UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K




(Mark
One)


xANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For
the fiscal year ended December 31, 2008


or




oTRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For
the transition period from___________to___________





Commission
File No. 1-13082




KENNETH
COLE PRODUCTIONS, INC.


(Exact
name of registrant as specified in its charter)




New York
            13-3131650(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S. Employer
              Identification
      Number)




603
West 50th Street, New York, NY  10019


(Address
of principal executive offices)





(212)
265-1500


(Registrant’s
telephone number)





Securities
registered pursuant to Section 12(b) of the Act:


Class
A common stock, par value $.01 per share





Securities
registered pursuant to Section 12 (g) of the Act:


None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes oNo x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes oNo x





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 xNo o





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o





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.   (Check one):




Large accelerated
      filer o
            Accelerated filer
      x
            Non-accelerated
      filer o
            Smaller reporting
      company o




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).  Yes oNo x





The
aggregate market value of voting and non-voting stock held by non-affiliates of
the registrant as of the close of business on June 30,
2008:  $125,912,093





Number of
shares of Class A Common Stock, $.01 par value, outstanding as of the close of
business on March 4, 2009:  9,878,793





Number of
shares of Class B Common Stock, $.01 par value, outstanding as of the close of
business on March 4, 2009:  8,010,497




DOCUMENTS
INCORPORATED BY REFERENCE




The
information required by Part III of Form 10-K is incorporated herein by
reference to the Registrant’s definitive proxy statement to be mailed to the
shareholders of the Registrant by April 30, 2009.









Kenneth
Cole Productions, Inc.




TABLE
      OF CONTENTSPagePART
      IItem 1
            Business
            3Item 1A
            Risk Factors
            17Item 1B
            Unresolved Staff Comments
            24Item 2
            Properties
            24Item 3
            Legal Proceedings
            24Item 4
            Submission of Matters to a Vote of Security
      Holders
            24PART IIItem 5
            Market for Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities
            25Item 6
            Selected Financial Data
            28Item 7
            Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
            29Item 7A
            Quantitative and Qualitative Disclosures About
      Market Risk
            38Item 8
            Financial Statements and Supplementary
      Data
            38Item 9
            Changes in and Disagreements with
      Accountants on Accounting and Financial Disclosure
            38Item 9A
            Controls and Procedures
            38Item 9B
            Other Information
            39PART IIIItem 10
            Directors, Executive Officers and
      Corporate Governance
            39Item 11
            Executive Compensation
            39Item 12
            Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters
            39Item 13
            Certain Relationships and Related
      Transactions, and Director Independence
            39Item 14
            Principal Accounting Fees and
      Services
            39PART IVItem 15
            Exhibits, Financial Statement
    Schedules
            39




2




Item
      1.
              Business


Important
Factors Relating to Forward Looking Statements





The
Private Securities Litigation Reform Act of 1995 (the “Reform Act”) and Section
21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)
provide a safe harbor for forward-looking statements made by or on behalf of
Kenneth Cole Productions, Inc. (the “Company”).  The Company and its
representatives may from time to time make written or oral statements that are
“forward-looking,” including statements contained in this report and other
filings with the Securities and Exchange Commission (the “SEC”) and in reports
to the Company’s shareholders.  Forward-looking statements generally
refer to future plans and performance and are identified by the words “believe,”
“expect,” “anticipate,” “plan,” “intend,” “will,” “estimate,” “project,” or
similar expressions.  All statements that express expectations and
projections with respect to future matters, including, but not limited to, the
launching or prospective development of new business initiatives, future
licensee sales growth, gross margins, store expansion and openings, changes in
distribution centers and implementation of management information systems, are
forward-looking statements within the meaning of the Reform
Act.  These statements are made on the basis of management’s views and
assumptions, as of the time the statements are made, regarding future events and
business performance and are subject to certain risks and
uncertainties.  Should one or more of these risks or uncertainties
materialize or should underlying assumptions prove incorrect, actual results may
vary materially from those anticipated, estimated or projected.




While the
Company does communicate from time to time with securities analysts, it is
against Company policy to disclose to them any material non-public
information.  Shareholders should not assume that the Company agrees
with any statement or report issued by an analyst, regardless of the content of
such statement or report.  To the extent that reports issued by
securities analysts contain any projections, forecasts or opinions, they are not
the responsibility of the Company.




There can
be no assurance that management’s expectations willnecessarily come to
pass.  A number of factors affecting the Company’s business and
operations could cause actual results to differ materially from those
contemplated by the forward-looking statements.  Those factors
include, but are not limited to, changes in domestic  economic
conditions or in political, economic or other conditions affecting foreign
operations and sourcing, demand and competition for the Company’s products,
risks associated with uncertainty relating to the Company's ability to
implement its growth strategies or its ability to successfully integrate
acquired business, risks arising out of litigation or trademark conflicts,
changes in customer or consumer preferences on fashion trends, delays in
anticipated store openings and changes in the Company’s relationship with its
suppliers and other resources.  This list of factors that may affect
future performance and the accuracy of forward-looking statements is
illustrative, but by no means exhaustive.  Accordingly, readers of
this annual report should consider these facts in evaluating the information and
are cautioned not to place undue reliance on the forward-looking statements
contained herein.  The Company undertakes no obligation to update or
revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.





General





Kenneth
Cole Productions, Inc. 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, Unlistedand Gentle Souls brand names, as
well as having the rights to use the Bongo trademark for footwear
through a license agreement.  The Company also designs, develops,
markets and sources sportswear, footwear, handbags and other accessories under
the Le Tigrebrand
name, whose trademark and intellectual property were acquired in September
2007.  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 fashion conscious consumers, reflecting a
modern metropolitan perspective and a lifestyle uniquely associated with Kenneth
Cole.  These products include core basics that generally remain
in demand from season to season and fashion products that are designed to
establish or capitalize on market trends.  The combination of 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 5,700 department store, specialty
store and off-price locations, as well as through its Consumer Direct business,
which includes full-priced retail stores, Company Stores (“outlets”) and
e-commerce.  The Company believes the diversity of its product
offerings distinguishes the Company from its competitors in terms of product
classifications (men’s, women’s and children’s footwear, handbags, apparel and
accessories), prices (“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.




3




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, underwear, belts, sunglasses, prescription
eyewear, watches, fragrance, jewelry, luggage, business cases, socks and small
leather goods.  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, fragrance and luggage.  In addition, the Company
licenses its children’s apparel.




Beginning
in Spring 2008, men’s sportswear, which was formerly offered pursuant to a
license agreement, is now being sold, marketed and distributed by the Company
directly.





Business
Growth Strategies





The
Company’s strategy is to continue to build upon the strength of its lifestyle
brand, Kenneth Cole,
through its well-differentiated and distinct labels including Kenneth Cole New York,Kenneth Cole Reaction,and
Unlisted, as well as
developing its newly acquired Le Tigre brand.  As
such, the Company continues to focus on designing and delivering high quality,
fashionable products, creating compelling retail environments, and continuing to
develop its partnerships with its licensees to ensure brand and distribution
integrity.  The Company believes that further segmentation and
development of the brands afford growth potential within each of the Company’s
business segments.




The
Company’s business segments, Wholesale, Consumer Direct and Licensing, are
presented below as a percentage of net revenues contributed as
follows:





For
      the Year Ended December 31,2008
            
            
            2007
            
            
            2006Wholesale
            
            
            54
            %
            
            
            57
            %
            
            
            59
            %Consumer
      Direct
            
            
            37
            
            
            
            34
            
            
            
            33Licensing
            
            
            9
            
            
            
            9
            
            
            
            8Total
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %





Wholesale.The Company
continues to reinforce the segmentation of its brands in wholesale by clarifying
brand positioning and developing unique product assortments.  This
segmentation approach facilitates the focus on key accounts and provides
opportunities to increase market penetration, attract new customers and further
enables the Company to address a wider variety of customers’ needs, both
domestically and internationally.  The Company believes it is in a
position to respond quickly to market changes, thereby enabling each brand to
deliver appropriate fashions in a more timely and effective
manner.  In addition, the Company is developing aspirational lifestyle
marketing that leverages our unique voice and focuses on product, while ensuring
the in-store experience is engaging, memorable and reflects the brands’
stories.  We believe the new marketing will build an emotional
connection with the consumer and reinforce the strength of the Kenneth Colelifestyle brand
franchise.




Consumer
Direct.  The Company’s Consumer Direct segment, which operates
full-priced retail and Company Stores (“outlets” or “Company Stores”),as well as e-commerce, affords significant growth potential while
simultaneously complementing the Company’s existing Wholesale and Licensing
businesses.  The Company believes that the sale of footwear, handbags,
men’s and women’s apparel, and licensed products through its consumer direct
channels of distribution increases consumer awareness of the Company’s brands,
reinforces the Company’s image and builds brand equity.  The Company
believes customers of its wholesale accounts in cities with a Kenneth Cole retail presence
have an enhanced brand awareness compared to those in cities without a Kenneth Cole retail
presence.  As a
result, the Company believes it can initiate more effective business and
merchandising practices for these stores.  The Company increased the
amount of specific “made for Company Store” product and revised its real estate
and rent structure.  In its full-priced retail stores, the Company
modified its stock position through balanced assortments and adjusted its price
points to align the price-value relationship of the Company’s
brands.  During 2008 the Company opened two full-priced retail stores
and closed eight, while continuing its expansion in Company Stores by opening
eleven such stores.




4




As of
December 31, 2008, the Company operated 96 full-priced retail and Company Stores
as compared to 91 stores as of December 31, 2007.




The
Company continues to invest in the enhancement, visual presentation and
development of its website to capitalize on the growth of emerging
technologies.  The Company believes that web-based transactions will
contribute to the Company’s future, both as a source of consumer information and
as a generator of new revenue.  Among other things, the website is
designed to generate incremental revenues through an additional distribution
channel, build brand equity, fortify brand image, increase consumer awareness,
improve customer service, provide entertainment and promote support for causes
the Company believes are important to its customers.   In July
2008, the Company outsourced the customer care, fulfillment and website
responsibilities related to its Internet business to a third-party that provides
direct-to-customer e-commerce services.  The current platform provides
for greater functionality with a variable cost structure.




In
addition, the Internet has enabled the Company to use its website to capture and
process relevant customer data and traffic providing greater understanding of
customer demographics, purchase patterns and market trends.  Based on
this data, the Company communicates with its customers and informs them of new
product offerings, Company events and other Kenneth Coleproduct trends
which it believes is invaluable for driving sales and building brand
loyalty.




Licensing.  The
strength of the Company’s brands, Kenneth Cole New York, Kenneth Cole Reaction, Unlisted, and Le Tigre provides
opportunities, through licensing agreements, to expand into new product
categories and broaden existing distribution channels.  The Company
believes its strategic licensing relationships are essential to the growth of
the Company both domestically and abroad.  Many of the existing
licensee businesses are still relatively small in their individual product
classifications and the Company believes they hold growth
potential.




The
Company chooses its licensing partners with care, considering many factors,
including the strength of their design, sourcing and distribution abilities,
thereby attempting to maintain the same value and style that Kenneth Cole customers have
come to expect.  In September 2007, the Company acquired the Le Tigre trademark and
launched the brand at JCPenney in Spring 2008.  The brand debuted in
junior sportswear, expanded into junior accessories and young men’s apparel, and
is expected to launch other categories such as watches and
sunglasses.  The Company believes the Le Tigre brand holds growth
potential both domestically and abroad.




The
Company is committed to expanding its product classifications internationally to
leverage the capabilities of its licensing partners, particularly in watches,
fragrance and eyewear.  In 2008, the Company’s licensees opened five
freestanding stores and fourteen shop-in-shops in international markets
including Israel, the Gulf Region, Latin America, Thailand, Taiwan and the
Philippines.





Products





The
Company markets its products principally under its Kenneth Cole New York, Kenneth Cole
Reaction, Unlisted,
Gentle Soulsand Le
Tigrebrand names, along with its licensed brand for footwear, Bongo, each targeted to
appeal to different consumers.  The Company believes that the products
marketed under the Kenneth
Colebrand names are aspirational to its customers and offer greater
price value relative to other designer brands.




Kenneth
Cole New York




Kenneth Cole New Yorkproducts are designed for the fashion conscious consumer and reflect the
relaxed metropolitan sophistication that is the hallmark of the Kenneth Cole New York
image.  The distinctive styling of this line has established Kenneth Cole New York as a
fashion authority for sophisticated men and women who are seeking a value
alternative to other designer brands.  As a result of strong brand
recognition and a reputation for style, quality and value, the Company believes
that Kenneth Cole New
York is an important resource for department and specialty stores, and
that it continues to provide growth opportunities.  The Kenneth Cole New York product
offering has evolved from a trendy line into one with broader fashion appeal,
including both fashion-forward styling and core basics.  The Company
continues to leverage the strength of its name through brand extensions,
in-store shops and the licensing of many product categories.  As such,
the Company continues to focus on designing and delivering high quality,
fashionable products, creating compelling retail environments, and continuing to
develop its partnerships with its licensees to ensure brand and distribution
integrity.




5


Kenneth Cole New York men's
footwear, manufactured through factories in China and Italy, is designed as
contemporary, comfortable leather fashion footwear and is sold to the
bridge-designer market at retail price points primarily from $125 to
$300.  As versatile as it is sophisticated, Kenneth Cole New York men’s
footwear may be worn to work, for special occasions or on weekends with casual
clothes.  In addition, the Company uses the label “silver technology”
in its line to denote enhanced comfort combined with its fine leather shoe
craftsmanship.  The silver technology product features a micro-tech
midsole, a removable gel insole, and a fiberglass shank.




Kenneth Cole New Yorkwomen’s
footwear, primarily manufactured through factories in China and Italy, includes
sophisticated and fashionable dress, casual and special occasion footwear that
is sold to the bridge-designer market at retail price points primarily from $100
to $300.  Women's footwear is constructed by fine leather craftsmen to
provide the customer high quality designer styling with value for the
fashion-conscious woman.  The line is currently being enhanced with
special comfort features to extend its appeal and further differentiate the line
from competitive footwear products.




Kenneth Cole New York
handbags are generally made of quality-crafted leathers and sold to the
bridge-designer market at retail price points primarily from $220 to
$400.  The assortment includes high-fashion bags and tailored career
bags for the sophisticated metropolitan consumer.




Kenneth Cole New York men’s
sportswear is a contemporary sportswear collection which includes knits, wovens,
pants, sweaters and jackets and targets the fashion-conscious male with a modern
design sensibility.  The line was re-launched in-house in January 2008
after the Company terminated its licensing agreement with its
licensee.  The collection is sold in select department and specialty
stores, and in our own retail stores and on our website with retail price points
primarily from $35 to $250.




Kenneth
Cole Reaction




Kenneth Cole Reactionconsists ofa variety of product
classifications, which address the growing trend toward flexible lifestyle
dressing at affordable prices.  Kenneth Cole Reaction
includes a comfort-oriented casual line,as well as more dressy
styles.  Kenneth
Cole Reaction women’s footwear, primarily manufactured in China, is
designed for the workplace as well as for outside the office, with an emphasis
on comfort, versatility, contemporary styling and value.  In addition,
the Company has added “RXN comfort technology” which uses a pod system insole
and gel heel pad to enhance comfort, support and flexibility.  It is
targeted to compete in the largest single category of footwear sold in
department stores, women’s “better,” and the majority of the line retails
primarily in the $80 to $190 price range.  Kenneth Cole Reactionmen’s
footwear, primarily manufactured in China, combines fashionable and versatile
styling with affordable pricing and is positioned in the fastest growing
classification in the men’s market.  This line retails primarily in
the $70 to $160 price range.




Kenneth Cole Reaction
handbags, primarily manufactured in China, are designed to be multifunctional
with a contemporary look and are primarily made of leather and non-leather
technical fabrications, such as nylon, microfiber and canvas.  Kenneth Cole Reactionhandbags have been styled to appeal to the same customer as the Kenneth Cole Reaction
footwear line to meet the varying needs of the Company’s
customers.  This line generally retails at price points ranging from
$50 to $200.




Kenneth Cole Reactionchildren’s footwear, primarily manufactured in China, includes dress and
casual footwear sold at price points ranging from $30 to $65 and is targeted to
boys and girls ages 6 to 12, who the Company believes are making more of their
own fashion choices than ever before.  The toddler line for boys and
girls ages 2 to 5 has price points ranging from $30 to $50.  The
Company believes that children’s footwear is a natural extension of its footwear
business and that its use of styles based upon successful performers in its
existing men’s and women’s styles, greatly enhances the likelihood of product
performance.




Gentle
Souls




Gentle Souls women’s footwear
is designed and targeted for the sophisticated, active woman who expects a
comfortable fit with a stylish design.  The footwear is sold in specialty
retail and high end department stores, and in our own retail stores and on our
website at price points primarily from $185 to $300.  The line consists of
approximately 40 styles that are manufactured with high quality leather around
an exclusive comfort technology.  The products contain the patented flax
seed construction which is the first successful application of a displaceable
solid that conforms to the foot.  The product line was launched in
2007.




6


Unlisted




Unlistedproducts are
designed and targeted to the younger, trendier consumer market, the country’s
largest consumer base of fashion merchandise.  The Unlistedbrand was developed
to expand the Company’s sales into a younger, more moderately priced business
and includes men’s footwear, women’s footwear and handbags.




Unlisted footwear provides
the young consumer with a wide selection of footwear with contemporary styling
and quality at affordable prices. Unlistedwomen’sfootwear includes not
only fashion styles, but also evening styles, basic pumps and loafers that
generally retail at price points ranging from $30 to $50 with approximately 60
styles per season.  The men’s footwear line includes casual and dress
assortments in a variety of fashion styles, with approximately 50 styles per
season.  Unlistedmen’s footwear appeals to a broader young men’s market with shoes that
range at retail price points from $50 to $80.




Bongo




Bongo products are designed
for the junior consumer market and are sold through mid-tier department and
specialty stores.  The brand brings fashion and style at reasonable
price points to the junior market.  The women’s footwear line has a
wide variety of casual and dress styles including pumps, boots and
sandals.  The price points for the women’s line range from $30 to $50
with approximately 40 styles per season.




Le
Tigre




The Le Tigre brand consists of a
variety of product classifications and is primarily oriented towards a youthful
customer interested in a sporty and colorful branded lifestyle
aesthetic.  Le
Tigre products are designed to be worn primarily on casual
occasions.




In
November 2007, the Company entered into a licensing arrangement with JCPenney
permitting JCPenney to carry an assortment of items in its
stores.  The apparel offerings under the Le Tigre brand include a
range of casual polo shirts, woven shirts, active knits, sweaters, bottoms, and
handbags.  The products at JCPenney retail in the $10 to $45 price
range.  The Company anticipates that JCPenney will roll out other
classifications of Le
Tigre products, including watches, sunglasses and cold weather
items.





Business
Segments





Wholesale
Operations





The
Company strives to provide affordable fashion footwear, handbags, apparel and
accessories with consistent marketing and management support to its wholesale
customers.  The Company provides this support by producing strong
image-driven advertising, offering creative quality products and maintaining
adequate inventory levels of new products as well as products included in the
Company’s open stock program.  The Company employs a sales force, as
well as corporate account specialists, to sell its products and to manage its
relationships with its wholesale customers.   Duties of these
employees include analyzing and monitoring the wholesale customers’ selling
information.




The
Company’s products are distributed to approximately 1,500 wholesale accounts for
sale in approximately 5,700 store locations
in the United States.  The Company markets its branded products to
major department stores and chains, such as Macy’s and Dillard Department
Stores, and upscale specialty retailers, including Bloomingdales and
Nordstrom.  In addition, the Company sells out-of-season branded
products and overruns through its Company Stores and to off-price
retailers.




The
Company markets its product lines and introduces new styles at separate
industry-wide footwear, handbag and apparel tradeshows that occur several times
throughout the year in New York, Las Vegas, Milan and at various regional
shows.  These tradeshows also afford the Company the opportunity to
assess preliminary demand for its products.  After each show, the
Company’s sales force and corporate account specialists visit customers to
review the Company’s product lines and to secure purchase
commitments.  The Company’s products are also displayed at showrooms
in New York.




7




Private
Label




The
Company designs, develops and sources private label footwear and handbags for
selected retailers.  These private label customers include major
retailers that do not purchase the Company’s brands.  The Company’s
private label business requires minimal overhead and capital because the Company
does not typically incur any costs related to importing, shipping or warehousing
of inventory, all of which are usually borne by the private label
customer.




Canada




The
Company manages its Canadian footwear and handbag operations from its New York
City headquarters with a sales staff and third-party distribution center in
Canada. The Company markets its branded products in Canada to independent
specialty retailers and large department stores, including Sears Canada, Browns,
Townshoe, The Bay, Sterling and Friedmans.  The branded products marketed
in Canada include Kenneth Cole
New York, Kenneth Cole Reaction,andUnlisted men’s and women’s
footwear, as well as Kenneth
Cole New York handbagsandKenneth Cole Reaction
children’s footwear and handbags.




International




In 2007,
the Company expanded wholesale footwear and handbag distribution into Germany
and Spain while exploring other opportunities in the European
market.  During 2008, wholesale distribution in Europe expanded to
approximately 10 countries.





Consumer
Direct Operations





Retail
Operations





The
Company continues to pursue opportunities to enhance and strengthen its retail
operations.  At December 31, 2008, the Company operated 43 Kenneth Cole New Yorkfull-pricedretail stores and 53
Company Stores under the Kenneth Cole New York name.  The
Company opened eleven Company Stores (“outlets”) in 2008 and plans on opening
twelve to fifteen locations in 2009.  In its full-priced retail
stores, the Company modified its stock position through balanced assortments and
adjusted its price points to align the price-value relationship of the Company’s
brands, which the Company believes will contribute to improved operating
performance.  In addition, the Company continued to evaluate its
real-estate portfolio to identify unproductive stores, and as a result closed
eight full-priced retail stores in 2008 and will close three to five additional
full-priced retail stores in 2009.




The
Company believes its full-priced retail stores provide a showcase for the brand
and all product categories merchandised in an engaging selling
environment.  The Company believes that these stores complement its
wholesale business by building brand awareness, and enabling the Company to
reach consumers who prefer the environment of a retail store.  The
customer is presented with a broad assortment of footwear, handbags, apparel and
accessories that is enhanced through merchandising and personalized service to
optimize the customer experience.  The Company believes that its
retail stores further enhance its image and represent an opportunity for revenue
and earnings growth.




A portion
of the products sold in the Company’s full-priced retail stores are sourced
exclusively for those stores to differentiate the product mix from that of its
wholesale customers.  Similarly, a portion of the products sold in
Company Stores (“outlets”) are sourced exclusively for those stores to
differentiate their product mix from that of full-priced retail stores and
wholesale customers.





Internet





The
Company maintains a website to provide information regarding the Company and its
products, as well as to conduct online business.  The Company’s
website, www.kennethcole.com,is regularly enhanced to enable consumers to purchase directly from the
Company online.




The
Company also maintains two toll-free telephone numbers (1-800-KEN-COLE and
1-800-UNLISTED), which provide customer service and answers to product-related
questions.  In July 2008, the Company outsourced customer care,
fulfillment and website responsibilities related to its internet business to a
third party that provides direct-to-customer e-commerce services.




8


Licensing





Domestic
Licensing





The
Company views its licensing agreements as a vehicle to serve its customers
better by extending its product offerings, thereby allowing more consumers to
meet their fashion apparel and accessory needs without compromising on price,
value or style.  The Company considers entering into licensing and
distribution agreements with respect to certain products if such agreements
provide more effective sourcing, marketing and distribution of such products
than could be achieved internally.  The Company continues to pursue
opportunities in new product categories that it believes to be complementary to
its existing product lines.




Licensees
range from small to medium-sized manufacturers to companies that are among the
industry leaders in their respective product categories.  The Company
selects licensees that it believes can produce and service quality fashion
products consistent with the Kenneth Cole New York, Kenneth Cole
Reaction and Unlisted brand
images.  In September 2007, the Company acquired the Le Tigre trademark and other
intellectual property associated with the Le Tigre brand and launched
the brand at JCPenney in Spring 2008 through a licensing agreement.




The
Company communicates its design direction and coordinates all marketing efforts
with its licensees.  The Company generally grants licenses for three
to five year terms with renewal options, limits licensees to certain territorial
rights and retains the right to terminate the licenses if certain specified
sales levels are not attained.  Each license provides the Company with
the right to review, inspect and approve all product designs and quality and
approve any use of its trademarks in packaging, distribution, advertising and
marketing.  The Company plans to continue to draw upon Kenneth Cole’s
creative strength and the Company’s marketing resources to enhance brand
definition with its licensing partners.




The
following table summarizes the Company’s product categories being retailed under
its licensing agreements at the end of 2008 for the Kenneth Cole New York, Kenneth Cole
Reaction, Unlistedand Le Tigrebrands:




Kenneth
      Cole
            Kenneth
      ColeProduct
      Category
            New
      York
            Reaction
            Unlisted
            Le
      TigreMen’s
      Tailored Clothing
            X
            XMen’s
      Sportswear
            
            
            
            XMen’s
      Outerwear
            X
            XMen’s
      Underwear
            XMen’s
      Neckwear
            X
            X
            XMen’s
      Dress Shirts
            X
            X
            XMen’s
      Casual Pants
            
            XMen’s
      Small Leather Goods
            X
            X
            XMen’s
      Belts
            X
            XMen’s
      Coldweather
            X
            X
            
            XMen’s
      Socks
            X
            X
            XWomen’s
      Apparel
            
            X
            X
            XWomen’s
      Outerwear
            X
            XWomen’s
      Small Leather Goods
            X
            X
            X
            XMen’s/Women’s
      Sleepwear
            
            
            XMen’s/Women’s
      Jewelry
            X
            XMen’s/Women’s
      Swimwear
            X
            XMen’s/Women’s
      Watches
            X
            X
            XMen’s/Women’s
      Optical Frames
            X
            XMen’s/Women’s
      Luggage/Briefcases
            X
            X
            XMen’s/Women’s
      Sunglasses
            X
            X
            X
            XMen’s/Women’s
      Fragrances
            X
            XChildren’s
      Apparel
            
            X
            
            X





All of
the Company’s licensees of the Kenneth Cole New York, Kenneth Cole
Reaction, and Unlistedbrands are required to contribute to the Company a percentage of their
net sales of licensed products, subject to minimum amounts, for the ongoing
marketing of the Kenneth Colebrands.




9


The
Company currently has a corporate gift program, whereby corporate customers are
sold Kenneth Cole items
for award and recognition programs.  During 2008, the Company licensed
this operation to a third party provider.  Orders are drop-shipped
from the Company’s licensees or its warehouses.  The Company believes
this is another avenue to enhance customer awareness and strengthen market
position of its various brands.





International
Licensing





The
Company sells its products through distributors and licensees to wholesale
customers and direct retailers in international markets including Canada,
Mexico, parts of Europe, the Middle East, parts of Asia, Central America, parts
of South America and the Caribbean Islands.  The Company also
continues to grow its international presence through broader wholesale
distribution of watches, fragrance and eyewear while continuing to explore
markets throughout the world.




