SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13082
KENNETH COLE PRODUCTIONS, INC.
(Exact name of registrant as specified in its charter)
New York 13-3131650
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
152 West 57th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 265-1500
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes (X) No ( )
Indicate the number of shares of each of the issuer's classes of
common stock, as of the latest practicable date:
Class August 10, 2000
Class A Common Stock ($.01 par value) 11,736,777
Class B Common Stock ($.01 par value) 8,678,097
<PAGE>
Kenneth Cole Productions, Inc.
Index to 10-Q
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999...3
Consolidated Statements of Income for the three and six month
periods ended June 30, 2000 and 1999....................................5
Consolidated Statement of Changes in Shareholders' Equity for
the six month period ended June 30, 2000................................6
Consolidated Statements of Cash Flows for the six month periods
ended June 30, 2000 and 1999............................................7
Notes to Consolidated Financial Statements..............................8
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................12
Item 3. Quantitative and Qualitative Disclosure about Market Risk...........16
Part II. OTHER INFORMATION
Item 1.Legal Proceedings....................................................17
Item 2.Changes in Securities and Use of Proceeds............................17
Item 3.Defaults Upon Senior Securities......................................17
Item 4.Submission of Matters to a Vote of Security Holders..................17
Item 5.Other Information....................................................18
Item 6.Exhibits and Reports on Form 8-K.....................................18
Signatures..................................................................19
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
Kenneth Cole Productions, Inc. and Subsidiaries
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
<CAPTION>
June 30, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash $ 43,248,000 $ 71,415,000
Due from factors 32,937,000 26,925,000
Accounts receivable, net 6,954,000 6,990,000
Inventories 48,652,000 39,553,000
Prepaid expenses and other current assets 1,573,000 375,000
Deferred taxes 1,766,000 1,766,000
------------ ------------
Total current assets 135,130,000 147,024,000
Property and equipment - at cost,
less accumulated depreciation 24,860,000 19,431,000
Other assets:
Deposits and deferred taxes 3,174,000 3,352,000
Deferred compensation plan assets 8,313,000 7,052,000
------------ ------------
Total other assets 11,487,000 10,404,000
------------ ------------
Total assets $171,477,000 $176,859,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
<CAPTION>
June 30, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 29,940,000 $ 27,323,000
Accrued expenses and other current liabilities 9,285,000 13,644,000
------------ ------------
Total current liabilities 39,225,000 40,967,000
Deferred compensation 8,313,000 7,052,000
Other 4,178,000 3,509,000
Commitments and contingencies
Shareholders' equity:
Class A Common Stock, par value $.01,
20,000,000 shares authorized, 13,168,036,
and 13,058,057 issued in 2000 and 1999 132,000 131,000
Class B Common Stock, par value $.01,
9,000,000 shares authorized,
8,678,097 outstanding in 2000 and 1999 87,000 87,000
Additional paid-in capital 55,642,000 53,140,000
Accumulated other comprehensive income 352,000 235,000
Retained earnings 95,278,000 81,093,000
----------- -----------
151,491,000 134,686,000
Class A Common Stock in treasury, at cost,
1,420,000 and 723,750 shares in 2000 and 1999 (31,730,000) (9,355,000)
----------- -----------
Total shareholders' equity 119,761,000 125,331,000
----------- -----------
Total liabilities and shareholders' equity $ 171,477,000 $ 176,859,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net sales $ 85,303,000 $ 62,269,000 $175,594,000 $125,802,000
Licensing revenue 5,339,000 3,048,000 9,375,000 5,558,000
------------ ------------ ------------ ------------
Net revenue 90,642,000 65,317,000 184,969,000 131,360,000
Cost of goods sold 50,350,000 36,648,000 101,420,000 73,244,000
------------ ------------ ------------ ------------
Gross profit 40,292,000 28,669,000 83,549,000 58,116,000
Selling, general
and administrative
expenses 30,152,000 22,823,000 61,255,000 44,419,000
------------ ------------ ------------ ------------
Operating income 10,140,000 5,846,000 22,294,000 13,697,000
Interest income, net 545,000 156,000 1,347,000 255,000
