<PAGE>
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 September 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)
603 West 50th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 265-1500
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes (X) No ( )
Indicate the number of shares of each of the issuer's classes of
common stock, as of the latest practicable date:
Class November 10, 2000
Class A Common Stock ($.01 par value) 11,927,387
Class B Common Stock ($.01 par value) 8,633,097
<PAGE>
Kenneth Cole Productions, Inc.
Index to 10-Q
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999...3
Consolidated Statements of Income for the three and nine month periods
ended September 30, 2000 and 1999.........................................5
Consolidated Statement of Changes in Shareholders' Equity for the
nine month period ended September 30, 2000................................6
Consolidated Statements of Cash Flows for the nine month periods
ended September 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.............18
Part II. OTHER INFORMATION
Item 1.Legal Proceedings......................................................19
Item 2.Changes in Securities and Use of Proceeds..............................19
Item 3.Defaults Upon Senior Securities........................................19
Item 4.Submission of Matters to a Vote of Security Holders....................19
Item 5.Other Information......................................................19
Item 6.Exhibits and Reports on Form 8-K.......................................19
Signatures....................................................................20
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash $ 50,923,000 $ 71,415,000
Due from factors 40,289,000 26,925,000
Accounts receivable, net 7,197,000 6,990,000
Inventories 44,593,000 39,553,000
Prepaid expenses and other current assets 2,569,000 375,000
Deferred taxes 1,766,000 1,766,000
------------- -------------
Total current assets 147,337,000 147,024,000
Property and equipment - at cost, less
accumulated depreciation 32,176,000 19,431,000
Other assets:
Deposits and deferred taxes 3,353,000 3,352,000
Deferred compensation plan assets 9,053,000 7,052,000
------------- -------------
Total other assets 12,406,000 10,404,000
------------- -------------
Total assets $ 191,919,000 $ 176,859,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 29,442,000 $ 27,323,000
Accrued expenses and other current liabilities 16,210,000 13,644,000
------------- -------------
Total current liabilities 45,652,000 40,967,000
Deferred compensation 9,053,000 7,052,000
Other 4,430,000 3,509,000
Commitments and contingencies
Shareholders' equity:
Class A Common Stock, par value $.01,
20,000,000 shares authorized, 13,308,041
and 13,058,057 issued in 2000 and 1999 133,000 131,000
Class B Common Stock, par value $.01,
9,000,000 shares authorized, 8,633,097
and 8,678,097 outstanding in 2000 and 1999 86,000 87,000
Additional paid-in capital 57,433,000 53,140,000
Accumulated other comprehensive income 385,000 235,000
Retained earnings 108,204,000 81,093,000
------------- -------------
166,241,000 134,686,000
Class A Common Stock in treasury, at cost,
1,470,000 and 723,750 shares in 2000 and 1999 (33,457,000) (9,355,000)
------------- -------------
Total shareholders' equity 132,784,000 125,331,000
------------- -------------
Total liabilities and shareholders' equity $ 191,919,000 $ 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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net sales $ 104,228,000 $ 81,327,000 $ 279,822,000 $ 207,129,000
Licensing revenue 6,343,000 4,226,000 15,718,000 9,784,000
------------- ------------- ------------- -------------
Net revenue 110,571,000 85,553,000 295,540,000 216,913,000
Cost of goods sold 57,801,000 46,294,000 159,221,000 119,538,000
------------- ------------- ------------- -------------
Gross profit 52,770,000 39,259,000 136,319,000 97,375,000
Selling, general and
administrative
expenses 32,206,000 26,026,000 93,461,000 70,445,000
------------- ------------- ------------- -------------
Operating income 20,564,000 13,233,000 42,858,000 26,930,000
Interest and other
income (979,000) (325,000) (2,326,000) (580,000)
------------- ------------- ------------- -------------
Income before provision
for income taxes 21,543,000 13,558,000 45,184,000 27,510,000
Provision for income
taxes 8,617,000 5,491,000 18,073,000 11,142,000
