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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13082
KENNETH COLE PRODUCTIONS, INC.
(Exact name of registrant as specified in its charter)
New York 13-3131650
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
603 West 50th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 265-1500
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class April 26, 2005
Class A Common Stock ($.01 par value) 11,723,856
Class B Common Stock ($.01 par value) 8,055,497
Kenneth Cole Productions, Inc.
Index to 10-Q
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2005
and December 31, 2004 ........................................... 3
Condensed Consolidated Statements of Income for the three months
ended March 31, 2005 and 2004 ................................... 5
Condensed Consolidated Statement of Changes in Shareholders' Equity
for the three months ended March 31, 2005 ....................... 6
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2005 and 2004.................................... 7
Notes to Condensed Consolidated Financial Statements.............. 8
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures.................................. 22
Part II. OTHER INFORMATION
Item 1.Legal Proceedings......................................... 23
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3.Defaults Upon Senior Securities............................ 23
Item 4.Submission of Matters to a Vote of Security Holders........ 23
Item 5.Other Information.......................................... 23
Item 6.Exhibits................................................... 23
Signatures........................................................ 24
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2005 2004
Assets
Current assets:
Cash and cash equivalents $ 61,731,000 $ 80,014,000
Marketable securities 45,100,000 40,000,000
Due from factors 51,754,000 34,936,000
Accounts receivable, net 11,020,000 16,978,000
Inventories, net 50,089,000 47,166,000
Prepaid expenses and other current assets 2,616,000 2,664,000
Deferred taxes, net 3,136,000 3,136,000
----------- -----------
Total current assets 225,446,000 224,894,000
Property and equipment, at cost, less
accumulated depreciation and amortization 37,684,000 38,510,000
Other assets:
Deferred taxes, net 10,696,000 9,625,000
Deposits and sundry 8,654,000 8,826,000
Deferred compensation plan assets 25,399,000 22,732,000
---------- ----------
Total other assets 44,749,000 41,183,000
----------- -----------
Total assets $307,879,000 $304,587,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
March 31, December 31,
2005 2004
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 28,246,000 $ 35,767,000
Accrued expenses and other current liabilities 7,593,000 8,947,000
Deferred income 4,877,000 2,920,000
Income taxes payable 5,669,000 4,253,000
---------- ----------
Total current liabilities 46,385,000 51,887,000
---------- ----------
Accrued rent and other long-term liabilities 14,493,000 13,440,000
Deferred compensation plans liabilities 25,399,000 22,732,000
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; 15,099,689
and 15,054,845 issued as of March 31, 2005
and December 31, 2004, respectively 151,000 150,000
Class B Common Stock, par value $.01,
9,000,000 shares authorized; 8,055,497
issued and outstanding as of
March 31, 2005 and December 31, 2004 81,000 81,000
Additional paid-in capital 79,397,000 78,417,000
Accumulated other comprehensive income 817,000 1,053,000
Retained earnings 221,312,000 216,983,000
----------- -----------
301,758,000 296,684,000
Class A Common Stock in treasury, at cost,
3,388,400 shares as of March 31, 2005
and December 31, 2004 (80,156,000) (80,156,000)
------------ ------------
Total Shareholders' Equity 221,602,000 216,528,000
------------ ------------
Total Liabilities and Shareholders' Equity $307,879,000 $304,587,000
============ ============
See accompanying notes to condensed consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
2005 2004
Net sales $120,292,000 $113,351,000
Royalty revenue 9,606,000 9,026,000
----------- -----------
Net revenues 129,898,000 122,377,000
Cost of goods sold 73,732,000 69,909,000
----------- -----------
Gross profit 56,166,000 52,468,000
Selling, general and
administrative expenses 44,982,000 40,792,000
---------- ----------
Operating income 11,184,000 11,676,000
Interest and other
income, net 517,000 249,000
---------- ----------
Income before provision
for income taxes 11,701,000 11,925,000
Provision for income
taxes 4,212,000 4,532,000
---------- ------------
Net income $ 7,489,000 $ 7,393,000
============ ============
Earnings per share:
Basic $.38 $.37
Diluted $.37 $.36
Dividends declared per