In North
America, the Company, directly and through licensing arrangements, continues to
sell and market its products in Canada.  The majority of product
classifications available domestically are also available in
Canada.  Currently, the Company maintains direct distribution of its
footwear and handbag businesses in Canada and manages this business from its New
York City headquarters through its Wholesale segment.  The Company’s
Latin American licensee agreement covers Mexico, Latin America, South America
and the Caribbean, with the exception of Brazil, Argentina and
Uruguay.  Currently, the Company’s licensee operates 39 stores and
various shop-in-shops in this region.  In Europe, the Company’s
licensee sells footwear, luggage, small leather goods and handbags to department
stores within the United Kingdom and has also entered into an exclusive
arrangement with a leading department store to sell men’s tailored clothing,
dress shirts and neckwear in the United Kingdom.  Within the Middle
East and Asia, the Company’s licensees maintain 27 retail stores and numerous
shop-in-shops at local department stores.  The stores are located in
the United Arab Emirates, Israel, Bahrain, Kuwait, Oman, the Philippines,
Thailand and Taiwan.




The
Company realizes the critical role that licensees have on the strategic plan to
reposition Kenneth Cole
as an accessible luxury brand, and on the growth and development of Kenneth Cole and its
diffusion brands.  Therefore, the Company takes significant care to
strategically align itself with viable business partners around the
world.  The Company is strategically planning the expansion of its
international licensing programs as a means of developing a truly global
brand.  The Company’s international sales generate approximately 4% of
its total revenue.  See Note 10 to the Consolidated Financial
Statements for a measure of foreign revenues.





Design





Kenneth
D. Cole, the Company’s Chairman and Chief Creative Officer, founded the Company
in 1982 and its success to date is largely attributable to his design talent,
creativity and marketing abilities.  Mr. Cole selects designers to
work with him in the creation and development of new product
styles.  Designers collaborate with Mr. Cole to create designs that
they believe fit the Company’s image, reflect current or approaching trends and
can be manufactured cost-effectively.




The
Company’s design teams constantly monitor fashion trends and search for new
inspirations.  Members of the various teams travel worldwide to assess
fashion trends in Europe, the United States and Asia and work closely with
retailers to monitor consumer preferences.  Once the initial designs
are complete, a prototype is developed, reviewed and refined prior to
commencement of production.




In order
to reduce the impact of changes in fashion trends on the Company’s product sales
and to increase the Company’s profitability, the Company continuously seeks to
develop new core product styles that remain fashionable from season to season
without significant changes in design or styling.  Since these core
styles are seasonless, retailers’ inventories of core styles tend to be
maintained throughout the year and reordered as necessary, primarily through
electronic data interchange (“EDI”).




Sourcing





The
Company does not own or operate any manufacturing
facilities.  Instead, it sources its branded and private label
products directly or indirectly through independently-owned manufacturers
primarily in Italy and China, among other European and Asian
locations.  The Company maintains an office in Dongguan, China and has
long-standing relationships with several independent buying agents to monitor
the production, quality and timely




10
 
  two
manufacturers in China during the years ended December 31, 2008 and 2007,
respectively.  Approximately 40% of Kenneth Cole New YorkandKenneth Cole
Reactionmen’s footwear purchases were from two manufacturers in China
during the year ended December 31, 2008 and 42% were from one manufacturer in
China utilizing many different factories during the year ended December 31,
2007.  In addition, approximately 61% and 52% of Kenneth Cole Reactionwomen’s
footwear purchases were sourced through two Chinese manufacturers during the
years ended December 31, 2008 and December 31, 2007,
respectively.  The Company believes it has alternative manufacturing
sources available to meet its current and future production requirements in the
event the Company is required to change current manufacturers or current
manufacturers are unavailable to fulfill the Company’s production
needs.  Many of these manufacturers, however, subcontract a portion of
such purchases to ensure the consistent and timely delivery of quality
products.  The Company is a significant customer of several of these
manufacturers and has established long-standing relationships with
them.  While the Company believes it has alternative manufacturing
sources available to meet its current and future production requirements, there
can be no assurance that, in the event the Company is required to change its
current manufacturers, alternative suppliers will be available on terms
comparable to the Company’s existing arrangements.





In
advance of the Fall and Spring selling seasons, the Company works with its
manufacturers to develop product prototypes for industry
tradeshows.  During this process, the Company works with the
manufacturers to determine production costs, materials, break-even quantities
and component requirements for new styles.  Based on indications from
the tradeshows and initial purchasing commitments from wholesalers, the Company
will place production orders with the manufacturers.  In addition, the
Company has a program, “test and react,” whereby prototypes are rushed to its
own retail stores immediately after completion to determine initial consumer
response and purchase behavior.  Successful styles, consumer
acceptance and demand are used to adjust factory production and line development
prior to initial season shipping.  As a result of the need to maintain
in-stock inventory positions, the Company places manufacturing orders for open
stock and certain fashion products prior to receiving firm commitments from its
customers.  Once an order has been placed, the manufacturing and
delivery time ranges from three weeks to four months depending on whether the
product is new or is currently in production.  Throughout the
production process, the Company monitors product quality through inspections at
both the factories and upon receipt at its warehouses.  To control
inventory levels, the Company monitors sell-through data on a weekly basis and
seeks input on product demand from wholesale customers and its retail stores to
adjust production as needed.





Advertising
and Marketing





The
Company believes that advertising to promote and enhance its brands is an
integral part of its long-term growth strategy.  The Company believes
that its advertising campaigns have brought it national and international
recognition for its timely focus on current events and social issues and have
resulted in increased sales and consumer awareness.  The campaigns
also feature fashionable products to broaden the Company’s lifestyle
appeal.  Advertising appears in magazines such as Vogue, GQ, Details, Vanity Fair, and
InStyle, newspapers,
outdoor, online and other media advertising.  The majority of the
Company’s licensees are required to contribute to the Company a percentage of
their net sales of licensed products, subject to minimums, for the advertising
and promotion of the image of the Company’s brands.  In addition, the
Company believes personal appearances by Kenneth D. Cole further enhance the
Company’s brand awareness and equity.




The
Company utilizes its in-house staff for marketing, advertising and public
relations efforts enabling the Company to maintain the integrity of its
brands.  It will also retain outside advertising agencies periodically
to assist in the development of creative campaigns and will use outside
advertising firms to coordinate its international advertising
effort.




In order
to continue to strengthen brand awareness of its products and increase sales,
the Company is actively involved in development, marketing and merchandising
programs for its wholesale customers.  As part of this effort, the
Company utilizes cooperative advertising programs, sales promotions and produces
trade show sales tools and direct mail programs which feature a variety of
branded products marketed by the Company and its licensees.  As a
result of these internal productions, the Company believes that there is a
singular focus, strong synergy and consistency in all of the Company’s
communications.




An
additional aspect of the Company’s marketing efforts is the creation and
placement of branded enhancements in key department and specialty store
locations.  These focus areas create an environment that is consistent
with the Company’s image and enables the retailer to display and stock a greater
volume of the Company’s products per square foot of retail
space.  These enhancements are achieved through the placement of
fixtures, point of purchase displays and graphics.  The Company
believes that these in-store enhancements encourage longer-term commitment by
retailers to the Company’s products and heighten consumer brand
awareness.




11


In 2008,
the Company, along with its licensees, began its silver anniversary campaign
celebrating its 25th
anniversary through a year-long calendar of events, print advertising and
creative marketing.  In addition, Kenneth D. Cole published and
launched his second book “Awearness,” a collection of inspiring stories about
how to make a difference through volunteerism and service.  The
Company believes the campaign and the book have heightened awareness of the
Company, its brands, products and social concerns.





Distribution





To
facilitate distribution, the Company’s products are inspected, bar coded, packed
and shipped from manufacturers by ocean or air to the Company’s distribution
facilities located in the United States and Canada.  The Company
utilizes fully-integrated information systems and bar code technology to
facilitate the receipt, processing and distribution of products through
third-party warehouse distribution centers.  The products are then
shipped to the Company’s wholesale and direct customers either in predetermined
sizes, in case packs or under its open stock program.  The Company’s
open stock program allows its wholesale customers to reorder, typically via EDI,
core basic styles in a range of colors and sizes as well as many fashion styles,
for immediate shipment. While the open stock program requires an increased
investment in inventories, the Company believes this program is an important
service for its wholesale customers by allowing them to manage inventory levels
more effectively.  The Company expects that affording customers
improved flexibility in ordering specific stock keeping units (“SKUs”) in
smaller quantities will ultimately reduce the incidence of markdowns and
allowances.




The
Company has capitalized on its centralized distribution facilities to provide
additional support to its retail store operations on shipments of footwear,
handbags and apparel.  The Company’s EDI program is also used to
re-supply its retail store on a variety of products, thereby enhancing its
service to the Company’s retail operations through improved inventory management
and customer response.  To facilitate distribution, the Company has
third-party public warehouses located on both the east and west coasts of the
United States, as well as in Canada, to accommodate merchandise imported from
Asia, Europe and South America.  The Company uses its third-party
internet service provider to provide distribution and warehousing as part of the
fulfillment agreement, while the Company supplies merchandise to the provider
based on customer demand.





Information
Technologies





The
Company believes that sophisticated information systems are essential to the
Company’s ability to maintain its competitive position and to support continued
growth.  The Company’s management information systems were designed to
provide, among other things, comprehensive order processing, production,
accounting and management information for the sourcing, importing, distribution
and marketing aspects of the Company’s business.  The Company
continues to update and enhance its distribution and financial systems with
newer technology that offers greater functionality and reporting
capabilities.  The Company also utilizes an EDI system that provides a
computer link between the Company and many of its wholesale customers, as well
as its retail operations, that enable the Company to receive online orders and
to accumulate sales information on its products shipped to its wholesale
customers, retail stores and internet customers.  The Company’s EDI
system also improves the efficiency of responding to customer needs and allows
both the customer and the Company to monitor purchases, shipments and invoicing.
In its retail stores, the Company uses point-of-sale registers to capture sales
data, track inventories, traffic and generate EDI replenishment
orders.




The
Company regularly evaluates the adequacy of its information technologies and
upgrades such systems to support its growth.  In 2006, the Company
signed a software license agreement with SAP America, Inc. (“SAP”) and
implemented an integrated business platform, using SAP software products, across
the Company’s full-priced retail stores and Company Stores.  The
Company believes that failure to continue to upgrade and enhance its management
information systems to support growth and expansion, either in its internal
systems or in systems of third parties, could have a material adverse effect on
the Company’s financial condition and its results of operations.




In 2008,
the Company outsourced customer care, fulfillment and website responsibilities
to GSI.  The GSI e-commerce platform improves functionality and has
been interfaced with the Company’s SAP retail store system.




12


Trademarks





The
Company, through its wholly-owned subsidiary, Kenneth Cole Productions (LIC),
Inc., owns federal registrations for its principal trademarks Kenneth Cole, Kenneth Cole New York, Kenneth Cole Reaction, Reaction,
Kenneth Cole Collectionand Unlistedas well as several
other ancillary and derivative trademarks.  In September 2007, the
subsidiary acquired the Le
Tigre trademark and other intellectual property associated with the Le Tigre
brand.  Each of the federal registrations is currently in full force
and effect and is not the subject of any legal proceedings.  In
addition, the Company has several federal applications pending in the United
States Patent and Trademark office for trademarks and service
marks.  Moreover, the Company continues to expand its current
international registrations in numerous countries throughout the
world.  The Company regards its trademarks and other proprietary
rights as valuable assets in the marketing and distribution of its products, and
fully intends to maintain, renew and protect the registrations, as well as
vigorously defend all of its trademarks against infringements.  In
January 2006, the Company acquired the Gentle Souls trademark, a
related patent application, certain other trade secrets and proprietary
processes, and other intellectual property and goodwill associated with the
Gentle Souls
brand.





Competition





Competition
in the footwear, handbag and apparel industries is intense and these product
classifications are subject to rapidly changing consumer demands.  The
Company competes with numerous designers, brands and manufacturers of footwear,
handbags, apparel and accessories, some of which are larger, have achieved
greater recognition for their brand names, have captured greater market share
and/or have substantially greater financial, distribution, marketing and other
resources than the Company.  The Company also competes for the limited
shelf-space available for the display of its products to consumers, and the
Company’s licensed apparel and accessories also compete with a substantial
number of designer and non-designer brands.  Moreover, the general
availability of contract manufacturing capacity allows access by new market
entrants.  The Company believes the success of its business depends on
its ability to stimulate and respond to changing consumer preferences by
producing innovative and attractive products, brands and marketing, while
remaining competitive in quality and price.





Foreign
Operations





The
Company’s business is subject to the risks of doing business abroad, such as
fluctuations in currency exchange rates, local market conditions, labor unrest,
political instability, actions of a public enemy, military or other government
intervention, priorities, restrictions or allocations and the imposition of
additional regulations relating to imports, including quotas, duties or taxes
and other charges on imports.  There can be no assurance that these
factors will not have a material adverse effect on the Company’s operations in
the future.




In order
to reduce the risk of exchange rate fluctuations, the Company may enter into
forward exchange contracts to protect the future purchase price of inventory
denominated in Euros.  These Euro dollar forward exchange contracts
are used to reduce the Company’s exposure to changes in foreign exchange rates
and are not held for the purpose of trading or speculation.





Import
Restrictions





Although
most of the goods sourced by the Company are not currently subject to quotas,
countries in which the Company’s products are manufactured may, from time to
time, impose new or adjust prevailing quotas or other restrictions on exported
products.  In addition, the United States may impose new duties,
tariffs and other restrictions on imported products, any of which could have a
material adverse effect on the Company’s operations and its ability to import
its products at current or increased quantity levels.  In accordance
with the Harmonized Tariff Schedule, a fixed duty structure in effect for the
United States, the Company pays import duties on its products.  The
majority of its products have import duties that primarily fall within a range
of approximately 6% to 37.5%, depending on the category and the principal
component of the product.  Other restrictions on the importation of
footwear, apparel, and other products are periodically considered by the United
States government and no assurance can be given that tariffs or duties on the
Company’s goods may not be raised, resulting in higher costs to the Company, or
that import quotas restricting such goods may not be imposed or made more
restrictive.





13





Seasonality





The
Company’s products are marketed primarily for Fall and Spring seasons, with
slightly higher volume of wholesale products sold during the first and third
quarters.  The Company’s retail business follows the general seasonal
trends that are characteristic of the retail industry, with sales and earnings
highest in the fourth quarter and weakest in the first
quarter.  Because the timing of wholesale shipments of products for
any season may vary from year to year and retail’s highest sales and earnings
are in the fourth quarter, the results for any one quarter may not be indicative
of the results for the full year.  In 2008, the fourth quarter results
were significantly impacted by the severe deterioration in the economy during
the quarter, which negatively impacted the Company’s fourth quarter and full
year results.





Customers





The
Company’s department store customers include major United States retailers,
several of which are under common ownership.  In 2008 and 2007, the
Company had no customer or group under common ownership account for more than
10% of consolidated sales.  The Company’s ten largest customers
represented 39.0% and 43.1% of the Company’s net sales for the years ended
December 31, 2008 and 2007, respectively.





Backlog





The
Company had unfilled wholesale customer orders, including sportswear, through
the end of the second quarter of $42.0 million and $56.1 million as of March 7,
2009 and March 8, 2008, respectively.  The Company’s backlog at a
particular time is affected by a number of factors, including seasonality,
timing of market weeks and wholesale customer purchases of its core products
through the Company’s open stock program.  Accordingly, a comparison
of backlog from period to period may not be indicative of eventual
shipments.





Sales
Returns and Allowances





The
Company’s ability to collect chargebacks for deductions taken by its customers
for returns, discounts and allowances as well as potential future customer
deductions is significant to its operations.  The Company reserves
against known chargebacks as well as potential future customer deductions based
on a combination of historical activity and current market
conditions.  Actual results may differ from these estimates under
different assumptions or conditions, which may have a significant impact on the
Company’s results.





Employees





At
December 31, 2008, the Company had approximately 1,800 employees (which include
approximately 900 part-time employees), none of whom are covered under a
collective bargaining agreement.  The Company considers its
relationship with its employees to be satisfactory.





Directors
and Executive Officers





Name
            
            Age
            
            Present PositionKenneth
      D. Cole
            
            54
            
            Chairman
      of the Board of Directors and Chief Creative OfficerJill
      Granoff
            
            46
            
            Chief
      Executive OfficerDavid
      P. Edelman
            
            47
            
            Chief
      Financial Officer and TreasurerMichael
      F. Colosi
            
            43
            
            Senior
      Vice President and General Counsel and Corporate
  SecretaryJeffrey
      Cohen
            
            55
            
            President
      of Consumer DirectMichael
      DeVirgilio
            
            40
            
            President
      of Licensing and InternationalDanesha
      Dixon Smith
            
            36
            
            Senior
      Vice President, Human ResourcesKristen
      Dykstra
            
            37
            
            Senior
      Vice President, Chief Marketing OfficerDouglas
      Jakubowski
            
            45
            
            Chief
      Merchandising OfficerChris
      Nakatani
            
            45
            
            President
      of WholesaleRyan
      M. O’Sullivan
            
            35
            
            President
      of the Le Tigre DivisionMartin
      E. Franklin
            
            44
            
            DirectorRobert
      C. Grayson
            
            63
            
            DirectorDenis
      F. Kelly
            
            59
            
            DirectorPhilip
      R. Peller
            
            69
            
            Director




14


Kenneth D. Cole has served as
the Company’s Chairman of the Board since its inception in 1982 and was also
President until February 2002 and Chief Executive Officer until May
2008.  Prior to founding Kenneth Cole Productions, Inc., Mr. Cole was
a founder and, from 1976 through 1982, a senior executive of El Greco, Inc., a
shoe manufacturing and design company which manufactured Candies women’s shoes.
Mr. Cole is the Chairman of the Board of Directors of the Foundation for AIDS
Research (“amfAR”). In addition, he is on the Board of Trustees of the Sundance
Institute and the Council of Fashion Designers of America.




Jill Granoff joined the
Company as its Chief Executive Officer in May 2008.  Ms. Granoff was
most recently employed with Liz Claiborne Inc. (“Liz Claiborne”) where she was
the Executive Vice President of Direct Brands, responsible for Juicy Couture,
Lucky Brand Jeans, Kate Spade and its Outlet and E-Commerce
businesses.  Prior to joining Liz Claiborne, Ms. Granoff was President
and Chief Operating Officer of Victoria Secret Beauty, a division of Limited
Brands, where she worked from 1999 to 2006.  From 1990 to 1999, Ms.
Granoff held various executive positions at The Estee Lauder
Companies.  Ms. Granoff is a member of the Executive Committee of the
Board of Governors of Cosmetic Executive Women and The Women’s
Forum.




David P. Edelman was
appointed as the Chief Financial Officer in July 2004.  He joined the
Company in January 1995 and served as the Company’s Senior Vice President of
Finance since April 2000.  Before joining the Company, Mr. Edelman was
Chief Financial Officer of a women’s suit wholesaler, and he was employed for 10
years as a Certified Public Accountant with Ernst & Young (“E&Y”) in
various specialty groups including E&Y’s National Consulting Office and its
Retail and Apparel Audit Group.  Mr. Edelman serves on the Board of
Directors of the American Apparel and Footwear Association.




Michael F. Colosihas served
as the Company’s Senior Vice President, General Counsel and Corporate Secretary
since March 2007.  Mr. Colosi previously served as Corporate Vice
President and General Counsel for the Company from July 2000 to February 2007
and as Corporate Secretary since July 2004.  Previously, Mr. Colosi
was the Associate General Counsel and Assistant Secretary for The Warnaco Group,
Inc. from 1996 to 2000.  After clerking for Judge J. Edward Lumbard of
the U.S. Court of Appeals for the Second Circuit, he was engaged in the private
practice of law from 1992 to 1996.




Jeffrey Cohen was named
President of Consumer Direct in March 2008.  He joined the Company as
Divisional President of Company Stores in October 2006.  Previously,
he served as President of Retail at Calvin Klein, Inc., Guess? and Ecko
Unlimited.  Mr. Cohen served as President of Retail at Tommy Hilfiger,
Inc. from 1993 to 2000.  Prior to 1993, Mr. Cohen served as President
of Retail with Polo Ralph Lauren (“Polo”) and held other executive positions
during his ten years with Polo.




Michael DeVirgilio was named
President of Licensing and International in February 2009.  Mr.
DeVirgilio previously served as Executive Vice President of Business Development
from January 2006 to February 2009.  He served as Senior Vice
President of Licensing from May 2005 to January 2006.  Prior to that, he
served as Corporate Vice President of Licensing and Design Services from March
2002 to May 2005.  From 1999 to 2001, Mr. DeVirgilio served as
Divisional Vice President of Licensing.  Mr. DeVirgilio joined the
Company as Director of Licensing in 1997.  Prior to joining the
Company, Mr. DeVirgilio was Director of Merchandising for the Joseph & Feiss
Company (a division of Hugo Boss, USA).




Danesha Dixon Smith joined
the Company as Senior Vice President of Human Resources in October 2008. She
previously worked at Liz Claiborne, Inc. in positions of increasing
responsibility culminating in her appointment as Senior Vice President, Human
Resources. From April 2005 to April 2007, Ms. Smith was the Vice President of
Human Resources at Cendant Corporation where she worked in the company’s real
estate division. Ms. Smith also held numerous leadership positions at the Home
Depot.




Kristen Dykstra joined the
Company as Senior Vice President, Chief Marketing Officer in August 2008. Ms.
Dykstra was previously employed by BCBG Max Azria Group, Inc. from October 1997
to July 2008, where she most recently served as Senior Vice President of Global
Marketing and Public Relations. Prior to BCBG, Ms. Dykstra worked at various
public relations and advertising agencies including Orsi Public Relations and
Lord Dentsu & Partners, a division of Young & Rubicam.




Douglas Jakubowski was named
Chief Merchandising Officer in February 2009.  Mr. Jakubowski
previously served as President of Kenneth Cole – Apparel and Corporate Relations
from October 2007 to February 2009.  He previously served as President
of the Kenneth Cole
Reaction brand and Senior Vice President of Reaction




15


from July
2005 to October 2007.  Prior to joining the Company, Mr. 
Jakubowski served as President of Perry Ellis Menswear from 2003 to
2005.  From 1997 to 2003, he served as Executive Vice President of
Merchandising and Design for Perry Ellis Sportswear.  Prior to joining
Perry Ellis, Mr. Jakubowski held various management positions including Vice
President of Sales and Marketing at International News, and Director of
Marketing and Sales at Koral Industries.




Chris Nakatanijoined the
Company as President of Wholesale on March 9, 2009.  Mr. Nakatani was
most recently employed with Perry Ellis International where he was the Corporate
EVP Strategic Planning, responsible for three separate wholesale
divisions.  From 1998 to 2006, Mr. Nakatani was employed by Tommy
Hilfiger in roles of increasing responsibility including his last position as
President of Sales & Planning.  Prior to Tommy Hilfiger, Mr.
Nakatani was employed by Polo Ralph Lauren from 1989 to 1998 where he served in
roles of increasing responsibility including those in sales and
merchandising.  He started his career at Nordstrom.




Ryan M. O’Sullivan joined the
Company as President of the Le Tigre Division in January 2008. He was previously
the Managing Member and a Founder of Le Tigre LLC where he held the position of
Chief Executive Officer since 2002. Mr. O’Sullivan is also a Founder of MT
Trading LLC, a financial services firm with offices in New York, Philadelphia,
and Boston, and a Senior Advisor to Equator LLC, an asset management firm
specializing in the creation and management of environmental assets worldwide.
Additionally, Mr. O’Sullivan has held senior positions in the Capital Markets
and Investment Banking Divisions of several large investment and commercial
banks including Morgan Stanley Dean Witter and Wachovia Bank.




Martin E. Franklinhas served
as the Chairman and Chief Executive Officer of Jarden Corporation since
2001.  He has served as Director of GLG Partners, Inc. since
2006.  Mr. Franklin has served as the Chairman of Liberty Acquisitions
Holdings, Corp and Liberty Acquisition Holdings (International) Company since
2007.  Previously Mr. Franklin served as Executive Chairman of Bollé
Inc. from 1997 to 2000.  He also held the position of Chairman and CEO
of Lumen Technologies, Inc. from 1996 to 1998, and its predecessor, Benson
Eyecare Corporation, from 1992 to 1996.  Mr. Franklin is currently a
member of the Board of Directors of the Jewish Theological Seminary of America
and One Family Fund, and various other charitable organizations.




Robert C. Graysonis the
founder of Robert C. Grayson & Associates (d.b.a. The Grayson Company), a
broad-based consulting practice for the consumer goods sector.  From
1992 to 1996, Mr. Grayson served initially as an outside consultant to Tommy
Hilfiger Corp., a wholesaler and retailer of men’s sportswear and boyswear, and
later accepted titles of Chairman of Tommy Hilfiger Retail, Inc. and Vice
Chairman of Tommy Hilfiger Corp.  From 1970 to 1992, Mr. Grayson
served in various capacities for Limited Inc., including President and CEO of
Lerner New York from 1985 to 1992, and President and CEO of Limited Stores from
1982 to 1985.  He also serves as a director of St. John Knits, Lillian
August Inc., U-Food, and Stax Incorporated.




Denis F. Kelly is a Managing
Partner of Scura, Rise & Partners, LLC as well as Chairman of Ashburn Hill
Corp, a manufacturer of fire resistant (FR) garments.  From July 1993
to December 2000, Mr. Kelly was the head of the Mergers and Acquisitions
Department at Prudential Securities Incorporated.  From 1991 to 1993,
Mr. Kelly was President of Denbrook Capital Corp., a merchant-banking
firm.  Mr. Kelly was at Merrill Lynch from 1980 to 1991, where he
served as Managing Director, Mergers & Acquisitions from 1984 to 1986, and
then as a Managing Director, Merchant Banking, from 1986 to 1991.  Mr.
Kelly is a director of MSC Industrial Direct, Inc.




Philip R. Pellerwas employed
by Arthur Andersen LLP for 39 years.  Prior to his retirement from
Arthur Andersen in 1999, he served as Managing Partner of Practice Protection
and Partner Matters for Andersen Worldwide SC, the coordinating entity for the
activities of Arthur Andersen and Andersen Consulting, from 1996 to
1999.  Prior to  that  appointment,  Mr.
Peller served  as  the  Managing
Director  -  Quality,  Risk  Management  and  Professional
Competence  for  the worldwide audit
practice.  Mr. Peller joined Arthur Andersen in 1960 and was promoted
to Audit Partner in 1970.  Mr. Peller is a Certified Public
Accountant.  Mr. Peller is currently a member of the Board of
Directors and Chair of the Audit Committee of MSC Industrial Direct Co., Inc.
and serves as a consultant to other companies.