------------- ------------- ------------- -------------
Net income $ 12,926,000 $ 8,067,000 $ 27,111,000 $ 16,368,000
============= ============= ============= =============
Earnings per share:
Basic $ .63 $ .40 $ 1.32 $ .83
Diluted $ .59 $ .38 $ 1.24 $ .79
Shares used to compute
earnings per share:
Basic 20,488,000 20,189,000 20,591,000 19,805,000
Diluted 21,902,000 21,210,000 21,936,000 20,772,000
</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 Additional
Number Number Paid-in
of shares Amount of shares Amount Capital
<S> <C> <C> <C> <C> <C>
Shareholders' equity
January 1, 2000 13,058,057 $ 131,000 8,678,097 $ 87,000 $ 53,140,000
Net income
Foreign currency
translation
adjustments
Comprehensive income
Exercise of stock options,
including tax benefit 202,175 1,000 4,200,000
Issuance of Class A Common
Stock for Employee Stock
Purchase Plan 2,809 93,000
Purchase of Class A
Common Stock
Conversion of Class B
Shares to Class A
Shares 45,000 1,000 (45,000) (1,000)
----------------------------------------------------------
Shareholders' equity
September 30, 2000 13,308,041 $ 133,000 8,633,097 $ 86,000 $ 57,433,000
==========================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other Treasury Stock
Comprehensive Retained Number
Income Earnings of Shares Amount Total
<S> <C> <C> <C> <C> <C>
Shareholders' equity
January 1, 2000 $235,000 $ 81,093,000 (723,750)$ (9,355,000) $125,331,000
Net Income 27,111,000 27,111,000
Foreign currency
translation
adjustments 150,000 150,000
-------------
Comprehensive income 27,261,000
Exercise of stock options,
including tax benefit 4,201,000
Issuance of Class A Common
Stock for Employee Stock
Purchase Plan 93,000
Purchase of Class A
Common Stock (746,250) (24,102,000) (24,102,000)
Conversion of Class B
Shares to Class A
Shares
-----------------------------------------------------------
Shareholders' equity
September 30, 2000 $385,000 $108,204,000 (1,470,000)$(33,457,000) $132,784,000
===========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION> (Unaudited)
Nine Months Ended
September 30,
2000 1999
<S> <C> <C>
Cash flows from operating activities
Net income $ 27,111,000 $ 16,368,000
Adjustments to reconcile net income to net cash
Used in operating activities:
Depreciation and amortization 3,676,000 2,548,000
Unrealized loss (gain) on deferred compensation 291,000 (305,000)
Provision for bad debts 208,000 905,000
Changes in assets and liabilities:
Increase in due from factors (13,364,000) (21,413,000)
Increase in accounts receivable (415,000) (1,606,000)
Increase in inventories (5,040,000) (6,203,000)
(Increase) decrease in prepaid
expenses & other current assets (713,000) 953,000
Increase in other assets (2,293,000) (868,000)
Increase in accounts payable 2,119,000 5,744,000
Increase in income taxes payable 2,322,000 319,000
Increase in accrued expenses and
other current liabilities 2,873,000 2,880,000
Increase in other non-current liabilities 3,069,000 3,070,000
------------ ------------
Net cash provided by operating activities 19,844,000 2,392,000
Cash flows from investing activities
Acquisition of property and equipment, net (16,421,000) (5,262,000)
Purchase of marketable securities (1,481,000)
------------ ------------
Net cash used in investing activities (17,902,000) (5,262,000)
Cash flows from financing activities
Proceeds from exercise of stock options 1,561,000 834,000
Proceeds from issuance of common stock 93,000 29,000,000
Purchases of treasury stock (24,102,000) (4,171,000)
Principal payments on capital lease obligations (136,000) (126,000)
------------ ------------
Net cash (used in) provided by financing activities (22,584,000) 25,537,000
Effect of exchange rate changes on cash 150,000 125,000
------------ ------------
Net (decrease) increase in cash (20,492,000) 22,792,000
Cash, beginning of period 71,415,000 13,824,000
------------ ------------
Cash, end of period $ 50,923,000 $ 36,616,000
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 49,000 $ 22,000
Income taxes $ 15,733,000 $ 10,821,000
</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 in the
United States 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 nine months ended September 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 $27,261,000 and $16,493,000 for
the nine month periods ended September 30, 2000 and 1999,
respectively. Comprehensive income for the three month periods ended
September 30, 2000 and 1999 amounted to $12,959,000 and $8,063,000,
respectively.
