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EX-31.2 - EX-31.2 - COLE KENNETH PRODUCTIONS INCd28028_ex31-2.htm
EX-32.1 - EX-32.1 - COLE KENNETH PRODUCTIONS INCd28028_ex32-1.htm
EX-31.1 - EX-31.1 - COLE KENNETH PRODUCTIONS INCd28028_ex31-1.htm
EX-32.2 - EX-32.2 - COLE KENNETH PRODUCTIONS INCd28028_ex32-2.htm



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, 2011

or

( ) 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
incorporation or organization)
    (I.R.S. Employer
Identification No.)
 

           
  603 West 50th Street, New York, NY     10019  
  (Address of principal executive offices)     (Zip Code)  

(212) 265-1500
(Registrant's telephone number, including area code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ( ) No ( )

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ( ) Accelerated filer (X) Non-accelerated filer () (Do not check if a smaller reporting company) Smaller reporting company ( ).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X)

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

           
  Class     May 4, 2011  
  Class A Common Stock ($.01 par value)     10,258,858  
  Class B Common Stock ($.01 par value)     8,010,497  


Kenneth Cole Productions, Inc.
Index to Form 10-Q

                 
  Part I.     FINANCIAL INFORMATION        
                 
  Item 1.     Financial Statements (Unaudited)        
                 
        Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010     3  
                 
        Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010     5  
                 
        Condensed Consolidated Statement of Changes in Shareholders' Equity for the three months ended March 31, 2011     6  
                 
        Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010     7  
        Notes to Condensed Consolidated Financial Statements     8  
  Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations     15  
                 
  Item 3.     Quantitative and Qualitative Disclosures about Market Risk     18  
                 
  Item 4.     Controls and Procedures     19  
                 
                 
  Part II.     OTHER INFORMATION        
                 
  Item 1.     Legal Proceedings     19  
                 
  Item 1A.     Risk Factors     19  
                 
  Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds     19  
                 
  Item 3.     Defaults Upon Senior Securities     19  
                 
  Item 5.     Other Information     19  
                 
  Item 6.     Exhibits     19  
                 
        Signatures     20  

2


Part I. FINANCIAL INFORMATION
Item 1. Financial Statements

Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)

                 
        March 31,
2011
    December 31,
2010
 
  Assets              
  Current assets:              
  Cash and cash equivalents   $ 39,286   $ 83,395  
  Restricted cash     15,000     --  
  Accounts receivable, net     61,654     35,779  
  Inventories     42,354     36,539  
  Prepaid expenses and other current assets     3,283     4,305  
  Total current assets     161,577     160,018  
                 
  Property and equipment, at cost, less accumulated
depreciation and amortization
    47,621     48,862  
                 
  Other assets:              
  Intangible assets, net     7,223     7,317  
  Deferred taxes, net     365     528  
  Investments and other     4,848     4,808  
  Deferred compensation plans' assets     42,397     41,436  
  Total other assets     54,833     54,089  
                 
  Total Assets   $ 264,031   $ 262,969  
                 

See accompanying notes to condensed consolidated financial statements.

3


Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(In thousands, except share and per share amounts)
(Unaudited)

                 
        March 31,
2011
    December 31,
2010
 
  Liabilities and Shareholders' Equity              
  Current liabilities:              
  Accounts payable and accrued expenses   $ 65,538   $ 43,608  
  Other current liabilities     9,742     13,055  
  Deferred income     3,997     3,069  
  Total current liabilities     79,277     59,732  
                 
  Accrued rent and other long-term liabilities     12,074     15,872  
  Deferred compensation plans' liabilities     41,351     40,630  
                 
  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, 40,000,000 shares authorized; 16,096,388 and 16,070,348 issued as of March 31, 2011 and December 31, 2010, respectively     161     160  
  Class B Convertible Common Stock, par value $.01, 9,000,000 shares authorized; 8,010,497 issued and outstanding as of March 31, 2011 and December 31, 2010, respectively     80     80  
  Additional paid-in capital     112,336     110,847  
  Accumulated other comprehensive loss     (284 )   (592 )
  Retained earnings     143,957     161,161  
        256,250     271,656  
  Class A Common Stock in treasury, at cost, 5,855,550 shares as of March 31, 2011 and December 31, 2010, respectively     (124,921 )   (124,921 )
  Total shareholders' equity     131,329     146,735  
                 
  Total Liabilities and Shareholders' Equity   $ 264,031   $ 262,969  
                 

See accompanying notes to condensed consolidated financial statements.