------------ ------------ ------------ ------------
Income before
provision for
income taxes 10,685,000 6,002,000 23,641,000 13,952,000
Provision for
income taxes 4,274,000 2,431,000 9,456,000 5,651,000
------------ ------------ ------------ ------------
Net income $ 6,411,000 $ 3,571,000 $ 14,185,000 $ 8,301,000
============ ============ ============ ============
Earnings per share:
Basic $ .31 $ .18 $ .69 $ .42
Diluted $ .29 $ .17 $ .65 $ .41
Shares used to
compute earnings
per share:
Basic 20,513,000 19,629,000 20,642,000 19,610,000
Diluted 21,848,000 20,550,000 21,953,000 20,400,000
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
<CAPTION>
Class A Class B
Common Stock Common Stock
Number Number
of shares Amount of shares Amount
<S> <C> <C> <C> <C>
Shareholders'equity
January 1, 2000 13,058,057 $131,000 8,678,097 $87,000
Net Income
Foreign Currency
translation adjustment
Comprehensive Income
Exercise of stock
options including
tax benefit 109,979 1,000
Purchase of Class A
Common Stock
----------------------------------------------
Shareholders' equity
June 30, 2000 13,168,036 $132,000 8,678,097 $87,000
==============================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional Other
Paid-in Comprehensive Retained
Capital Income Earnings
<S> <C> <C> <C>
Shareholders' equity
January 1, 2000 $53,140,000 $235,000 $81,093,000
Net Income 14,185,000
Foreign Currency
translation adjustment 117,000
Comprehensive income
Exercise of stock
options including
tax benefit 2,502,000
Purchase of
Class A Common
Stock
------------------------------------------------
Shareholders' equity
June 30, 2000 $55,642,000 $352,000 $95,278,000
================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Treasury Stock
Number of
Shares Amount Total
<S> <C> <C> <C>
Shareholders' equity
January 1, 2000 (723,750) $ (9,355,000) $125,331,000
Net Income 14,185,000
Foreign Currency
translation adjustment 117,000
------------
Comprehensive Income 14,302,000
Exercise of stock options,
including tax benefit 2,503,000
Purchase of Class A
Common Stock (696,250) $(22,375,000) (22,375,000)
-----------------------------------------------------
Stockholders' equity
June 30, 2000 (1,420,000) $(31,730,000) $119,761,000
=====================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
2000 1999
<S> <C> <C>
Cash flows from operating activities
Net income $ 14,185,000 $ 8,301,000
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 1,770,000 1,704,000
Unrealized loss (gain) on deferred compensation 379,000 (799,000)
Provision for bad debts 150,000 715,000
Changes in assets and liabilities:
Increase in due from factors (6,012,000) (6,453,000)
(Increase) decrease in accounts receivable (114,000) 1,392,000
Increase in inventories (9,099,000) (5,944,000)
(Increase) decrease in prepaid expenses &
other current assets (1,198,000) 1,139,000
Increase in other assets (1,462,000) (970,000)
Increase in accounts payable 2,617,000 6,395,000
Decrease in income taxes payable (2,466,000) (1,215,000)
Decrease in accrued expenses and other
current liabilities (532,000) (3,000)
Increase in other non-current liabilities 2,027,000 2,791,000
------------ ------------
Net cash provided by operating activities 245,000 7,053,000
Cash flows from investing activities
Acquisition of property and equipment, net (7,199,000) (3,932,000)
------------ ------------
Net cash used in investing activities (7,199,000) (3,932,000)
Cash flows from financing activities
Proceeds from exercise of stock options 1,135,000 608,000
Purchase of treasury stock (22,375,000)
Principal payments on capital lease obligations (90,000) (82,000)
------------ ------------
Net cash (used in) provided by financing
activities (21,330,000) 526,000
Effect of exchange rate changes on cash 117,000 129,000
------------ ------------
Net (decrease) increase in cash (28,167,000) 3,776,000
Cash, beginning of period 71,415,000 13,824,000
------------ ------------
Cash, end of period $ 43,248,000 $ 17,600,000
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 32,000 $ 67,000
Income taxes $ 11,922,000 $ 6,867,000
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared by Kenneth Cole Productions, Inc. (the "Company")
in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. Certain
items contained in these financial statements are based on estimates.
In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments, consisting of only normal and
recurring adjustments, necessary for a fair presentation of the
financial position and results of operations and cash flows for the
periods presented. All significant intercompany transactions have
been eliminated.