3. Marketable Securities
The Company's marketable securities consist of an equity
investment which is considered to be "trading" and, accordingly is
carried on the balance sheet at fair market value based on quoted
market prices. At September 30, 2000 marketable securities in the
amount of $1,725,000 are included in other current assets, and
unrealized gains of $244,000 are included in other income.
4. Segment Information
Kenneth Cole Productions, Inc. has three reportable segments: Wholesale,
Consumer Direct, and Licensing /International. The Wholesale segment designs
and sources a broad range of fashion footwear, handbags and accessories and
markets its products for sale to more than 3,700 department and specialty
store locations and to the Company's Consumer Direct segment. The Consumer
Direct segment markets the broad selection of the Company's branded products,
including licensee products, for sale directly to the consumer through its own
channels of distribution, which include full price retail stores, outlet
stores, e-commerce (at website address www.kennethcole.com and www.kc-
reaction.com) and catalogs. The Licensing segment, through third party
licensee agreements, has evolved the Company from a footwear resource to a
diverse lifestyle brand competing effectively in about 30 apparel and
accessories categories for both men and women. The Company maintains control
over quality and image and licensees sell primary to the same channels of
distribution as those of the Company's Wholesale segment. The Company earns
royalties on the licensee's sales of branded product.
The Company evaluates segment performance and allocates resources to segments
based on segment income before elimination of intersegment profit, unallocated
corporate overhead and income taxes. Intercompany profit on intersegment
sales between wholesale and Consumer Direct are eliminated in consolidation.
Financial information of the Company's reportable segments is as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30, 2000
Consumer Licensing/
Wholesale Direct International Totals
<S> <C> <C> <C> <C>
Revenues from external
Customers $ 70,919 $ 33,309 $ 6,343 $ 110,571
Intersegment revenues 8,759 8,759
Segment income (1) 16,549 4,083 5,139 25,771
Segment assets 146,535 44,681 3,221 194,437
<CAPTION>
Nine Months Ended
September 30, 2000
Consumer Licensing/
Wholesale Direct International Totals
<S> <C> <C> <C> <C>
Revenues from external
Customers $ 185,616 $ 94,206 $ 15,718 $ 295,540
Intersegment revenues 21,551 21,551
Segment income (1) 31,809 13,325 11,728 56,862
<CAPTION>
Three Months Ended
September 30, 1999
Consumer Licensing/
Wholesale Direct International Totals
<S> <C> <C> <C> <C>
Revenues from external
Customers $ 56,056 $ 25,271 $ 4,226 $ 85,553
Intersegment revenues 7,361 7,361
Segment income (1) 9,716 3,778 3,595 17,089
Segment assets 117,593 32,880 2,293 152,766
<CAPTION>
Nine Months Ended
September 30, 1999
Consumer Licensing/
Wholesale Direct International Totals
<S> <C> <C> <C> <C>
Revenues from external
Customers $ 137,809 $ 69,320 $ 9,784 $ 216,913
Intersegment revenues 18,016 18,016
Segment income (1) 18,351 10,078 8,192 36,621
</TABLE>
(1) Before elimination of intersegment profit, unallocated corporate overhead
and income taxes
The reconciliation of the Company's reportable segment revenues, profit and
loss, and assets are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues
Revenues for external
customers $ 110,571 $ 85,553 $ 295,540 $ 216,913
Intersegment revenues 8,759 7,361 21,551 18,016
Elimination of intersegment
revenues (8,759) (7,361) (21,551) (18,016)
---------- ---------- ---------- ----------
Total consolidated
revenues $ 110,571 $ 85,553 $ 295,540 $ 216,913
========== ========== ========== ==========
Income
Total profit for
reportable segments $ 25,771 $ 17,089 $ 56,862 $ 36,621
Elimination of intersegment
profit and unallocated
corporate overhead (4,228) (3,531) (11,678) (9,111)
---------- ---------- ---------- ----------
Total income before
elimination of intersegment
profit, unallocated
corporate overhead and
income taxes $ 21,543 $ 13,558 $ 45,184 $ 27,510
========== ========== ========== ==========
Assets
Total assets for
reportable segments $ 194,437 $ 152,766
Elimination of intersegment
inventory profit (2,518) (2,043)
---------- ----------
Total consolidated assets $ 191,919 $ 150,723
========== ==========
</TABLE>
5. Recently Issued Pronouncements
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.