4


Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)

                 
        Three Months Ended
March 31,
 
        2011     2010  
                 
  Net sales   $ 107,696   $ 99,393  
  Royalty revenue     9,777     10,119  
  Net revenues     117,473     109,512  
  Cost of goods sold     75,802     63,962  
  Gross profit     41,671     45,550  
                 
  Selling, general and administrative expenses     46,305     44,580  
  Store closing and severance costs     12,482     --  
  Operating (loss)/income     (17,116 )   970  
  Interest and other income, net     47     967  
  Impairment of investments     --     (20 )
  (Loss)/income before provision for income taxes     (17,069 )   1,917  
  Provision for income taxes     133     85  
  Net (loss)/income   $ (17,202 ) $ 1,832  
                 
  (Loss)/earnings per share:              
  Basic   $ (0.94 ) $ 0.10  
  Diluted   $ (0.94 ) $ 0.10  
                 
  Shares used to compute (loss)/earnings per share:              
  Basic     18,239,000     18,092,000  
  Diluted     18,239,000     18,484,000  
                 
                 

See accompanying notes to condensed consolidated financial statements.

5


Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Shareholders' Equity
(In thousands, except share amounts)
(Unaudited)

  

                                                                 
        Class A
Common Stock
    Class B
Common Stock
    Additional     Accumulated
Other
          Treasury Stock        
        Number
of shares
    Amount     Number
of shares
    Amount     Paid-in
Capital
    Comprehensive
Loss
    Retained
Earnings
    Number of
Shares
    Amount     Total  
  Shareholders' equity
December 31, 2010
    16,070,348   $ 160     8,010,497   $ 80   $ 110,847   $ (592 ) $ 161,161     (5,855,550 ) $ (124,921 ) $ 146,735  
  Net loss                                         (17,202 )               (17,202 )
  Translation adjustment for foreign currency                                   278                       278  
  Unrealized gain on available-for-sale securities                                   30                       30  
  Comprehensive loss                                                           (16,894 )
  Stock-based compensation expense                             1,311                             1,311  
  Exercise of stock options and related tax benefits     19,871     1                 187                             188  
  Issuance of restricted stock     6,368                                                        
  Shares surrendered by employees to pay taxes on restricted stock     (2,657 )                     (35 )                           (35 )
  Issuance of Class A Common Stock for Employee Stock Purchase Plan     2,458                       26                             26  
  Dividends associated with vesting of restricted stock                                         (2 )               (2 )
  Shareholders' equity
March 31, 2011
    16,096,388   $ 161     8,010,497   $ 80   $ 112,336   $ (284 ) $ 143,957     (5,855,550 ) $ (124,921 ) $ 131,329  

See accompanying notes to condensed consolidated financial statements.

6


Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

                 
        Three Months Ended
March 31,
 
        2011     2010  
  Cash flows used in operating activities              
  Net (loss)/income   $ (17,202 ) $ 1,832  
  Adjustments to reconcile net (loss)/income to net cash              
  used in operating activities:              
  Depreciation and amortization     2,509     2,172  
  Provision for doubtful accounts     87     (43 )
  Benefit from deferred taxes     (16 )   (337 )
  Unrealized (gain)/loss from investments     (30 )   101  
  Writedown of investments     --     2  
  Stock-based compensation expense     1,357     1,134  
  Tax benefit from stock option exercises and restricted stock vested     (61 )   (19 )
  Changes in operating assets and liabilities:              
  Increase in accounts receivable     (25,962 )   (13,363 )
  Increase in inventories     (5,815 )   (6,166 )
  Decrease in prepaid expenses and other current assets     1,022     4,634  
  Increase in other assets     (1,022 )   (1,043 )
  Increase in accounts payable and accrued expenses     21,884     4,628  
  (Decrease)/increase in deferred income and other current liabilities     (1,922 )   3,094  
  (Decrease)/increase in other long-term liabilities     (3,077 )   286  
  Net cash used in operating activities     (28,248 )   (3,088 )
  Cash flows (used in)/provided by investing activities              
  Acquisition of property and equipment     (1,032 )   (129 )
  Deposit in restricted cash account     (15,000 )   --  
  Proceeds from sale of investments     --     1,055  
  Purchase of intangible assets     --     (88 )
  Net cash (used in)/provided by investing activities     (16,032 )   838  
  Cash flows provided by financing activities              
  Shares surrendered by employees to pay taxes on restricted stock     (35 )   (22 )
  Proceeds from exercise of stock options     188     --  
  Proceeds from employee stock purchase plan     26     31  
  Dividends associated with vesting of restricted stock     (2 )   (1 )
  Net cash provided by financing activities     177     8  
  Effect of exchange rate changes on cash     (6 )   39  
  Net decrease in cash     (44,109 )   (2,203 )
  Cash and cash equivalents, beginning of period     83,395     68,505  
  Cash and cash equivalents, end of period   $ 39,286   $ 66,302  
  Supplemental disclosures of cash flow information              
  Cash paid during the period for:              
  Interest   $ 18   $ 5  
  Income taxes paid/(refunded), net   $ 141   $ (4,012 )

See accompanying notes to condensed consolidated financial statements.

