<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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 (I.R.S. Employer
Incorporation or Organization) Identification Number)
152 West 57th 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:
Name of Each Exchange
Title of Each Class on Which Registered
Class A common stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark 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. ( )
Aggregate market value of the voting stock held by
nonaffiliates of the registrant as of the close of business on
March 27, 2000: $441,874,645
Number of shares of Class A Common Stock, $.01 par value,
outstanding as of the close of business on
March 27, 2000: 12,060,567
Number of shares of Class B Common Stock, $.01 par value,
outstanding as of the close of business on
March 27, 2000: 5,785,398
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 29, 2000.
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Kenneth Cole Productions, Inc.
TABLE OF CONTENTS
Page
PART I
Item 1 Business 3
Item 2 Properties 15
Item 3 Legal Proceedings 15
Item 4 Submission of Matters to a Vote of Security Holders 15
PART ll
Item 5 Market for Registrant's Common Equity and
Related Shareholder Matters 16
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 7A Quantitative and Qualitative Disclosures about
Market Risk 22
Item 8 Financial Statements and Supplementary Data 22
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 22
PART lll
Item 10 Directors and Executive Officers of the Registrant 23
Item 11 Executive Compensation 23
Item 12 Security Ownership of Certain Beneficial Owners
and Management 23
Item 13 Certain Relationships and Related Transactions 23
PART lV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 24
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Item 1. Business
Important Factors Relating to Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 (the
"Act") and Section 21E of the Securities Exchange Act of 1934
provides 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 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," "intend," "will," or
similar expressions. All statements that express expectations
and projections with respect to future matters, including the
launching or prospective development of new business initiatives,
"Year 2000" issues, future licensee sales growth, and the
introduction of the Euro are forward-looking statements within
the meaning of the 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. There can be no assurance, however, that
management's expectations will necessarily 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, demand and competition for the Company's
products, changes in 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.
General
Kenneth Cole Productions, Inc. incorporated in September 1982,
designs, sources and markets a broad range of fashion footwear
and handbags, and through license agreements, designs and markets
apparel and accessories under its Kenneth Cole New York, Reaction
Kenneth Cole and Unlisted.com brand names. The Company's
products are targeted to appeal to fashion conscious consumers,
reflecting a casual urban perspective and a lifestyle uniquely
associated with Kenneth Cole. These products include core basics,
which generally remain in demand from season to season, and
fashion products that are designed to establish or capitalize on
market trends. The combination of basics and fashion styles
provides freshness in assortments and maintains a fashion-forward
image, while a multiple brand strategy, helps insulate the
Company from a temporary downturn in business.
The Company markets its products to more than 3,700 department
and specialty store locations, as well as through its consumer
direct business, which includes an expanding base of retail and
outlet stores, consumer catalogs and interactive websites,
including an on-line store. 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 (from ''better'' to ''moderate'') and styling. The
diversity of the Company's product mix provides balance to its
overall product sales and business planning and increases sales
opportunities to wholesale customers who do not carry the
Company's full range of products.
The popularity of the Kenneth Cole brand names among consumers
has enabled the Company to selectively expand its product
offerings and channels of distribution through licensing
agreements. The Company, through licensing agreements, offers a
lifestyle collection of men's product categories including
tailored clothing, dress shirts, sportswear, neckwear,
briefcases, portfolios, jewelry, belts, scarves, leather and
fabric outerwear, sunglasses, eyewear, watches, luggage, hosiery,
underwear, robes, loungewear and small leather goods. During
1999, the Company entered into a major multi-brand initiative to
launch women's apparel and will begin selling Kenneth Cole New
York sportswear for the Fall 2000 season. Other women's product
categories currently being sold pursuant to license agreements
include small leather goods, hats, gloves, scarves and wraps,
leather and fabric outerwear, sunglasses, eyewear, watches,
jewelry, luggage and sportswear.
Business Growth Strategies
The Company's strategy is to continue to build upon the
strength of its lifestyle brand franchise, which is comprised of
three well-differentiated and distinct brands: Kenneth Cole New
York, Reaction Kenneth Cole and Unlisted.com. The Company views
its lifestyle brands as a vital and significant strategic asset
and the foundation for a sustainable competitive advantage. The
further segmentation and development of the three brands afford
enormous growth potential within each of the Company's business
segments.