Share $.16 $.12
Shares used to compute
earnings per share:
Basic 19,735,000 19,855,000
Diluted 20,185,000 20,610,000
See accompanying notes to condensed consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
Class A Class B
Common Stock Common Stock
Number Number
of shares Amount of shares Amount
Shareholders' equity
January 1, 2005 15,054,845 $150,000 8,055,497 $81,000
Net Income
Translation adjustment
foreign currency,
net of taxes of $9,000
Forward contracts,
net of taxes of ($163,000)
Unrealized gain on available
for sale security,
net of taxes of $22,000
Comprehensive Income
Exercise of stock options, and
related tax benefits of $167,000 42,394 1,000
Issuance of Class A Common Stock
for ESPP 2,450
Dividends paid on Common Stock
Class A and B
---------------------------------------------
Shareholders' equity
March 31,2005 15,099,689 $151,000 8,055,497 $81,000
=============================================
See accompanying notes to condensed consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
Accumulated
Additional Other
Paid-in Comprehensive Retained
Capital Income Earnings
Shareholders' equity
January 1, 2005 $78,417,000 $1,053,000 $216,983,000
Net Income 7,489,000
Translation adjustment
foreign currency,
net of taxes of $9,000 16,000
Forward contracts,
net of taxes of ($163,000) (290,000)
Unrealized gain on available
for sale security,
net of taxes of $22,000 38,000
Comprehensive Income
Exercise of stock options, and
related tax benefits of $167,000 921,000
Issuance of Class A Common Stock
for ESPP 59,000
Dividends paid on Common Stock
Class A and B (3,160,000)
-------------------------------------------
Shareholders' equity
March 31,2005 $79,397,000 $ 817,000 $221,312,000
===========================================
See accompanying notes to condensed consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
Treasury Stock
Number of
Shares Amount Total
Shareholders' equity
January 1, 2005 (3,388,400) $(80,156,000) $216,528,000
Net Income 7,489,000
Translation adjustment
foreign currency,
net of taxes of $9,000 16,000
Forward contracts,
net of taxes of ($163,000) (290,000)
Unrealized gain on available
for sale security,
net of taxes of $22,000 38,000
------------
Comprehensive Income 7,253,000
Exercise of stock options, and
related tax benefits of $167,000 922,000
Issuance of Class A Common Stock
for ESPP 59,000
Dividends paid on Common Stock
Class A and B (3,160,000)
---------------------------------------------
Shareholders' equity
March 31,2005 (3,388,400) $(80,156,000) $221,602,000
=============================================
See accompanying notes to condensed consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2005 2004
Cash flows from operating activities
Net income $ 7,489,000 $ 7,393,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 2,174,000 1,912,000
Unrealized gain on deferred compensation plans (544,000) (803,000)
Provision for doubtful accounts 34,000 50,000
Benefit for deferred taxes (1,071,000)
Tax benefit from stock options 167,000 730,000
Changes in operating assets and liabilities:
Increase in due from factors (16,818,000) (10,807,000)
Decrease in accounts receivable 5,924,000 131,000
Increase in inventories (3,213,000) (1,822,000)
Decrease (increase) in prepaid expenses and
other current assets 48,000 (132,000)
Increase in other assets (1,913,000) (1,358,000)
(Decrease) increase in accounts payable (7,521,000) 790,000
Increase (decrease) in deferred income,
accrued expenses and other current liabilities 564,000 (2,298,000)
Increase in income taxes payable 1,416,000 2,074,000
Increase in other long-term liabilities 3,720,000 2,242,000
---------------------------
Net cash used in operating activities (9,544,000) (1,898,000)
Cash flows from investing activities
Acquisition of property and equipment (1,348,000) (722,000)
Purchases of marketable securities (5,100,000)
--------------------------
Net cash used in investing activities (6,448,000) (722,000)
Cash flows from financing activities
Proceeds from exercise of stock options 755,000 1,931,000
Proceeds from employee stock purchase plan 59,000 59,000
Dividends paid to shareholders (3,160,000) (2,389,000)
---------------------------
Net cash used in financing activities (2,346,000) (399,000)
Effect of exchange rate changes on cash 55,000 (2,000)
---------------------------
Net decrease in cash (18,283,000) (3,021,000)
Cash, beginning of period 80,014,000 111,102,000
---------------------------
Cash, end of period $61,731,000 $108,081,000
============================
Supplemental disclosures of cash
flow information
Cash paid during the period for:
Interest $ 2,000 $ 1,000
Income taxes, net $ 3,700,000 $ 1,728,000
See accompanying notes to condensed consolidated financial statements.