In July 2000, the Emerging Issues Task Force issued EITF: Issue
00-10, "Accounting for Shipping and Handling Fees and Costs." The
new pronouncement requires shipping and handling billings to
customers be recorded as revenue. Amounts for shipping and handling
costs can no longer be netted with related shipping and handling
billings. The EITF does not specify how handling costs should be
classified. While the company has not yet determined its accounting
treatment for the adoption of this pronouncement it does not expect
the adoption of EITF 00-10 to have a material effect on the revenues
and costs of the Company.
6. 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.
All applicable share and per share data have been adjusted for
the stock split. Earnings per share reflects the conversion of Class
B Common Stock to Class A Common Stock.
7. 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.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following discussion and analysis should be read in
conjunction with the Company's consolidated financial statements and
related notes thereto which are included herein.
Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995
Important Factors Relating to Forward Looking Statements
Statements contained herein and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press
releases, and in oral statements made by or with the approval of
authorized personnel that relate to the Company's future performance,
including, without limitation, statements with respect to the
Company's anticipated results of operations or level of business for
2000 or any other future period, are "forward-looking statements"
within the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are
based on current expectations, and are subject to certain risks,
uncertainties and assumptions, referred to below, including but not
limited to economic, competitive, governmental and technological
factors affecting the company's operations, markets, products and
services are indicated by words or phrases such as "plan",
"anticipate", "estimate", "project", "management expects", the
Company believes", "currently envisions" and similar words or
phrases. Should one or more of these risks or uncertainties
materialize, or should underling assumptions prove incorrect, actual
results may vary materially from those anticipated, estimated or
projected.
Such factors include, among others, the following: risks
associated with changes in the competitive marketplace, including the
introduction of new products or pricing changes by the Company's
competitors; changes in global economic conditions; risks associated
with the Company's dependence on sales to a limited number of large
department store customers, risks related to extending credit to
customers; risks associated with the Company's dependence on its
licensing partners for a substantial portion of its net income and
risks associated with a lack of operational and financial control
over licensed businesses; risks associated with consolidations,
restructurings and other ownership changes in the retail industry;
risks associated with competition in the segments of the fashion and
consumer product industries in which the Company operates, including
the Company's ability to shape, stimulate and respond to changing
consumer tastes and demands by producing attractive products, brands
and marketing, and its ability to remain competitive in the areas of
quality and price; risks associated with uncertainty relating to the
Company's ability to implement its growth strategies; risks
associated with the Company's entry into new markets either through
internal development activities or through acquisitions; risks
associated with the possible adverse impact of the Company's
unaffiliated manufacturers' inability to manufacture in a timely
manner, to meet quality standards or to use acceptable labor
practices; risks associated with changes in social, political,
economic and other conditions affecting foreign operations and
sourcing and the possible adverse impact of changes in import
restrictions; risks related to the Company's ability to establish and
protect its trademarks and other proprietary rights. The Company
undertakes no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future
events or otherwise.
