, 2005
and continues through December 31, 2008, with options to renew
based on certain milestones to be met by G-III. As part of the
agreement, the Company will earn royalties based on a percentage
of G-III's net sales. The Company will receive $3,000,000 over
the term of the agreement, as consideration for the grant of the
license, and also received 50,000 shares of its G-III's
unregistered stock, with a value of $297,000 at the date of
receipt. The cash and stock consideration will be amortized over
the entire term of the agreement as part of the royalty stream.
In addition, the Company recorded the shares as an "available for
sale" investment under SFAS 115, which is included in Deposits
and Sundry in the accompanying Consolidated Balance Sheet.
Note O - Related Party Transactions
In 2002, the Board of Directors authorized a $600,000
contribution payable to the Kenneth Cole Productions, Inc.
Foundation, which was paid in June 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 - New Accounting and Tax Developments
In December 2004, the Financial Accounting Standards Board
issued SFAS No. 123R ("SFAS 123R"), "Share-Based Payment". SFAS
123R requires the Company to measure compensation cost for all
share-based payments at fair value for interim and annual periods
beginning after June 15, 2005. The Company is currently
evaluating the requirements and impact of SFAS 123R on the
Company's consolidated financial statements.
In October 2004, Internal Revenue Code Section 965 was enacted
as part of the American Job Creation Act. This is a temporary
provision that allows U.S. companies to repatriate earnings from
their foreign subsidiaries at a reduced tax rate provided that
specified conditions and restrictions are satisfied. In
addition, FASB Staff Position FAS 109-2 was issued to provide
accounting and disclosure evidence relating to the repatriation
provision. The Company believes the range of reasonably possible
amounts of unremitted earnings that is being considered for
repatriation, as a result of this provision, is between $7 and
$12 million. The related reduction in income tax expense is
expected to be $1 to $2.5 million. The Company expects to adopt
this repatriation plan in the second half of 2005.
Note Q- Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 2004 and 2003 appear
below (in thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
2004
Net sales $113,351 $103,720 $132,929 $123,438
Licensing revenue 9,026 9,337 11,784 12,616
Net revenues 122,377 113,057 144,713 136,054
Gross profit 52,468 51,374 63,624 63,918
Operating income 11,676 10,992 19,280 14,469
Net income 7,393 7,027 12,158 9,274
Earnings per share basic $ 0.37 $ 0.35 $ 0.60 $ 0.46
Earnings per share diluted $ 0.36 $ 0.34 $ 0.59 $ 0.45
Dividends Declared $ 0.12 $ 0.12 $ 0.14 $ 0.14
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
Dividends Declared -- -- $ 0.075 $ 0.09
Note R- Subsequent Event
On February 23, 2005, the Board of Directors declared a
quarterly cash dividend of $.16 per share payable on March 25,
2005 to shareholders of record at the close of business on March
9, 2005.
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 4, 2005
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 4, 2005
Kenneth D. Cole and Chairman of the Board
/S/PAUL BLUM President and Director March 4, 2005
Paul Blum
/S/DAVID P. EDELMAN Chief Financial Officer March 4, 2005
David P. Edelman
/S/ROBERT C. GRAYSON Director March 4, 2005
Robert C. Grayson
/S/DENIS F. KELLY Director March 4, 2005
Denis F. Kelly
/S/PHILLIP B. MILLER Director March 4, 2005
Phillip B. Miller
Kenneth Cole Productions, Inc.
Schedule II
Valuation and Qualifying Accounts
For the Years Ended December 31, 2004, 2003, and 2002
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions of Period
Year ended December 31, 2004
Allowance for doubtful
accounts $ (475,000) $ (54,000) $ 227,000 $ (302,000)
Reserve for returns and sales
allowances $(9,425,000) 1,048,000 $(8,377,000)
------------ ---------- ----------- ------------
$(9,900,000) $ (54,000) $ 1,275,000 $(8,679,000)
============ ========== =========== ============
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)
============ ========== =========== ============
Kenneth Cole Productions,
Inc.