7


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. and its subsidiaries (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, results of operations and cash flows for the periods presented. All intercompany transactions have been eliminated.

Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. 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, 2010.

The Company's Consolidated Balance Sheet at December 31, 2010, as presented, was derived from the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

2. Restricted Cash

The Company terminated its Asset-Based Lending Facility ("ABL") effective March 31, 2011. Given its current cash position, barring extraordinary developments the Company does not anticipate any need for borrowing before December 31, 2011 when the ABL would have expired by its terms. The Company expects to enter into a less expensive long-term credit facility in the near future. Since the ABL had provided a letter of credit arrangement, as a result of its termination, the Company deposited $15.0 million into a restricted cash account as collateral for a comparable amount of irrevocable standby and open commercial letters of credit outstanding. As of March 31, 2011, the Company had $3.0 million of standby and open letters of credit outstanding.

3. Stock-Based Compensation

The Company has stock-based compensation plans under which directors, officers and other eligible employees receive stock options, restricted stock, and other equity-based awards.

Stock options are granted with an exercise price equal to the market value of a share of the Company's common stock on the date of grant. Stock option grants expire within 10 years and generally vest on a graded basis within two to four years from the date of grant. Restricted stock unit awards generally vest on a graded basis over a two to three year period or cliff vest after one or three years. During the three months ended March 31, 2011 and 2010, the Company granted 20,000 and 6,000 stock options, respectively. The Company granted 18,393 shares of restricted stock during the three months ended March 31, 2011. The Company did not grant shares of restricted stock during the three months ended March 31, 2010. Stock options outstanding and unvested restricted stock amounted to 2,940,333 and 205,546 shares, respectively, as of March 31, 2011.

8


Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

3. Stock-Based Compensation (continued)

The following table summarizes the components of stock-based compensation expense for the three months ended March 31, 2011 and 2010, which is recorded in Selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations (dollars in thousands):

                 
        Three months ended
March 31,
 
        2011     2010  
  Stock options   $ 963   $ 353  
  Restricted stock units and employee stock purchase plan     394     781  
  Total stock-based compensation expense   $ 1,357   $ 1,134  

The fair value of stock options was estimated using the Black-Scholes option-pricing model. The following table summarizes the weighted-average assumptions used to compute the fair value of stock option grants for the three months ended March 31, 2011 and 2010:

                 
        Three months ended
March 31,
 
        2011     2010  
  Weighted-average volatility     61.6%     64.2%  
  Risk-free interest rate     3.5%     3.7%  
  Weighted-average dividend yield     0%     0%  
  Expected term     3 to 5 years     3 years  

The fair value of restricted stock was calculated by multiplying the market value of a share of the Company's common stock on the date of grant by the number of shares granted and is amortized on a straight-line basis over the vesting periods.

As of March 31, 2011, approximately $3.6 million of unrecognized stock compensation expense related to unvested stock options and restricted stock awards, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 1.8 years, compared to approximately $4.7 million of unrecognized stock compensation expense to be recognized over a weighted average period of 2.0 years as of March 31, 2010.

9


Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

4. (Loss)/earnings Per Share

Basic (loss)/earnings per share is calculated by dividing net (loss)/income by weighted-average common shares outstanding. Diluted (loss)/earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of equity based awards under the Company's stock incentive plans. Dilutive securities, which include stock options and restricted stock, 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. All stock options and restricted stock outstanding as of March 31, 2011 have been excluded from the diluted per share calculation as the impact would be antidilutive. Stock options and restricted stock outstanding for the three months ended March 31, 2010 in an aggregate amount of 2,105,000 have been excluded from the diluted per share calculation as the impact would be antidilutive. The shares used to calculate basic and diluted (loss)/earnings per share consists of the following:

                             
              Three months ended
March 31,
       
              2011     2010        
        Weighted-average common shares outstanding     18,239,000     18,092,000        
        Effect of dilutive securities:                    
        Restricted stock and employee stock purchase plan     --     219,000        
        Stock options     --     173,000        
        Weighted-average common shares outstanding and common share equivalents     18,239,000     18,484,000        

5. Investments

The Company reviews its investments for other-than-temporary impairment whenever the fair value of an investment is less than carrying value and evidence indicates that an investment's carrying value may not be recoverable within a reasonable period of time.  In the Company's evaluation of its investments it also considers its ability and intent to hold the investment until the market price recovers, the reasons for the decline in fair value, the duration of the decline in fair value and expected future performance.  Based on this evaluation, no charge for an other-than-temporary impairment of investments was required for the three months ended March 31, 2011.