Operating results for the six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the
year ended December 31, 2000. These unaudited financial statements
should be read in conjunction with the financial statements and
footnotes included in the Company's annual report on Form 10-K for
the year ended December 31, 1999.
The consolidated balance sheet at December 31, 1999, as
presented, was derived from the audited financial statements as of
December 31, 1999 included in the Company's Form 10-K.
2. Comprehensive Income
Comprehensive income amounted to $14,302,000 and $8,430,000 for
the six month periods ended June 30, 2000 and 1999, respectively.
Comprehensive income for the three month periods ended June 30, 2000
and 1999 amounted to $6,474,000 and $3,635,000, respectively.
3. Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and for Hedging Activities" ("SFAS 133") which
the Company expects to adopt on January 1, 2001. This Statement
requires all derivatives to be recorded in the balance sheet at fair
value and establishes special accounting for three different types of
hedges. The Company, based on its current hedging activities, does
not expect the adoption of SFAS 133 to have a material effect on the
earnings and financial position of the Company.
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
4. Segment Information
The Company has three reportable segments: Wholesale, Consumer Direct and
Licensing. The Company evaluates segment performance and allocates
resources to segments based on segment income before taxes and
unallocated corporate overhead. Intercompany profit on intersegment sales
between wholesale and Consumer Direct is eliminated in consolidation.
Financial information of the Company's reportable segments is as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended
June 30, 2000
Consumer
Wholesale Direct Licensing Totals
<S> <C> <C> <C> <C>
Revenues from external customers $ 53,216 $ 32,087 $ 5,339 $ 90,642
Intersegment revenues 5,609 5,609
Segment income before provision
for Income taxes 5,984 4,272 3,735 13,991
Segment assets 137,875 35,177 824 173,876
Three Months Ended
June 30, 1999
Consumer
Wholesale Direct Licensing Totals
Revenue from external customers $ 38,349 $ 23,920 $ 3,048 $ 65,317
Intersegment revenues 4,681 4,681
Segment income before provision
for Income taxes 2,334 3,617 2,521 8,472
Segment assets 86,148 28,328 881 115,357
Six Months Ended
June 30, 2000
Consumer
Wholesale Direct Licensing Totals
Revenue from external customers $114,697 $ 60,897 $ 9,375 $184,969
Intersegment revenues 12,792 12,792
Segment income before provision
for Income taxes 15,260 9,242 6,589 31,091
Six Months Ended
June 30, 1999
Consumer
Wholesale Direct Licensing Totals
Revenue from external customers $ 81,752 $ 44,050 $ 5,558 $131,360
Intersegment revenues 10,655 10,655
Segment income before provision
for Income taxes 8,635 6,300 4,597 19,532
</TABLE>
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The reconciliation of the Company's reportable segment revenues, profit and
loss, and assets are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues
Revenues for external customers $ 90,642 $ 65,317 $184,969 $131,360
Intersegment revenues 5,609 4,681 12,792 10,655
Elimination of intersegment
revenues (5,609) (4,681) (12,792) (10,655)
--------- --------- --------- ---------
Total consolidated revenues $ 90,642 $ 65,317 $184,969 $131,360
========= ========= ========= =========
Income
Total profit for reportable
segments $ 13,991 $ 8,472 $ 31,091 $ 19,532
Elimination of intersegment
profit and Unallocated corporate
overhead (3,306) (2,470) (7,450) (5,580)
--------- --------- ---------- --------
Total income before income
taxes $ 10,685 $ 6,002 $ 23,641 $ 13,952
Assets
Total assets for reportable
segments $173,876 $115,357
Elimination of inventory profit
and intercompany investment in
consolidation (2,399) (1,753)
--------- ---------
Total consolidated assets 171,477 113,604
========= =========
</TABLE>
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
5. Stock Split
On February 23, 2000, the Board of Directors declared a three-
for-two stock split to be effected in the form of a stock dividend.
Shareholders of record on March 6, 2000 received, on March 27, 2000,
one additional share of common stock for each two shares held.