Available
Information





The
Company files its annual, quarterly and current reports and other information
with the SEC.  The certifications required under Section 302 of the
Sarbanes-Oxley Act of 2002 are filed as exhibits to the annual and quarterly
reports on Form 10-K and Form 10-Q, respectively.  In addition, the
Company has provided the annual certification to the New York Stock
Exchange.  The Company’s annual reports on Form 10-K, quarterly
reports on




16




Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, are available free of charge in the “Investor” section under
the subheading  “About Us” on the Company’s website, www.kennethcole.com.  These
reports, and any amendments to these reports, are made available on our website
as soon as reasonably practicable after such reports are filed with or furnished
to the SEC.  The public may read and copy any materials filed by the
Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549.  The public may also obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.  In addition, the SEC maintains an Internet site that
contains reports, proxy and information statements and other information
regarding the Company, which is available at http://www.sec.gov.




In addition, the Company’s website,
www.kennethcole.com,includes, free of charge,
items related to corporate governance matters, including the Company’s Corporate
Governance Guidelines, charters of various committees of the Company’s Board of
Directors and the Company’s Code of Business Conduct and Ethics applicable to
employees, officers and directors.  A printed copy of the Company’s
Form 10-K, Corporate Governance Guidelines and Code of Business Conduct and
Ethics is available without charge by sending a written request
to:  Investor Relations, Kenneth Cole Productions, Inc., 400 Plaza
Drive, Secaucus, NJ  07094.




Item
      1A.
                Risk
      Factors


The
Company operates in a changing environment that involves numerous known risks
and uncertainties that could materially adversely affect its
operations.  The risks described below highlight some of the factors
that have affected and in the future could affect the Company’s
operations.  Additional risks that the Company does not yet know of or
that it currently thinks are immaterial may also affect business
operations.  If any of the events or circumstances described below
actually occurs, the Company’s business, financial condition or results of
operations could be materially adversely impacted.





The
Company may not be able to respond to changing fashion and consumer demands in a
timely manner.





The
footwear, apparel and accessory industries are subject to changing consumer
demands and fashion trends.  The Company believes that its success
depends in large part upon its ability to identify and interpret fashion trends
and to anticipate and respond to such trends in a timely manner.  The
Company has generally been successful in this regard but there can be no
assurance that the Company will be able to continue to meet changing consumer
demands or to develop successful styles in the future.  If the Company
misjudges the market for a particular product or product line, it may result in
an increased inventory of unsold and outdated finished goods, which may have an
adverse effect on the Company’s financial condition and results of
operations.  In addition, any failure by the Company to identify or
respond to changing demands and trends could, in the long term, adversely affect
consumer acceptance of the Company’s brand names, which may have an adverse
effect on the Company’s business and prospects.





The
Company intends to market additional lines of footwear, apparel and fashion
accessories in the future.  As is typical with new products, demand
and market acceptance for any new products introduced by the Company will be
subject to uncertainty.  Achieving market acceptance for each of these
products may require substantial marketing efforts and the expenditure of
significant funds to create customer demand.  There can be no
assurance that the Company’s marketing effort will successfully generate sales
or that the Company will have the funds necessary to undertake such an
effort.





The
Company’s sales are influenced by general economic cycles and the current
economic situation.





Footwear,
apparel and accessories are cyclical industries dependent upon the overall level
of consumer spending.  The Company’s wholesale customers may
anticipate and respond to adverse changes in economic conditions and uncertainty
by reducing inventories and canceling orders.  As a result, any of the
following could reduce the Company’s sales and adversely affect its business and
financial condition: a substantial deterioration in general economic conditions,
consumer confidence and spending levels, consumer credit availability, global
factory production, commercial real estate market conditions, or credit market
conditions; a substantial increase in fuel and energy costs, unemployment, or
interest rates; and any adverse acts of nature or political events.





The
current economic situation is having a significant negative impact on businesses
around the world, including some of the Company’s customers, suppliers and
licensees.  Although the Company believes that its cash position will
provide it with liquidity sufficient to endure the current environment, the
impact of current market conditions on the Company’s major customers, suppliers
and licensees cannot be predicted and may be severe.  The inability of




17




major
manufacturers to ship products could impair the Company’s ability to meet the
delivery date requirements of the Company’s customers. A disruption in the
ability of the Company’s significant customers and licensees to access liquidity
could cause serious disruptions or an overall deterioration of their businesses
which could lead to a significant reduction in their future orders of the
Company’s products and the inability or failure on their part to meet their
payment obligations to the Company, any of which could have a material adverse
effect on the Company’s results of operations.  Additionally, consumer
demand for the Company’s merchandise has been impacted by negative trends in
consumer confidence and other economic factors currently impacting consumer
spending behavior.  Furthermore, the Company derives a relatively
insignificant portion of its sales from international markets, which enhances
its exposure to domestic economic conditions.




The
footwear, apparel and accessory industries are highly
competitive.  Any increased competition could result in reduced sales
or margins.





Competition
in the footwear, apparel and accessory industries is intense.  The
Company’s products compete with other branded products within their product
categories as well as with private label products sold by retailers, including
some of the Company’s customers.  To varying degrees, depending on the
product category involved, the Company competes on the basis of style, price,
quality, comfort and brand prestige and recognition, among other
considerations.  The Company also competes with numerous
manufacturers, importers and distributors of footwear, apparel and accessories
for the limited shelf-space available for the display of such product to the
consumer.  Moreover, the general availability of contract
manufacturing capacity allows ease of access by new market
entrants.  Some of the Company’s competitors are larger, have achieved
greater recognition for their brand names, have captured greater market share
and/or have substantially greater financial, distribution, marketing and other
resources than the Company.





The
loss of any of the Company’s largest customers could have a material adverse
effect on its financial results.





Although
currently no customer comprises more than ten percent of the Company’s customer
base, should one of its larger customers be negatively impacted, it could
adversely affect the Company’s business.  In recent years the retail
industry has experienced consolidation and other ownership changes.





In the
future, retailers may continue to have financial problems, consolidate, undergo
restructurings or reorganizations, or realign their affiliations, any of which
could further increase the concentration of the Company’s
customers.  The loss of any of the Company’s largest customers, or the
bankruptcy or material financial difficulty of any customer, could have a
material adverse effect on its business.  The Company does not have
long-term contracts with any of its customers, and sales to customers generally
occur on an order-by-order basis.  As a result, customers can
terminate their relationships with the Company at any time or under certain
circumstances cancel or delay orders, which could reduce the Company’s sales and
adversely affect its business condition.





The
success of the Company’s business depends on its ability to attract and retain
key employees.





The
Company is heavily dependent on its current executive officers and
management.  The loss of any of its executive officers or
management, including but not limited to, Kenneth D. Cole, or the inability to
attract and retain qualified personnel could delay the development and
introduction of new products, harm the Company’s ability to sell products,
damage the image of its brands and/or prevent the Company from executing its
business strategy.





Imposition
of quotas and fluctuations in exchange rates could increase the Company’s costs
and impact its ability to source goods.





The
Company’s business is subject to risks of doing business abroad, including, but
not limited to, fluctuations in exchange rates and the imposition of additional
regulations relating to imports, including quotas, duties, taxes and other
charges on imports.





In order
to reduce the risk of exchange rate fluctuations, the Company often enters into
forward exchange contracts to protect the purchase price under its agreements
with its manufacturers or purchases products in United States
dollars.  The Company cannot fully anticipate all of its currency
needs and, therefore, cannot fully protect against the effect of such
fluctuations.





Although
the majority of the goods sold by the Company are not currently subject to
quotas, countries in which the Company’s products are manufactured may, from
time to time, impose new or adjust prevailing quotas or other




18




restrictions
on exported products and the United States may impose new duties, tariffs and
other restrictions on imported products, any of which could adversely affect the
Company’s operations and its ability to import its products at the Company’s
current or increased quantity levels.  Other restrictions on the
importation of footwear and the Company’s other products are periodically
considered by the United States Congress and no assurances can be given that
tariffs or duties on the Company’s goods may not be raised.  If
tariffs are raised in the future, they will result in higher costs to the
Company, and if import quotas are imposed or made more restrictive, the Company
may not be able to source its goods at historical factories or at similar
prices.




The
voting shares of the Company’s stock are concentrated in one majority
shareholder.





Currently,
Kenneth D. Cole owns approximately 90% of the voting power and approximately 47%
of the outstanding common stock of the Company.  As a result, Mr. Cole
has the ability to control (i) the election of all of the Company’s directors
other than the directors who will be elected by the holders of Class A Common
Stock, voting separately as a class, and (ii) the results of all other
shareholder matters.  Mr. Cole’s interests may differ from the
interests of the other stockholders.





War,
acts of terrorism, and natural disasters could affect the Company’s ability to
procure, sell and deliver product.





In the
event of actual or threatened war, acts of terrorism or the escalation of
existing hostilities, or in the event of a natural disaster, the Company’s
ability to procure its products from its manufacturers for sale to its customers
may be negatively affected.  The Company imports a substantial portion
of its products from other countries.  If it becomes difficult or
impossible to import the Company’s products into the countries in which it sells
its products, the Company’s sales and profit margins may be adversely
affected.  Additionally, war, military responses to future
international conflicts, and possible future terrorist attacks may lead to a
downturn in the U.S. and/or international economies, which could have a material
adverse effect on the Company’s results of operations.





The
Company’s business is subject to risks associated with sourcing outside the
United States.





Substantially
all of the Company’s products are produced by independent manufacturers. The
Company faces the risk that these third-party manufacturers with whom it
contracts to produce its products may not produce and deliver its products on a
timely basis, or at all.  The Company cannot be certain that it will
not experience operational difficulties with its manufacturers, such as
reductions in the availability of production capacity, errors in complying with
product specifications, insufficient quality control, and failures to meet
production deadlines or increases in manufacturing costs.  The failure
of any manufacturer to perform to the Company’s expectations could result in
supply shortages for certain products and harm its business.





In
addition, the Company’s foreign manufacturers may be adversely affected by
additional factors such as political instability in countries where contractors
and suppliers are located, imposition of regulations and quotas relating to
imports, imposition of duties, taxes and other charges on imports, significant
fluctuation of the value of the dollar against foreign currencies and
restrictions on the transfer of funds to or from foreign countries.





The
capacity of the Company’s manufacturers to manufacture its products also is
dependent, in part, upon the availability of raw materials.  The
Company’s manufacturers may experience shortages of raw materials, which could
result in delays in deliveries of the Company’s products by its manufacturers or
in increased costs to the Company.  Any shortage of raw materials or
inability of a manufacturer to manufacture or ship its products in a timely
manner, or at all, could impair the Company’s ability to ship orders of its
products in a cost-efficient, timely manner and could cause the Company to miss
the delivery requirements of its customers.  As a result, the Company
could experience cancellations of orders, refusals to accept deliveries or
reductions in its prices and margins, any of which could harm the Company’s
financial performance and results of operations.





The
Company relies on licensees for revenues, supply of products and compliance with
Company standards.





The
Company licenses its trademarks to third parties for manufacturing, marketing,
distribution and sale of various products and intends to expand its licensing
programs.  While the Company enters into comprehensive licensing
agreements with its licensees covering product design, product quality,
sourcing, manufacturing, marketing and other requirements, its licensees may not
comply fully with those agreements.  Non-compliance could include
marketing products under the Company’s brand names that do not meet its quality
and other requirements or engaging in manufacturing practices that do not meet
the Company’s supplier code of conduct.  These activities could harm
the Company’s brand equity, its reputation and its business.





19


In
addition, the Company’s royalty revenues could be affected by the results of its
licensees or distributors, or the transition of any of its licensing categories
in-house.  The financial difficulties of any of its partners or their
failure to produce and deliver acceptable product could have an adverse impact
on the Company’s royalty revenues in the future.  In the event of a
business failure of any such partner or of the breakdown of the Company’s
relationship with any domestic or foreign partner, there is no guarantee that
the Company could replace such royalty revenues or business.





Failure
to anticipate and maintain proper inventory levels could have an adverse
financial effect on the Company’s business.





The
Company maintains an inventory of selected products that it anticipates will be
in high demand.  The Company may be unable to sell the products it
ordered in advance from manufacturers or that it has in its
inventory.  Inventory levels in excess of customer demand may result
in inventory write-downs or the sale of excess inventory at discounted or
closeout prices.  These events could significantly harm the Company’s
operating results and impair the image of the Company’s
brands.  Conversely, if the Company underestimates consumer demand for
its products or if manufacturers fail to supply quality products in a timely
manner, the Company may experience inventory shortages, which may result in
unfilled orders, negatively impact customer relationships, diminish brand
loyalty and result in lost revenues.





The
Company relies on third parties for distribution and warehousing.





The
Company relies on warehousing and distribution facilities operated by third
parties in California, New Jersey and Ontario, Canada.  Any damage at
any of these facilities due to fire, earthquake, flood, terrorist attack or any
other natural or man-made cause, including operational or financial hardship of
the provider or its capacity, could impair a portion of the Company’s inventory
or its ability to use its warehousing and distribution facilities.





Outcomes
of litigation or changes in regulatory control could impact the Company’s
financial condition.





From time
to time, the Company may be a party to lawsuits and regulatory actions relating
to its business.  Due to the inherent uncertainties of litigation and
regulatory proceedings, the Company cannot accurately predict the ultimate
outcome of any such proceedings.  An unfavorable outcome could have a
material adverse impact on the Company’s business, financial condition and
results of operations.  In addition, regardless of the outcome of any
litigation or regulatory proceedings, such proceedings could result in
substantial costs and may require that the Company devote substantial resources
to defend itself.  Further, changes in government regulations both in
the United States and in the countries in which the Company operates could have
adverse affects on its business and subject it to additional regulatory
actions.





The
loss or infringement of the Company’s trademarks and other proprietary rights,
or its failure to procure these rights, could have a material adverse effect on
its operations.





The
Company believes that its trademarks and other proprietary rights are important
to its success and competitive position.  Accordingly, the Company
devotes substantial resources to the establishment and protection of its
trademarks on a worldwide basis.  There can be no assurances that such
actions taken to establish and protect the Company’s trademarks and other
proprietary rights will be adequate to prevent imitation of its products by
others or to prevent others from seeking to block sales of the Company’s
products as violative of their trademarks and proprietary rights.  In
addition, the laws of certain foreign countries may not protect trademarks and
proprietary rights to the same extent as do the laws of the United
States.  During the course of the Company’s expansion of its trademark
portfolio, it has experienced conflicts with various third parties that have
acquired or claimed ownership rights in one or more of its trademarks or
otherwise have contested the Company’s rights to its trademarks. The Company has
in the past endeavored to resolve certain of these conflicts through both legal
action and negotiated settlements.  There can be no assurances that
the Company will be able to resolve such conflicts successfully or that others
will not assert rights in, or ownership of, the Company’s trademarks and other
proprietary rights.  Any litigation regarding Company trademarks or
other proprietary rights could be time consuming and costly, and the loss of
such trademarks and other proprietary rights, or the loss of the exclusive use
of such trademarks and other proprietary rights, could have a material adverse
effect on the Company’s operations.





20





Implementation
of management information systems may impact the Company’s financial
results.





During
2007, the Company implemented SAP information management software in its retail
operations and considered further expansion of SAP as an entity-wide integrated
system solution.  If any further implementation of SAP or new system
enhancements is initiated, delays or computer and operational complications in
connection with such implementation, could have a material adverse effect on the
Company’s business, financial condition or results of
operations.  Difficulties migrating existing systems to any new
software or enhancements could impact the Company’s ability to design, produce
and ship its products on a timely basis.





Seasonality
of the Company’s business and the timing of store openings and closings could
result in fluctuations in its financial performance.





The
Company’s business is subject to seasonal fluctuations.  Historically,
fourth quarter’s sales are typically higher due to holiday
business.  Therefore, results of operations for any single quarter are
not necessarily indicative of the results that may be achieved for a full fiscal
year.  Quarterly results have been, and in the future will continue to
be, significantly impacted by the timing of new store openings and their
respective pre-opening costs, as well as store closings and related
costs.  In 2008, the financial results of the Company were
significantly impacted by severe deterioration of the economy in the fourth
quarter, which negatively impacted the fourth quarter and full year
results.





Adverse
publicity could negatively affect public perception of the brand.





The
Company’s results could be substantially affected by adverse publicity resulting
from its products or its advertising.





Expiration
of leases could result in fluctuations in the Company’s financial
performance.





As retail
store leases expire, the Company may not be able to renew them on acceptable
terms or secure suitable replacement locations.  While the Company
continues to explore new markets and is always evaluating new potential
locations, some stores may close, and this may have an adverse impact on the
financial operations of the Company’s Consumer Direct division.





The
Company’s expectations of growth anticipate new store openings which are subject
to many factors beyond its control.





Future
growth in sales and profits in the Company’s Consumer Direct division will
depend to some extent on its ability to increase the number of
stores.  The lease negotiation and development timeframes, and the
accomplishment of other milestones on which opening new stores depend, vary from
location to location and can be subject to unforeseen delays.  The
number and timing of new stores actually opened during any given period, and
their associated contribution to net income for the period, will depend on a
number of factors including, but not limited to: the identification and
availability of suitable markets, locations, and leases; the negotiation of
acceptable lease terms for new locations; the development of new merchandise and
effective management of inventory to meet the needs of new and existing stores
on a timely basis; the successful management of its infrastructure to
accommodate new store openings; the fostering of current relationships and
development of new relationships with vendors that are capable of supplying a
greater volume of merchandise; the availability of suitable financing to the
Company and its landlords; the timing of the delivery of the leased premises to
the Company from its landlords in order to commence build-out construction
activities; the ability of the Company and its landlords to obtain all necessary
governmental licenses and permits to construct, open, and operate its stores on
a timely basis; the Company’s ability to manage the construction and development
costs of new stores, and the availability and/or cost of raw materials; the
avoidance of construction delays and cost overruns in connection with the
build-out of new stores; the rectification of any unforeseen engineering or
environmental problems with the leased premises; adverse weather during the
construction period; and the hiring and training of qualified operating
personnel in the local market.  Any of the above factors could have a
material adverse impact on the Company’s financial condition.





The
Company’s plans to expand its store base may not be successful and may not
result in an increase in its revenues even though they increase costs. The
Company will be required to enter into additional leases, increase its rental
expenses and make capital expenditures for these stores. These commitments may
be costly to terminate, and these investments may be difficult to recapture if
the Company decides to close a store or alter its strategy.  The
Company must offer a broad product assortment, appropriately manage retail
inventory levels, operate effective retail systems, execute effective pricing
strategies and integrate its stores into its overall business mix. In addition,




21




the
opening of stores may divert some revenues from its wholesale customers.
 The increased demands of operating additional stores could cause the
Company to operate less effectively, which could cause the performance of its
existing operations to suffer materially. As a result, the Company’s revenues
could decline and its profitability could be adversely affected.




The
effects of hurricanes and other natural disasters may increase insurance costs
for which the Company may take on higher deductibles if losses
occur.





The
Company has operations in flood, hurricane and earthquake zones.  As
such, the Company has insured itself against losses from natural
disasters.  The cost of such insurance could rise significantly as a
result of the effects of future natural disasters throughout the United
States.  To offset such costs, the Company may take on larger
deductibles which, if aggregated through multiple disaster locations, could have
a material effect on its results of operations.





Negative
conditions in global credit markets may impair the Company’s marketable
securities portfolio.





The
Company has investments in auction-rate securities which reset every 28 days
that are “double A” and “single A” rated debt obligations, and substantially all
have insurers.   The recent conditions in the global credit
markets have prevented some investors from liquidating their holdings of
auction-rate securities because the amount of securities submitted for sale has
exceeded the amount of purchase orders for such securities.  If there
is insufficient demand for the securities at the time of auction, the auction
may not be completed and the interest rates may not be reset to predetermined
interest rates.  When auctions for these securities fail, the
investments may not be readily convertible to cash until a future auction of
these investments is successful or they are redeemed or
mature.   If a decline in market value continues that is deemed
other-than-temporary resulting in a writedown, the result could have a material
effect on the Company’s results of operations.





The
Company’s ability to collect receivables could be impacted by adverse economic
conditions.





The
Company’s factors collect and insure significant receivable
balances.  If the global credit markets deteriorate or economic
conditions worsen, the Company may be exposed to potential significant
write-offs in the event of bankruptcy by its factors that could adversely impact
its financial results.  In addition, challenging economic conditions
may impair the ability of the Company’s customers to pay for products and
licensees to pay royalties.  As a result, reserves for doubtful
accounts and write-offs of accounts receivable may increase.





The
worldwide apparel industry is subject to ongoing pricing pressure, which could
adversely affect the Company’s sales and margins.





The
apparel market is characterized by low barriers to entry for both suppliers and
marketers, intense competition, global sourcing through suppliers located
throughout the world, trade liberalization, continuing movement of product
sourcing to lower cost countries, the ongoing emergence of new competitors with
widely varying strategies and resources, consolidation in the retail industry,
and pressure from retailers to reduce the costs of products. These factors
contribute to ongoing downward pricing pressure.  This pressure may
require the Company to: reduce wholesale prices on existing products; reduce
gross margins across the Company’s product lines; and yield to increased
retailer demands for allowances, incentives and other forms of economic
support.  If the Company’s sales prices decline and the Company fails
to reduce its product costs or operating expenses sufficiently, its losses could
continue or grow. This could have a material adverse effect on the Company’s
results of operations and financial condition.





The
Company may experience continued contraction in its primary distribution
channels.





In the
United States, department stores are the primary distribution channels for the
Company’s products.  Sales through these distribution channels could
constrict, or the Company may be unable to increase sales of its products
through these channels, for several reasons, including, but not limited to,:
many of the Company’s primary customers are reducing the number of stores they
operate, thereby reducing the number of doors into which the Company’s products
can be sold; and these customers maintain — and seek to grow — substantial
private-label and exclusive offerings as they strive to differentiate the brands
and products they offer from those of their competitors.  The ability
to maintain retail floor space, market share and sales in these channels depends
on the Company’s ability to offer differentiated and exclusive products and to
increase retailer profitability on its products, which could have an adverse
impact on the Company’s margins.





22


The
Company cannot assure the successful implementation of its long-term strategic
plan.





The
Company seeks to undertake a number of strategic initiatives, including
extending certain of its brands, conducting and executing a strategic review of
certain other of its brands, expanding its geographic coverage, and enhancing
its operations. The success of its long-term strategic plan and its ability to
execute this plan are subject to a variety of risks, including, but not limited
to, the following:





●
            The
      Company’s strategy involves the expansion of the Company’s retail
      stores.  The risks associated with that strategy are detailed
      above, under the heading “The Company’s expectations of
      growth anticipate new store openings which are subject to many factors
      beyond its control.”





●
            As
      part of the Company’s strategic plan, it designated certain brands for
      strategic review, which includes the possible consolidation of certain
      lines into other brands or the licensure of brands to third
      parties.  There can be no assurances that the Company will
      identify the appropriate brands for strategic review or that the measures
      the Company takes with respect to those brands will yield the intended
      results.





●
            Part
      of the Company’s strategic plan is the growth of the Le Tigre
      brand.  The growth of that brand cannot be
      assured.  In 2007, one of the Company’s subsidiaries signed an
      agreement with JCPenney to relaunch the Le Tigre brand at
      JCPenney. The success of Le Tigre at JCPenney, as well as the introduction
      of new product categories in both the U.S. and overseas under the Le Tigrelabel, may be
      negatively impacted in 2009 and beyond by ongoing economic
      uncertainty.  Additionally, the growth of the brand abroad may
      be challenged by difficulties procuring the necessary trademarks and
      proprietary rights.





●
            The
      Company has previously announced structural realignment measures and other
      initiatives designed to yield substantial cost savings. There can be no
      assurances that the Company can successfully execute these measures or
      that they will produce the anticipated cost
  savings.





●
            The
      Company lacks the distribution channels abroad that it has in the U.S.,
      and it may have difficulty developing successful distribution strategies
      and alliances in each of the major countries that it has targeted for
      significant international growth.  Additionally, macroeconomic
      trends may continue to be extremely difficult, and could limit the
      Company’s ability to implement its growth strategies in select
      geographies.





The
Company could suffer if one of its manufacturers fails to use acceptable labor
practices.





The
Company requires its independent manufacturers to operate in compliance with
Company guidelines and applicable laws and regulations. While the Company’s
internal and vendor operating guidelines promote ethical business practices, the
Company does not control these manufacturers or their labor practices. The
violation of labor or other laws by an independent manufacturer used by the
Company, or the divergence of an independent manufacturer’s labor practices from
those generally accepted as ethical or appropriate in the U.S., could interrupt,
or otherwise disrupt, the shipment of finished products to the Company or damage
its reputation. Any of these, in turn, could have a material adverse effect on
the Company’s financial condition and results of operations.





If
the Company fails to maintain the value of its brands, its sales are likely to
decline.





The
Company’s success depends on the value of its brands. The brands under which the
Company sells products are integral to its business as well as to the
implementation of its strategies for expanding its business. Maintaining,
promoting, and positioning the Company’s brands will depend largely on the
success of its marketing and merchandising efforts and its ability to provide a
consistent, high quality customer experience. Its brands could be adversely
affected if it fails to achieve these objectives or if its public image or
reputation were to be tarnished by negative publicity or consumer perception.
Any of these events could result in decreases in sales.





The
Company’s inability to maintain levels of comparable store sales could cause
earnings to decline.





If the
Company’s future comparable store sales fail to meet market expectations,
its losses could continue or grow. A variety of factors affect comparable
store sales, including fashion trends, competition, current economic conditions,
pricing, inflation, the timing of the release of new merchandise and promotional
events, changes in merchandise mix, the success of marketing programs, timing
and level of markdowns and weather conditions. These factors may cause
comparable store sales results to be materially lower than recent periods or
expectations, which could cause declines in quarterly earnings and stock
price.





23


A
reduction in the volume of traffic to the Company’s stores could significantly
reduce sales and leave the Company with unsold inventory.





The
Company’s stores are located in premiere shopping districts and shopping
malls.  Sales at these stores are derived, in part, from the volume of
traffic in those areas. The Company’s mall stores benefit from the ability of
the malls’ “anchor” tenants, generally large department stores, and other area
attractions to generate consumer traffic in the vicinity of its stores and the
continuing popularity of the malls as shopping destinations.  Sales
volume and traffic at mall stores could continue to be adversely affected by
economic downturns, the closing of anchor department stores and competition from
non-mall retailers and other malls where the Company does not have
stores.  Any of these events, or a decline in the desirability of the
shopping environment of a particular mall or area or in the popularity of
shopping generally among the Company’s customers, would adversely affect the
Company’s results.




Item
      1B.
                  Unresolved Staff
  Comments


None.




Item
      2.
                    Properties


The
Company’s corporate headquarters building is located at 603 West 50th Street,
New York, New York.  The building is owned by the Company and has
approximately 119,000 square feet of space.  The Company leases 51,000
square feet of office space in Secaucus, New Jersey for its administrative
offices.  The Company also has a technical and administrative office
in Dongguan, China and closed its office in Florence, Italy during
2008.  The Company does not own or operate any manufacturing
facilities.  As of December 31, 2008, the Company leased space for all
of its 43 full-priced retail stores (aggregating approximately 214,000 square
feet) and 53 Company Stores (aggregating approximately 243,000 square
feet).  Generally, the leases provide for an initial term of five to
ten years and certain leases provide for renewal options permitting the Company
to extend the term thereafter.  In addition, certain leases have
co-tenancy failure options allowing the Company to terminate leases prior to
contractual expiration dates based on specified terms not met by the landlord or
the Company as defined by the lease.