10


Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

5. Investments (continued)

The following table presents gross unrealized gains on, and estimated fair value of, the Company's long-term investments as of March 31, 2011 and December 31, 2010 (in thousands):

                                         
                       
                    March 31, 2011  
        Historical     (1)     Estimated     Other than Temporary     Gross Unrealized  
        Cost     Cost Basis     Fair Value     Impairment     Gains     Losses  
  Auction-rate securities   $ 6,100   $ 2,424   $ 2,546     --   $ 122     --  
                       
                    December 31, 2010  
        Historical Cost     (1)
Cost Basis
    Estimated Fair Value     Other than Temporary Impairment     Gross Unrealized  
        Gains     Losses  
  Auction-rate securities   $ 6,100   $ 2,424   $ 2,516     --   $ 92     --  

(1) The cost basis is historical cost less other-than-temporary impairment charged to income.

The Company had $1.5 million of non-credit other-than-temporary impairments for auction-rate securities recorded in Accumulated other comprehensive loss at March 31, 2011.

6. Fair Value Measurement

The Company's financial assets, measured at fair value on a recurring basis, were as follows (in thousands):

                       
        Fair Value at
March 31, 2011
    Fair Value at
December 31, 2010
    Hierarchy  
  Deferred compensation plans' assets   $ 37,321     36,473     Level 2  
  Auction-rate securities   $ 2,546     2,516     Level 3  

A Level 1 hierarchy represents a fair value that is derived from unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. A Level 2 hierarchy represents a fair value that is derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The deferred compensation plans' assets are primarily comprised of interests in limited partnerships that invest in a variety of assets including publicly traded equity securities, debt securities and privately-held companies. The general partners that manage the limited partnerships determine the fair value of the plan's investment by determining the net asset valuation in accordance with applicable accounting standards. Certain of these investments have short-term lockup provisions and redemption restrictions which require advance notice for redemption. Management does not believe that these short-term lockup provisions and redemption restrictions affect the plan's ability to transact redemptions at the net asset value. A Level 3 hierarchy represents a fair value that is derived from inputs that are unobservable or from observable inputs based on unobservable data in an inactive market. The fair value of the Company's auction-rate securities is determined from an independent third-party valuation. The primary variables used in determining fair value include collateral, rating, insurance, credit risk and downgrade risk of the security. Maturity dates for these auction-rate securities range from 2033 to 2050.

11


Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

6. Fair Value Measurement (continued)

The following table presents the reconciliation of the beginning and ending fair value measurements of the Company's Level 3 assets, auction-rate securities, measured at fair value using observable inputs based on unobservable data in an inactive market for the three months ended March 31, 2011 and 2010 (in thousands):

                       
        March 31, 2011     March 31, 2010        
  Beginning balance   $ 2,516   $ 3,529        
  Unrealized gain/(loss) recorded in Accumulated other comprehensive loss     30     (93 )      
  Impairment charge recorded in Accumulated other comprehensive loss     --     (8 )      
  Impairment charge included in Statement of Operations     --     (2 )      
  Ending balance   $ 2,546   $ 3,426        

Based on the Company's review of its investments, no charge for an other-than-temporary impairment of investments was required for the three months ended March 31, 2011. The Company recorded a $20,000 impairment charge on its auction-rate securities within Impairment of investments in the Condensed Consolidated Statement of Operations during the three months ended March 31, 2010.

7. Comprehensive (Loss)/income

Comprehensive (loss)/income is comprised of net (loss)/income, the effect of foreign currency translation and changes in unrealized gains and losses on available-for-sale securities. Comprehensive loss for the three months ended March 31, 2011 amounted to $16.9 million. Comprehensive income for the three months ended March 31, 2010 amounted to $0.6 million.