In order to have effectuated the stock split for the shares of
outstanding Class B Common Stock, 2,892,699 shares of Class B Common
Stock would have been required to be issued. As of March 6, 2000,
214,602 shares of authorized but unissued Class B Common Stock
remained available for future issuance. As a result, an insufficient
number of authorized and unissued shares of Class B Common Stock were
available for distribution on March 27, 2000, the distribution date
for the stock split. Therefore, the Company issued in the form of a
dividend 28,927 shares of its Series A Convertible Preferred Shares
to the holders of Class B Common Stock in lieu of shares of Class B
Common Stock. Each share of Series A Convertible Preferred Stock is
automatically convertible into 100 shares of Class B Common Stock
upon the due authorization of a sufficient number of Class B Common
Stock to permit such conversion. On May 25, 2000, the Board of
Directors approved a resolution to increase the number of shares of
Class B Common Stock from 6.0 million to 9.0 million to permit the
conversion, thereby providing the holders of Series A Convertible
Preferred Stock with the shares of Class B Common Stock that should
have been issued to them pursuant to the stock split. As a result,
all 28,927 shares of Series A Convertible Preferred Stock were
converted into 2,892,699 shares of Class B Common Stock.
All applicable share and per share data have been adjusted for
the stock split and subsequent conversion of Series A Convertible
Preferred Stock to Class B Common Stock.
6. Related Party Transaction
On March 29, 2000, the Company made a $500,000 contribution to
the Kenneth Cole Foundation, of which Mr. Cole is co-trustee. The
Kenneth Cole Foundation, a not for profit organization, fosters
programs to aid primarily in the fields of education, medical
research and arts and culture.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth the Company's condensed
consolidated statements of income in thousands of dollars and as a
percentage of net revenue for the three and six months ended June 30,
2000 and June 30, 1999.
<TABLE>
<CAPTION>
Three Months Ended
(in thousands) June 30, 2000 June 30, 1999
<S> <C> <C> <C> <C>
Net sales $ 85,303 94.1% $ 62,269 95.3%
Licensing revenue 5,339 5.9 3,048 4.7
Net revenue 90,642 100.0 65,317 100.0
Gross profit 40,292 44.5 28,669 43.9
Selling, general &
administrative expenses 30,152 33.3 22,823 34.9
Operating income 10,140 11.2 5,846 9.0
Interest income, net 545 0.6 156 0.2
Income before income taxes 10,685 11.8 6,002 9.2
Income tax expense 4,274 4.7 2,431 3.7
Net income 6,411 7.1 3,571 5.5
Six Months Ended
(in thousands) June 30, 2000 June 30, 1999
Net Sales 175,594 94.9 125,802 95.8
Licensing revenue 9,375 5.1 5,558 4.2
Net revenue 184,969 100.0 131,360 100.0
Gross profit 83,549 45.2 58,116 44.2
Selling, general &
administrative expenses 61,255 33.1 44,419 33.8
Operating income 22,294 12.1 13,697 10.4
Interest income, net 1,347 0.7 255 0.2
Income before income taxes 23,641 12.8 13,952 10.6
Income tax expense 9,456 5.1 5,651 4.3
Net income 14,185 7.7 8,301 6.3
</TABLE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Consolidated net revenues increased 38.8% to $90.6 million for
the three months ended June 30, 2000 compared to $65.3 million for
the three months ended June 30, 1999.
Wholesale net sales (including sales to its Consumer Direct
business segment) increased $15.8 million or 36.7% for the three
months ended June 30, 2000 to $58.8 million from $43.0 million for
the three months ended June 30, 1999. This increase is primarily
attributable to an increase in sales of men's footwear in each of the
Company's three brands and sales increases in Reaction Kenneth Cole
and Kenneth Cole New York women's footwear.
Net sales in the Company's Consumer Direct segment increased
$8.2 million or 34.1% to $32.1 million for the three months ended
June 30, 2000 compared to $23.9 million for the three months ended
June 30, 1999. The improvement in net sales is due to the increase
in number of stores as well as a comparable stores sales increase of
15.2%. Retail stores opened subsequent to June 30, 1999 contributed
$4.1 million of net sales during the three-month period ended June
30, 2000. The Company believes that its retail stores convey the
image of the Company and seamlessly showcase both Company and
licensee products and that this comprehensive presentation reinforces
the Kenneth Cole New York lifestyle brand, thereby increasing
consumer awareness and demand.