Item
    3.
                    Legal
      Proceedings
  The
Company is, from time to time, a party to litigation that arises in the normal
course of its business operations.  The Company is not presently a party to
any litigation that it believes might have a material adverse effect on its
business operations.




Item
    4.
                      Submission of Matters to a Vote of Security
      Holders


None.




24




PART II




Item
    5.
                        Market for Registrant’s Common Equity, Related
      Stockholder Matters, and Issuer Purchases of Equity
      Securities


The
Company’s Class A Common Stock is listed and traded (trading symbol: KCP) on the
New York Stock Exchange (“NYSE”).  On February 27, 2009 the closing
sale price for the Class A Common Stock was $7.00.  The following
table sets forth the high and low closing sale prices for the Class A Common
Stock for each quarterly period for 2008 and 2007, as reported on the NYSE
Composite Tape:





2008:
            
            High
            
            
            LowFirst
      Quarter
            
            
            17.68
            
            
            
            14.10Second
      Quarter
            
            
            19.51
            
            
            
            12.70Third
      Quarter
            
            
            18.02
            
            
            
            12.39Fourth
      Quarter
            
            
            14.37
            
            
            
            5.692007:
            
            High
            
            
            LowFirst
      Quarter
            
            
            27.67
            
            
            
            22.85Second
      Quarter
            
            
            27.94
            
            
            
            23.07Third
      Quarter
            
            
            25.02
            
            
            
            19.37Fourth
      Quarter
            
            
            20.34
            
            
            
            17.27





The number of shareholders of record of
the Company’s Class A Common Stock on February 28, 2009 was 89.





There
were 8 holders of record of the Company’s Class B Common Stock on February 28,
2009, all of which were directly or indirectly owned by Kenneth D.
Cole.  There is no established public trading market for the Company’s
Class B Common Stock.





The
Company repurchased 1,619,200 shares of its own stock during 2008, none of which
was repurchased during the fourth quarter.





Dividend
Policy





The
payment of any future dividends will be at the discretion of the Company’s Board
of Directors and will depend, among other things, upon future earnings,
operations, capital requirements, proposed tax legislation, the financial
condition of the Company and general business conditions.





The
Company made $0.09 per share dividend payments to shareholders of record as of
the close of business on March 14, May 22, August 21 and November 20 during the
fiscal year ended December 31, 2008 and $0.18 per share dividend payments to
shareholders of record as of the close of business on March 8, May 24, August 23
and November 21 during the fiscal year ended December 31, 2007.  The
Board of Directors suspended the Company’s quarterly dividend on February 26,
2009.





25




The Company had the following
securities authorized for issuance under equity compensation plans as of
December 31, 2008:





Plan
      Category
            
            Number
      of securities to be
              issued
      upon exercise of
              outstanding
      options,
              warrants,
      and rights
              (a)
            
            
            Weighted-average
      exercise
              price
      of outstanding
              options,
      warrants, and
              rights
              (b)
            
            
            Number
      of securities
              remaining
      available for
              future
      issuance under
              equity
      compensation plans
              (excluding
      securities
              reflected
      in column (a))
              (c)Equity
      compensation plans approved by
              security
      holders
            
            
            2,411,263
            
            
            
            $21.75
            
            
            
            425,836Equity
      compensation plans not approved
              by
      security holders
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/A





Stock
Performance Graph





The
following graph compares the yearly percentage change in the cumulative total
shareholder return on the Class A Common Stock during the period beginning on
December 31, 2003 and ending on December 31, 2008 with the cumulative total
return on the Standard & Poor's 500 Composite Index and the Standard &
Poor’s Footwear Index.  The comparison assumes that $100 was invested
on December 31, 2003 in the Class A Common Stock in the foregoing indices and
assumes the reinvestment of dividends.







26











27




Item
    6.
                          Selected Financial
  Data


The
following selected financial data has been derived from the consolidated
financial statements of the Company and should be read in conjunction with the
consolidated financial statements and notes thereto that appear elsewhere in
this Annual Report and in “Management's Discussion and Analysis of Financial
Condition and Results of Operations” set forth in Item 7 of this Annual
Report.





(Amounts
are in thousands except for per share and dividend amounts.)





2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Income
      Statement Data:Net
      sales
            
            $
            448,578
            
            
            $
            466,405
            
            
            $
            492,282
            
            
            $
            474,060
            
            
            $
            473,438Royalty
      revenue
            
            
            43,759
            
            
            
            44,315
            
            
            
            44,217
            
            
            
            43,983
            
            
            
            42,763Net
      revenue
            
            
            492,337
            
            
            
            510,720
            
            
            
            536,499
            
            
            
            518,043
            
            
            
            516,201Cost
      of goods sold
            
            
            293,452
            
            
            
            287,408
            
            
            
            304,672
            
            
            
            283,727
            
            
            
            284,817Gross
      profit (2)
            
            
            198,885
            
            
            
            223,312
            
            
            
            231,827
            
            
            
            234,316
            
            
            
            231,384Selling
      and general administrative expenses (1)
            
            
            208,168
            
            
            
            207,863
            
            
            
            194,718
            
            
            
            188,953
            
            
            
            174,519Impairment
      of long-lived assets
            
            
            3,028
            
            
            
            10,564
            
            
            
            121
            
            
            
            --
            
            
            
            448Operating
      (loss)/income
            
            
            (12,311
            )
            
            
            4,885
            
            
            
            36,988
            
            
            
            45,363
            
            
            
            56,417Interest
      income, net
            
            
            1,730
            
            
            
            5,661
            
            
            
            4,875
            
            
            
            4,151
            
            
            
            1,411Impairment
      of investments
            
            
            (7,840
            )
            
            
            (295
            )
            
            
            --
            
            
            
            --
            
            
            
            --(Loss)/income
      before (benefit from)/provision for income taxes
            
            
            (18,421
            )
            
            
            10,251
            
            
            
            41,863
            
            
            
            49,514
            
            
            
            57,828(Benefit
      from)/provision for income taxes
            
            
            (3,621
            )
            
            
            3,168
            
            
            
            15,098
            
            
            
            15,988
            
            
            
            21,976Net
      (loss)/income
            
            $
            (14,800
            )
            
            $
            7,083
            
            
            $
            26,765
            
            
            $
            33,526
            
            
            $
            35,852(Loss)/earnings
      per share:Basic
            
            $
            (0.80
            )
            
            $
            0.35
            
            
            $
            1.34
            
            
            $
            1.69
            
            
            $
            1.79Diluted
            
            $
            (0.80
            )
            
            $
            0.35
            
            
            $
            1.31
            
            
            $
            1.65
            
            
            $
            1.74Weighted-average
      shares outstanding:Basic
            
            
            18,423
            
            
            
            20,057
            
            
            
            20,046
            
            
            
            19,888
            
            
            
            20,050Diluted
            
            
            18,423
            
            
            
            20,325
            
            
            
            20,396
            
            
            
            20,318
            
            
            
            20,652Cash
      dividends per share
            
            $
            0.36
            
            
            $
            0.72
            
            
            $
            0.72
            
            
            $
            0.66
            
            
            $
            0.522008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Balance
      Sheet Data:Working
      capital
            
            $
            97,521
            
            
            $
            139,677
            
            
            $
            169,862
            
            
            $
            187,106
            
            
            $
            173,007Cash
            
            
            64,704
            
            
            
            90,653
            
            
            
            105,441
            
            
            
            63,747
            
            
            
            80,014Marketable
      Securities
            
            
            5,085
            
            
            
            8,305
            
            
            
            12,250
            
            
            
            66,400
            
            
            
            40,000Inventory
            
            
            43,342
            
            
            
            48,033
            
            
            
            46,274
            
            
            
            45,465
            
            
            
            47,166Total
      assets
            
            
            313,435
            
            
            
            356,122
            
            
            
            361,113
            
            
            
            340,671
            
            
            
            304,587Total
      debt, including current maturities
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            3,000
            
            
            
            --Total
      shareholders' equity
            
            $
            199,762
            
            
            $
            241,990
            
            
            $
            257,676
            
            
            $
            244,660
            
            
            $
            216,528






(1)
            Includes
      warehousing and receiving expenses.





(2)
            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.




28




Item
    7.
                            Management’s Discussion and Analysis of
      Financial Condition and Results of
  Operations




The
following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto that appear elsewhere in
this Annual Report.





Overview





Kenneth
Cole Productions, Inc. designs, sources and markets a broad range of fashion
footwear, handbags and apparel and, through license agreements, designs and
markets apparel and accessories under its Kenneth Cole New York, Kenneth Cole
Reaction, Unlistedand Gentle Souls brand names, as
well as having the rights to use the Bongo trademark for footwear
through a license agreement.  The Company also designs, develops,
markets and sources sportswear, footwear, handbags and other accessories under
the Le Tigrebrand
name, whose trademark and intellectual property were acquired in September
2007.  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 fashion conscious consumers, reflecting a
modern metropolitan perspective and a lifestyle uniquely associated with Kenneth
Cole.  These products include core basics that generally remain
in demand from season to season and fashion products that are designed to
establish or capitalize on market trends.  The combination of 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 5,700 department, specialty and
off-price store locations, as well as through its Consumer Direct business,
which includes full-priced retail stores, Company Stores (“outlets”) and
e-commerce.  The Company believes the diversity of its product
offerings distinguishes the Company from its competitors in terms of product
classifications (men’s, women’s and children’s footwear, handbags, apparel and
accessories), prices (“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.




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, underwear, belts, sunglasses, prescription
eyewear, watches, fragrance, jewelry, luggage, business cases, socks and small
leather goods.  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, fragrance and luggage.  In addition, the Company
licenses its children’s apparel.




Our
opportunities for long-term growth are accompanied by challenges and risks,
particularly in the current steep recessionary environment.  Our results
are dependent on consumer demand for our products and factors such as general
economic and business conditions, interest rate fluctuations, consumer credit
availability, energy costs, geo political stability, customer traffic, tax law,
stock market activity and other consumer impacting conditions.  The recent
unprecedented volatility that has disrupted capital and consumer markets has
also reduced incomes and employment and reduced consumer confidence to levels
that have not been seen in decades.  Since fashion and fashion related
products are viewed as discretionary spending, the economic environment has
reduced customer spending dramatically and the Company believes this economic
downturn will continue and therefore could have a material adverse effect on the
Company’s future results of operations, and financial condition.




The
Company recorded net revenues of $492.3 million for the year ended December 31,
2008.  Diluted loss per share was $(0.80), including impairment and
severance charges of $12.9 million, for the year ended December 31, 2008
compared to diluted earnings per share of $0.35, including impairment and
severance charges of $11.7 million for the year ended December 31,
2007.  As of December 31, 2008, the Company had $64.7 million in cash
and cash equivalents and no debt.





Critical
Accounting Policies and Estimates





General





The
Company’s management’s discussion and analysis of its financial condition and
results of operations are based upon the Company’s consolidated financial
statements, which have been prepared in accordance with




29




accounting
principles generally accepted in the United States.  The preparation
of these financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities.  On an ongoing basis, the Company evaluates its
estimates, including those related to product returns, bad debts, inventories,
income taxes, financing operations, contingencies and litigation.  The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other
sources.  Actual results may differ from these estimates under
different assumptions or conditions.





The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:





Inventory





The
Company writes down its inventory for estimated obsolescence equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions.  If actual
market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.





Sales
Returns and Allowances





The
Company’s ability to collect chargebacks for deductions taken by its customers
for returns, discounts and allowances as well as potential future customer
deductions is significant to its operations.  The Company reserves
against known chargebacks as well as potential future customer deductions based
on a combination of historical activity and current market
conditions.  Actual results may differ from these estimates under
different assumptions or conditions, which may have a significant impact on the
Company’s results.





Allowance
for Doubtful Accounts





The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers and licensees to make required
payments, including royalties and advertising revenues from its licensing
partners.  Customers include non-factored accounts and credit card
receivables from third-party service providers.  If the financial
conditions of these customers and licensees were to deteriorate and impair their
ability to make payments, additional allowances may be required.





Impairment
of Indefinite-lived Intangible Assets and Long-Lived Assets





The
Company performs a review of its indefinite-lived intangible assets and
long-lived assets for impairment on a quarterly basis or whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable.  If the total of the expected future undiscounted cash flows
is less than the carrying amount of the asset, a loss is recognized for the
difference between the fair value and carrying value of the asset.





Fair
Value




On
January 1, 2008, the Company adopted certain provisions of FASB Statement
of Financial Accounting Standards No. 157, Fair Value Measurements,
which establishes the authoritative definition of fair value, sets out a
framework for measuring fair value and expands the required disclosures about
fair value measurement.
  The
Company’s financial assets and liabilities are measured using inputs from the
three levels of the fair value hierarchy, which are as
follows:




●
            Level
      1 - 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;




●
            Level
      2 - 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; and




●
            Level
      3 - a fair value that is derived from inputs that are unobservable or from
      observable inputs based on unobservable data in an inactive
      market.




30




Income
Taxes





The
Company’s income taxes are routinely under audit by federal, state or local
authorities.  These audits include questioning of the timing and
amount of deductions and the allocation of income among various tax
jurisdictions.  Based on its annual evaluations of tax positions, the
Company believes it has appropriately accrued for probable
exposures.  To the extent the Company is required to pay amounts in
excess of recorded income tax liabilities, the Company’s effective tax rate in a
given financial statement period could be materially impacted.  The
Company adopted Financial Accounting Standards Board Interpretation No. 48
“Accounting for Uncertainty in
Income Taxes” (“FIN 48”) on January 1, 2007 which requires financial
statement recognition and measurement of a tax position taken or expected to be
taken in a return.  The adoption of FIN 48 did not have a material
impact on the financial statements.





Litigation





The
Company is periodically involved in various legal actions arising in the normal
course of business.  Management is required to assess the probability
of any adverse judgments as well as the potential range of any
losses.  Management determines the required accruals after a careful
review of the facts of each significant legal action.  The Company’s
accruals may change in the future due to new developments in these
matters.





Contingencies





In the
ordinary course of business, the Company is involved in and subject to
compliance and regulatory reviews and audits by numerous authorities, agencies
and other governmental agents and entities from various
jurisdictions.  The Company is required to assess the likelihood of
any adverse outcomes of these matters.  A determination of the amount
of reserves required, if any, for these reviews is made after careful analysis
of each individual issue.  The reserves may change in the future due
to new developments or final resolution in each matter, which may have a
significant impact on the Company’s results.





Stock-based
Compensation





The
Company accounts for share-based payments pursuant to SFAS No. 123R “Share-based
Payment” (“SFAS 123R”) which requires all share-based payments, including grants
of employee stock options, to be recognized in the financial statements based on
their fair values.  Under SFAS 123R, the Company measures the
cost of services received in exchange for stock options and similar awards based
on the grant-date fair value of the award and recognizes this cost in the income
statement over the period during which an award recipient is required to provide
services in exchange for the award.  The Company uses the
Black-Scholes model to assess the fair value of non-qualified employee stock
options and amortizes this cost over the service period.  In addition,
stock compensation expense is reduced for estimated forfeitures prior to vesting
primarily based on historical annual forfeiture rates and by employee
classification.  Estimated forfeitures are reassessed on a quarterly
basis and may change based on new facts and circumstances.





New
Accounting Pronouncements





In
March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 161, “Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133” (“SFAS 161”).  SFAS 161 amends and
expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.”SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008.  The Company will adopt the provisions on
January 1, 2009 and has determined that it will not have a material impact on
the Company’s consolidated financial statements.





In April
2008, the FASB issued Staff Position FAS 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”).  FSP 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
“Goodwill and Other Intangible
Assets” (“SFAS 142”).  The intent of FSP 142-3 is to improve
the consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS No. 141R “Business Combinations”and
other applicable accounting literature.  FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008
and must be applied prospectively to intangible assets acquired after the
effective date.  The Company will adopt the provisions on January 1,
2009 and has determined that it will not have a material impact on the Company’s
consolidated financial statements.




31




In May
2008, the FASB issued SFAS No. 162, “Hierarchy of Generally Accepted
Accounting Principles”(“SFAS 162”).  This statement is
intended to improve financial reporting by identifying a consistent framework,
or hierarchy, for selecting accounting principles to be used in preparing
financial statements of nongovernmental entities that are presented in
conformity with GAAP.  This statement will be effective sixty days
following the U.S. Securities and Exchange Commission’s approval of the Public
Company Accounting Oversight Board amendment to AU Section 411, “The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.”  The
Company expects that SFAS 162 will not have a material impact on the Company’s
consolidated financial statements.




In
October 2008, the FASB issued Staff Position No. FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active” (“FSP
157-3”), which clarifies the application of SFAS No. 157, “Fair Value Measurements,” in
an inactive market and illustrates how an entity would determine fair value when
the market for a financial asset is not active.  The staff position is
effective immediately and applies to prior periods for which financial
statements have not been issued, including interim or annual periods ending on
or before September 30, 2008.  The implementation of FSP 157-3
did not have a material impact on the Company’s consolidated financial
statements.





Results
of Operations





The
following table sets forth certain operating data of the Company as a percentage
of net revenues for the periods indicated below:





2008
            
            
            2007
            
            
            2006Net
      sales
            
            
            91.1
            %
            
            
            91.3
            %
            
            
            91.8
            %Royalty
      revenue
            
            
            8.9
            
            
            
            8.7
            
            
            
            8.2Net
      revenues
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0Cost
      of goods sold
            
            
            59.6
            
            
            
            56.3
            
            
            
            56.8Gross
      profit (1)
            
            
            40.4
            
            
            
            43.7
            
            
            
            43.2Selling,
      general and administrative expenses
            
            
            42.3
            
            
            
            40.7
            
            
            
            36.2Impairment
      of long-lived assets
            
            
            0.6
            
            
            
            2.1
            
            
            
            0.1Operating
      (loss)/income
            
            
            (2.5
            )
            
            
            1.0
            
            
            
            6.9Interest
      income, net
            
            
            0.4
            
            
            
            1.1
            
            
            
            1.0Other
      expense
            
            
            (1.6
            )
            
            
            (0.1
            )
            
            
            --(Loss)/income
      before (benefit from)/provision for income taxes
            
            
            (3.7
            )
            
            
            2.0
            
            
            
            7.8(Benefit
      from)/provision for income taxes
            
            
            (0.7
            )
            
            
            0.6
            
            
            
            2.8Net
      (loss)/income
            
            
            (3.0
            )%
            
            
            1.4
            %
            
            
            5.0
            %





(1) Gross
profit may not be comparable to other entities, since some entities include the
costs related to their distribution network (receiving and warehousing) in cost
of goods sold and other entities, similar to the Company, exclude these costs
from gross profit, including them instead in a line item such as selling,
general and administrative expenses.





Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007





Net
revenues decreased $18.4 million, or 3.6%, to $492.3 million in 2008 from $510.7
million in 2007.  The decrease was due to decreases in the Company’s
Wholesale and Licensing business segments, partially offset by increases in the
Company’s Consumer Direct business.




Wholesale
net sales (excluding sales to the Company’s Consumer Direct business segment)
decreased $23.6 million, or 8.1%, to $267.2 million in 2008 from $290.8 million
in 2007.  The decrease was primarily attributable to a decline in
sales across the Company’s branded footwearbusinesses, offset by
incremental sales from the Company’s in-house launch of its previously licensed
men’s sportswear collections.  The challenging retail environment and
continued stress in the macro-economic marketplace, particularly the department
store channel, as well as generally softer sell-thrus compared to the prior
year, resulted in declines in most of the Company’s Wholesale
businesses.




32




Net sales
in the Company’s Consumer Direct segment increased $5.8 million, or 3.3%, to
$181.4 million for the year ended December 31, 2008 from $175.6 million for the
year ended December 31, 2007.  Comparable store sales decreased $3.0
million, or 2.0%, primarily from a highly challenging holiday retail
environment, while new store sales in 2008 plus that portion of 2008 sales for
stores not open for all of 2007 increased $4.5 million.  In addition,
Internet sales increased 73.8% for the year ended December 31, 2008 as compared
to December 31, 2007.  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.  During 2008 the Company opened two full-priced retail stores
and closed eight, while continuing its expansion in Company Stores by opening
eleven stores.  As the Company has increased the amount of specific
“made for Company Store” product and focused merchandising on key assortments,
sales have improved at its Company Store locations.  In its
full-priced retail stores, the Company continued to balance its assortments,
tailored to the local markets, and adjusted its price points to align the
price-value relationship of the Company’s brands and continues to review its
real estate portfolio for both its full-priced retail and Company
stores.  In addition, the Company outsourced customer care,
fulfillment and website responsibilities related to its Internet business to a
third-party that provides direct-to-customer e-commerce services.  In
July 2008, the third party platform was also integrated with SAP, the Company’s
retail store system.




Royalty
revenue decreased $0.6 million, or 1.3%, to $43.7 million in 2008 from $44.3
million in 2007.  The decrease in licensing revenues was primarily
attributable to a reduction in men’s sportswear royalties from an a licensing
agreement that terminated December 31, 2007 offset by incremental royalties
received from existing licensees and the launch of the Le Tigrebrand.  During 2008, the Company began shipping men’s
sportswear, effectively transitioning the licensing model to an in-house
operation.




Consolidated
gross profit, as a percentage of net revenues, decreased to 40.4% for the year
ended December 31, 2008 from 43.7% for the year ended December 31,
2007.  The decrease, as a percentage of net revenues, was primarily
the result of a decrease in the Wholesale and Consumer Direct segment margins,
partially offset by the sales and revenue mix shifting to Consumer Direct and
Licensing as a percentage of total sales.  The decrease in the margins
was primarily due to soft sell-thrus and higher dilution from a promotional and
challenging macro environment, while converting the Company’s inventory to cash,
specifically during the fourth quarter, to improve liquidity, thereby keeping
assortments fresh and current for the Spring 2009 season.  The
Consumer Direct segment, which operates at a higher gross profit level than the
Wholesale segment, had increased revenues as a percentage of net revenues of
36.9% for the year ended December 31, 2008 compared to 34.4% for the year ended
December 31, 2007, while the Wholesale segment revenues as a percentage of net
revenues decreased to 54.3% for the year ended December 31, 2008 from 56.9% for
the year ended December 31, 2007.  The revenues in the Licensing
segment, which carries no cost of goods sold, increased as a percentage of
revenue to 8.9% for the year ended December 31, 2008 compared to 8.7% for the
year ended December 31, 2007.




Selling,
general and administrative (“SG&A”) expenses and impairment of long-lived
assets, inclusive of warehousing and receiving expenses, decreased $7.2 million
to $211.2 million for the year ended December 31, 2008 from $218.4 million for
the year ended December 31, 2007.  The decrease in 2008 is
primarily related to the impairment of certain store leasehold improvements,
furniture and fixtures and certain shop-in-shop buildout costs of $3.0 million
as compared to $10.6 million in 2007.The decrease in expenses
excluding those charges denoted above were primarily attributable to a reduction
in payroll as the Company reduced its headcount and a variety of cuts in
discretionary spending such as tradeshows, travel and entertainment and
information technology costs.  As a percentage of net revenues,
expenses excluding severance and asset impairment increased to 41.8% for the
year ended December 31, 2008 compared to 40.5% for the year ended December 31,
2007.  Total SG&A expenses and impairment of long-lived assets as
a percent of revenues were 42.3% and 40.7% for the years ended December 31, 2008
and 2007, respectively.   The increase was due to loss of
leverage on the decrease in Wholesale sales and the greater portion of revenues
from the Consumer Direct segment which carries a higher SG&A expense level
than the Wholesale and Licensing segments due primarily to store occupancy and
store payroll costs.  The Company is continuing the right-sizing of
its cost structure by taking additional actions, including incremental payroll
reductions, compensation adjustments, reductions in third party distribution
costs as well as curtailment of non-media related marketing.




Interest
income, net decreased $3.9 million to approximately $1.7 million for the year
ended December 31, 2008 as compared to $5.6 million for the year ended December
31, 2007.  The decrease is primarily due to the Company’s lower
average cash balances and interest rates.




33


Impairment
of investment increased $7.5 million to approximately $7.8 million for the year
ended December 31, 2008 as compared to $0.3 million for the year ended December
31, 2007.  The increase is due to the Company recording
other-than-temporary impairments of $4.6 million related to an investment in the
common stock of one of its licensees which is recorded at market value based
upon the underlying share price and a $3.2 million charge related to
auction-rate securities during the year ended December 31, 2008 as compared to
an other-than-temporary impairment of $0.3 million related to auction-rate
securities during the year ended December 31, 2007.




The
Company’s effective tax rate decreased to a 19.7% benefit for the year ended
December 31, 2008 compared to a 30.9% provision for the year ended December 31,
2007.  The decrease in the Company’s tax rate is a result of the tax
benefit from the Company’s net loss offset by a valuation allowance of $3.1
million reserved against tax assets for certain other-than-temporary investment
impairments and the impact of interest and penalties on tax reserves for
uncertain positions.




As a
result of the foregoing, net (loss)/ income decreased by $21.9 million, to
$(14.8) million ((3.0%) of net revenues) for the year ended December 31, 2008
from $7.1 million (1.4% of net revenues) for the year ended December 31,
2007.





Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006





Net
revenues decreased $25.8 million, or 4.8%, to $510.7 million in 2007 from $536.5
million in 2006.  The decrease was due to decreases in the Company’s
Wholesale and Consumer Direct business segments, partially offset by slight
increases in the Company’s Licensing business.




Wholesale
net sales (excluding sales to the Company’s Consumer Direct business segment)
decreased $24.2 million, or 7.7%, to $290.8 million in 2007 from $315.0 million
in 2006.  The decrease is primarily due to a decline in sales across
the Company’s branded businesses. The challenging retail environment, from a
lack of strong direction in footwear fashion trends, as well as generally softer
sell-thrus compared to the prior year, resulted in the decline in most of the
Company’s Wholesale businesses.




Net sales
in the Company’s Consumer Direct segment decreased $1.7 million, or 0.9%, to
$175.6 million for the year ended December 31, 2007 from $177.3 million for the
year ended December 31, 2006.  The decrease primarily related to a
decrease in full-priced retail and Company Store sales of $2.1 million, or 1.2%,
offset by increased Internet sales of $0.4 million, or 7%, for the year ended
December 31, 2007 as compared to December 31, 2006.  Comparable store
sales decreased $1.2 million, or 0.7%, while new store sales in 2007 plus that
portion of 2007 sales for stores not open for all of 2006 decreased $0.9
million.  Comparable stores sales 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.  As the Company has increased the amount of specific “made
for Company Store” product, sales have improved at its Company store
locations.  In its full-priced retail stores, the Company limited
overstock positions and reduced markdowns through standardized assortments and
modified price points to align the price-value relationship of the Company’s
brands, which the Company believes will result in improved operating performance
over time.  In addition, the Company closed five full-priced retail
stores and one Company Store during 2007 and seven stores in January 2008 and
continues to evaluate its real-estate portfolio.  As part of its
strategic plan for the Consumer Direct segment, the Company signed an agreement
to outsource the order-taking and fulfillment responsibilities related to its
Internet business to a third-party that provides direct-to-customer e-commerce
services, which the Company believes will increase the efficiency of this
business.