8. Segment Information

The Company designs and sources a broad range of fashion footwear, handbags, accessories, and apparel and has three reportable segments: Wholesale, Consumer Direct and Licensing. The Wholesale segment markets footwear, handbags and men's apparel products for sale to approximately 5,200 domestic department and specialty store locations, the Company's Consumer Direct segment and international retailers. 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-priced retail stores, Company Stores ("outlets") and its e-commerce website (at website address www.kennethcole.com). The Licensing segment, through third-party licensee agreements, has evolved the Company from primarily a footwear resource to a diverse global lifestyle brand competing effectively in approximately 30 apparel and accessories categories for men, women and children. The Company maintains control over quality, brand image and distribution of the licensees' products. The segment consists primarily of royalties earned on domestic and international licensee sales to third parties of products bearing the Company's trademarks and trade names.

The Company's reportable segments are business units that offer products to overlapping consumers through different channels of distribution. Each segment is managed separately, while results across segments are reviewed by the executive management committee. The Company evaluates performance of each of its segments and allocates resources

12


Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

8. Segment Information (continued)

based on profit or loss before store closing and severance costs, stock-based compensation expense, writedown of available-for-sale securities, impairment of intangible and long-lived assets, unallocated corporate overhead and income taxes for each segment.

Financial information of the Company's reportable segments is as follows (in thousands):

                             
           
        Three Months Ended  
        March 31, 2011  
              Consumer              
        Wholesale     Direct     Licensing     Totals  
  Net revenues   $ 74,508   $ 33,188   $ 9,777   $ 117,473  
  Segment (loss)/income (1) (2)     (420 )   (9,020 )   7,846     (1,594 )
  Segment assets (3)     209,507     46,286     8,238     264,031  

                             
           
        Three Months Ended  
        March 31, 2010  
              Consumer              
        Wholesale     Direct     Licensing     Totals  
  Net revenues   $ 62,435   $ 36,958   $ 10,119   $ 109,512  
  Segment income/(loss) (1) (2)     2,152     (5,056 )   7,812     4,908  
  Segment assets (3)     170,802     48,059     39,158     258,019  
                                         
   _________________  
  (1 )   Excludes store closing and severance costs, stock-based compensation expense, writedown of available-for-sale securities, impairment of intangible and long-lived assets, unallocated corporate overhead and income taxes.  
  (2 )   The Wholesale segment includes primarily all of the Company's allocated corporate overhead.  
  (3 )   The Wholesale segment includes corporate assets.  

The reconciliation of the Company's reportable segment (loss)/income is as follows (in thousands):

                             
        Three Months Ended  
        March 31, 2011     March 31, 2010  
                 
  (Loss)/Income              
  Total (loss)/income for reportable segments (1)   $ (1,594 ) $ 4,908  
  Adjustment for store closing and severance costs, stock-based compensation expense, writedown of available-for-sale securities, impairment of intangible and long-lived assets and unallocated corporate overhead     (15,475 )   (2,991 )
  Total (loss)/income before provision for income taxes   $ (17,069 ) $ 1,917  
                                         
   _________________  
  (1 )   Excludes store closing and severance costs, stock-based compensation expense, writedown of available-for-sale securities, impairment of intangible and long-lived assets unallocated corporate overhead and income taxes.  

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Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

8. Segment Information (continued)

Revenues from international customers were approximately 8.9% and 7.3% of the Company's consolidated net revenues for the three months ended March 31, 2011 and 2010, respectively.

9. Income Taxes

The Company's effective tax rate consists of primarily of state, local and foreign jurisdiction taxes as the Company remains substantially in a fully valued deferred tax position for federal income tax purposes and is in a loss position for the three months ended March 31, 2011.

10. Commitments and Contingencies

During the three months ended March 31, 2011, the Company recorded $12.5 million of net expenses comprised of $7.0 million of net store closing costs and $5.5 million of severance costs for certain executives. The expenses are included within Store closing and severance costs in the Condensed Consolidated Statement of Operations. During the three months ended March 31, 2011 the Company paid all amounts related to the store closing costs. As of March 31, 2011, the Company had accrued severance costs of $4.1 million which are expected to be paid through the third quarter of 2012.

As of March 31, 2011 the Company had accrued store closing costs of $1.5 million related to 2010 store closings which are expected to be paid through the third quarter of 2013.

11. Related Party Transaction

The Company recorded expenses of approximately $0.3 million and $0.1 million for the three months ended March 31, 2011 and 2010, respectively, to a third-party aviation company which hires and uses an aircraft partially owned by Emack LLC, a company which is wholly owned by the Company's Chairman, Interim Chief Executive Officer and Chief Creative Officer. Management believes that all transactions were made on terms and conditions similar to or more favorable than those available in the marketplace from unrelated parties.