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared by Kenneth Cole
Productions, Inc. (the "Company") in accordance with accounting
principles generally accepted in the United States for interim
financial information. Accordingly, they do not include all of
the information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements. Certain items contained in these financial
statements are based on estimates. In the opinion of the
Company's management, the accompanying unaudited condensed
consolidated financial statements reflect all significant
adjustments, consisting of only normal and recurring
adjustments, necessary for a fair presentation of the financial
position and results of operations and cash flows for the
periods presented. All significant intercompany transactions
have been eliminated.
Operating results for the three months ended March 31,
2005 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2005. These unaudited
condensed consolidated financial statements should be read in
conjunction with the financial statements and footnotes
included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2004.
The consolidated balance sheet at December 31, 2004, as
presented, was derived from the audited financial statements
included in the Company's Annual Report on Form 10-K for the
period ended December 31, 2004.
2. Stock-Based Compensation
The Company measures compensation expense for its
stock-based compensation plans using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and
related Interpretations. The Company has adopted disclosure
only provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123").
Pro forma disclosures, as required by Statement of
Financial Accounting Standard No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure," are computed
as if the Company recorded compensation expense based on the
fair value for stock-based awards or grants. The following pro
forma information includes the effects of the options discussed
above.
Three Months Ended
March 31,
2005 2004
Net Income, as reported $7,489,000 $7,393,000
Deduct: Stock-based
employee compensation
expense determined under
fair value method, net of
related tax effects (1,201,000) (736,000)
----------- -----------
Pro forma net income $6,288,000 $6,657,000
=========== ===========
Earnings per share:
Basic - as reported $ .38 $ .37
Basic - pro forma $ .32 $ .34
Diluted - as reported $ .37 $ .36
Diluted - pro forma $ .31 $ .32
3. 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
similary, except that it includes the dilutive effect of the
assumed exercise of securities under the Company's stock
incentive plans.
The following is an analysis of the differences between
basic and diluted earnings per common share:
Three Months Ended
March 31, March 31,
2005 2004
Weighted average common
shares outstanding 19,735,000 19,855,000
Effect of dilutive securities:
Stock options 450,000 755,000
---------- ----------
Weighted average common
shares outstanding and common
share equivalents 20,185,000 20,610,000
========== ==========
Stock options outstanding as of March 31, 2005 and 2004,
aggregating 914,292 and 30,500, respectively, have not been
included in the diluted per share calculations since their
effect would be antidilutive.
4. Comprehensive Income
Comprehensive income is comprised of net income, the effect
of foreign currency translation and changes in unrealized gains
and losses on forward exchange contracts and the available-for-
sale security. Comprehensive income for the three-month
periods ended March 31, 2005 and 2004 amounted to $7,253,000
and $6,786,000, respectively.
5. Derivative Instruments and Hedging Activities
In the normal course of business, the Company routinely
enters into forward contracts in anticipation of future
purchases of inventory denominated in Euros. 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 and are not held for the
purpose of trading or speculation. The Company has classified
these contracts as cash flow hedges in accordance with SFAS No.
133 "Accounting for Derivative Instruments and Hedge
Activities." The Company had outstanding forward contracts of
$17,000,000 at March 31, 2005 with maturity dates through
September 2005.