Royalty
revenue increased $0.1 million or 0.2% to $44.3 million in 2007 from $44.2
million in 2006.  The increase in licensing revenues was primarily
attributable to incremental revenues from its existing licensees offset by a
reduction in sportswear royalties from an amendment to the Company’s licensing
agreement relating to its Kenneth Cole Reaction men’s
and Kenneth Cole New
York sportswear businesses.  The Company has transitioned its
Kenneth Cole New York
and Kenneth Cole
Reaction men’s sportswear businesses from a licensing model to an
in-house operation, and has commenced shipments for the Spring 2008
season.




Consolidated
gross profit, as a percentage of net revenues, increased to 43.7% for the year
ended December 31, 2007 from 43.2% for the year ended December 31,
2006.  This increase was primarily due to an increase in Consumer
Direct margins, as well as a change in mix of the Company’s net revenues from
its Wholesale, Consumer Direct and Licensing segments.  The Consumer
Direct segment, which operates at a higher gross profit level than the Wholesale
segment, had increased revenues as a percentage of net revenues of 34.4% for the
year ended December 31, 2007 compared to 33.1% for the year ended December 31,
2006, while the Wholesale segment




34




revenues
as a percentage of net revenues decreased to 56.9% for the year ended December
31, 2007 from 58.7% for the year ended December 31, 2006.  The
revenues in the Licensing segment, which carries no cost of goods sold,
increased as a percentage of net revenues to 8.7% for the year ended December
31, 2007 as compared to 8.2% for the year ended December 31, 2006.  In
addition, wholesale margins decreased from softer sell-thrus in a challenging
retail environment, while retail margins improved from reduced markdowns from
modified price points to align the price-value relationship of the Company’s
brands.





Selling,
general and administrative (“SG&A”) expenses, including warehousing and
receiving expenses, increased $13.1 million to $207.9 million for the year ended
December 31, 2007 from $194.8 million for the year ended December 31,
2006.  The increase in SG&A expenses was primarily attributable to
increases in stock-based compensation expense, costs incurred with transitioning
the men’s sportswear business to an in-house operation, costs associated with
the implementation of the Company’s SAP retail and point-of-sale systems and
legal reserves.  As a percentage of net revenues, SG&A expenses
increased to 40.7% for the year ended December 31, 2007, from 36.3% for the year
ended December 31, 2006 from the additional costs mentioned above and loss of
leverage on the decrease in Wholesale sales.




The
Company incurred an impairment on long-lived assets of $10.6 million during the
year ended December 31, 2007 compared to $0.1 million in 2006.  The
increase in charges in 2007 primarily related to the impairment in 2007 of
certain leasehold improvements and furniture and fixtures in twenty-three of the
Company’s stores.




Interest
and other income increased $0.5 million, or 10.1%, to approximately $5.4 million
for the year ended December 31, 2007 as compared to the year ended December 31,
2006, primarily due to an average higher rate of return on
investments.




The
Company’s effective tax rate decreased to 30.9% for the year ended December 31,
2007 from 36.1% for the year ended December 31, 2006.  This was
primarily due to a $0.8 million tax benefit and a decrease in the related level
of earnings in the various state and local taxing jurisdictions to which the
Company’s earnings are subject during the year ended December 31, 2007 as
compared to December 31, 2006.  In 2006, the Company recorded $0.6
million of net tax benefits for agreements reached with certain tax
jurisdictions that closed outstanding audit periods for which the Company had
previously established reserves.




As a
result of the foregoing, net income decreased by $19.7 million or 73.5% to $7.1
million (1.4% of net revenues) for the year ended December 31, 2007 from $26.8
million (5.0% of net revenues) for the year ended December 31,
2006.




Related
Party Transactions





The
Company has an exclusive license agreement with Iconix Brand Group, Inc. and its
trademark holding company, IP Holdings, LLC (“Iconix”), to use the Bongo trademark in connection
with the manufacture, sale and distribution of women’s, men’s and children’s
footwear in certain territories.  The Chief Executive Officer and
Chairman of Iconix is the brother of the Company’s Chairman and Chief Creative
Officer.  The term of the agreement is through December 31,
2010.  Management believes that the license agreement with Iconix was
entered into at arm’s-length.  During these periods, the Company is
obligated to pay Iconix a percentage of net sales based upon the terms of the
agreement.  The Company recorded approximately $1.1 million, $1.1
million and $1.4 million in aggregate royalty and advertising expense under the
agreement for the years ended December 31, 2008, 2007 and 2006,
respectively.




The
Company recorded expenses of approximately $0.6 million, $0.5 million and $0.5
million for the years ended December 31, 2008, 2007 and 2006, 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 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.





Liquidity
and Capital Resources





As of
December 31, 2008, the Company had $64.7 million in cash and cash equivalents,
which consist primarily of overnight prime and government money market
funds.  The Company’s cash requirements are primarily for working
capital needs, retail expansion, new technology, and other corporate
activities.  The Company uses cash from operations as the primary
source of financing its capital expenditures, seasonal requirements and paying




35




dividends
that may be authorized by the Board of Directors.  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
December 31, 2008, working capital was $97.5 million compared to $139.7 million
at December 31, 2007 primarily due to a decrease in receivables and inventory
and the use of cash for the purchase of trademarks and other intangible assets,
the repurchase of common shares of the Company’s stock and dividend
payments.





Net cash
provided by operating activities was $21.9 million for the year ended December
31, 2008 compared to $34.4 million for the year ended December 31,
2007.  Thedecrease in cash flows
provided by operations is primarily attributable to a decrease in net income and
the timing of receivables and payables.




Net cash
used in investing activities totaled $15.9 million for the year ended December
31, 2008 compared to $20.3 million for the year ended December 31,
2007.  The decrease was primarily attributable to a $6.8 million
decrease in the purchases of intangible assets.  Included in the
purchases of intangible assets during the year ended December 31, 2008 are
payments of $5.5 million related to achieving two performance targets within the
Le TigreAsset Purchase
Agreement Amendment compared to a payment of $13.0 million used to purchase the
Le Tigretrademark and
other intellectual property associated with the brand during the year ended
December 31, 2007.  Capital expenditures decreased $1.2 million during
the year ended December 31, 2008 compared to December 31,
2007.  Capital expenditures for the year ended December 31, 2008 and
2007 included approximately $7.2 million and $5.1 million, respectively, for
amounts associated with furniture, fixtures and leasehold improvements for
retail store expansion and $4.2 million in costs for the implementation of the
SAP retail and POS information systems in 2007.  In addition, the
Company did not purchase or sell any marketable securities during the year ended
December 31, 2008, compared to sales of marketable securities of $8.4 million
offset by purchases of $4.7 million in 2007.




Net cash
used in financing activities was $31.7 million for the year ended December 31,
2008 compared to $28.9 million for the year ended December 31,
2007.  The increase was primarily attributable to $24.4 million used
to repurchase 1,619,200 treasury shares during the year ended December 31, 2008
as compared to $19.2 million used to repurchase 1,008,000 treasury shares during
the year ended December 31, 2007.  The Company also paid dividends of
$6.8 million during the year ended December 31, 2008 compared to $14.6 million
during the year ended December 31, 2007.  In addition, the Company
received proceeds of $0.1 million during the year ended December 31, 2008
related to stock option exercises as compared to $4.3 million received during
the year ended December 31, 2007.




Prior to
November 7, 2008 the Company sold substantially all of its accounts receivable
to its factors, without recourse, subject to credit limitations established by
the factors for each individual customer account during 2008.  Certain
accounts receivable in excess of established limits are factored with
recourse.  On November 7, 2008, the Company converted its factoring
agreement with its largest factor to a deferred purchase agreement
(“DPA”).  The DPA requires the factor to act as a collection agent for
the Company’s assigned receivables without transfer of ownership, subject to
credit approval and without recourse.In circumstances
where a customer's account cannot be factored without recourse, the Company may
take other measures to reduce its credit exposure, which could include requiring
the customer to pay in advance, or to provide a letter of credit covering the
sales price of the merchandise ordered.




The
Company’s material obligations under contractual agreements, primarily
commitments for future payments under operating lease agreements, as of December
31, 2008 are summarized as follows:





Payment
      Due by PeriodTotal
            
            
            1
      year or less
            
            
            2-3
      years
            
            
            4-5
      years
            
            
            After
      5 yearsOperating
      Leases and Other Obligations
            
            $
            138,543,000
            
            
            $
            24,744,000
            
            
            $
            44,375,000
            
            
            $
            38,144,000
            
            
            $
            31,280,000Purchase
      Obligations
            
            
            44,241,000
            
            
            
            44,241,000
            
            
            
            --
            
            
            
            --
            
            
            
            --Total
      Contractual
              Obligations
            
            $
            182,784,000
            
            
            $
            68,985,000
            
            
            $
            44,375,000
            
            
            $
            38,144,000
            
            
            $
            31,280,000





Contingent
rent and other charges amounted to $8.6 million and $8.4 million for the years
ended December 31, 2008 and 2007.




In
December 2006, the Company entered into a five-year senior unsecured revolving
credit facility (the “Revolving Credit Facility”), with various lenders, which
provides up to $100.0 million to finance working capital




36


requirements
and letters of credit to finance the Company's inventory purchases.  A
portion of the Revolving Credit Facility not in excess of $25.0 million shall be
available for the issuance of standby letters of credit.  The full
amount of the Revolving Credit Facility shall be available for the issuance of
commercial letters of credit.  The Revolving Credit Facility requires,
among other things, that the Company comply with a maximum leverage ratio of
2.25 to 1.0 of consolidated debt to consolidated earnings before interest,
non-cash compensation, income taxes and depreciation and various covenants on
indebtedness, dissolutions, mergers, asset sales, pledges and changes in lines
of business, as defined in the Revolving Credit Facility.  Failure by
the Company to comply with these covenants could reduce the borrowings available
under the Revolving Credit Facility.  If an event of default occurs,
borrowings and interest are payable immediately, unless cured as defined,
allowing borrowings to continue during the cure period.  Loans under
the Revolving Credit Facility bear an interest rate equal to the Alternate Base
Rate (defined as the higher of the Prime Rate or the Federal Funds Rate plus
0.5%) or the Adjusted LIBOR rate plus applicable margin as defined within the
agreement as elected by the Company.  The Company incurs facility fees
of ten basis points on the face amount of the Revolving Credit
Facility.  During 2008 and 2007, the Company incurred facility fees of
approximately $0.1 million.  There were no outstanding advances under
this agreement at December 31, 2008 and 2007.  Amounts available under
the Revolving Credit Facility at December 31, 2008 and 2007 were reduced by $3.5
million and $2.7 million, respectively, of standby and open letters of
credit.  The Company did not borrow under the Revolving Credit
Facility during 2008 and 2007 and currently has no availability under this
credit line at December 31, 2008.





In 2006, the Company repaid a
$3.0 million promissory note, which one of the Company’s foreign subsidiaries
entered into with a financial institution in connection with the Company’s tax
repatriation plan.




The
Company believes that it will be able to satisfy its current expected cash
requirements for 2009, including requirements for its new retail stores,
enhanced information systems and the payments of dividends that may be
authorized in the future by the Board of Directors, primarily with cash flow
from operations and cash on hand.





Off-Balance
Sheet Arrangements





The
Company did not have any off-balance sheet arrangements as of December 31,
2008.





Exchange
Rates





The
Company may enter into forward exchange contracts for its future purchases of
inventory denominated in foreign currencies, primarily the
Euro.  Gains and losses on forward exchange contracts that are used
for hedges are accounted for on the Company’s Consolidated Balance Sheet as
inventory and an adjustment to equity, and are subsequently accounted for as
part of the purchase price of the inventory upon execution of the
contract.  At December 31, 2008, the Company had no unrealized gains
or losses as no forward contracts were outstanding.  Unrealized gains
and losses are typically included in Other Comprehensive Income in the Company’s
Statement of Changes in Shareholders’ Equity and as an adjustment to inventory,
which is the underlying exposure on the Company’s Consolidated Balance
Sheet.  While the Company believes that its current procedures with
respect to the reduction of risk associated with currency exchange rate
fluctuations are adequate, there can be no assurance that such fluctuations will
not have a material adverse effect on the results of operations of the Company
in the future.
  Inventory
from contract manufacturers in Asia and Brazil are purchased in United States
dollars and the recent fluctuations of many of these currencies against the
United States dollar has not had any material adverse impact on the
Company.  However, future purchase prices for the Company’s products
may be impacted by fluctuations in the exchange rate between the United States
dollar and the local currencies of the contract manufacturer, which may affect
the Company’s cost of goods in the future.  The Company currently does
not believe the potential effects of such fluctuations would have a material
adverse effect on the Company.





Effects
of Inflation





The
Company does not believe that the relatively low rates of inflation experienced
over the last few years in the United States, where it primarily competes, have
had a significant effect on revenues or profitability.





37




Item
      7A.
            Quantitative and Qualitative
      Disclosures about Market
Risk




The
Company has marketable securities, specifically auction rate securities, that
contain “double A” and “single A” rated debt obligations and a preferred share
close 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 sources and uses of
cash, the Company does not anticipate that the lack of liquidity on these
investments will affect its ability to execute its current business
plan.  These assets have been classified as long-term in the Company’s
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 Euros.  Business activities in various
currencies expose the Company to the risk that the eventual net dollar cash
flows from transactions with foreign suppliers denominated in foreign currencies
may be adversely affected by changes in currency rates.  The Company
manages these risks by utilizing foreign exchange contracts.  The
Company does not enter into foreign currency transactions for speculative
purposes.




At
December 31, 2008, the Company had no forward contracts
outstanding.  The Company’s earnings may also be affected by changes
in short-term interest rates as a result of borrowings under its credit
facilities.  A two or less percentage point increase in interest rates
affecting the Company’s credit facilities would not have had a material effect
on the Company’s 2008 and 2007 operations.




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
    8.
              Financial Statements and Supplementary
      Data


See page
F-1 for an index to the consolidated financial statements, the Report of
Management and the Reports of the Registered Public Accounting Firm submitted as
part of this Annual Report.




Item
    9.
                Changes in and Disagreements with
      Accountants on Accounting and Financial
  Disclosure


None.


Item
    9A.
                  Controls and
  Procedures





Evaluation
of Disclosure Controls and Procedures





As of
December 31, 2008, 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 Exchange Act
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 Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosures.





Management’s
Report on Internal Control over Financial Reporting





The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act.  Under the supervision
and with the participation of management, including the Chief Executive Officer
and Chief Financial Officer, the Company conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December
31, 2008 based on the framework in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).  Based on that evaluation, management concluded that the
Company’s internal control over financial reporting was effective as of December
31, 2008.




38




The
Company’s internal control over financial reporting as of December 31, 2008 was
audited by Ernst & Young, LLP, an independent registered public accounting
firm, as stated in their report which is included herein.





Changes
in Internal Control over Financial Reporting





There
were no changes in the Company’s internal controls over financial reporting
during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.


Item
      9B.
              Other
      Information


None.





PART III


Item
    10.
              Directors, Executive Officers and
      Corporate Governance




Except for the information regarding
directors and executive officers of the registrant, which is included in Part I
of this Form 10-K, the information required by this item will be contained in
the Company’s Proxy Statement for its Annual Shareholders’ Meeting to be held
May 28, 2009 to be filed with the Securities and Exchange Commission within 120
days after December 31, 2008 and which is incorporated herein by reference in
response to this item.




Item
    11.
                Executive
  Compensation


The
information required by this item will be contained in the Company’s Proxy
Statement for its Annual Shareholders’ Meeting to be held May 28, 2009 to be
filed with the Securities and Exchange Commission within 120 days after December
31, 2008 and which is incorporated herein by reference in response to this
item.




Item
    12.
                  Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder
Matters


The information required by this item
will be contained in the Company’s Proxy Statement for its Annual Shareholders’
Meeting to be held May 28, 2009 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2008 and which is incorporated
herein by reference in response to this item.




Item
    13.
                    Certain Relationships and Related Transactions,
      and Director
Independence





The
information required by this item will be contained in the Company’s Proxy
Statement for its Annual Shareholders’ Meeting to be held May 28, 2009 to be
filed with the Securities and Exchange Commission within 120 days after December
31, 2008, and which is incorporated herein by reference in response to this
item.




Item
    14.
                      Principal Accounting Fees and
      Services


The information required by this item
will be contained in the Company’s Proxy Statement for its Annual Shareholders’
Meeting to be held May 28, 2009 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2008 and which is incorporated
herein by reference in response to this item.





PART IV




Item
      15.
                        Exhibits,
      Financial Statement Schedules


(a)           (1)
See page F-1 for an index to the consolidated financial statements submitted as
part of this AnnualReport.





(2) Schedule II – Valuation and
Qualifying Accounts is required to be filed by Item 8 of Form 10-K.




39




All other schedules, for which
provision is made in the applicable accounting regulations of the Securitiesand
Exchange Commission are not required under the related instructions, are shown
in the financialstatements or are inapplicable and therefore have been
omitted.





(3) The following exhibits are included
in this report:





Exhibit
              No.
            
            Description3.01
            
            Restated
      Certificate of Incorporation of Kenneth Cole Productions, Inc.;
      Certificate of Merger of Cole Fifth Avenue, Inc. into Kenneth Cole
      Productions, Inc.; Certificate of Merger of Cole Productions, Inc. into
      Kenneth Cole Productions, Inc.; Certificate of Merger of Cole Sunset, Inc.
      into Kenneth Cole Productions, Inc.; Certificate of Merger of Cole Union
      Street, Inc. into Kenneth Cole Productions, Inc.; Certificate of Merger of
      Cole West, Inc. into Kenneth Cole Productions, Inc.; Certificate of Merger
      of Kenneth Cole Woodbury, Inc. into Kenneth Cole Productions, Inc.;
      Certificate of Merger of Kenneth Cole Leather Goods, Inc. into Kenneth
      Cole Productions, Inc.; Certificate of Merger of Unlisted into Kenneth
      Cole Productions, Inc. (Incorporated by reference to Exhibit 3.01 to the
      Company’s Registration Statement on Form S-1, Registration No.
      33-77636).3.02
            
            By-laws.
      (Incorporated by reference to Exhibit 3.02 to the Company’s Registration
      Statement on Form S-1, Registration No. 33-77636).4.01
            
            Specimen
      of Class A Common Stock Certificate. (Incorporated by reference to Exhibit
      4.01 to the Company’s Registration Statement on Form S-1, Registration No.
      33-77636).*10.01
            
            Kenneth
      Cole Productions, Inc. 1994 Stock Option Plan. (Incorporated by reference
      to Exhibit 10.04 to the Company’s Registration Statement on Form S-1,
      Registration No. 33-77636).*10.02
            
            Employment
      Agreement, dated as of April 30, 1994, between Kenneth Cole Productions,
      Inc. and Kenneth D. Cole. (Incorporated by reference to Exhibit 10.05 to
      the Company’s Registration Statement on Form S-1, Registration No.
      33-77636).*10.03
            
            Amended
      and Restated Kenneth Cole Productions, Inc. 1994 Stock Option Plan
      (Previously filed as an Exhibit to the Registrant’s Proxy Statement filed
      on April 22, 1997 and incorporated herein by reference).10.04
            
            Kenneth
      Cole Productions, Inc. Employee Stock Purchase Plan (Incorporated by
      reference to the Company’s Registration Statement on Form S-8 Registration
      No. 33-31868, filed on March 7, 2000).10.05
            
            Kenneth
      Cole Productions, Inc. 2004 Stock Incentive Plan (Incorporated by
      reference to the Company’s Registration Statement on Form S-8 Registration
      No. 333-119101, filed on September 17, 2004).10.06
            
            Kenneth
      Cole Productions, Inc. 2004 Stock Incentive Plan (Incorporated by
      reference to the Company’s Registration Statement on Form S-8 Registration
      No. 333-131724 filed on February 10, 2006).10.07
            
            Stock
      Purchase Agreement between Kenneth Cole Productions, Inc. and Bernard
      Chaus, Inc. dated June 13, 2005 (Previously filed as Exhibit 10.21 to the
      Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
      June 30, 2005 and incorporated herein by reference).10.08
            
            Employment
      Agreement between Kenneth Cole Productions, Inc. and Richard S. Olicker
      dated January 3, 2006 (Previously filed as Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K filed on January 10,
      2006).10.09
            
            Employment
      Agreement between Kenneth Cole Productions, Inc. and Joel Newman dated
      February 13, 2006 (Previously filed as Exhibit 10.1 to the Registrant’s
      Current Report on Form 8-K, filed on February 16,
  2006).




40




10.10
            
            Kenneth
      Cole Productions, Inc. 2004 Stock Incentive Plan (Amended and Restated as
      of April 20, 2005) (Previously filed as Exhibit 10.26 to the Registrant’s
      Quarterly Report on Form 10-Q for the quarterly period ended March 31,
      2006 and incorporated herein by reference).10.11
            
            Kenneth
      Cole Productions, Inc. Sample Grant Award Letter (Previously filed as
      Exhibit 10.27 to the Registrant’s Quarterly Report on Form 10-Q for the
      quarterly period ended March 31, 2006 and incorporated herein by
      reference).10.12
            
            Employment
      Agreement between Kenneth Cole Productions, Inc. and Michael DeVirgilio
      dated March 31, 2006 (Previously filed as Exhibit 10.28 to the
      Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
      June 30, 2006 and incorporated herein by reference).10.13
            
            Employment
      Agreement between Kenneth Cole Productions, Inc. and Douglas Jakubowski
      dated October 12, 2006 (Previously filed as Exhibit 10.30 to the
      Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
      September 30, 2006 and incorporated herein by reference).10.14
            
            Credit
      Agreement between J.P. Morgan Securities Inc., JPMorgan Chase Bank,
      National Association, PNC Bank, National Association, Bank of America,
      N.A., and Wachovia Bank, National Association, and Kenneth Cole
      Productions, Inc. dated as of December 20, 2006. (Previously filed as
      Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 2006 and incorporate herein by reference).10.15
            
            Certificate
      of Amendment of the Certificate of Incorporation of Kenneth Cole
      Productions, Inc. dated October 15, 2007 (Previously filed as Exhibit
      10.32 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly
      period ended September 30, 2007 and incorporated herein by
      reference).10.16
            
            Employment
      Agreement between Kenneth Cole Productions, Inc. and Jill Granoff dated
      May 5, 2008 (Previously filed as Exhibit 10.33 to the Registrant’s
      Quarterly Report on Form 10-Q for the quarterly period ended March 31,
      2008 and incorporated herein by reference).+10.17
            
            Receivables
      management agreement between The CIT Group/Commercial Services, Inc. and
      Kenneth Cole Productions, Inc. dated November 7, 2008.+21.01
            
            List
      of Subsidiaries.+23.01
            
            Consent
      of Independent Registered Public Accounting Firm.+23.02
            
            Consent
      of Independent Appraisal Firm.+23.03
            
            Consent
      of Independent Appraisal Firm.+31.1
            
            Certification
      of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14
      and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002.+31.2
            
            Certification
      of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14
      and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002.+32.1
            
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+32.2
            
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


___________________________


*           Management
contract or compensatory plan or arrangement required to be identified pursuant
to Item15(a) (3) of this report.


+           Filed
herewith.




41




Kenneth
Cole Productions, Inc. and Subsidiaries
 Index to
Consolidated Financial Statements
     Reports
      of Independent Registered Public Accounting Firm
              F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2007
              F-4Consolidated
      Statements of Operations for the years endedDecember
      31, 2008, 2007 and 2006
              F-6Consolidated
      Statement of Changes in Shareholders’ Equityfor
      the years ended December 31, 2008, 2007 and 2006
              F-7Consolidated
      Statements of Cash Flows for the years endedDecember
      31, 2008, 2007 and 2006
              F-8Notes
      to Consolidated Financial Statements
              F-9
  F-1
  Report
of Independent Registered Public Accounting Firm
 
 
 To
The Board of Directors and Shareholders of Kenneth Cole Productions,
Inc.
 
 We have
audited the accompanying consolidated balance sheets of Kenneth Cole
Productions, Inc. and subsidiaries (the “Company”) as of December 31, 2008 and
2007, and the related consolidated statements of operations, cash flows and
changes in shareholders’ equity for each of the three years in the period ended
December 31, 2008.  Our audits also included the financial statement
schedule listed in the Index at Item 15(a).  These financial
statements and schedule are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Kenneth Cole
Productions, Inc. and subsidiaries at December 31, 2008 and 2007, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008, in conformity with U.S.
generally accepted accounting principles.  Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Kenneth Cole Productions,
Inc. and subsidiaries internal control over financial reporting as of December
31, 2008, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 6, 2009 expressed an unqualified opinion
thereon.
 
   /s/ Ernst & Young
      LLP
   New York,
New York
 March 6,
2009
  F-2
 Report
of Independent Registered Public Accounting Firm
 
  To
The Board of Directors and Shareholders of Kenneth Cole Productions,
Inc.
 