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 nine months ended
September 30, 2000 and September 30, 1999.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
<S> <C> <C> <C> <C>
Net sales $104,228 94.3% $ 81,327 95.1%
Licensing revenue 6,343 5.7 4,226 4.9
Net revenue 110,571 100.0 85,553 100.0
Gross profit 52,770 47.7 39,259 45.9
Selling, general &
administrative expenses 32,206 29.1 26,026 30.4
Operating income 20,564 18.6 13,233 15.5
Interest income, net (979) (0.9) (325) (0.3)
Income before income taxes 21,543 19.5 13,558 15.8
Income tax expense 8,617 7.8 5,491 6.4
Net income 12,926 11.7 8,067 9.4
<CAPTION>
Nine Months Ended
September 30,
2000 1999
<S> <C> <C> <C> <C>
Net sales $279,822 94.7% $207,129 95.5%
Licensing revenue 15,718 5.3 9,784 4.5
Net revenue 295,540 100.0 216,913 100.0
Gross profit 136,319 46.1 97,375 44.9
Selling, general &
administrative expenses 93,461 31.6 70,445 32.5
Operating income 42,858 14.5 26,930 12.4
Interest income, net (2,326) (0.8) (580) (0.3)
Income before income taxes 45,184 15.3 27,510 12.7
Income tax expense 18,073 6.1 11,142 5.1
Net income 27,111 9.2 16,368 7.6
</TABLE>
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30,1999
NET REVENUES. Consolidated net revenues increased 29.2% to
$110.6 million for the three months ended September 30, 2000 compared
to $85.6 million for the three months ended September 30, 1999.
NET SALES. Wholesale net sales (including sales to its Consumer
Direct business segment) increased $16.3 million or 25.6% for the
three months ended September 30, 2000 to $79.7 million from $63.4
million for the three months ended September 30, 1999. This increase
is primarily attributable to strong performance in almost every
division with particular emphasis in the core footwear and
accessories business. While both the Kenneth Cole and Reaction brands
showed significant sales increases in both men's and women's
footwear, the Unlisted.com women's footwear division remains
challenging, as much of the junior footwear market has come under
pressure. Net sales in the Company's Consumer Direct segment
increased $8.0 million or 31.8% to $33.3 million for the three months
ended September 30, 2000 compared to $25.3 million for the three
months ended September 30, 1999. The improvement in net sales is due
to the increase in number of stores and a comparable stores sales
increase of 7.8%. The Company opened nine stores and closed one
subsequent to September 30, 1999 and ended the third quarter with 64
stores (42 full price and 22 outlet). 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 demand and awareness. Accordingly the
Company plans to continue to expand its retail operations, generating
square footage increases of at least 25% per year.
GROSS PROFIT. Consolidated gross profit as a percentage of net
revenue increased to 47.7% for the three months ended September 30,
2000 from 45.9% for the comparable period last year. This increase is
in part due to the increase in licensing revenue, which has no
associated cost of goods sold. Licensing revenues increased to 5.7%
of total revenues for the three months ended September 30, 2000
compared with 4.9% a year ago. In addition, wholesale margins
increased because of better managed inventories resulting in improved
margins on less sales of excess inventory and the strength of the US
dollar versus the Euro resulting in slightly lower first cost unit
prices on certain imported products. Partially offsetting this
increase were slightly lower wholesale margins on sales of certain
women's footwear in the junior market. Gross profit also increased
as a result of higher Consumer Direct sales as a percentage of total
revenues as the Company's Consumer Direct gross profit percentage is
significantly higher than the Company's Wholesale gross profit
percentage.
LICENSING REVENUE. Licensing revenue increased 50.1% to $6.3
million for the three months ended September 30, 2000 from $4.2
million for the three months ended September 30, 1999. This increase
primarily reflects the incremental revenues associated with increased
sales from some of the company's long-standing licensees. The
Company experienced increases in several categories of apparel, such
as men's sportswear and tailored clothing, as well as from its
accessory licenses, particularly in watches and luggage. In
addition, women's sportswear began shipping during the quarter and
while it only contributed a nominal amount of licensing revenue the
Company is pleased with the initial sell-in as well as the sell-
thrus.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general
and administrative expenses, including shipping and warehousing,
increased 23.7% to $32.2 million (or 29.1% of net revenues) for the
three months ended September 30, 2000 from $26.0 million (or 30.4% of
net revenues) for the three months ended September 30, 1999. The
decrease as a percentage of net revenues is primarily from the
economies of scale over the Company's base fixed general and
administrative costs. Such economies were partially offset by
increased depreciation associated with the Company's move to its new
corporate headquarters, costs to enhance the Company's e-commerce and
catalog initiatives and start up costs associated with the expansion
of the Company's retail operations.