All terms and conditions of the Company's 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. As a result,
changes in the fair value of the contracts should be highly
effective in offsetting changes in the expected cash flows from
the forecasted transactions. No gains or losses related to
ineffectiveness of cash flow hedges were recognized in earnings
during the three months ended March 31, 2005. At March 31, 2005,
the notional amount of the Company's forward contracts was
$17,000,000, and resulted in an unrealized loss of approximately
$262,000 net of taxes, which was included in Other Comprehensive
Income in the Company's Condensed Consolidated Statement of
Changes in Shareholders' Equity and as a decrease to inventory,
the underlying exposure on the balance sheet. The Company
expects to reclassify all of the unrealized loss from Other
Comprehensive Income into earnings within the next six month
period due to the actual executions of foreign exchange contracts
to purchase merchandise and the ultimate sale of that
merchandise.
6. Segment Information
The Company has three reportable segments: Wholesale, Consumer
Direct and Licensing. The Company's reportable segments are
business units that offer different products and services or
similar products through different channels of distribution. The
Wholesale segment designs, sources and markets a broad range of
quality footwear and handbags for wholesale distribution. 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 earns royalties on licensee sales to third
parties of the Company's branded products and royalties on the
purchase and sale to foreign retailers or to consumers in foreign
countries. The Company maintains control over quality and image
and allows licensees to sell primarily to channels of
distribution the same as, similar to or otherwise consistent with
those of the Company's Wholesale segment. The Company evaluates
performance and allocates resources based on profit or loss
before income taxes 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 on royalties earned
and pretax segment profit. Intersegment sales between the
Wholesale and Consumer Direct segment include a markup, which is
eliminated in consolidation.
Financial information of the Commpany's reportable segments is as follows
(in thousands):
Three Months Ended
March 31, 2005
Consumer
Wholesale Direct Licensing Totals
Revenues from external customers $78,531 $41,761 $9,606 $129,898
Intersegment revenues 10,200 10,200
Segment income (1) 10,869 (1,670) 7,622 16,821
Segment assets 255,203 51,869 4,271 311,343
Three Month Ended
March 31, 2004
Consumer
Wholesale Direct Licensing Totals
Revenues from external customers $72,337 $41,014 $9,026 $122,377
Intersegment revenues 8,188 8,188
Segment income (1) 8,161 349 7,397 15,907
Segment assets 234,061 48,642 3,336 286,039
(1) Before elimination of intersegment profit, unallocated corporate
overhead and income taxes.
The reconciliation of the Company's reportable segment revenues, profit and
loss, and assets are as follows (in thousands):
Three Months Ended
March 31, 2005 March 31, 2004
Revenues
Revenues from external customers $129,898 $122,377
Intersegment revenues 10,200 8,188
Elimination of intersegment revenues (10,200) (8,188)
-------- --------
Total consolidated revenues $129,898 $122,377
========= =========
Income
Total profit for reportable segments $ 16,821 $ 15,907
Elimination of intersegment profit
and unallocated corporate overhead (5,120) (3,982)
-------- --------
Total income before income taxes $ 11,701 $ 11,925
========= =========
Assets
Total assets for reportable segments $311,343 $286,039
Elimination of intersegment inventory
profit (3,464) (2,273)
-------- --------
Total consolidated assets $307,879 $283,766
========= =========
Revenues from international customers were approximately 3.0% and 2.0% of the
Company's consolidated revenues for the three months ended March 31, 2005 and
2004, respectively.
7. Related Party
The Company has 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 $315,000 and $328,000
in royalty and advertising expense to Candies for the three months
ended March 31, 2005 and 2004, respectively.
8. Legal Proceedings
In 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. In 2005, a second purported class action was filed on
behalf of floor supervisors. In each lawsuit, the plaintiffs allege,
among other claims, that they worked hours for which they were
entitled to receive, but did not receive, overtime compensation under
California law. The lawsuits seek damages, penalties, restitution,
reclassification and attorneys' fees and costs. The Company denies
the allegations in each complaint and plans to defend the actions
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 such
litigation that it believes would have a material adverse effect on
its business operations.