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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 Kenneth Cole Production, Inc.'s (the "Company") anticipated results or level of business for 2011 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, changes in consumer preferences or fashion trends, events causing disruption in product shipment, change in import regulations, dependence on certain large customers, changes in the Company's relationships with vendors and other resources, the launching or prospective development of new business initiatives, future licensee sales growth, gross margins, store expansion, openings and closings, changes in distribution centers and implementation of management information systems. 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 and Estimates

The Company's Condensed 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, 2010.

Overview

The Company designs, sources and markets a broad range of fashion footwear, handbags and apparel and, through license agreements, designs and markets apparel and accessories under its Kenneth Cole New York, Kenneth Cole Reaction, Unlisted and Le Tigre brand names, as well as footwear under the proprietary trademark Gentle Souls. In addition, the Company designs, develops and sources private label footwear and handbags for selected retailers. The Company's products are targeted to appeal to modern fashion conscious consumers who seek accessible designer fashion that reflects a metropolitan lifestyle. 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 core 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 approximately 5,200 domestic department and specialty store locations, the Company's full-priced retail stores, outlet stores, and its e-commerce website, as well as internationally through its licensee partners and international retailers. 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, apparel and accessories), prices ("bridge", "better" and "moderate") and styling. The Company believes the diversity of its product mix provides balance to its overall sales and increases opportunities in all channels of distribution.

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The popularity of the Kenneth Cole brand names, including Kenneth Cole New York, Kenneth Cole Reaction and Unlisted, 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, neckwear, outerwear, sleepwear, socks, underwear, belts, business cases, small leather goods, sunglasses, prescription eyewear, watches, jewelry, and fragrance. Women's product categories currently being sold pursuant to license agreements include sportswear, outerwear, swimwear, sleepwear, small leather goods, belts, sunglasses, prescription eyewear, watches, jewelry and fragrance. In addition, the Company licenses luggage and children's apparel. In October 2010, the Company announced that it has made the strategic decision to terminate the licensing agreement with its women's sportswear licensee effective June 1, 2011, and will be bringing the business in-house starting with the Fall 2011 season.

The Company recorded net revenues of $117.5 million for the three months ended March 31, 2011. Diluted loss per share was $(0.94) for the three months ended March 31, 2011 as compared to diluted earnings per share of $0.10 for the three months ended March 31, 2010. Included in the diluted loss per share for the three months ended March 31, 2011 were expenses of $12.5 million for store closing and severance costs. Cash, cash equivalents and restricted cash were $54.3 million at March 31, 2011 versus $66.3 million at March 31, 2010 and the Company has no long-term debt.

Results of Operations

The following table sets forth the Company's Condensed Consolidated Statements of Operations in thousands of dollars and as a percentage of net revenues for the three months ended March 31, 2011 and March 31, 2010.

                                   
        Three Months Ended March 31,  
        2011     2010  
  Net sales   $ 107,696     91.7 % $ 99,393     90.8 %
  Royalty revenue     9,777     8.3     10,119     9.2  
  Net revenues     117,473     100.0     109,512     100.0  
  Gross profit (1)     41,671     35.5     45,550     41.6  
  Selling, general and administrative expenses     46,305     39.4     44,580     40.7  
  Store closing and severance costs     12,482     10.6     --     --  
  Operating (loss)/income     (17,116 )   (14.5 )   970     0.9  
  Interest and other income, net     47     0.0     967     0.9  
  Impairment of investments     --     --     (20 )   0.0  
  (Loss)/income before income taxes     (17,069 )   (14.5 )   1,917     1.8  
  Income tax expense     133     (0.1 )   85     0.1  
  Net (loss)/income   $ (17,202 )   (14.6 )% $ 1,832     1.7 %
   _______________________  
  (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.  

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Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

REVENUES: Net revenues increased 7.3%, or $8.0 million, to $117.5 million for the three months ended March 31, 2011 from $109.5 million for the three months ended March 31, 2010. Double-digit revenue growth in the Wholesale segment was partially offset by decreases in the Consumer Direct and Licensing segments.

NET SALES: Wholesale net sales increased 19.3%, or $12.1 million, to $74.5 million for the three months ended March 31, 2011 from $62.4 million for the three months ended March 31, 2010. The increase was primarily attributable to additional sales of $13.5 million for footwear and Reaction men's apparel offset by decreases in the handbag business.