OPERATING INCOME. As a result of the foregoing, operating
income increased 55.4% for the three months ended September 30, 2000
to $20.6 million (18.6% of net revenue) from $13.2 million (15.5% of
net revenue) for the three months ended September 30, 1999.
INTEREST AND OTHER INCOME. Interest and other income increased
to $979,000 from $325,000 in the comparable period in 1999. The
increase is the result of higher average cash balances generated from
internal operations, partially offset by the purchase of shares under
the Company's common stock repurchase program and capital
expenditures on the Company's new corporate headquarters. In
addition, the Company recorded an unrealized gain of $244,000 from
its investment in marketable securities during the quarter.
INCOME TAXES. The Company's effective tax rate has decreased to
40.0% for the three month period ended September 30, 2000 from 40.5%
in the corresponding period in 1999. This decrease is primarily a
result of the benefit of tax strategies implemented by the Company.
Nine months Ended September 30, 2000 Compared to Nine Months
Ended September 30, 1999
NET REVENUES. Consolidated net revenues increased 36.2% to
$295.5 million for the nine months ended September 30, 2000 compared
to $216.9 million for the nine months ended September 30, 1999.
NET SALES. Wholesale net sales (including sales to its
Consumer Direct business segment) increased $51.3 million or 32.9%
for the nine months ended September 30, 2000 to $207.2 million from
$155.8 million for the nine months ended September 30, 1999. This
increase is primarily attributable to significant sales increases in
men's footwear across all brands as well as in Kenneth Cole Reaction
women's footwear. Net sales in the Company's Consumer Direct segment
increased $24.9 million or 35.9% to $94.2 million for the nine months
ended September 30, 2000 compared to $69.3 million for the nine
months ended September 30, 1999. The improvement in net sales is
due to the increase in the number of stores as well as a comparable
store sales increased of 14.8%. The Company opened 4 stores during
the nine months ended September 30, 2000 of which 1 is full price and
3 are outlets.
GROSS PROFIT. Consolidated gross profit as a percentage of
net revenue increased to 46.1% for the nine months ended September
30, 2000 from 44.9% for the comparable period last year. This
increase primarily reflects additional sales from licensees resulting
in increased licensing revenue, which has no associated cost of goods
sold. Licensing revenue as a percentage of net revenues increased
to 5.3% for the nine-months ended September 30, 2000 compared to 4.5%
a year ago. In addition, wholesale margins increased because of
better managed inventories resulting in improved margins and because
of the strength of the US dollar versus the Euro resulting in lower
first cost unit prices in certain imported products. This increase
was partially offset by lower margins on sales of certain women's
footwear in the junior market.
LICENSING REVENUE. Licensing revenue increased 60.7% to $15.7
million for the nine months ended September 30, 2000 from $9.8
million for the nine months ended September 30, 1999. The increase
primarily reflects the incremental revenues associated with increased
sales from the Company's existing licensees.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
general and administrative expenses, including shipping and
warehousing, increased 32.7% to $93.5 million (or 31.6% of net
revenues) for the nine months ended September 30, 2000 from the $70.4
million (or 32.5% of net revenues) for the nine months ended
September 30, 1999. The decrease as a percentage of net revenues is
primarily attributable to certain economies realized in the Company's
wholesale segment. These economies of scale were partially offset
by expenditures on information systems to enhance the Company's e-
commerce initiatives and to open additional distribution and
warehousing facilities.
OPERATING INCOME. As a result of the foregoing, operating
income increased 59.1% for the nine months ended September 30, 2000
to $42.9 million (14.5% of net revenue) from $26.9 million (12.4% of
net revenue) for the nine months ended September 30, 1999.
INTEREST AND OTHER INCOME. Interest and other income
increased to $2,326,000 from $580,000 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.
In addition, the Company recorded an unrealized gain of $244,000 from
its investment in marketable securities during the third quarter of
2000.
INCOME TAXES. The Company's effective tax rate decreased to
40.0% for the nine month period ended September 30, 2000 from 40.5%
in the corresponding period last year. This decrease is primarily a
result of the benefit of tax strategies implemented by the Company.