 We have
audited Kenneth Cole Productions, Inc. and subsidiaries internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Kenneth Cole
Productions Inc.’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
  A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
  In our
opinion, Kenneth Cole Productions, Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2008, based onthe COSO criteria.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Kenneth Cole
Productions, Inc. and subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of operations, cash flows and changes in
shareholders’ equity for each of the three years in the period ended December
31, 2008 of Kenneth Cole Productions, Inc. and our report dated March 6, 2009
expressed an unqualified opinion thereon.
 /s/ Ernst & Young
      LLP
   New York,
New York
 March 6,
2009
  F-3
 
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Consolidated
Balance Sheets
 
 
 December2008
              
              
              2007AssetsCurrent
      assets:Cash
      and cash equivalents
              
              $
              64,704,000
              
              
              $
              90,653,000Due
      from factors
              
              
              9,190,000
              
              
              
              28,132,000Accounts
      receivable, less allowance for doubtful accounts of $1,061,000 and
      $230,000, respectively
              
              
              32,018,000
              
              
              
              19,805,000Inventories
              
              
              43,342,000
              
              
              
              48,033,000Prepaid
      expenses and other current assets
              
              
              2,738,000
              
              
              
              4,629,000Deferred
      taxes, net
              
              
              5,645,000
              
              
              
              5,173,000Total
      current assets
              
              
              157,637,000
              
              
              
              196,425,000Property
      and equipment, at cost, less accumulateddepreciation
      and amortization
              
              
              57,790,000
              
              
              
              60,357,000
 Other
      assets:Intangible
      assets, net
              
              
              19,842,000
              
              
              
              14,083,000Deferred
      taxes, net
              
              
              33,541,000
              
              
              
              24,660,000Investments
      and other
              
              
              7,280,000
              
              
              
              14,868,000Deferred
      compensation plans’ assets
              
              
              37,345,000
              
              
              
              45,729,000Total
      other assets
              
              
              98,008,000
              
              
              
              99,340,000Total
      Assets
              
              $
              313,435,000
              
              
              $
              356,122,000
  See
accompanying notes to consolidated financial statements.
  F-4
 
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Consolidated
Balance Sheets (continued)
 
 
 December2008
              
              
              2007Liabilities
      and Shareholders’ EquityCurrent
      liabilities:Accounts
      payable and accrued expenses
              
              $
              42,935,000
              
              
              $
              39,470,000Other
      current liabilities
              
              
              11,669,000
              
              
              
              10,852,000Deferred
      income
              
              
              5,512,000
              
              
              
              5,071,000Income
      taxes payable
              
              
              --
              
              
              
              1,355,000Total
      current liabilities
              
              
              60,116,000
              
              
              
              56,748,000Accrued
      rent and other long-term liabilities
              
              
              17,842,000
              
              
              
              14,992,000Deferred
      compensation plans’ liabilities
              
              
              35,715,000
              
              
              
              42,392,000Commitments
      and contingenciesShareholders'
      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; 15,726,672 and 15,604,673 issued
                as
      of December 31, 2008 and 2007,respectively
              
              
              157,000
              
              
              
              156,000Class
      B Convertible Common Stock, par value $.01,
                9,000,000
      shares authorized; 8,010,497 issued and
                outstanding
      as of December 31, 2008 and 2007,
                respectively
              
              
              80,000
              
              
              
              80,000Additional
      paid-in capital
              
              
              103,318,000
              
              
              
              99,277,000Accumulated
      other comprehensive income
              
              
              650,000
              
              
              
              914,000Retained
      earnings
              
              
              220,478,000
              
              
              
              242,108,000324,683,000
              
              
              
              342,535,000Class
      A Common Stock in treasury, at cost,
                5,855,550
      and 4,236,350 shares as of December 31,2008
                and
      2007, respectively
              
              
              (124,921,000
              )
              
              
              (100,545,000
              )Total
      shareholders’ equity
              
              
              199,762,000
              
              
              
              241,990,000Total
      Liabilities and Shareholders’ Equity
              
              $
              313,435,000
              
              
              $
              356,122,000
 
 See
accompanying notes to consolidated financial statements.
  F-5
  Kenneth
Cole Productions, Inc. and Subsidiaries
 Consolidated
Statements of Operations
 
 
 Year
      ended December 31,2008
              
              
              2007
              
              
              2006Net
      sales
              
              $
              448,578,000
              
              
              $
              466,405,000
              
              
              $
              492,282,000Royalty
      revenue
              
              
              43,759,000
              
              
              
              44,315,000
              
              
              
              44,217,000Net
      revenues
              
              
              492,337,000
              
              
              
              510,720,000
              
              
              
              536,499,000Cost
      of goods sold
              
              
              293,452,000
              
              
              
              287,408,000
              
              
              
              304,672,000Gross
      profit
              
              
              198,885,000
              
              
              
              223,312,000
              
              
              
              231,827,000Selling,
      general and administrative expenses
              
              
              208,168,000
              
              
              
              207,863,000
              
              
              
              194,718,000Impairment
      of long-lived assets
              
              
              3,028,000
              
              
              
              10,564,000
              
              
              
              121,000Operating
      (loss)/income
              
              
              (12,311,000
              )
              
              
              4,885,000
              
              
              
              36,988,000Interest
      income, net
              
              
              1,730,000
              
              
              
              5,661,000
              
              
              
              4,875,000Impairment
      of investments
              
              
              (7,840,000
              )
              
              
              (295,000
              )
              
              
              --(Loss)/income
      before (benefit from)/provision for income taxes
              
              
              (18,421,000
              )
              
              
              10,251,000
              
              
              
              41,863,000(Benefit
      from)/provision for income taxes
              
              
              (3,621,000
              )
              
              
              3,168,000
              
              
              
              15,098,000Net
      (loss)/income
              
              $
              (14,800,000
              )
              
              $
              7,083,000
              
              
              $
              26,765,000(Loss)/earnings
      per share:Basic
              
              $
              (0.80
              )
              
              $
              0.35
              
              
              $
              1.34Diluted
              
              $
              (0.80
              )
              
              $
              0.35
              
              
              $
              1.31Dividends
      declared per share
              
              $
              0.36
              
              
              $
              0.72
              
              
              $
              0.72Shares
      used to compute (loss)/earnings per share:Basic
              
              
              18,423,000
              
              
              
              20,057,000
              
              
              
              20,046,000Diluted
              
              
              18,423,000
              
              
              
              20,325,000
              
              
              
              20,396,000
  See
accompanying notes to consolidated financial statements.
  F-6
  Kenneth
Cole Productions, Inc. and Subsidiaries
 Consolidated
Statements of Changes in Shareholders’ Equity
   Class
      A
                Common Stock
              
              
              Class
      B
                Common Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              Treasury StockNumber
                of
      Shares
              
              
              Amount
              
              
              Number
                of
      Shares
              
              
              Amount
              
              
              Additional
                Paid-In
                Capital
              
              
              Deferred
                Compensation
              
              
              Accumulated
      Other
                Comprehensive
                Income
              
              
              Retained
                Earnings
              
              
              Number
                of
      Shares
              
              
              Amount
              
              
              TotalBalance
      at 12/31/05
              
              
              15,573,961
              
              
              $
              156,000
              
              
              
              8,010,497
              
              
              $
              80,000
              
              
              $
              89,351,000
              
              
              $
              (3,397,000
              )
              
              $
              1,257,000
              
              
              $
              237,369,000
              
              
              
              (3,388,400
              )
              
              $
              (80,156,000
              )
              
              $
              244,660,000Net
      Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              26,765,000
              
              
              
              
              
              
              
              
              
              
              
              26,765,000Translation
      adjustment fromForeign
      currency, net of taxes $(53,000)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (88,000
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (88,000
              )Forward
      contracts, net of taxes $110,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              184,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              184,000Unrealized
      gains on available-for-sale securities, net of taxes
    $319,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              531,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              531,000Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              27,392,000Reversal
      of deferred compensation upon adoption of SFAS 123R
              
              
              (138,182
              )
              
              
              (1,000
              )
              
              
              
              
              
              
              
              
              
              
              (3,396,000
              )
              
              
              3,397,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              --Stock-based
      compensation expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,193,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,193,000Exercise
      of stock options and related tax benefits
              
              
              203,283
              
              
              
              1,000
              
              
              
              
              
              
              
              
              
              
              
              4,009,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,010,000Issuance
      of restricted stock
              
              
              34,138
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              --
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              --Shares
      surrendered by employees to pay taxes on restricted stock
              
              
              (12,022
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (301,000
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (301,000
              )Issuance
      of Class A Common Stock from ESPP
              
              
              17,897
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              363,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              363,000Purchase
      of Class A Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (300,000
              )
              
              
              (7,169,000
              )
              
              
              (7,169,000
              )Reissuance
      of Treasury Shares
              
              
              (91,808
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,187,000
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              91,808
              
              
              
              1,187,000
              
              
              
              --Dividends
      paid on common stock
              
              
              384
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,000
              
              
              
              
              
              
              
              
              
              
              
              (14,481,000
              )
              
              
              
              
              
              
              
              
              
              
              (14,472,000
              )Balance
      at 12/31/06
              
              
              15,587,651
              
              
              $
              156,000
              
              
              
              8,010,497
              
              
              $
              80,000
              
              
              $
              92,041,000
              
              
              
              --
              
              
              $
              1,884,000
              
              
              $
              249,653,000
              
              
              
              (3,596,592
              )
              
              $
              (86,138,000
              )
              
              $
              257,676,000Net
      Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,083,000
              
              
              
              
              
              
              
              
              
              
              
              7,083,000Translation
      adjustment fromForeign
      currency, net of taxes $388,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              620,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              620,000Unrealized
      loss on available-for-sale securities, net of taxes
    $(995,000)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,590,000
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,590,000
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,113,000Stock-based
      compensation expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,065,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,065,000Exercise
      of stock options and related tax benefits
              
              
              308,800
              
              
              
              3,000
              
              
              
              
              
              
              
              
              
              
              
              5,357,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,360,000Issuance
      of restricted stock and related tax benefits
              
              
              97,320
              
              
              
              1,000
              
              
              
              
              
              
              
              
              
              
              
              118,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              119,000Shares
      surrendered by employees to pay taxes on restricted stock
              
              
              (37,878
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (887,000
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (887,000
              )Issuance
      of Class A Common Stock from ESPP
              
              
              17,022
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              340,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              340,000Purchase
      of Class A Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,008,000
              )
              
              
              (19,168,000
              )
              
              
              (19,168,000
              )Reissuance
      of Treasury Shares
              
              
              (368,242
              )
              
              
              (4,000
              )
              
              
              
              
              
              
              
              
              
              
              (4,757,000
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              368,242
              
              
              
              4,761,000
              
              
              
              --Dividends
      paid on common stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (14,628,000
              )
              
              
              
              
              
              
              
              
              
              
              (14,628,000
              )Balance
      at 12/31/07
              
              
              15,604,673
              
              
              $
              156,000
              
              
              
              8,010,497
              
              
              $
              80,000
              
              
              $
              99,277,000
              
              
              
              --
              
              
              $
              914,000
              
              
              $
              242,108,000
              
              
              
              (4,236,350
              )
              
              $
              (100,545,000
              )
              
              $
              241,990,000Net
      Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (14,800,000
              )
              
              
              
              
              
              
              
              
              
              
              (14,800,000
              )Translation
      adjustment fromForeign
      currency, net of taxes ($189,000)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (773,000
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (773,000
              )Unrealized
      gain on available-for-sale securities, net of reclassification adjustment,
      net of taxes of $319,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              509,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              509,000Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (15,064,000
              )Stock-based
      compensation expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,224,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,224,000Exercise
      of stock options and related tax benefits
              
              
              5,400
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              71,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              71,000Issuance
      of restricted stock and related tax benefits
              
              
              148,541
              
              
              
              1,000
              
              
              
              
              
              
              
              
              
              
              
              (676,000
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (675,000
              )Shares
      surrendered by employees to pay taxes on restricted stock
              
              
              (48,271
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (789,000
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (789,000
              )Issuance
      of Class A Common Stock from ESPP
              
              
              16,329
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              211,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              211,000Purchase
      of Class A Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,619,200
              )
              
              
              (24,376,000
              )
              
              
              (24,376,000
              )Dividends
      paid on common stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,830,000
              )
              
              
              
              
              
              
              
              
              
              
              (6,830,000
              )Balance
      at 12/31/08
              
              
              15,726,672
              
              
              $
              157,000
              
              
              
              8,010,497
              
              
              $
              80,000
              
              
              $
              103,318,000
              
              
              
              --
              
              
              $
              650,000
              
              
              $
              220,478,000
              
              
              
              (5,855,550
              )
              
              $
              (124,921,000
              )
              
              $
              199,762,000
  See
accompanying notes to consolidated financial statements
  F-7
  Kenneth Cole Productions, Inc. and Subsidiaries
 Consolidated
Statements of Cash Flows
   For
      the years ended December 31,2008
              
              
              2007
              
              
              2006Cash
      flows provided by operating activitiesNet
      (loss)/ income
              
              $
              (14,800,000
              )
              
              $
              7,083,000
              
              
              $
              26,765,000Adjustments
      to reconcile net (loss)/income to net cash provided by
      operating activities:Depreciation
      and amortization
              
              
              9,229,000
              
              
              
              12,032,000
              
              
              
              10,877,000Impairment
      of long-lived assets
              
              
              3,028,000
              
              
              
              10,564,000
              
              
              
              121,000Provision
      for doubtful accounts
              
              
              1,309,000
              
              
              
              188,000
              
              
              
              211,000Benefit
      from deferred taxes
              
              
              (10,371,000
              )
              
              
              (10,989,000
              )
              
              
              --Unrealized
      (gain)/loss from investments
              
              
              (509,000
              )
              
              
              1,590,000
              
              
              
              (531,000
              )Writedown
      of investments
              
              
              7,840,000
              
              
              
              295,000
              
              
              
              --Stock-based
      compensation expense
              
              
              5,145,000
              
              
              
              7,144,000
              
              
              
              3,193,000Tax
      benefit from stock option exercises and restricted stock
      vestings
              
              
              (933,000
              )
              
              
              (2,309,000
              )
              
              
              (700,000
              )Changes
      in operating assets and liabilities:Decrease/(increase)
      in due from factors
              
              
              18,942,000
              
              
              
              7,404,000
              
              
              
              (1,561,000
              )Increase
      in accounts receivable
              
              
              (13,522,000
              )
              
              
              (352,000
              )
              
              
              (1,161,000
              )Decrease/(increase)
      in inventories
              
              
              4,691,000
              
              
              
              (1,759,000
              )
              
              
              (625,000
              )Decrease/(increase)in prepaid expenses
      and other current assets
              
              
              2,149,000
              
              
              
              (219,000
              )
              
              
              3,280,000Decrease/(increase)
      in other assets
              
              
              10,168,000
              
              
              
              (8,206,000
              )
              
              
              (2,540,000
              )Increase
      in accounts payable and accrued expenses
              
              
              3,965,000
              
              
              
              2,916,000
              
              
              
              5,425,000Increase
      in deferred income and other current liabilities
              
              
              753,000
              
              
              
              1,621,000
              
              
              
              2,213,000(Decrease)/increase
      in income taxes payable
              
              
              (1,355,000
              )
              
              
              (1,052,000
              )
              
              
              229,000(Decrease)/increase
      in other long-term liabilities
              
              
              (3,827,000
              )
              
              
              8,456,000
              
              
              
              3,488,000Net
      cash provided by
      operating activities
              
              
              21,902,000
              
              
              
              34,407,000
              
              
              
              48,684,000Cash
      flows (used in)/provided by investing activitiesAcquisition
      of property and equipment
              
              
              (9,382,000
              )
              
              
              (10,573,000
              )
              
              
              (39,942,000
              )Purchase
      of intangible assets
              
              
              (6,567,000
              )
              
              
              (13,368,000
              )
              
              
              (601,000
              )Proceeds
      from sale of marketable securities
              
              
              --
              
              
              
              8,350,000
              
              
              
              54,250,000Purchases
      of marketable securities
              
              
              --
              
              
              
              (4,700,000
              )
              
              
              (100,000
              )Net
      cash (used in)/provided by investing activities
              
              
              (15,949,000
              )
              
              
              (20,291,000
              )
              
              
              13,607,000Cash
      flows used in financing activitiesShares
      surrendered by employees to pay taxes on restricted stock
              
              
              (789,000
              )
              
              
              (887,000
              )
              
              
              (301,000
              )Excess
      tax benefit from stock options and restricted stock
              
              
              8,000
              
              
              
              1,194,000
              
              
              
              700,000Proceeds
      from exercise of stock options
              
              
              63,000
              
              
              
              4,285,000
              
              
              
              3,310,000Proceeds
      from employee stock purchase plan
              
              
              211,000
              
              
              
              340,000
              
              
              
              363,000Payments
      of short-term borrowings
              
              
              --
              
              
              
              --
              
              
              
              (3,000,000
              )Acquisition
      of treasury shares
              
              
              (24,376,000
              )
              
              
              (19,168,000
              )
              
              
              (7,169,000
              )Dividends
      paid to shareholders
              
              
              (6,830,000
              )
              
              
              (14,628,000
              )
              
              
              (14,472,000
              )Net
      cash used in financing activities
              
              
              (31,713,000
              )
              
              
              (28,864,000
              )
              
              
              (20,569,000
              )Effect
      of exchange rate changes on cash
              
              
              (189,000
              )
              
              
              (40,000
              )
              
              
              (28,000
              )Net
      (decrease)/increase in cash
              
              
              (25,949,000
              )
              
              
              (14,788,000
              )
              
              
              41,694,000Cash
      and cash equivalents, beginning of year
              
              
              90,653,000
              
              
              
              105,441,000
              
              
              
              63,747,000Cash
      and cash equivalents, end of year
              
              $
              64,704,000
              
              
              $
              90,653,000
              
              
              $
              105,441,000Supplemental
      disclosures of cash flow informationCash
      paid during the year for:Interest
              
              $
              175,000
              
              
              $
              14,000
              
              
              $
              204,000Income
      taxes, net
              
              $
              3,664,000
              
              
              $
              16,575,000
              
              
              $
              17,337,000
  See
accompanying notes to consolidated financial statements.
  F-8
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
   Note
1 - Summary of Significant Accounting Policies
 
 A. Description
of business
 
 Kenneth
Cole Productions, Inc. and its subsidiaries (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 Gentle Soulsbrand names, as
well as having the rights to use the Bongo trademark for footwear
through a license agreement.  In addition, the Company acquired the
Le Tigre trademark and
other intellectual property associated with the Le Tigre brand in September
2007.  The Company markets its products to approximately 5,700
department, specialty and off-price store locations, as well as through its
Consumer Direct business, which includes its full-priced retail stores,
Company Stores (“outlets”) and e-commerce.
 
 B. Principles
of consolidation
 
 The
consolidated financial statements include the accounts of Kenneth Cole
Productions, Inc. and its subsidiaries, all of which are wholly owned. 
Intercompany transactions and balances have been eliminated in
consolidation.  Certain amounts in the Company’s previous financial
statements have been reclassified to conform to the 2008 presentation.
 
 C. Use
of estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those
estimates.
 
 D. Cash and cash
equivalents
 
 The
Company considers all highly liquid investments with an original maturity of
three months or less at the time of purchase to be cash
equivalents.
 
 E. Investments
 
 The
Company has marketable securities including “double A” and “single A” rated
auction rate securities that are substantially all insured.  Maturity
dates for these securities range from 2025 to 2050.  The Company
records the securities at fair value, and has classified them as
available-for-sale securities under SFAS No. 115 “Accounting for Certain Investments
in Debt and Equity Securities” (“SFAS 115”). The securities are
marketable through a monthly auction process and the interest rate on these
securities is reset every 28 days. If the auction process fails a default
interest rate is set as defined within the investment prospectus.  The
purchase and sale of these securities is included in the accompanying
Consolidated Statements of Cash Flows as an investing activity.  In
addition, the Company also has equity investments that are classified as
available-for-sale securities under SFAS 115.
  The
Company reviews its security investments to determine whether a decline in fair
value is other-than-temporary.  Any decline in fair value of an
investment that is determined to be other-than-temporary is adjusted by an
impairment charge within Impairment of investments in the Consolidated
Statements of Operations.  The primary factors the Company considers
in its determination are the length of time that the fair value of
the
  F-9
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
   Note
1 - Summary of Significant Accounting Policies (continued)
 
 E. Investments
(continued)
 
 investment
is below the Company’s carrying value, the financial condition and operating
performance of the investee, the reason for the decline in the fair value and
the Company’s intent and ability to hold the investment for a period of time
sufficient to allow for a recovery in fair value.
 
 F. Inventories
 
 Inventories,
which consist of finished goods, are stated at the lower of cost or fair market
value. Cost for the wholesale segment inventory is determined by the first-in,
first-out method, while full-priced retail and Company Store (“outlet”)
inventories are based on the moving-average cost method.
 
 G. Property
and equipment
 
 Property
and equipment are stated at cost less accumulated depreciation and
amortization.  Depreciation and amortization is computed using the
estimated useful lives of the related assets ranging from three to forty years
on a straight-line basis.  Leasehold improvements are amortized using
the straight-line method over the term of the related lease or the estimated
useful life, whichever is less.
  The
Company reviews long-lived assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable as measured by comparing the undiscounted future cash flows to
the asset’s net book value.  Impaired assets are written down to fair
value which represents the lesser of the related asset’s net book value or the
discounted future cash flows of the assets.
 
 H. Intangible
Assets
  Intangible
assets are recorded at cost and are reviewed for impairment at least
annually.  Intangible assets that have indefinite lives are not
subject to amortization while those with finite lives are amortized over their
estimated useful lives.
 
 I. Income
Taxes
 
 Income
taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes”(“SFAS 109”).Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
 
 On
January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), which did not have an impact on the Company’s
consolidated financial statements.  FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in the Company’s financial statements
in accordance with SFAS 109. FIN 48 also prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return, as
well as guidance on derecognition, classification, interest, penalties and
financial statement reporting disclosures.
 
 F-10
 
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 
 Note
1 - Summary of Significant Accounting Policies (continued)
 
 J. Revenue
recognition
 
 Wholesale
revenues are recognized upon shipment of products to customers since title
passes upon shipment.  Full-priced retail and Company Store (“outlet”)
revenues are recognized at the time of sale.  Both wholesale and
retail store revenues are shown net of returns, discounts and other
allowances.  Reserves for estimated returns and allowances for
discounts are provided when sales are recorded.  The Company has also
entered into various trade name license agreements that provide revenues based
on minimum royalties and additional revenues based on percentage of defined
sales.  Minimum royalty revenue is recognized on a straight-line basis
over each contract period, as defined in each license agreement.  In
circumstances whereby licensee sales exceed the quarterly contractual minimums,
but not the annual minimums, royalties are deferred on the Consolidated Balance
Sheets.  As the licensee sales exceed the annual contractual minimums,
the royalties are recognized.
 
 K. Advertising
costs
 
 The
Company incurred advertising costs, including certain in-house marketing
expenses, of $20.7 million, $19.5 million, and $19.0 million for the years ended
December 31, 2008, 2007 and 2006, respectively. Advertising costs are expensed
as incurred and are included in Selling, general, and administrative expenses in
the accompanying Consolidated Statements of Operations.  Included in
advertising expenses are costs associated with cooperative advertising programs,
under which the Company generally shares the cost of a customer’s advertising
expenditures.  In addition, licensee contributions toward advertising
are recognized when licensed products are sold by the Company’s
licensees.  Such contributions are based on contractual percentages of
sales and contain minimums.  For licensees whose sales are not
expected to exceed contractual sales minimums, contributions relating to
advertising are recognized based on the contractual minimums.  In
circumstances whereby licensee sales exceed the quarterly contractual minimums,
but not the annual minimums, such contributions toward advertising are deferred
on the Consolidated Balance Sheets.  As the licensee sales exceed the
annual contractual minimums, the licensee contributions toward advertising are
recognized.
 L. Stock-based
compensation
 
 Effective
January 1, 2006, the Company adopted SFAS No. 123R “Share-based Payment” (“SFAS
123R”) which requires all share-based payments, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values.  The Company elected to use the modified prospective transition
method to record stock-based compensation expense; therefore, prior period
results were not restated.   Under SFAS 123R, the Company
measures the cost of services received in exchange for stock options and similar
awards based on the grant-date fair value of the award and recognizes this cost
in the Consolidated Statements of Operations over the period during which an
award recipient is required to provide service in exchange for the
award.  The Company uses the Black-Scholes model to assess the fair
value of share-based payments and amortizes this cost over the service
period.  In addition, stock compensation expense is reduced for estimated
forfeitures prior to vesting primarily based on historical annual forfeiture
rates and by employee classification.  Estimated forfeitures are
reassessed on a quarterly basis and may change based on new facts and
circumstances.
 
 F-11
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 
 
 Note
1 - Summary of Significant Accounting Policies (continued)
 
 M. Derivative
instruments and hedging activities
 
 The
Company may use derivative instruments, typically forward contracts, to manage
its risk associated with movements in the Euro exchange rates in purchasing
inventory.  In accordance with SFAS No. 133 “Accounting for Derivative
Instruments and Hedge Activities” (“SFAS 133”), the Company recognizes
all derivatives on the Consolidated Balance Sheets.  Also, derivative
instruments that meet certain criteria in SFAS 133 are classified as cash flow
hedges, and changes in fair value are recognized in Accumulated other
comprehensive income in the accompanying Consolidated Statements of Changes in
Shareholders’ Equity, until the underlying transaction is completed and the
derivative is settled.  Upon settlement, any amounts remaining in
Accumulated other comprehensive income are reclassified to
earnings.  Those derivatives that are not classified as cash flow
hedges are adjusted to fair value through earnings.  The Company does
not hold derivative instruments for the purpose of trading or
speculation.
 
 N. Shipping
and Handling Costs
 
 The
Company includes amounts billed to customers for shipping costs in net
sales.  The related internal and external shipping and handling costs
incurred by the Company are included in the Cost of goods sold line item in the
accompanying Consolidated Statements of Operations.  Such costs
include inbound freight costs, purchasing costs, inspection costs, internal
transfer costs, and other product procurement related charges.
 
 O. Cost of Goods
Sold and Selling, General and Administrative Expenses
 
 Costs
associated with the production and procurement of product are included in the
Cost of goods sold line item in the accompanying Consolidated Statements of
Operations, including inbound freight costs, purchasing costs, inspection costs,
and other product procurement related charges.  All other expenses,
excluding interest and income taxes, are included in Selling, general, and
administrative expenses, including receiving, warehousing, and distribution
expenses that are general and administrative in nature.
 
 P. Research
and Development Costs
 
 The
Company does not incur research and development costs.
 
 Note
2 – (Loss)/Earnings Per Share
 
 The
Company calculates (loss)/earnings per share in accordance with SFAS No. 128,
“Earnings Per Share”
(“SFAS 128”).  Basic (loss)/earnings per share are calculated by
dividing net (loss)/income by weighted-average common shares
outstanding.  Diluted earnings per share are calculated similarly,
except that it includes the dilutive effect of the assumed exercise of
securities under the Company’s stock incentive plans.  Dilutive
securities, which include stock options 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.  Basic and diluted (loss)/earnings per common share consist of
the following:
 
 F-12
 
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
  Note
2 – (Loss)/Earnings Per Share (continued)
  For
      the Year Ended December 31,2008
              
              
              2007
              
              
              2006Weighted-average
      commonshares outstanding
              
              
              18,423,000
              
              
              
              20,057,000
              
              
              
              20,046,000Effect
      of dilutive securities:Restricted
      stock & employee stock purchase plan
              
              
              --
              
              
              
              132,000
              
              
              
              113,000Stock
      options
              
              
              --
              
              
              
              136,000
              
              
              
              237,000Weighted-average
      commonshares outstanding and common share equivalents
              
              
              18,423,000
              
              
              
              20,325,000
              
              
              
              20,396,000
 
 All stock
options and restricted stock outstanding as of December 31, 2008 have been
excluded in the diluted per share calculation as the impact would be
antidilutive.  Stock options amounting to 1,423,000 and 783,000 as of
December 31, 2007 and 2006, respectively, have been excluded from the diluted
per share calculations, since their effect would be antidilutive.
 