Net sales in the Company's Consumer Direct segment decreased 10.2%, or $3.8 million, to $33.2 million for the three months ended March 31, 2011 from $37.0 million for the three months ended March 31, 2010. Sales decreased primarily from the closing of stores over the past twelve months which had net sales of $4.4 million for the three months ended March 31, 2010 and the comparable store sales decrease of 2.7%, or $0.8 million. The sales reduction was partially offset by incremental sales from stores opened after March 31, 2010 that were not included in comparable store sales. Comparable stores are defined as new stores that are open for longer than thirteen months. A store that stops operations is included in the comparable sales calculation through the date of closing. The Company opened two outlets during the three months ended March 31, 2011. The Company closed seven full-priced retail stores and one outlet during the three months ended March 31, 2011 as compared to no store openings or closings during the three months ended March 31, 2010.

LICENSING REVENUE: Royalty revenue decreased 3.4%, or $0.3 million, to $9.8 million for the three months ended March 31, 2011 from $10.1 million for the three months ended March 31, 2010. The decrease in licensing revenues was primarily attributable to the termination of the Le Tigre license agreement with JC Penney. The Company recorded no licensing revenue for Le Tigre during the three months ended March 31, 2011 versus $0.9 million during the three months ended March 31, 2010. This decrease was partially offset by an increase in contractual royalty minimums. Excluding Le Tigre, royalty revenue was up 6.5%.

GROSS PROFIT: Consolidated gross profit, as a percentage of net revenues, decreased to 35.5% for the three months ended March 31, 2011 from 41.6% for the three months ended March 31, 2010. The 610 basis point decrease resulted from decreases at both the Wholesale and Consumer Direct segments due to increasing cost pressures in the Wholesale segment on initial mark-ups and the aggressive markdowns in Consumer Direct to clear inventory resulting from the Company's decision to accelerate the closure of unproductive stores. In addition, the decrease, as a percentage of net revenues, was due to the revenue mix shifting to the Wholesale segment. For the next twelve months, the Company believes the shift in sales mix to the Wholesale segment will continue and accordingly the consolidated gross profit, as a percentage of net revenues, will be less year over year. The Consumer Direct segment, which operates at a higher gross profit level than the Wholesale segment, had decreased revenues as a percentage of net revenues to 28.3% for the three months ended March 31, 2011 compared to 33.8% for the three months ended March 31, 2010, while the Wholesale segment revenues, as a percentage of net revenues, increased to 63.4% for the three months ended March 31, 2011 from 57.0% for the three months ended March 31, 2010. The revenues in the Licensing segment, which carries nominal cost of goods sold, decreased, as a percentage of net revenues, to 8.3% for the three months ended March 31, 2011 compared to 9.2% for the three months ended March 31, 2010.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative ("SG&A") expenses, including warehousing and receiving expenses, as a percentage of net revenues, decreased 130 basis points to 39.4% for the three months ended March 31, 2011 as compared to 40.7% for the three months ended March 31, 2010. For the next twelve months, the Company believes the shift in sales mix to the Wholesale segment will continue and accordingly, the Consolidated SG&A expenses, as a percentage of net revenues, will decrease year over year. In addition, total SG&A increased $1.7 million to $46.3 million for the three months ended March 31, 2011 from $44.6 million for the three months ended March 31, 2010. The increase in SG&A expenses was primarily attributable to start up and operating costs for the women's and Reaction men's apparel businesses incurred during the three months ended March 31, 2011.

STORE CLOSING AND SEVERANCE COSTS: The Company closed eight stores during the three months ended March 31, 2011 and incurred approximately $7.0 million in net costs for contract lease terminations and other related costs to close the stores. In addition, approximately $5.5 million of severance was recorded for certain executives during the three months ended March 31, 2011.

INTEREST AND OTHER INCOME, NET: Interest and other income, net decreased $0.9 million to approximately $0.1 million for the three months ended March 31, 2011 as compared to $1.0 million for the three months ended March 31, 2010.  The decrease is primarily due to the Company realizing a $0.8 million gain on the sale of a portion of the Company's equity investments during the three months ended March 31, 2010. The Company sold all of its equity investments during the remainder of 2010.

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INCOME TAXES: The Company's effective tax rate was 0.8% for the three months ended March 31, 2011 compared to 4.4% for the three months ended March 31, 2010. Income tax expense in each period is comprised of state, local, and foreign jurisdiction taxes.

NET (LOSS)/INCOME: As a result of the foregoing, the Company recorded a net loss of $17.2 million or (14.6)% of net revenues for the three months ended March 31, 2011 as compared to net income of $1.8 million, or 1.7% of net revenues for the three months ended March 31, 2010.

Related Party Transaction

Please refer to Footnote 11 for the Company's related party transaction disclosure.