Liquidity and Capital Resources
The Company's cash requirements derive from working capital
needs, retail expansion, enhanced technology and e-commerce
initiatives, and other corporate activities. The Company uses cash
from operations and, when necessary, borrowings under its line of
credit as the primary sources of financing. 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 $19.8 million for the
nine months ended September 30, 2000, compared to $2.4 million
provided by operating activities for the nine months ended September
30, 1999. This improvement was driven by the 66% increase in net
income and favorable changes in accounts receivable and accounts
payable as a result of timing (i.e., customer remittances and
payments to vendors). Net cash used in investing activities
increased to $17.9 million in the nine months ended September 30,
2000 from $5.3 million in the comparable period last year. This
increase is primarily a result of increased capital expenditures for
leasehold improvements on the Company's new corporate headquarters
(relocated in July 2000) and its ongoing retail expansion. Net cash
used in financing activities was $22.6 million for the nine months
ended September 30, 2000 compared to net cash provided by financing
activities of $25.5 million in the comparable period last year. This
change is primarily due to the use of funds to repurchase shares of
the Company's common stock during 2000 versus the Company issuing 1.5
million shares of common stock to Liz Claiborne, Inc., during 1999.
At September 30, 2000 and December 31, 1999 working capital was
$101.7 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 $4.4 million reduced the amount available under the line of
credit from $25.0 million to $20.6 million at September 30, 2000.
In August, 1999, the Board of Directors authorized the
repurchase from time to time, subject to market conditions, of up to
2,250,000 shares of the Company's Class A Common Stock. During 2000,
the Company repurchased in the open market 746,250 shares under this
plan at an aggregate cost of $24.1 million.
Capital expenditures totaled approximately $16.4 million and
$5.3 million for the nine months ended September 30, 2000 and 1999,
respectively. Capital expenditures primarily reflect the costs
associated with the following: i) the expansion of the company's
retail operations; ii) the Company's expansion of its selling and
administrative offices and its distribution facilitates; and iii)
additional purchases of information systems. The Company plans to
invest approximately $7.0 million in capital expenditures during the
fourth quarter of 2000 and approximately $15 million during 2001.
The Company believes that its current cash levels, cash from
ongoing operations and funds available under its line of credit
facility will be sufficient to satisfy its cash requirements for the
next 12 months, including requirements for its retail expansion,
additional corporate office space, new distribution facilities,
information systems improvements, common stock repurchase plan and
other corporate activities.
SEASONALITY OF BUSINESS
The Company's business is affected by seasonal tends, with
higher levels of wholesale sales in its future third quarters and
higher retail sales in its fourth quarter. These trends result
primarily from the timing of seasonal wholesale shipments to retail
customers and key vacation travel and holiday shopping periods in the
retail segment. As a result of the growth in the Company's retail
operations and licensing revenue, historical quarterly operating
trends and working capital requirements may not accurately reflect
future performances. In addition fluctuations in sales, licensing
revenue and operating income in any fiscal quarter may be affected by
the timing of seasonal wholesale shipments and other events affecting
retail.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in the Company's financial
instruments represent the potential loss in fair value, earnings or
cash flows arising from adverse changes in interest rates or foreign
currency exchange rates. The Company is primarily exposed to currency
exchange-rate risks with respect to its inventory transactions
denominated in Italian Lira. The Company manages these exposures
through operating and financing activities and, when appropriate,
through the use of derivative financial instruments for identifiable
market risk exposures, including foreign exchange contracts. The
Company does not enter into foreign currency transactions for trading
or other speculative purposes. At September 30, 2000, the Company
had forward exchange contracts totaling $19.2 million with an
unrealized loss of approximately $205,000. The Company's earnings
may also be affected by changes in short-term interest rates as a
result of cash balances, short-term investments and borrowings under
its line of credit facility.
<PAGE>
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. None
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 September 30, 2000.
<PAGE>
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
November 13, 2000 /s/ STANLEY A. MAYER
Stanley A. Mayer
Executive Vice President and
Chief Financial Officer
<PAGE>
INDEX OF EXHIBITS
Sequential
Exhibit Number Description Page No.
27.01 Financial Data Schedule 22
<PAGE>