 Note
3 - Due from Factors and Accounts Receivable
 
 Prior to
November 7, 2008, the Company sold primarily all of its accounts receivable
to its factors, without recourse, subject to credit limitations established by
the factors for each individual customer account.  Certain accounts
receivable in excess of established limits are factored with
recourse.  On November 7, 2008, the Company amended its factoring
agreement with its largest factor to a deferred purchase agreement
(“DPA”).  The DPA requires the factor to act as a collection agent for
the Company’s assigned receivables without transfer of ownership, subject to
credit approval and without recourse.  All receivables with this
factor prior to the DPA were recorded within Due from Factors, while all
receivables with this factor subsequent to the DPA are included within Accounts
receivable.  Included in amounts due from factors at December 31, 2008
and 2007 are accounts receivable subject to recourse totaling approximately
$0.6 million and $0.8 million, respectively.  At December 31, 2008 and
2007, the balance due from factors, which includes chargebacks, is net of
allowances for returns, discounts, and other deductions of approximately $2.9
million and $10.6 million, respectively.  The allowances are provided
for known chargebacks reserved for but not written off the Company’s financial
records and for potential future customer deductions based on management’s
estimates.  The agreements with the factors provide for payment of a
service fee on receivables sold or assigned.
  The
Company has accounts receivable that are non-factored as well as amounts
receivable from the factor under the DPA agreement that are at the Company’s
risk.  Non-factored accounts receivable include wholesale accounts,
receivables from licensees and credit card receivables from third-party service
providers.  At December 31, 2008 and 2007, the accounts receivable
balance includes allowance for doubtful accounts and Consumer Direct sales
returns of approximately $1.8 million and $1.1 million,
respectively.  The allowances provided for sales returns are for
potential future retail customer merchandise returns, while the allowance for
doubtful accounts is provided for estimated losses resulting from the inability
of the Company’s wholesale customers to make required payments, both of which
are based on management’s estimates.  In addition, accounts
receivable at December 31, 2008 is net of allowances for chargebacks from
wholesale customers of $6.5 million for returns, discounts, and other deductions
that are processed under the DPA with the factor.  The allowances are
provided for known chargebacks reserved for but not written off the Company’s
financial records and for potential future customer deductions based on
management’s estimates.  These amounts would have previously been
recorded within the Due from factors balance prior the execution of the DPA
agreement.
  F-13
  Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
   Note
4 - Investments
 
 The
Company reviews its investments for other-than-temporary impairment whenever the
fair value of an investment is less than amortized cost and evidence indicates
that an investment’s carrying value may not be recoverable within a reasonable
period of time.  The fair value of the Company’s auction rate securities
(“marketable 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.  In the Company’s evaluation of its investments it also
considered 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 in
2008, the Company recorded an other-than temporary impairment of investments of
$7.8 million, consisting of marketable securities of $3.2 million and an
investment in common stock of one of its licensees of $4.6
million.  The Company recorded an other-than-temporary impairment of
investments of $0.3 million related to its marketable securities in
2007.
  The
following table presents gross unrealized gains/(losses) on, and estimated fair
value of, the Company’s long-term investments as of December 31, 2008 and
2007:
 
 December
      31, 2008
              
              
              December
      31, 2007Estimated
      Fair Value
              
              
              Gross
      Unrealized
              
              
              Estimated
      Fair
                Value
              
              
              Gross
      UnrealizedGains
              
              
              Losses
              
              
              Gains
              
              
              LossesAuction-rate
      securities
              
              $
              5,085,000
              
              
              
              --
              
              
              
              --
              
              
              $
              8,305,000
              
              
              
              --
              
              
              
              --Equity
      securities
              
              $
              899,000
              
              
              $
              182,000
              
              
              
              --
              
              
              $
              4,648,000
              
              
              $
              810,000
              
              
              $
              (1,500,000
              )Total
              
              $
              5,984,000
              
              
              $
              182,000
              
              
              
              --
              
              
              $
              12,953,000
              
              
              $
              810,000
              
              
              $
              (1,500,000
              )
 
 The
Company recorded a net unrealized gain of approximately $0.2 million for the
year ended December 31, 2008 and a net unrealized loss of approximately $0.7
million for the year ended December 31, 2007.  The Company also
reclassified approximately $1.5 million of gross unrealized losses from
Accumulated other comprehensive income into Impairment of investments during the
year ended December 31, 2008.
  Auction-rate
securities are recorded as long term within Investments and other in the
Consolidated Balance Sheets at December 31, 2008 and 2007 based on the lack of
an active credit market for investors to purchase and sell these
investments.
 
 Note
5 - Fair Value Measurement
 
 The
Company’s financial assets, measured at fair value pursuant to FASB Statement
No. 157, “Fair Value
Measurements” (“SFAS 157”),were as follows:
 
 Fair
      Value at
                December
      31, 2008
              
              HierarchyInvestments
              
              $
              899,000
              
              Level
      1Deferred
      compensation plans’ assets
              
              
              32,909,000
              
              Level
      2Marketable
      securities
              
              
              5,085,000
              
              Level
      3
 
 F-14
 
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 
  Note
5 - Fair Value Measurement (continued)
 
 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.  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
following table presents the reconciliation of the beginning and ending fair
value measurements of the Company’s Level 3 inputs, marketable securities,
measured at fair value using observable inputs based on unobservable data in an
inactive market as of December 31, 2008:
 
 Beginning
      balance at January 1, 2008
              
              $
              --Transfer
      in from Level 2 inputs
              
              
              8,305,000Impairment
      charge included in Statement of Operations
              
              
              (3,220,000
              )Ending
      balance at December 31, 2008
              
              $
              5,085,000
 
 The
Company recorded an other-than temporary impairment of $7.8 million consisting
of marketable securities of $3.2 million and an investment in common stock of
one of its licensees of $4.6 million, from $5.0 million to $0.4 million, within
Impairment of investment in the Consolidated Statements of Operations during the
year ended December 31, 2008.  The Company recorded an
other-than-temporary impairment of $0.3 million related to its marketable
securities for the year ended December 31, 2007.
 
 Note
6 - Property and Equipment
  Property
and equipment consist of the following:
 
 December
      31,Useful
      lives
              
              2008
              
              
              2007Property
      and equipment—at cost:Land
              
              
              $
              5,462,000
              
              
              $
              5,462,000Building
      and building improvements
              15-40
      years
              
              
              33,773,000
              
              
              
              33,615,000Furniture
      and fixtures
              7
      years
              
              
              30,263,000
              
              
              
              29,886,000Machinery
      and equipment
              3-7
      years
              
              
              26,568,000
              
              
              
              30,561,000Leasehold
      improvements
              Up
      to 10 years
              
              
              36,017,000
              
              
              
              37,267,000132,083,000
              
              
              
              136,791,000Less
      accumulated depreciation and amortization
              
              
              
              74,293,000
              
              
              
              76,434,000Net
      property and equipment
              
              
              $
              57,790,000
              
              
              $
              60,357,000
 
 Depreciation
and amortization expense amounted to $8.9 million, $11.8 million and $10.7
million for the years ended December 31, 2008, 2007 and 2006,
respectively.
 
 F-15
 
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 
 Note
7 - Intangible Assets
 
 Intangible
assets, primarily trademarks, consist of the following:
 
 December
      31,2008
              
              
              2007Indefinite
      lived intangible assets
              
              $
              17,762,000
              
              
              $
              12,291,000Finite
      lived intangible assets
              
              
              3,022,000
              
              
              
              2,426,000Less
      accumulated amortization
              
              
              (942,000
              )
              
              
              (634,000
              )Net
      finite lived intangible assets
              
              
              2,080,000
              
              
              
              1,792,000Net
      intangible assets
              
              $
              19,842,000
              
              
              $
              14,083,000
 
 Amortization
expense amounted to $0.3 million, $0.2 million and $0.2 million for the years
ended December 31, 2008, 2007 and 2006, respectively.  The
weighted-average amortization period of intangible assets acquired in 2008 and
2007 is 9.6 years and 4.4 years, respectively. Amortization expense for the
following five years is estimated to be as follows:
 
 2009
              
              $
              318,0002010
              
              
              309,0002011
              
              
              292,0002012
              
              
              283,0002013
              
              
              254,000
 
 In 2007,
the Company acquired the Le
Tigre trademark and other intellectual property associated with the Le Tigre brand from Le Tigre,
LLC (the “Seller”).  The Company paid the Seller approximately $13.0
million.  During 2008, pursuant to two amendments to the Asset
Purchase Agreement, the Company paid the Seller an additional $5.5 million for
achieving specified performance targets.  The final purchase price for
Le Tigre was $18.5
million.  In accordance with SFAS No. 142, “Goodwill and Other Intangible
Assets”, the Company recorded the intellectual property in “Intangible
Assets” on the accompanying Consolidated Balance Sheets at fair
value.  Based on an independent third-party valuation, management
allocated the majority of the $18.5 million paid as an indefinite lived
intangible asset and a nominal amount as a finite lived intangible
asset.
  During
2008, the Company paid $0.5 million for the final cash payment related to the
Gentle Soulstrademark
purchased in 2006.
 
 Note
8 – Impairment of Long-Lived Assets
 
 Management
reviews its retail stores’ estimated undiscounted future cash flows and compares
it to the unamortized leasehold improvements to determine whether or not a
write-down to fair value is required.  In 2008, 2007 and 2006, the
Company recorded non-cash asset impairment charges of $1.9 million, $10.6
million and $0.1 million, respectively, related to its stores’ leasehold
improvements and furniture and fixtures.
  Management
also reviews its wholesale customer shop-in-shops’ estimated undiscounted future
cash flows to determine whether a writedown is required.  In 2008, the
Company recorded a non-cash asset impairment charge of $1.1 million for
shop-in-shops’ build out costs.
  F-16
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
   Note
9 - Foreign Currency Transactions, Derivative Instruments and Hedging
Activities
 
 The
Company, in the normal course of business, may enter into forward contracts in
anticipation of future purchases of inventory denominated in foreign
currencies.  These forward contracts are used to hedge against the
Company’s exposure to changes in Euro exchange rates to protect the purchase
price of merchandise under such commitments.  The Company classifies
these contracts as cash flow hedges under SFAS 133.  The Company had
no forward contracts outstanding as of December 31, 2008 and 2007.
 
 Note
10 - Segment Reporting
 
 The
Company has three reportable segments:  Wholesale, Consumer Direct and
Licensing.  The Wholesale segment designs and sources a broad range of
fashion footwear, handbags, accessories, and apparel and markets its products
for sale to approximately 5,700 department, specialty and off-price store
locations and to the Company’s Consumer Direct segment.  The Consumer
Direct segment markets a broad selection of the Company’s branded products,
including licensee products, for sale directly to the consumer through its own
channels of distribution, which include full-priced retail stores, Company
Stores (“outlets”) and e-commerce (at website addresses www.kennethcole.com
and www.kennethcolereaction.com).
 The Licensing segment, through third-party licensee agreements, has
evolved the Company from a footwear resource to a diverse lifestyle brand
competing effectively in approximately 30 apparel and accessories categories for
men, women and children.  The Company maintains control over quality,
image and distribution of the licensees.  This segment primarily
consists of royalties earned on licensee sales to third parties of the Company’s
branded products and royalties earned on the purchase and sale to foreign
retailers, distributors, or to consumers in foreign countries.  The
Company’s reportable segments are business units that offer products to
overlapping consumers through different channels of
distribution.  Each segment is managedseparately,
althoughplanning,
implementation and results across segments are reviewed internally by the
executive management committee.  The Company evaluates performance of
each of its segments and allocates resources based on profit or loss
before unallocated corporate overhead, stock-based compensation expense,
writedown of marketable securities, non-operating impairment charges and income
taxes for each segment. The accounting policies of the reportable
segments are the same as those described in the Summary of Significant
Accounting Policies. Intersegment sales between the Wholesale and Consumer
Direct segments are eliminated in consolidation.
  F-17
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
  Note
10 - Segment Reporting (continued)
 
 Financial
information of the Company’s reportable segments is as follows (dollars in
thousands):
 
 ConsumerWholesale
              
              
              Direct
              
              
              Licensing
              
              
              TotalsYear
      Ended December 31, 2008Revenues
              
              $
              267,151
              
              
              $
              181,427
              
              
              $
              43,759
              
              
              $
              492,337Intersegment
      revenues
              
              
              40,458
              
              
              
              --
              
              
              
              --
              
              
              
              40,458Interest
      income, net
              
              
              1,730
              
              
              
              --
              
              
              
              --
              
              
              
              1,730Depreciation
      expense
              
              
              3,048
              
              
              
              5,873
              
              
              
              --
              
              
              
              8,921Impairment
      of long-lived assets
              
              
              1,111
              
              
              
              1,917
              
              
              
              --
              
              
              
              3,028Segment (loss)/income
      (1) (3)
              
              
              (9,595
              )
              
              
              (20,579
              )
              
              
              33,785
              
              
              
              3,611Segment
      assets (2)
              
              
              196,024
              
              
              
              55,071
              
              
              
              62,340
              
              
              
              313,435Expenditures
      for long-lived assets
              
              
              2,088
              
              
              
              7,309
              
              
              
              6,552
              
              
              
              15,949Year
      Ended December 31, 2007Revenues
              
              $
              290,768
              
              
              $
              175,637
              
              
              $
              44,315
              
              
              $
              510,720Intersegment
      revenues
              
              
              27,804
              
              
              
              --
              
              
              
              --
              
              
              
              27,804Interest
      income, net
              
              
              5,366
              
              
              
              --
              
              
              
              --
              
              
              
              5,366Depreciation
      expense
              
              
              3,575
              
              
              
              8,145
              
              
              
              73
              
              
              
              11,793Impairment
      of long-lived assets
              
              
              --
              
              
              
              10,564
              
              
              
              --
              
              
              
              10,564Segment
      income/(loss) (1) (3)
              
              
              13,544
              
              
              
              (23,937
              )
              
              
              36,655
              
              
              
              26,262Segment
      assets (2)
              
              
              255,818
              
              
              
              51,904
              
              
              
              48,400
              
              
              
              356,122Expenditures
      for long-lived assets
              
              
              1,309
              
              
              
              9,364
              
              
              
              13,268
              
              
              
              23,941Year
      Ended December 31, 2006Revenues
              
              $
              314,981
              
              
              $
              177,301
              
              
              $
              44,217
              
              
              $
              536,499Intersegment
      revenues
              
              
              28,262
              
              
              
              --
              
              
              
              --
              
              
              
              28,262Interest
      income, net
              
              
              4,875
              
              
              
              --
              
              
              
              --
              
              
              
              4,875Depreciation
      expense
              
              
              3,454
              
              
              
              7,197
              
              
              
              4
              
              
              
              10,655Impairment
      of long-lived assets
              
              
              --
              
              
              
              121
              
              
              
              --
              
              
              
              121Segment
      income/(loss) (1) (3)
              
              
              31,956
              
              
              
              (12,623
              )
              
              
              34,562
              
              
              
              53,895Segment
      assets (2)
              
              
              251,851
              
              
              
              64,914
              
              
              
              44,348
              
              
              
              361,113Expenditures
      for long-lived assets
              
              
              24,063
              
              
              
              15,870
              
              
              
              610
              
              
              
              40,543
 (1)
              Before
      unallocated corporate overhead, stock-based compensation expense,
      writedown of marketable securities, investment impairment charges and
      income taxes.
 (2)
              The
      Wholesale segment includes corporate
assets.
 (3)
              The
      Wholesale segment includes primarily all of the Company’s allocated
      corporate overhead.
  F-18
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
   Note
10 - Segment Reporting (continued)
 
 The
reconciliation of the Company’s reportable segment revenues and profit and loss
are as follows (dollars in thousands):
 
 Revenues
              
              2008
              
              
              2007
              
              
              2006Revenues
      for reportable segments
              
              $
              492,337
              
              
              $
              510,720
              
              
              $
              536,499Intersegment
      revenues (1)
              
              
              40,458
              
              
              
              27,804
              
              
              
              28,262Elimination
      of intersegment revenues
              
              
              (40,458
              )
              
              
              (27,804
              )
              
              
              (28,262
              )Total
      consolidated revenues
              
              $
              492,337
              
              
              $
              510,720
              
              
              $
              536,499(Loss)/incomeTotal
      income for reportable segments (1)
              
              $
              3,611
              
              
              $
              26,262
              
              
              $
              53,895Elimination
      of unallocated corporate overhead, stock-based compensation expense,
      writedown of marketable securities and non-operating impairment
      charges
              
              
              (22,032
              )
              
              
              (16,011
              )
              
              
              (12,032
              )Total
      (loss)/income before (benefit from)/provision for income
    taxes
              
              $
              (18,421
              )
              
              $
              10,251
              
              
              $
              41,863
 (1)
              Before
      unallocated corporate overhead, stock-based compensation expense,
      writedown of marketable securities, investment impairment charges and
      income taxes.
 
 Revenues
from international customers were approximately 3.9%, 3.0%, and 2.5%
of the Company’s consolidated revenues for the years ended December 31, 2008,
2007 and 2006, respectively.
 
 Note
11 - Other Current Liabilities
 
 Other
current liabilities consist of the following:
 
 December
      31,2008
              
              
              2007Rent
              
              $
              989,000
              
              
              $
              1,158,000Compensation
              
              
              7,972,000
              
              
              
              6,252,000Customer
      credits
              
              
              1,750,000
              
              
              
              1,876,000Other
              
              
              958,000
              
              
              
              1,566,000Total
      other current liabilities
              
              $
              11,669,000
              
              
              $
              10,852,000
 
 Note
12 - Benefit Plans
 
 A. 401(k)
Plan
 
 The
Company’s 401(k) profit-sharing plan covers all domestic employees, subject to
certain minimum age and length of service requirements who are permitted to
contribute specified percentages of their salary up to the maximum permitted by
the Internal Revenue Service.  As defined in the 401(k) Plan document,
the Company may make a matching and/or additional discretionary
contribution.  No additional discretionary contributions were made
during 2008.  Contributions to the plan for the years ended December
31, 2008, 2007 and 2006 were approximately $0.5 million, $0.5 million and $0.6
million, respectively.
 
 F-19
 
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
   Note
12 - Benefit Plans (continued)
 
 B. Deferred
compensation plans
 
 The
Company has three nonqualified deferred compensation plans that are maintained
primarily to provide deferred compensation benefits for the Company’s “highly
compensated employees”, as defined.  The Company accounts for the
investments in the deferred compensation plans as trading securities in
accordance with SFAS 115.  The unrealized gains and losses on the
investments are recorded in Selling, general and administrative expenses in the
accompanying Consolidated Statements of Operations. The assets are included in
Deferred compensation plans’ assets, and the related liabilities are
included in Deferred compensation plans’ liabilities.  The Company’s
deferred compensation plans comply with regulation 409a of the Internal Revenue
Code which regulates deferred compensation.
  The
Kenneth Cole Productions, Inc. Deferred Compensation Plan is solely for the
Company’s Chairman and Chief Creative Officer.  Amounts deferred and
invested under this plan, at his discretion, were $1.6 million, $2.0 million and
$1.4 million for the years ended December 31, 2008, 2007 and 2006,
respectively.  As of December 31, 2008 and 2007, the Company has
recorded a liability of $32.9 million and $38.1 million, respectively, for this
plan, and the fair value of the related assets were $32.9 million and $38.1
million, respectively.
  The
Kenneth Cole Productions, Inc. Nonqualified Deferred Compensation Plan (“Nonqual
Plan”) provides for the Company, at its discretion, to fund the Nonqual Plan on
behalf of qualified employees.  Contributions by the Company are 100%
vested at time of funding and the employee has the right to select various
investment options.  The employees are entitled to the assets based
upon the returns of the various investments that they can elect.  The
Company has the right to invest in any funds it chooses.  The Company
has funded the Nonqual Plan with Company owned variable life insurance
contracts.  Amounts deferred under the plan were $0.3 million, $0.2
million and $0.3 million for the years ended December 31, 2008, 2007 and 2006,
respectively.  As of December 31, 2008 and 2007, the Company has
recorded a liability of $0.8 million and $1.1 million, respectively, for this
plan.
  The
Supplemental Executive Retirement Plan (“SERP”) provides for the Company, at its
discretion, to fund the SERP on behalf of qualified
employees.  Contributions by the Company are vested based upon the
respective participants’ years of service, and the employee has the right to
select various investment options.  Employees are entitled to the
assets based upon the returns of various investments they elect from the
Company’s contributions that are vested.  The Company has the right to
invest in any funds at its discretion and has funded the SERP with Company owned
variable life insurance contracts.  As of December 31, 2008 and 2007,
the Company has recorded a liability of $2.0 million and $3.2
million, respectively, for this plan.
  The fair
value of the Nonqual Plan and SERP investments was $4.4 million and $7.6 million
at December 31, 2008 and 2007, respectively.
  On
January 1, 2008 the Company amended its SERP.  Under the amended plan,
benefits earned become 30% vested after 3 years of service, 60% vested after 6
years of service and 100% vested after 10 years of service or termination of
service resulting from retirement, disability or death.
 
 F-20
 
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 
 Note
12 - Benefit Plans (continued)
 
 C. Employee
Stock Purchase Plan
 
 The
Company sponsors a qualified employee stock purchase plan (“ESPP”), the terms of
which allow for qualified employees, as defined, to participate in the purchase
of designated shares of the Company’s Class A Common Stock at a price equal to
85% of the closing price at the end of each quarterly stock purchase
period.  For the years ended December 31, 2008, 2007 and 2006,
employees purchased 16,329, 17,022, and 17,897 shares,
respectively.  Total shares purchased through December 31, 2008 were
127,803.
 
 Note
13 - Stock–Based Compensation
 
 The Company’s 2004 Stock Incentive Plan
(the “Plan”),as
amended,authorizes the
grant of optionsand
restricted stockto
employees for up to6,320,162 shares of the Company’s Class
A Common Stock.  The
Plan provides for the grant of stock options, restricted stock awards and other
stock unit awards to directors, officers and other eligible
employees.  Stock options are granted with an exercise price
equal to the market value of a share of common stock on the date of
grant.  Stock option grants expire within 10 years and vest on a
graded basis within two to five years from the date of
grant.  Restricted stock unit awards generally vest on a graded
basisover a
three to four year period or cliff vest after three years.  All awards
are expensed on a straight-line basis.
  SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized as compensation expense over the service period (generally the
vesting period) in the consolidated financial statements based on their fair
values.Under the modified prospective method,
awards that were granted, modified, or settled on or after January 1, 2006 are
measured and accounted for in accordance with SFAS 123R.  Unvested
equity-based awards that were granted prior to January 1, 2006 continue to be
accounted for in accordance with SFAS 123, except that all awards are recognized
in the results of operations over the remaining vesting periods.  The
impact of forfeitures that may occur prior to vesting is also estimated and
considered in the amount recognized.  Also, the realization of tax
benefits in excess of amounts recognized for financial reporting purposes is
recognized in the Consolidated Statementsof Cash Flows as a financing
activity.In
addition, the Company’s
ESPP isconsidered
compensatory under SFAS 123R,as the ESPP contains apurchase price discountin excess of 5%.  In accordance with the
guidance set forth in SFAS 123R, the Company reversed the deferred compensation
amount in Shareholders’ Equity related to restricted stock as of January 1,
2006.
  F-21
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
   Note
13 - Stock–Based Compensation (continued)
 
 The
following table summarizes stock option activity for the years ended December
31, 2008, 2007 and 2006:
 
 Shares
              
              
              Weighted-
      average exercise price per shareOutstanding
      as of December 31, 2005
              
              
              2,600,717
              
              
              $
              23.64Granted
              
              
              27,000
              
              
              $
              24.73Exercised
              
              
              (203,283
              )
              
              $
              16.28Expired
              
              
              (131,185
              )
              
              $
              31.14Forfeited
              
              
              (174,364
              )
              
              $
              27.24Outstanding
      as of December 31, 2006
              
              
              2,118,885
              
              
              $
              23.60Granted
              
              
              20,000
              
              
              $
              23.75Exercised
              
              
              (308,800
              )
              
              $
              13.88Expired
              
              
              (65,306
              )
              
              $
              29.62Forfeited
              
              
              (10,000
              )
              
              $
              23.85Outstanding
      as of December 31, 2007
              
              
              1,754,779
              
              
              $
              25.08Granted
              
              
              881,500
              
              
              $
              14.69Exercised
              
              
              (5,400
              )
              
              $
              11.71Expired
              
              
              (173,949
              )
              
              $
              24.96Forfeited
              
              
              (45,667
              )
              
              $
              14.97Outstanding
      as of December 31, 2008
              
              
              2,411,263
              
              
              $
              21.51Exercisable
      as of December 31, 2008
              
              
              1,565,013
              
              
              $
              25.15
 
 The
weighted-average grant-date fair value of options granted during the years ended
December 31, 2008, 2007 and 2006 was $4.98, $10.18 and $10.97,
respectively.  The weighted-average remaining term for stock options
outstanding and exercisable, as of December 31, 2008, was 5.5 years and 4.3
years, respectively.  There was no aggregate intrinsic value of stock
options outstanding and exercisable as of December 31, 2008.  The
intrinsic value for stock options is calculated based on the exercise price of
the underlying awards and the market price of the Company’s common stock as of
the reporting date.  The total fair value of options vested during the
years ended December 31, 2008, 2007 and 2006 was $1.5 million, $1.4 million and
$2.1 million, respectively.
  The intrinsic value related to the
exercise of stock options
was approximately $20,000 for the year ended December 31,
2008,which is currently
deductible for tax purposes.  The intrinsic value related to the
exercise of stock options
was$2.9 million for the
year ended December 31, 2007.  In addition, 368,242 treasury shares
were re-issued for options exercised and restricted stock vestings during the
year ended December 31, 2007.
 
 F-22
 
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 
 Note
13 - Stock–Based Compensation (continued)
 
 The
following table summarizes restricted stock unit activity for the years ended
December 31, 2008, 2007 and 2006.
 
 SharesUnvested
      as of January 1, 2006
              
              
              138,182Granted
              
              
              515,616Vested
              
              
              (34,138
              )Forfeited
              
              
              (53,557
              )Unvested
      as of December 31, 2006
              
              
              566,103Granted
              
              
              305,044Vested
              
              
              (97,320
              )Forfeited
              
              
              (111,647
              )Unvested
      as of December 31, 2007
              
              
              662,180Granted
              
              
              329,455Vested
              
              
              (148,541
              )Forfeited
              
              
              (154,236
              )Unvested
      as of December 31, 2008
              
              
              688,858Vested
      as of December 31, 2008
              
              
              294,781
 
 The
weighted-average grant-date fair value of restricted stock awards granted during
the years ended December 31, 2008, 2007 and 2006 was $11.89, $23.71 and
$25.32, respectively.  The total grant-date fair value of restricted
shares vested during the years ended December 31, 2008, 2007 and 2006 was $3.7
million, $2.6 million and $0.7 million, respectively.  The
weighted-average remaining contractual term of unvested shares of restricted
stock as of December 31, 2008 and 2007 was 1.8 years and 1.9 years,
respectively.
  The
following table summarizes the components of stock-based compensation expense,
which is recorded in Selling, general and administrative expenses in the
Consolidated Statements of Operations, for the years ended December 31, 2008,
2007 and 2006.
 
 Year
      ended December 31,2008
              
              
              2007
              
              
              2006Stock
      options
              
              $
              928,000
              
              
              $
              1,714,000
              
              
              $
              1,137,000Restricted
      stock units and employee stock purchase plan
              
              
              4,217,000
              
              
              
              5,532,000
              
              
              
              2,056,000Total
      stock-based compensation expense
              
              $
              5,145,000
              
              
              $
              7,246,000
              
              
              $
              3,193,000
  Tax
benefits were attributed to the stock-based compensation expense.  The
Company elected to adopt the alternative method of calculating the historical
pool of windfall tax benefits as permitted by FASB Staff Position (FSP) No. SFAS
123R-c, “Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment
Awards.”
This is a simplified method to determine the pool of windfall tax benefits that
is used in determining the tax effects of stock compensation in the results of
operations and cash flow reporting for awards that were outstanding as of the
adoption of SFAS 123R.
 