Licensing revenue increased 75.2% to $5.3 million for the three
months ended June 30, 2000 from $3.0 million for the three months
ended June 30, 1999. This increase primarily reflects the incremental
revenues associated with increased sales of existing licensed
products. Licensing revenue increased as a percentage of net revenues
to 5.9% for the three months ended June 30, 2000 compared to 4.7% for
the three months ended June 30, 1999.
Consolidated gross profit as a percentage of net revenue
increased to 44.5% for the three months ended June 30, 2000 from
43.9% for the comparable period last year. This increase is primarily
due to the increased proportion of revenue from the Licensing segment
which has no associated cost of goods sold and produces substantially
higher margins than the Company's consolidated gross profit
percentages. Partially offsetting this increase were slightly lower
wholesale margins on sales of certain women's footwear in the junior
market price points. Net sales from the Consumer Direct segment were
35.4% of net consolidated revenue for the three months ended June 30,
2000 compared to 36.6% for the three months ended June 30, 1999.
Selling, general and administrative expenses, including shipping
and warehousing, increased 32.1% to $30.2 million (or 33.3% of net
revenues) for the three months ended June 30, 2000 from $22.8 million
(or 34.9% of net revenues) for the three months ended June 30, 1999.
The decrease as a percentage of net revenues is primarily
attributable to certain economies realized in the wholesale segment,
which grew 36.7%, along with the decline in the proportion of revenue
from the Company's Consumer Direct segment, which operates at a higher
cost structure than its wholesale operations.
The Company's effective tax rate has decreased to 40.0% for the
three month period ended June 30, 2000 from 40.5% in the
corresponding period in 1999. The decrease is due to the relative
level of earnings in the various state and local taxing jurisdictions
in which the Company conducts business.
As a result of the foregoing, operating income increased 73.5%
for the three months ended June 30, 2000 to $10.1 million (11.2% of
net revenue) from $5.8 million (9.0% of net revenue) for the three
months ended June 30, 1999.
Interest income increased to $545,000 from $156,000 in the
comparable period in 1999. The increase is the result of higher cash
balances generated from internal operations and the $29 million
received from the sale of Class A Common Stock to Liz Claiborne, Inc.
during the third quarter of 1999 offset by capital expenditures for
the Company's new headquarters and the purchase of $22.4 million in
treasury stock.
Six months Ended June 30, 2000 Compared to Six Months Ended June 30,
1999
Consolidated net revenues increased 40.8% to $185.0 million for
the six months ended June 30, 2000 compared to $131.4 million for the
six months ended June 30, 1999. This increase is primarily due to
volume increases in each of the Company's operating segments:
Wholesale, Consumer Direct and Licensing.
Wholesale net sales (including sales to its Consumer Direct
business segment) increased $35.1 million or 38.0% for the six months
ended June 30, 2000 to $127.5 million from $92.4 million for the six
months ended June 30, 1999. This increase is primarily attributable
to an increase in sales of men's footwear and Reaction Kenneth Cole
women's footwear. The overall increase is due to increased sales by
new and existing customers due a continued growing consumer
acceptance of Kenneth Cole New York as a premier lifestyle brand.
Net sales in the Company's Consumer Direct segment increased
$16.8 million or 38.2% to $60.9 million for the six months ended June
30, 2000 compared to $44.1 million for the six months ended June 30,
1999. The improvement in net sales is due to the increase in the
number of stores as well as a comparable store sales increase of
18.8%. Retail stores opened since June 30, 1999 contributed $7.7
million of net sales during the six-month period ended June 30, 2000.
Licensing revenue increased 68.7% to $9.4 million for the six
months ended June 30, 2000 from $5.6 million for the six months ended
June 30, 1999. This increase primarily reflects the incremental
revenues in sales of existing licensees. Licensing revenue increased
as a percentage of the net revenues to 5.1% of the six months ended
June 30, 2000 compared to 4.2% for the six months ended June 30,
1999.
Consolidated gross profit as a percentage of net revenue
increased to 45.2% for the six months ended June 30, 2000 from 44.2%
for the comparable period last year. This increase is primarily due
to the increased proportion of revenue from the Licensing segment,
which has no associated cost of goods sold. Wholesale sales as a
percentage of net revenue remained relatively constant while, net
sales from the Consumer Direct segment were 32.9% of net consolidated
revenue for the six months ended June 30, 2000 compared to 33.5% for
the six months ended June 30, 1999.