9. Reclassifications
Certain amounts in the Company's previous financial statements
have been reclassified to conform to the 2005 presentation.
10. New Accounting Pronouncements
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. In April 2005, the
Securities and Exchange Commission deferred implementation of SFAS
123R for certain registrants to no later than the beginning of the
first fiscal year beginning after June 15, 2005. The Company is
currently evaluating the requirements and impact of SFAS 123R on the
Company's consolidated financial statements, and expects to
adopt the provisions of SFAS 123R on January 1, 2006.
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 million and $12 million. The
related reduction in income tax expense is expected to be $1 million
to $2.5 million. In addition, the Company's 2005 effective tax rate
will decrease due to this provision. The Company expects to adopt
this repatriation plan in the second half of 2005.
11. Subsequent Events
On April 7, 2005, the Company accelerated the vesting of 250,000
"out-of-the-money" stock options held by Kenneth D. Cole. These
options were originally granted on August 4, 2004 and would have
vested ratably in annual installments on the next three anniversaries
of the date of grant. The per share exercise price for these options
was $32.09, which was above the $30.34 fair market value of the
Company's Class A common stock on the date of acceleration. The
purpose of the acceleration is to eliminate future compensation
expense recognition the Company would otherwise be required to
recognize in the Income Statement with respect to these accelerated
options once SFAS 123R becomes effective in January 2006. The
estimated future expense recognition that will be eliminated is
approximately $2,115,000. This amount differs from the amount
previously reported in the Company's Form 8-K, dated April 7, 2005,
due to the deferral of SFAS 123R. The acceleration of options did
not trigger an expense for accounting purposes, as the stock options
had no intrinsic value at the date of acceleration.
On April 20, 2005, the board of directors declared a quarterly
cash dividend of $0.16 per share payable on June 16, 2005, which will
be paid to shareholders of record at the close of business on May 24,
2005.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements Disclosure
The statements contained in this report which are not historical
facts, including, without limitation, statements that relate to
future performance and/or statements regarding the Company's
anticipated results or level of business for 2005 or any other future
period, may be deemed to constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are based on current expectations only, and
actual future results might differ materially from those projected in
such statements due to a number of risks and uncertainties,
including, but not limited to, demand and competition for the
Company's products, the ability to enter into new licensee
agreements, to maintain and renew existing licensing agreements and
to open new stores, changes in consumer preferences or fashion
trends, events causing disruption in product shipment, change in
import regulations, dependence on certain large customers and changes
in the Company's relationships with vendors and other resources. The
forward-looking statements contained herein are also subject to other
risks and uncertainties that are described in the Company's reports
and registration statements filed with the Securities and Exchange
Commission. The Company undertakes no obligation to publicly update
or revise any forward-looking statement, whether as a result of new
information, future results or otherwise.
Update on Critical Accounting Policies
The Company's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the
United States, which require the Company to make estimates in the
application of its accounting policies based on the best assumptions,
judgments and opinions of management. For a summary of the Company's
significant accounting policies, see the Company's consolidated
financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 2004.
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, Unlisted, and Bongo
brand names. During the fiscal year ended December 31, 2004, the
Company introduced the Tribeca trademark brand for women's footwear.
In addition, the Company designs and sources footwear and handbags
for its customers under its customers' own trademarks. 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 online
e-commerce.
The popularity of the Kenneth Cole New York and Kenneth Cole
Reaction brand names among consumers has enabled the Company to
expand its product offerings and channels of distribution through
licensing agreements and allows it to offer through these agreements
a lifestyle collection of men's product categories such as 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
also licenses children's apparel.
The Company recorded net revenues of $129.9 million for the
three months ended March 31, 2005; a 6.1% increase over the
comparable period in the prior year, and diluted earnings per share
grew 2.8% to $0.37 from $0.36 over the first quarter of 2004. The
Company's balance sheet reflected $106.8 million in cash and
marketable securities, and had no debt as of March 31, 2005. The
Company continues to focus on designing and delivering high quality,
fashionable products, creating efficient and compelling retail
environments, and continuing close partnerships with its licensees to
ensure brand quality and distribution integrity.