 F-23
  Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 
 Note
13 - Stock–Based Compensation (continued)
 
 The fair
value of stock options was estimated using the Black-Scholes option-pricing
model.  This model requires the input of subjective assumptions that
will usually have a significant impact on thefair
value estimate.  The assumptions for the current period grants were
developed based on SFAS 123R and SEC guidance contained in Staff Accounting
Bulletin (SAB) No. 107, “Share-Based Payment.”
  The
following table summarizes the assumptions used to compute the weighted-average
fair value of stock option grants:
 
 Year
      Ended December 31,2008
              2007
              2006Weighted-average
      volatility
              38.3%
              45.0%
              49.6%Risk-free
      interest rate
              4.0%
      to 4.1%
              4.0%
      to 4.8%
              5.0%
      to 5.2%Weighted-average
      dividend yield
              2.5%
              3.2%
              2.9%Expected
      term
              4-9
      years
              9
      years
              3-9
      years
 
 The
weighted-average volatility for the options granted during the years ended
December 31, 2008, 2007, and 2006 was developed using historical volatility for
periods equal to the expected term of the options. An increase in the
weighted-average volatility assumption will increase stock compensation
expense. The expected volatility used in the calculation of the Company’s
stock-based compensation expense for the year ended December 31, 2008 ranged
from 32.6% to 46.7%.
  The
risk-free interest rate was developed using the U.S. Treasury yield curve for
periods equal to the expected term of the options on the grant
date.  An increase in the risk-free interest rate will increase stock
compensation expense.
  The
dividend yield is a ratio that estimates the expected dividend payments to
shareholders.  The dividend yield is calculated by using the dividends
declared per share and the Company’s stock price on the date of
grant.  A decrease in the dividend yield will increase stock
compensation expense.  The dividend yields used in the calculations of
the Company’s stock-based compensation expense for the year ended December 31,
2008 ranged from 2.4% to 3.1%.
  The
expected term of the stock option grants was developed after considering vesting
schedules, life of the option, historical experience and estimates of future
exercise behavior patterns.  An increase in the expected holding
period will increase stock compensation expense.
  The fair
value of restricted stock was calculated by multiplying the Company’s stock
price on the date of grant by the number of shares granted and is being
amortized on a straight-line basis over the vesting periods.  SFAS
123R requires the recognition of stock-based compensation for the number of
awards that are ultimately expected to vest.  As a result, for most
awards, recognized stock compensation was reduced for estimated forfeitures
prior to vesting primarily based on historical annual forfeiture rates and by
employee classification ranging from 0% to 100% for stock options, and 0% to
100% for restricted stock.  Estimated forfeitures will continue to be
reassessed in subsequent periods and may change based on new facts and
circumstances.
  As of
December 31, 2008, approximately $10.5 million of unrecognized stock
compensation related to unvested stock options and restricted stock awards, net
of estimated forfeitures, is expected to be recognized over a weighted-average
period of 2.3 years.
  F-24
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
  Note
14   - Income Taxes
 
 The
Company accounts for income taxes in accordance with SFAS 109 and FIN
48.  As such, the Company’s policy on classification of interest and
penalties is to include these amounts in the provision for income taxes in the
accompanying Consolidated Statements of Operations.  During the year
ended December 31, 2008, the Company recognized a tax expense of $0.3 million
for interest and penalties. During the year ended December 31, 2007, the Company
recognized a tax benefit of $0.2 million for interest and
penalties.  Interest and penalties accrued at December 31, 2008 and
2007 were $1.2 million and $0.9 million, respectively. The total amount of
unrecognized tax benefits at December 31, 2008 and 2007 is approximately $2.4
million of which $1.1 million and $1.3 million, respectively, would affect the
Company’s effective tax rate if recognized.  If settlements are
effected in accordance with the Company’s expectations, the total unrecognized
tax benefits could decrease by approximately $0.1 million within the next twelve
months.
  Unrecognized
tax benefits consist of the following:
 
 2008
              
              
              2007Balance
      as of January 1
              
              $
              2,423,000
              
              
              $
              2,160,000Additions
      to current period positions
              
              
              267,000
              
              
              
              504,000Additions
      for positions of prior years
              
              
              1,040,000
              
              
              
              301,000Reductions
      for positions of prior years
              
              
              --
              
              
              
              (542,000
              )Settlements
      with taxing authorities
              
              
              (1,099,000
              )
              
              
              --Lapses
      of applicable statute of limitations
              
              
              (243,000
              )
              
              
              --Balance
      as of December 31
              
              $
              2,388,000
              
              
              $
              2,423,000
 
 The
Company and certain of its subsidiaries are subject to U.S. federal income tax
as well as income tax of multiple state, local, and foreign
jurisdictions.  U.S. federal income tax returns have been examined
through 2005. In addition, audits are currently being conducted for certain
state and federal tax jurisdictions ranging from 2003 to 2007.
  In 2006,
the Company reached agreements with various taxing authorities which closed
certain outstanding audits, for which the Company had previously established
reserves.  The Company recorded a tax benefit of approximately $0.6
million, net of certain tax liabilities, during the year ended December 31,
2006.
  The
components of (loss)/income before (benefit from)/provision for income taxes are
as follows:
 
 Year
      Ended December 31,
              
              2008
              
              
              2007
              
              
              2006Domestic
              
              $
              (26,328,000
              )
              
              $
              3,286,000
              
              
              $
              35,649,000International
              
              
              7,907,000
              
              
              
              6,965,000
              
              
              
              6,214,000$
              (18,421,000
              )
              
              $
              10,251,000
              
              
              $
              41,863,000
 
 F-25
 
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 
 Note
14   - Income Taxes (continued)
 
 Significant
items comprising the Company’s deferred tax assets and liabilities are as
follows:
 
 December
      31,2008
              
              
              2007Deferred
      tax assets:Inventory
      allowances and capitalization
              
              $
              3,033,000
              
              
              $
              2,274,000Allowance
      for doubtful accounts and sales allowances
              
              
              894,000
              
              
              
              819,000Deferred
      rent
              
              
              4,322,000
              
              
              
              4,536,000Deferred
      compensation
              
              
              14,693,000
              
              
              
              13,558,000Depreciation
      and asset impairment
              
              
              5,221,000
              
              
              
              5,450,000Stock-based
      compensation
              
              
              3,383,000
              
              
              
              3,017,000Unrealized
      losses on available-for-sale securities
              
              
              --
              
              
              
              406,000Writedown
      of investments
              
              
              3,132,000
              
              
              
              --Deferred
      income, customer obligations, and other
              
              
              2,895,000
              
              
              
              1,956,000Net
      operating loss carryforwards
              
              
              5,472,000
              
              
              
              --Non-deductible
      accruals
              
              
              792,000
              
              
              
              950,00043,837,000
              
              
              
              32,966,000Valuation
      allowances on writedown of investments
              
              
              (3,132,000
              )
              
              
              --Total
      deferred tax assets
              
              $
              40,705,000
              
              
              $
              32,966,000Deferred
      tax liabilities:Amortization
      of intangible assets
              
              
              (471,000
              )
              
              
              (106,000
              )Unrealized
      gains on available-for-sale securities
              
              
              (70,000
              )
              
              
              --Undistributed
      foreign earnings
              
              
              (978,000
              )
              
              
              (3,027,000
              )Total
      deferred tax liabilities
              
              
              (1,519,000
              )
              
              
              (3,133,000
              )Net
      deferred tax assets
              
              $
              39,186,000
              
              
              $
              29,833,000
 
 As of
December 31, 2008, the Company had net operating loss carryforwards of
approximately $13.5 million that will expire in 2028.  In addition,
the Company recorded a valuation allowance related to the writedown of
investments because of the uncertainty of ultimately realizing these future tax
benefits.
  The
(benefit from)/provision for income taxes consists of the
following:
 
 December
      31,2008
              
              
              2007
              
              
              2006Current:Federal
              
              $
              5,988,000
              
              
              $
              13,045,000
              
              
              $
              13,402,000State
      and local
              
              
              376,000
              
              
              
              414,000
              
              
              
              1,465,000Foreign
              
              
              386,000
              
              
              
              698,000
              
              
              
              231,0006,750,000
              
              
              
              14,157,000
              
              
              
              15,098,000Deferred:Federal
              
              
              (9,131,000
              )
              
              
              (10,104,000
              )
              
              
              --State
      and local
              
              
              (1,247,000
              )
              
              
              (885,000
              )
              
              
              --Foreign
              
              
              7,000
              
              
              
              --
              
              
              
              --(10,371,000
              )
              
              
              (10,989,000
              )
              
              
              --$
              (3,621,000
              )
              
              $
              3,168,000
              
              
              $
              15,098,000
 
 F-26
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 
 Note
14   - Income Taxes (continued)
 
 The reconciliation of income tax
computed at the U.S. federal statutory tax rate to the effective income tax rate
for 2008, 2007 and 2006 is as follows:
 
 2008
              
              
              2007
              
              
              2006Federal
      income tax at statutory rate
              
              
              35.0
              %
              
              
              35.0
              %
              
              
              35.0
              %State
      and local taxes, net of federal tax benefit
              
              
              3.9
              %
              
              
              0.7
              %
              
              
              2.5
              %Adjustment
      to unrecognized tax benefits
              
              
              (3.2
              )%
              
              
              (1.8
              )%
              
              
              (1.4
              )%Valuation
      allowances
              
              
              (15.4
              )%
              
              
              --
              
              
              
              --Other
      permanent differences
              
              
              (0.6
              )%
              
              
              1.8
              %
              
              
              --Effect
      of rate changes
              
              
              --
              
              
              
              (4.8
              )%
              
              
              --19.7
              %
              
              
              30.9
              %
              
              
              36.1
              %
 
 Note
15 - Commitments and Contingencies
 
 A. Operating
leases and Other Property Agreements
 
 The
Company leases office, retail and warehouse facilities under non-cancelable
operating leases between 5 and 15 years with options to renew at varying
terms.  Future minimum lease payments for non-cancelable leases with
initial terms of one year or more consisted of the following at December 31,
2008:
 
 2009
              
              $
              24,744,0002010
              
              
              22,970,0002011
              
              
              21,405,0002012
              
              
              19,546,0002013
              
              
              18,598,000Thereafter
              
              
              31,280,000Total
      minimum cash payments
              
              $
              138,543,000
 
 In
addition, certain of these leases contain rent escalation provisions and require
additional percentage rent payments to be made.  Step rent provisions
and escalation clauses are taken into account in computing the minimum lease
payments, recognized on a straight-line basis over the minimum lease
term.  The Company may also receive capital improvement funding from
landlords, primarily as an incentive for the Company to lease retail and outlet
store space from the landlords.  Such amounts are amortized as a
reduction of rent expense over the life of the related lease.
  Rent
expense is as follows:
  2008
              
              
              2007
              
              
              2006Minimum
      rent
              
              $
              25,563,000
              
              
              $
              26,835,000
              
              
              $
              27,894,000Contingent
      rent and other
              
              
              8,570,000
              
              
              
              8,414,000
              
              
              
              6,972,000Total
      rent expense
              
              $
              34,133,000
              
              
              $
              35,249,000
              
              
              $
              34,866,000
 
 Sub-tenants
rental income for 2008, 2007, and 2006 was $0.2 million, $0.2 million, and
$0.9 million, respectively.  Future minimum rental income from
sub-tenants is $0.3 million for 2009.Future minimum rental
income from sub-tenants does not include rent escalation and other charges that
are subsequently passed through to the sub-tenant.
  The
Company leases 51,000 square feet of office space in Secaucus, New Jersey for
its administrative offices.  In addition, the Company also leases a
23,500 square foot facility in Secaucus
  F-27
  Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
   Note
15 - Commitments and Contingencies (continued)
 
 used for
Company Store space, as well as an additional distribution warehousing
facility.  The Company also has a technical and administrative office
in Dongguan, China.  The Company closed its office in Florence, Italy
during 2008.  The Company does not own or operate any manufacturing
facilities.
 
 The
Company leases space for all of its 43 full-priced retail stores
(aggregating approximately 214,000 square feet) and 53 Company Stores
(aggregating approximately 243,000 square feet).  Generally, the
leases provide for an initial term of five to ten years and certain leases
provide for renewal options permitting the Company to extend the term
thereafter.
 
 B. Letters
of credit
 
 The
Company was contingently liable for $2.6 million and $0.2 million of open
letters of credit as of December 31, 2008 and 2007, respectively.  In
addition, at December 31, 2008 and 2007, stand-by letters of credit amounted to
approximately $0.9 million and $2.5 million, respectively.
 
 C. Concentrations
 
 In the
normal course of business, the Company sells to major department stores and
specialty retailers and believes that its broad customer base will mitigate the
impact that financial difficulties of any such retailers might have on the
Company’s operations.  The Company had no customer account for more
than 10% of consolidated net sales for the years ended December 31, 2008, 2007
and 2006.
  The
Company sources each of its product lines separately, based on the individual
design, styling and quality specifications of such products.  The
Company primarily sources its products directly or indirectly through
manufacturers in Italy, Spain, Brazil and China.  However,
approximately 42% and 47% of total handbag purchases came from two manufacturers
in China during the years ended December 31, 2008 and 2007,
respectively.  Approximately 40% of Kenneth Cole and Kenneth Cole Reaction men’s
footwear purchases were from two manufacturers in China during the year ended
December 31, 2008 and 42% were one manufacturer in China utilizing many
different factories during the year ended December 31, 2007,
respectively.  Approximately 61% and 52% of Kenneth Cole Reactionladies’
footwear purchases were sourced through two Chinese manufacturers during the
years ended December 31, 2008 and December 31, 2007,
respectively.  The Company believes it has alternative manufacturing
sources available to meet its current and future production requirements in the
event the Company is required to change current manufacturers or current
manufacturers are unavailable to fulfill the Company’s production
needs.
 
 D. Lines
of Credit Facilities
 
 In
December 2006, the Company entered into a five-year senior unsecured revolving
credit facility (the “Revolving Credit Facility”), with various lenders, which
provides up to $100.0 million to finance working capital requirements and
letters of credit to finance the Company's inventory purchases.  A
portion of the Revolving Credit Facility not in excess of $25.0 million shall be
available for the issuance of standby letters of credit.  The full
amount of the Revolving Credit Facility shall be available for the issuance of
commercial letters of credit.  The Revolving Credit Facility requires,
among other things, that the Company comply with a maximum leverage ratio and
various covenants on indebtedness, dissolutions, mergers, asset sales, pledges
and changes in lines of business, as defined.  Failure by the Company
to comply with these covenants could reduce the borrowings available under the
Revolving Credit Facility.  If an event of default occurs, borrowings
and interest are payable immediately, unless cured as defined, allowing
borrowings to continue during the cure period.  Loans under the
Revolving
  F-28
  Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
  Note
15 - Commitments and Contingencies (continued)
 
 D. Lines
of Credit Facilities (continued)
 
 Credit
Facility bear an interest rate equal to the Alternate Base Rate (defined as the
higher of the Prime Rate or the Federal Funds Rate plus 0.5%) or the Adjusted
LIBOR rate plus applicable margin as defined within the agreement as elected by
the Company.  The Company incurs facility fees of ten basis points on
the face amount of the Revolving Credit Facility.  During 2008 and
2007, the Company incurred facility fees of approximately $0.1
million.  There were no outstanding advances under this agreement at
December 31, 2008 and 2007.  Amounts available under the Revolving
Credit Facility at December 31, 2008 and 2007 were reduced by $3.5 million and
$2.7 million, respectively, of standby and open letters of
credit.  The Company did not borrow under the Revolving Credit
Facility during 2008 and 2007 and currently has no availability under this
credit line at December 31, 2008.
 
 E. Other
 
 The
Company reclassified approximately $1.4 million from Prepaid expenses to Income
taxes payable for the year ended December 31, 2007 related to short-term FIN 48
payables that were netted against receivables, approximately $6.6 million of
SERP assets from Investments and other to Deferred compensation plans assets and
approximately $3.2 million of SERP liabilities from Accrued rent and other
long-term liabilities to Deferred compensation plans’ liabilities to conform to
the 2008 presentation. The Accumulated other
comprehensive income balance is comprised of unrealized gains/(losses) on equity
securities and foreign currency translation gains/(losses).
 
 Note
16 - Shareholders’ Equity
 
 A. Common
stock
 
 Class A
Common Shareholders are entitled to one vote for each share held of record and
Class B Common Shareholders are entitled to ten votes for each share held of
record.  Each share of Class B Common Stock is convertible into one share
of Class A Common Stock at the option of the Class B Shareholder.  The
Class A Common Shareholders vote together with Class B Common Shareholders on
all matters subject to shareholder approval, except that Class A Common
Shareholders vote separately as a class to elect 25%, but not less than two, of
the Board of Directors of the Company.  Shares of neither class of common
stock have preemptive or cumulative voting rights.
 
 B. Preferred
Stock
 
 The
Company’s Certificate of Incorporation authorizes the issuance of 1,000,000
shares of preferred stock.  The preferred stock may be issued from
time to time as determined by the Board of Directors of the Company, without
shareholder approval.  Such preferred stock may be issued in such
series and with such preferences, conversion or other rights, voting powers,
restrictions, or limitations as to dividends, qualifications or other
provisions, as may be fixed by the Board of Directors.
 
 C. CommonStock
Repurchase
 
 In 2008,
the Company’s Board of Directors increased the authorization for the Company’s
common stock repurchase plan by approximately 4,000,000 shares to an aggregate
of 9,388,400 of shares of Class A common stock.  During 2008, the
Company repurchased 1,619,200 of its shares at an aggregate price of $24.4
million and during 2007, repurchased 1,008,000 of its shares at an aggregate
price of $19.2 million.  The Company had 3,072,800 and 692,000 shares
available for repurchase as of December 31, 2008 and 2007,
respectively.
  F-29
 Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 Note
17 - Licensing Agreements
 
 In 2006,
the Company amended its license agreement with one of its licensees which
covered the manufacture and distribution of men’s and women’s sportswear under
the Kenneth Cole New
York trademark and men’s sportswear under the Kenneth Cole Reaction
trademark.  The amended agreement allowed the Company to assume
control of its Kenneth Cole
New York sportswear categories in 2007.  In January 2007, the
Company reached an agreement with the licensee to end its license agreement at
the end of 2007 and assume control over its Kenneth Cole Reactionsportswear business in 2007.
 
 Note
18 - Related Party Transactions
 
 The
Company has an exclusive license agreement with Iconix Brand Group, Inc. and its
trademark holding company, IP Holdings, LLC (“Iconix”), to use the Bongo trademark in connection
with the manufacture, sale and distribution of women’s, men’s and children’s
footwear in certain territories.The
Chief Executive Officer and Chairman of Iconix is the brother of the Company’s
Chairman and Chief Creative Officer.  The term of the agreement is
through December 31, 2010.  Management believes that the license
agreement with Iconix was entered into at arm’s-length.  During these
periods, the Company is obligated to pay Iconix a percentage of net sales based
upon the terms of the agreement.  The Company recorded approximately
$1.1 million, $1.1 million and $1.4 million in aggregate royalty and advertising
expense under the agreement for the years ended December 31, 2008, 2007 and
2006, respectively.
  The
Company recorded expenses of approximately $0.6 million, $0.5 million and $0.5
million for the years ended December 31, 2008. 2007 and 2006, 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 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.
 
 Note
19 - New Accounting Pronouncements
 
 In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133” (“SFAS 161”).  SFAS 161 amends and expands the
disclosure requirements of SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.”SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008.  The Company will adopt the provisions on
January 1, 2009 and has determined that it will not have a material impact on
the Company’s consolidated financial statements.
 
 In April
2008, the FASB issued Staff Position FAS 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”).  FSP 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
“Goodwill and Other Intangible
Assets” (“SFAS 142”).  The intent of FSP 142-3 is to improve
the consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS No. 141R “Business Combinations”and
other applicable accounting literature.  FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008
and must be applied prospectively to intangible assets acquired after the
effective date.  The Company will adopt the provisions on January 1,
2009 and has determined that it will not have a material impact on the Company’s
consolidated financial statements.
  F-30
  Kenneth
Cole Productions, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 Note
19 - New Accounting Pronouncements (continued)
 
 In May
2008, the FASB issued SFAS No. 162, “Hierarchy of Generally Accepted
Accounting Principles”(“SFAS 162”).  This statement is
intended to improve financial reporting by identifying a consistent
framework, or hierarchy, for selecting accounting principles to be used in
preparing financial statements of nongovernmental entities that are presented in
conformity with GAAP.  This statement will be effective sixty days
following the U.S. Securities and Exchange Commission’s approval of the Public
Company Accounting Oversight Board amendment to AU Section 411, “The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.” The
Company expects that SFAS 162 will not have a material impact on the Company’s
consolidated financial statements.
  In
October 2008, the FASB issued Staff Position No. FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active” (“FSP
157-3”) which clarifies the application of SFAS No. 157 “Fair Value Measurements” in
an inactive market and illustrates how an entity would determine fair value when
the market for a financial asset is not active.  The Staff Position is
effective immediately and applies to prior periods for which financial
statements have not been issued, including interim or annual periods ending on
or before September 30, 2008.  The implementation of FSP 157-3 did not
have a material impact on the Company’s consolidated financial
statements.
 
 Note
20- Quarterly Financial Data (Unaudited)
 
 Summarized
quarterly financial data for 2008 and 2007 appear below (in thousands, except
per share and dividend data):
 
 First
                Quarter
              
              
              Second
                Quarter
              
              
              Third
                Quarter
              
              
              Fourth
                Quarter2008Net
      sales
              
              $
              112,615
              
              
              $
              100,893
              
              
              $
              120,161
              
              
              $
              114,909Royalty
      revenue
              
              
              9,882
              
              
              
              10,258
              
              
              
              11,947
              
              
              
              11,672Net
      revenues
              
              
              122,497
              
              
              
              111,151
              
              
              
              132,108
              
              
              
              126,581Gross
      profit
              
              
              50,227
              
              
              
              46,044
              
              
              
              54,351
              
              
              
              48,263Operating
      income/(loss)
              
              
              1,112
              
              
              
              (3,058
              )
              
              
              2,455
              
              
              
              (12,820
              )Net
      income/(loss)
              
              
              807
              
              
              
              (2,052
              )
              
              
              (1,554
              )
              
              
              (12,001
              )Earnings/(loss)
      per share basic
              
              $
              0.04
              
              
              $
              (0.11
              )
              
              $
              (0.09
              )
              
              $
              (0.67
              )Earnings/(loss)
      per share diluted
              
              $
              0.04
              
              
              $
              (0.11
              )
              
              $
              (0.09
              )
              
              $
              (0.67
              )Dividends
      declared
              
              $
              0.09
              
              
              $
              0.09
              
              
              $
              0.09
              
              
              $
              0.092007Net
      sales
              
              $
              119,868
              
              
              $
              108,337
              
              
              $
              118,644
              
              
              $
              119,556Royalty
      revenue
              
              
              9,470
              
              
              
              10,612
              
              
              
              11,669
              
              
              
              12,564Net
      revenues
              
              
              129,338
              
              
              
              118,949
              
              
              
              130,313
              
              
              
              132,120Gross
      profit
              
              
              52,554
              
              
              
              52,725
              
              
              
              57,851
              
              
              
              60,182Operating
      income
              
              
              4,333
              
              
              
              3,819
              
              
              
              4,057
              
              
              
              (7,324
              )Net
      income
              
              
              3,440
              
              
              
              3,304
              
              
              
              3,433
              
              
              
              (3,094
              )Earnings
      per share basic
              
              $
              0.17
              
              
              $
              0.16
              
              
              $
              0.17
              
              
              $
              (0.16
              )Earnings
      per share diluted
              
              $
              0.17
              
              
              $
              0.16
              
              
              $
              0.17
              
              
              $
              (0.16
              )Dividends
      declared
              
              $
              0.18
              
              
              $
              0.18
              
              
              $
              0.18
              
              
              $
              0.18
  F-31
  Kenneth
Cole Productions, Inc.
 Schedule
II
 Valuation
and Qualifying Accounts
 For
the Years Ended December 31, 2008, 2007 and
2006
 Balance
      at
              
              
              Charged
      to
              
              
              
              
              
              BalanceBeginning
              
              
              Costs
      and
              
              
              
              
              
              at
      EndDescription
              
              of Period
              
              
              Expenses
              
              
              Deductions
              
              
              of PeriodYear
      ended December 31, 2008Allowance
      for doubtful accounts
              
              $
              (230,000
              )
              
              $
              (1,309,000
              )
              
              $
              478,000
              
              
              $
              (1,061,000
              )Reserve
      for returns and sales allowances
              
              
              (11,456,000
              )
              
              
              (29,981,000
              )
              
              
              31,320,000
              
              
              
              (10,117,000
              )$
              (11,686,000
              )
              
              $
              (31,290,000
              )
              
              $
              31,798,000
              
              
              $
              (11,178,000
              )Year
      ended December 31, 2007Allowance
      for doubtful accounts
              
              $
              (249,000
              )
              
              $
              (188,000
              )
              
              $
              207,000
              
              
              $
              (230,000
              )Reserve
      for returns and sales allowances
              
              
              (9,736,000
              )
              
              
              (24,770,000
              )
              
              
              23,050,000
              
              
              
              (11,456,000
              )$
              (9,985,000
              )
              
              $
              (24,958,000
              )
              
              $
              23,257,000
              
              
              $
              (11,686,000
              )Year
      ended December 31, 2006Allowance
      for doubtful accounts
              
              $
              (298,000
              )
              
              $
              (211,000
              )
              
              $
              260,000
              
              
              $
              (249,000
              )Reserve
      for returns and sales allowances
              
              
              (8,848,000
              )
              
              
              (18,862,000
              )
              
              
              17,974,000
              
              
              
              (9,736,000
              )$
              (9,146,000
              )
              
              $
              (19,073,000
              )
              
              $
              18,234,000
              
              
              $
              (9,985,000
              )
  
  Signatures
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
   KENNETH
      COLE PRODUCTIONS, INC.By:
                /s/ JILL
      GRANOFFJill
      GranoffChief Executive
      OfficerDate:
      March 12, 2009
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
 
 
 Signature
              
              Title
              
              Date/s/ KENNETH
      D. COLE
              
              Chairman
      of the Board and Chief Creative Officer
              
              March
      12, 2009Kenneth
      D. Cole/s/ JILL
      GRANOFF
              
              Chief
      Executive Officer
              
              March
      12, 2009Jill
      Granoff/s/ DAVID
      P. EDELMAN
              
              Chief
      Financial Officer
              
              March
      12, 2009David
      P. Edelman/s/ ROBERT
      C. GRAYSON
              
              Director
              
              March
      12, 2009Robert  C.
      Grayson/s/ DENIS
      F. KELLY
              
              Director
              
              March
      12, 2009Denis
      F. Kelly/s/ PHILIP
      R. PELLER
              
              Director
              
              March
      12, 2009Philip
      R. Peller/s/ MARTIN
      E. FRANKLIN
              
              Director
              
              March
      12, 2009Martin
      E. Franklin