Selling, general and administrative expenses, including shipping
and warehousing, increased 37.9% to $61.3 million (or 33.1% of net
revenues) for the six months ended June 30, 2000 from the $44.4
million (or 33.8% of net revenues) for the six months ended June 30,
1999. The decrease as a percentage of net revenues is primarily
attributable to certain economies realized in the Company's Wholesale
segment, slightly offset by increased expenditures in technology
aimed at enhancing its e-commerce initiatives. The decrease in SG&A
as a percentage of net revenues was also due to a lower proportion
of consolidated revenue generated from the Company's Consumer Direct
segment, which operates at a higher cost structure than its wholesale
operations.
Interest income increased to $1,347,000 from $255,000 in the
comparable period in 1999. The increase is the result of higher
average cash balances generated from internal operations and from the
$29 million received by the Company from the sale of 1,500,000 shares
of its Class A Common Stock to Liz Claiborne, Inc. during the third
quarter of 1999.
The Company's effective tax rate decreased to 40.0% for the six
month period ended June 30, 2000 from 40.5% in the corresponding
period last year. The decrease is due to the relative level of
earnings in the various state and local taxing jurisdictions to which
the Company's earnings are subject.
As a result of the foregoing, operating income increased 62.8%
for the six months ended June 30, 2000 to $22.3 million (12.1% of net
revenue) from $13.7 million (10.4% of net revenue) for the six months
ended June 30, 1999.
Liquidity and Capital Resources
The Company uses cash from operations as the primary source of
financing for its expansion and seasonal requirements and has
borrowings available under its line of credit. 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. Cash provided by operating activities
was $.2 million for the six months ended June 30, 2000, compared to
$7.1 million provided by operating activities for the six months
ended June 30, 1999. The decrease in cash flow used in operations is
primarily attributable to the receipt of inventory from the Company's
suppliers to support Consumer Direct and wholesale growth offset by
the timing of trade accounts payable. At June 30, 2000 and December
31, 1999 working capital was $95.9 million and $106.1 million,
respectively.
The Company currently has a line of credit, which allows for
borrowings and letters of credit up to a maximum of $25.0 million to
finance working capital requirements. Open letters of credit in the
amount of $4.8 million reduced the amount available under the line of
credit from $25.0 million to $20.2 million at June 30, 2000.
In December 1998, the Company entered into a 15-year lease with
a ten year renewal option, which over the next five year period, will
provide the Company with approximately 126,000 square feet of office
space. During 2000, the Company incurred approximately $5.6 million
in capital costs and an additional $5-10 million are expected over
the next two years.
Capital expenditures totaled approximately $7.2 million and $3.9
million for the six months ended June 30, 2000 and 1999,
respectively. Expenditures on furniture, fixtures and leasehold
improvements for new retail store openings and expansions were
approximately $1.2 million and $3.5 million for the six months ended
June 30, 2000 and June 30, 1999, respectively. The remaining
expenditures were primarily for leasehold improvements to the
Company's new corporate headquarters and additional warehouse space.
The Company believes that it will be able to satisfy its cash
requirements for the next year, including requirements for its retail
expansion, new corporate office space and information systems
improvements, primarily with cash flow from operations, current cash
levels, and, if necessary, with borrowings under its line of credit.
Year 2000
In late 1999, the Company completed its replacement,
remediation and testing of systems. As a result of those planning
and implementation efforts, the Company experienced no significant
disruptions in mission critical information technology and non-
information technology systems and believes those systems
successfully responded to the Year 2000 date change. The Company
expensed approximately $1.0 million during 1999 in connection with
preparing for year 2000. The Company continues to incur handling and
other related charges from its retail customers resulting from issues
arising from the implementation of the new systems. However, the
Company believes these issues are not material and are being
corrected in a prioritized manner. In addition, the Company is not
aware of any material problems resulting from Year 2000 issues,
either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its
information systems and those of its suppliers and vendors throughout
the year 2000 to ensure any latent Year 2000 issues that may arise
are addressed promptly.
The foregoing commentary should be considered to fall
within the coverage of the "Safe Harbor Statement" under the Private
Securities Litigation reform Act of 1995 included in this report.
Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995
Important Factors Relating to Forward Looking Statements
This report contains certain forward looking statements, as
defined in The Private Securities Litigation Reform Act of 1995, with
respect to cash flows from operation, market risks and Year 2000
issues. The forward-looking statements contained in this Form 10-Q
were prepared by management and are qualified by, and subject to,
significant business, economic, competitive, regulatory and other
uncertainties and contingencies, all of which are difficult or
impossible to predict and many of which are beyond the control of the
Company. Accordingly, there can be no assurance that the forward-
looking statements contained in this Form 10-Q will be realized or
that actual results will not be significantly higher or lower.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not believe it has a material exposure to
market risk. The Company is exposed to currency exchange-rate risks
with respect to its inventory transactions primarily denominated in
Italian Lira, which has been converted to the Euro effective January
1, 1999. 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 June 30, 2000, the Company had forward
exchange contracts totaling $17.7 million with an unrealized gain of
approximately $112,000. The Company's earnings may also be affected
by changes in short-term interest rates as a result of borrowings
under its line of credit facility. At the Company's borrowing levels
a two percent increase in interest rates affecting the Company's
credit facility would not have a material effect on the Company's
projected 2000 and 1999 net income.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities and Use of Proceeds. None
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Kenneth Cole Productions, Inc. Annual Meeting of
Shareholders was held on May 25, 2000.
(b) Election of Directors - All nominees were elected through
proxies solicited pursuant to Regulation 14A under the
Securities and Exchange Act of 1934. There was no
solicitation in opposition to management's nominees as listed
in the Proxy Statement, and each of the nominees were elected
to hold office until the next Annual Meeting of Shareholders.
(c) Matters voted on at the Annual Meeting of Shareholders
included the election of directors, amendment to the
certificate of incorporation to increase the number of
authorized Class B Common Stock from 6,000,000 to 9,000,000,
the approval of the Kenneth Cole Productions, Inc. Employee
Stock Purchase Plan and the ratification of the selection of
the independent public accountants.
The results of the election of directors were as follows:
<TABLE>
For Withheld
<S> <C> <C>
Paul Blum 96,299,912 189,270
Kenneth D. Cole 96,299,839 189,343
Robert C. Grayson 9,363,717 344,485
Denis F. Kelly 9,606,927 101,275
Philip B. Miller 96,386,545 102,587
Stanley A. Mayer 96,299,912 189,270
</TABLE>
Holders of 12,067,816 shares of Class A Common Stock, and
5,785,398 shares of Class B Common Stock, and 28,927 shares of
Series A Convertible Preferred Stock, constituting approximately
97.67% of the shares entitled to vote, were present in person or
by proxy at the Annual Meeting of Shareholders. Each record
holder of Class A Common Stock is entitled to one vote per
share, each record holder of Class B Common Stock is entitled to
10 votes per share and each record holder of Series A
Convertible Preferred Stock is entitled to 1000 votes per share.
Holders of Class A Common Stock voted separately to elect
Robert C. Grayson and Denis Kelly.
With regard to the amendment of the certificate of incorporation
to increase the number of authorized shares of Class B Common
Stock from 6,000,000 to 9,000,000, the results were as follows:
FOR AGAINST ABSTAIN
93,034,070 3,454,770 342
With regard to the approval of the Kenneth Cole Productions,
Inc. Employee Stock Purchase Plan, the results were as follows:
FOR AGAINST ABSTAIN
96,445,917 41,687 2,578
With regard to the ratification of the appointment of Ernst &
Young LLP as the independent certified public accountants, the
results were as follows:
FOR AGAINST ABSTAIN
96,484,851 3,520 811
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.01 Financial Data Schedule.
(b) Reports on Form 8-K: The Company did not file any reports on
Form 8-K during the three months ended June 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Kenneth Cole Productions, Inc.
Registrant
August 10, 2000 /s/ STANLEY A. MAYER
Stanley A. Mayer
Executive Vice President and
Chief Financial Officer
INDEX OF EXHIBITS
Sequential
Exhibit Number Description Page No.
27.01 Financial Data Schedule 21
Exhibit 27.01
Financial Data Schedule
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE KENNETH COLE PRODUCTIONS, INC. CONSOLIDATED BALANCE SHEET AS OF
JUNE 30, 2000, AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE SIX
MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