Results of Operations
The following table sets forth the Company's condensed
consolidated statements of income in thousands of dollars and as a
percentage of net revenues for the three months ended March 31, 2005
and March 31, 2004.
Three Months Ended
March 31,
2005 2004
Net sales $120,292 92.6% $113,351 92.6%
Royalty revenue 9,606 7.4 9,026 7.4
Net Revenues 129,898 100.0 122,377 100.0
Gross profit (1) 56,166 43.2 52,468 42.9
Selling, general &
administrative expenses 44,982 34.6 40,792 33.3
Operating income 11,184 8.6 11,676 9.6
Interest and other income, net 517 0.4 249 0.1
Income before income taxes 11,701 9.0 11,925 9.7
Income tax expense 4,212 3.2 4,532 3.7
Net income $ 7,489 5.8 $ 7,393 6.0
(1) Gross Profit may not be comparable to other entities, since some
entities include the costs related to their distribution network in
cost of goods sold and others 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.
Three Months Ended March 31, 2005 Compared to Three Months Ended
March 31, 2004
REVENUES: Consolidated net revenues increased $7.5 million, or 6.1%,
to $129.9 million for the three months ended March 31, 2005 from
$122.4 million for the three months ended March 31, 2004. The
increase in revenues occurred in all of the Company's segments:
Wholesale, Consumer Direct and Licensing as further described below,
in the sections entitled "Net Sales" and "Licensing Revenue."
NET SALES: Wholesale net sales (excluding sales to the Company's
Consumer Direct business segment) increased $6.2 million, or 8.6%, to
$78.5 million, for the three months ended March 31, 2005 from $72.3
million for the three months ended March 31, 2004. This increase is
primarily attributable to increased sales of the Company's Kenneth
Cole Reaction branded footwear, and increased sales in the handbag
businesses in excess of 40%. Sales increases were partially offset
by declines in the Company's volume businesses and Kenneth Cole New
York footwear.
Net sales in the Company's Consumer Direct segment increased $0.8
million, or 1.8%, to $41.8 million for the three months ended March
31, 2005 from $41.0 million for the three months ended March 31,
2004. The increase in net sales is due primarily to increases in
sales from the Company's Catalog and Internet operations and its Gift
Program. New stores opened in 2005 and that portion of 2005 sales for
stores not open for all of 2004 increased by $1.7 million, and was
offset by a decrease in comparable store sales of $2.2 million or
5.8%.
LICENSING REVENUE: Royalty revenue increased 6.4% to $9.6 million
for the three months ended March 31 2005 from $9.0 million for the
three months ended March 31, 2004. The growth in licensing revenues
was primarily driven by incremental minimum royalties from existing
licensee product categories.
GROSS PROFIT: Consolidated gross profit, as a percentage of net
revenues, increased to 43.2% for the three months ended March 31,
2005 from 42.9% for the three months ended March 31, 2004. This was
primarily a result of an increase in margin in the Wholesale segment,
offset by a decrease in Consumer Direct margin. The increase in
gross profit from the Wholesale segment resulted from changes in
sourcing and better sell-thrus at retail. In addition, changes in
the mix of the Company's revenues from its Wholesale and Consumer
Direct segments also affected consolidated gross margins. Although
the Consumer Direct segment operates at a higher gross profit level
than the Wholesale segment, its revenue as a percentage of net
revenue decreased to 32.1% for the three months ended March 31, 2005
from 33.5% for the three months ended March 31, 2004. Revenues from
the Wholesale segment as a percentage of net revenue increased to
60.5% for the three months ended March 31, 2005 from 59.1% for the
three months ended March 31, 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses, including warehousing and receiving,
increased 10.3% to $44.9 million (or 34.6% of net revenues) for the
three months ended March 31, 2005 from $40.8 million (or 33.3% of net
revenues) for the three months ended March 31, 2004. Expenses, as a
percentage of net revenues, increased primarily due to investments in
people and systems and the Company's loss of leverage on its
comparable stores' sales base.