Affiliate Group Members location of
incorporation
Cole Amsterdam, Inc. Delaware
Cole Amsterdam, B.V. Amsterdam
Cole Aspen, Inc. Colorado
Cole Broadway, Inc. New York
Cole Cabazon, Inc. California
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 Garden State, Inc. Delaware
Cole Georgetown, Inc. District of Columbia
Cole Grand Central, Inc. Delaware
Cole Grant, Inc. Delaware
Cole Las Vegas, Inc. Delaware
Cole Michigan Avenue, Inc. Delaware
Cole New Orleans, Inc. Delaware
Cole Newbury, Inc. Massachusetts
Cole Northpark, Inc. Texas
Cole Oakbrook, Inc. Delaware
Cole Phipps, Inc. Georgia
Cole Pike, Inc. Delaware
Cole Reading Outlet, Inc. Pennsylvania
Cole Santa Monica, 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 Tyson, Inc. Virginia
Cole Waikele, Inc. New York
Cole Westchester, Inc. New York
K.C.P.L., Inc. Delaware
KCP Beneficiary Services,LLC Delaware
KCP Trust, LLC Delaware
Kenneth Cole Canada, Inc. Canada
Kenneth Cole Catalog, Inc. Virginia
Kenneth Cole Gilroy, Inc. California
Kenneth Cole Productions,(LIC), Inc. Bahamas
Kenneth Cole Productions, Inc. New York
Kenneth Cole Productions, LP Delaware
Kenneth Cole Services(NY), Inc. Delaware
Kenneth Cole Services, Inc. Delaware
Kenneth Cole Trading, Inc. Delaware
Kenneth Cole Woodbury, Inc. New York
Kenneth Cole, Inc. New Jersey
Kenneth Productions, Inc. Delaware
Kenth, Ltd. Hong Kong
Riviera Holding, LLC Delaware
South Side, LLC Delaware
Cole 57th. St., LLC Delaware
Exhibit 23.01
CONSENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
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,
Registration Statement (Form S-8 No. 33-
31868) pertaining to the Kenneth Cole
Productions, Inc. Employee Stock Purchase
Plan, and Registration Statement (Form S-8
No. 333-11901) pertaining to the Kenneth
Cole Productions, Inc. 2004 Stock Incentive
Plan of our reports dated February 23, 2005,
with respect to the consolidated financial
statements and schedule of Kenneth Cole
Productions, Inc., Kenneth Cole Productions,
Inc. management's assessment of the
effectiveness of internal control over
financial reporting, and the effectiveness of
internal control over financial reporting of
Kenneth Cole Productions, Inc., included in
the Annual Report (Form 10-K) for the year
ended December 31, 2004.
/s/ Ernst & Young LLP
New York, New York
March 3, 2005
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 of
Kenneth Cole Productions, Inc.;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial
statements, and other financial information
included in this 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 report;
4. The registrant's other certifying
officer and I are responsible for
establishing and maintaining disclosure
controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) 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. Designed such internal control over
financial reporting, or caused such internal
control over financial reporting to be
designed under our supervision, to provide
reasonable assurance regarding the
reliability of financial reporting and the
preparation of financial statements for
external purposes in accordance with
generally accepted accounting principles;
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 (the
registrant's fourth fiscal quarter in the
case of an annual report) 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
registrant's board of directors (or persons
performing the equivalent functions):
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 4, 2005
Exhibit 31.1
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, David P. Edelman, certify that:
5. I have reviewed this annual report of
Kenneth Cole Productions, Inc.;
6. Based on my knowledge, this 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
report;
7. Based on my knowledge, the financial
statements, and other financial information
included in this 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 report;
8. The registrant's other certifying
officer and I are responsible for
establishing and maintaining disclosure
controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
e. 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;
f. Designed such internal control over
financial reporting, or caused such internal
control over financial reporting to be
designed under our supervision, to provide
reasonable assurance regarding the
reliability of financial reporting and the
preparation of financial statements for
external purposes in accordance with
generally accepted accounting principles;
g. 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
h. 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 (the
registrant's fourth fiscal quarter in the
case of an annual report) 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
registrant's board of directors (or persons
performing the equivalent functions):
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/ David P. Edelman
------------------
David P. Edelman
Chief Financial Officer
Date: March 4, 2005
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, 2004 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 4, 2005
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, 2004 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/ David P. Edelman
David P. Edelman
Chief Financial Officer
Kenneth Cole Productions, Inc.
March 4, 2005