Liquidity and Capital Resources

As of March 31, 2011, the Company had $54.3 million in cash, cash equivalents and restricted cash, which consist primarily of money market funds. The Company uses cash from operations as the primary source of financing its capital expenditures and seasonal requirements. Cash needs 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 wholesale customers and its retail stores and the level of inventory and accounts receivable balances. At March 31, 2011 and December 31, 2010, working capital was $82.3 million and $100.3 million, respectively.

Cash used in operating activities was $28.2 million for the three months ended March 31, 2011, compared to $3.1 million for the three months ended March 31, 2010. The increase in cash used in operating activities was primarily attributable to a decrease in net income and an increase in receivables partially offset by an increase in accounts payable and accrued expenses.

Net cash used in investing activities totaled $16.0 million for the three months ended March 31, 2011 compared to net cash provided by investing activities of $0.8 million for the three months ended March 31, 2010. The decrease resulted primarily from the Company depositing $15.0 million into a restricted cash account which serves as collateral for irrevocable standby and open letters of credit. In addition, the decrease was attributable to capital expenditure additions of $0.9 million during the three months ended March 31, 2011 as compared to March 31, 2010 and the proceeds of $1.0 million from the sale of a portion of an equity investment during the three months ended March 31, 2010.

Net cash provided by financing activities was $0.2 million for the three months ended March 31, 2011. The increase was primarily attributable to proceeds from the exercise of stock options during the three months ended March 31, 2011.

During the first quarter of the 2011 fiscal year, the Company had a revolving senior secured asset based credit facility (the "Facility") which provided the Company with borrowing availability of $60 million. The Company did not borrow under the Facility which was terminated on March 31, 2011. Barring extraordinary developments, the Company expects to satisfy its current cash requirements for 2011, including requirements for its new stores, anticipated store closing costs, expected enhancement of information systems and anticipated current obligations, primarily with cash flow from operations and cash on hand. As such, the Company does not anticipate any need for borrowing before December 31, 2011 when the Facility would have expired by its terms. The Company expects to enter into a less expensive long-term credit facility in the near future.

At March 31, 2011, the Company had $15.0 million of restricted cash, all of which is classified as a current asset. The restricted cash serves as collateral for irrevocable standby and open letters of credit that provides financial assurance that the Company will fulfill its obligations. The cash is held in custody by the issuing bank and is restricted as to withdrawal or use. As of March 31, 2011, the Company had $3.0 million of standby and open letters of credit. The Company did not have any off-balance sheet arrangements as of March 31, 2011.

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 has auction-rate-securities that contain "A" through "double C" rated debt obligations and a preferred share closed end fund that are substantially all insured. All of the Company's auction-rate securities have failed at auction as a result of illiquidity and imbalance in order flow within the market. A failed auction is not an indication of an increased credit risk or a reduction in the underlying collateral; however, parties wishing to sell securities could not do so. Based on current market conditions, it is not known when or if the capital markets will come back into balance to achieve successful auctions for these securities. If these auctions continue to fail, it could result in the Company holding securities beyond their next scheduled auction reset dates and will limit the liquidity of these investments. Based on the Company's expected operating cash flows, and other

18


sources and uses of cash, the Company does not anticipate that the lack of liquidity of these investments will affect its ability to execute its current business plan. These assets have been classified as long-term in the Company's Condensed Consolidated Balance Sheets and have been recorded at their fair value.

The Company is exposed to currency exchange rate risks with respect to its inventory transactions denominated in foreign currencies, although greater than 95% of the transactions are in US dollars. 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 periodically utilizing foreign exchange contracts. The Company does not enter into foreign currency transactions for trading or speculative purposes. At March 31, 2011, the Company had no forward exchange contracts outstanding.

The Company sources a significant amount of product from China and is subject to foreign currency exposure. If the Yuan is allowed to float freely against other foreign currency, a two percent change in exchange rates could have a material effect on the cost of future inventory purchases to be transacted by the Company.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

The Company's Interim 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 1934 (the "Exchange Act"), 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 all material information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to the Company's management, including the Company's Interim Chief Executive Officer and Chief Financial Officer, 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. None  
           
  Item 1A.     Risk Factors. There have been no material changes during the quarterly period ended March 31, 2011 from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.  
           
  Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds. None  
           
  Item 3.     Defaults Upon Senior Securities. 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.  

19


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

           
        Kenneth Cole Productions, Inc.  
        Registrant  
           
           
           
  May 6, 2011     /s/ DAVID P. EDELMAN  
        David P. Edelman  
       

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

20