INTEREST AND OTHER INCOME: Interest and other income increased to
$0.5 million for the three months ended March 31, 2005 from $0.3
million for the three months ended March 31, 2004. The increase is
due to a higher average rate of return on the Company's investments.
INCOME TAXES: The Company's effective tax rate has decreased to 36%
for the three months ended March 31, 2005 from 38% for the three
months ended March 31, 2004 as a result of a temporary provision that
allows U.S. companies to repatriate earnings from their foreign
subsidiaries at a reduced tax rate. (See "New Accounting and Tax
Developments.")
NET INCOME: As a result of the foregoing, net income increased 1.3%
for the three months ended March 31, 2005 to $7.5 million (5.8% of
net revenues) from $7.4 million (6.0% of net revenues) for the three
months ended March 31, 2004.
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. In April
2005, the Securities and Exchange Commission deferred implementation
of SFAS 123R for certain registrants to no later than the beginning
of the first fiscal year beginning after June 15, 2005. The Company
is currently evaluating the requirements and impact of SFAS 123R on
the Company's consolidated financial statements, and expects to adopt
the provisions of SFAS 123R on January 1, 2006.
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 million and $12 million. The
related reduction in income tax expense is expected to be $1 million
to $2.5 million. In addition, the Company's 2005 effective tax rate
will decrease due to this provision. The Company expects to adopt
this repatriation plan in the second half of 2005.
Liquidity and Capital Resources
The Company uses cash from operations as the primary source of
financing for its expansion and seasonal requirements. Cash
requirements vary from time to time as a result of the timing of the
receipt of merchandise from suppliers, the delivery by the Company of
merchandise to its customers, and the level of accounts receivable
and due from factors balances. At March 31, 2005 and December 31,
2004 working capital was $179.1 million and $173.0 million,
respectively.
Cash used in operating activities was $9.5 million for the three
months ended March 31, 2005, compared to $1.9 million used in
operating activities for the three months ended March 31, 2004. The
increase in cash flows used in operations is primarily attributable
to seasonal working capital requirements, including an increase in
the Company's due from factor and inventory balances, and the timing
of payables.
Net cash used in investing activities increased $5.7 million to
$6.4 million for the three months ended March 31, 2005 from $0.7
million for the three months ended March 31, 2004. Investing
activities for the three months ended March 31, 2005 and 2004 were
primarily for capital expenditures and marketable securities.
Capital expenditures for new retail store openings and expansions
were approximately $0.9 million and $0.5 million for the three months
ended March 31, 2005 and March 31, 2004, respectively. The remaining
expenditures were used primarily for information technology and
office build-out and renovations. In addition, $5.1 million was used
to purchase marketable securities during the three months ended March
31, 2005.
Net cash used in financing activities was $2.3 million for the
three months ended March 31, 2005 compared to $0.4 million used in
financing activities for the three months ended March 31, 2004.
During the three months ended March 31, 2005, the Company declared
and paid quarterly cash dividends of approximately $3.2 million to
common stock shareholders compared to $2.4 million of dividends
declared and paid during the three months ended March 31, 2004. This
was primarily offset by proceeds from the exercise of stock options
of $0.8 million during the three months ended March 31, 2005 compared
to $1.9 million of proceeds from excercises during the three months
ended March 31, 2004.
The Company's material obligations under contractual agreements,
primarily commitments for future payments under operating lease
agreements as of March 31, 2005, are summarized as follows:
Payments Due by Period
Total 1 year or 2-3 years 4-5 years After 5
less years
Operating leases
and other
obligations $203,932,000 $26,005,000 $73,377,000 $21,727,000 $82,823,000
Purchase
obligations 50,361,000 50,361,000
--------------------------------------------------------------
Total
Contractual
Obligations $254,293,000 $76,366,000 $73,377,000 $21,727,000 $82,823,000
==============================================================
The Company utilizes forward contracts to hedge its cost on
future purchases of inventory in Euros. These forward contracts are
used to hedge against the Company's exposure to changes in the Euro
exchange rates to protect the purchase price of merchandise under
such commitments and are not held for the purpose of trading or
speculation. At March 31, 2005, the Company had forward contracts
totaling $17 million in notional value with an unrealized loss of
$262,000, net of taxes.
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, with 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 currently has a line of credit, which allows for
borrowings and letters of credit up to a maximum of $25 million to
finance working capital requirements. The Company has no outstanding
advances under this line of credit; however, amounts available under
the line of credit were reduced by $6.7 million in standby letters of
credit and $0.1 million in open letters of credit to $18.2 million at
March 31, 2005.
The Company believes that it will be able to satisfy its cash
requirements for the next year, including requirements for its retail
expansion and renovations, office build-out of its corporate
headquarters, the purchase of the New York City corporate
headquarters, dividend payments, and enhancements to its information
systems, primarily with cash flow from operations and current cash
levels.
The foregoing commentary should be considered to fall
within the coverage of the "Safe Harbor Statement" under the Private
Securities Litigation reform Act of 1995 included in this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not believe it has a material exposure to
market risk. The Company is primarily exposed to currency exchange
rate risks with respect to its inventory transactions denominated in
Euros. Business activities in various currencies expose the Company
to the risk that the eventual net dollar cash flows from transactions
with foreign suppliers denominated in foreign currencies may be
adversely affected by changes in currency rates. The Company manages
these risks by utilizing forward contracts to hedge its cost on
future purchases. The Company does not enter into foreign currency
transactions for speculative purposes. At March 31, 2005, the
Company had forward contracts totaling $17 million in notional value
with an unrealized loss of $262,000 net of taxes. The Company's
earnings may also be affected by changes in short-term interest rates
as a result of borrowings under its line of credit facility. At the
Company's borrowing levels, a two percent increase in interest rates
affecting the Company's credit facility would not have a material
effect on the Company's year-to-date earnings.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
The Company's Chief Executive Officer and Chief Financial
Officer have evaluated the effectiveness of the Company's "disclosure
controls and procedures" (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 2004, as amended) as of the end of
the period covered by this quarterly report, 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.
Changes in internal control over financial reporting
There were no changes in the Company's internal controls over
financial reporting during the period covered by this report that
have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
In 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. In 2005, a second purported class action was filed on
behalf of floor supervisors. In each case, the plaintiffs allege,
among other claims, that they worked hours for which they were
entitled to receive, but did not receive, overtime compensation under
California law. The lawsuits seek damages, penalties, restitution,
reclassification and attorneys' fees and costs. The Company denies
the allegations in each complaint and plans to defend the actions
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 such
litigation that it believes would have a material adverse effect on
its business operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits.
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Kenneth Cole Productions, Inc.
Registrant
April 29, 2005 /s/ DAVID P. EDELMAN
David P. Edelman
Chief Financial Officer
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Kenneth D. Cole, certify that:
1. I have reviewed this quarterly report on Form 10-Q being filed by
Kenneth Cole Productions, Inc.;
2. Based on my knowledge, the report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by the report;
3. Based on my knowledge, the financial statements, and other
financial information included in the report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
the report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act
Rules 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 quarterly 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 that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
(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: April 29, 2005
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, David P. Edelman, certify that:
1. I have reviewed this quarterly report on Form 10-Q being filed by
Kenneth Cole Productions, Inc.;
2. Based on my knowledge, the report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by the report;
3. Based on my knowledge, the financial statements, and other
financial information included in the report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
the report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act
Rules 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 quarterly 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 that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
(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: April 29, 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 Quarterly Report of Kenneth Cole Productions,
Inc. (the "Company") on Form 10-Q for the period ending March 31,
2005 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.
April 29, 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 Quarterly Report of Kenneth Cole Productions,
Inc. (the "Company") on Form 10-Q for the period ending March 31,
2005 as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, David P. Edelman, 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.
April 29, 2005