Wholesale. By strengthening and streamlining its department
store distribution channels, the Company continues to reinforce
the segmentation of its three brands at wholesale, ensuring even
greater growth capability for each in the future. This
facilitates the broadening of product offerings, which attracts
new customers and further enables the Company to address a wider
variety of customers' needs domestically and abroad. By
combining retail and wholesale merchandising functions, the
Company is in a greater position to quickly respond to market
changes enabling each wholesale division to deliver appropriate
fashions in a more timely and effective manner. This approach
has been effective in turning around the women's footwear
business in a difficult and challenging environment.
Consumer Direct. The Company's Consumer Direct segment, which
operates full price retail as well as outlet stores, catalogs and
e-commerce affords significant growth potential while
simultaneously complementing the existing wholesale and licensing
businesses. The Company believes that the sales of footwear,
handbags and licensed products through its consumer direct
channels of distribution increase consumer awareness of the
Company's brands, reinforce the Company's image and build brand
equity. Wholesale customers in cities with a Kenneth Cole retail
presence consistently perform better than those without.
The Company continues to pursue opportunities to expand its
retail store operations. As of December 31, 1999, the Company
operated 61 specialty retail and outlet stores as compared with
54 stores as of December 31, 1998. The Company plans to open or
expand approximately 8 to 11 stores in 2000, expanding retail
square footage by approximately 35% to 40%. This expansion
includes outlet stores, which provide opportunities for the
Company to sell excess and out-of-season merchandise, thereby
reducing the need to sell such merchandise through its regular
off-price channels of distribution or to discounters at
excessively low prices. To accommodate the Company's diversity
of product offerings, larger format stores were introduced in
late 1998 and additional locations are being planned for 2000.
The Company believes that these larger format stores will
generate increased sales and profitability as this new retail
model allows for a true-cross section of both Company and
licensee products, enabling the Company to present a fairly broad
lifestyle offering that the consumer wants to see. In addition,
the Company believes that there will be certain economies in
several selling and administrative expense areas.
The Company continues to invest significantly in the
enhancement, visual presentation and development of its websites
to capitalize on the growth of the Internet and emerging
technologies. The Company believes that e-commerce will be an
integral contributor in the Company's future as a source of
consumer information and as a generator of new revenue. The
websites are designed to, among other things, create additional
revenues through a new distribution channel, build brand equity,
fortify image, increase consumer awareness, improve customer
service, promote supporting causes the Company believes is
important to its customers and provide entertainment. The Company
has strengths in its existing capabilities in customer service,
including multiple toll-free telemarketing lines, merchandising,
catalog, fulfillment and e-commerce. Accordingly, the Company
believes it has a strategic advantage over those just beginning
with on-line commerce.
In addition to seasonal image campaigns via traditional
advertising media, the Internet has enabled the Company to
communicate directly with its customers and have its customers
communicate directly with the Company. The Company believes this
dynamic relationship is invaluable for building customer loyalty.
Further, the Company's Internet presence through multiple
websites has enabled the creation of a substantial e-mail
database by which marketing and customer service regularly
interacts with existing and new customers on-line.
Licensing. The growing strength of the Company's three brands,
Kenneth Cole New York, Reaction Kenneth Cole and Unlisted.com,
provides opportunities, through licensing agreements, to extend
into new product categories and broaden existing distribution
channels. Licensed product sales continued to grow and now
represent about half of the Company's brand sales at retail. Last
year's licensee sales included the roll out of men's sportswear
and dress shirts. Most of the existing licensee businesses are
still relatively new in their individual product classifications
and hold impressive growth potential.
The Company chooses its licensing partners very carefully,
placing great importance on the strength of their sourcing and
distribution abilities to ensure the same value and style that
Kenneth Cole customers have come to expect. Within these
strategic parameters the Company entered into a major multi-brand
initiative to launch the Company into the women's apparel market
under an exclusive womenswear license agreement with L.C.K.C.,
LLC, a division of Liz Claiborne, Inc. ("Liz Claiborne Inc.").
Under the agreement, Liz Claiborne Inc. will produce the Kenneth
Cole New York collection of women's contemporary sportswear for
the Fall 2000 season, followed by the launch of a junior line
under the Reaction Kenneth Cole brand and the launch of a women's
status denim and sportswear line under the Unlisted.com brand in
2001. The Company believes that women's apparel will grow into
its largest licensee product classification and will further
define and enhance the Company's brands, enabling it to better
deliver exactly what the customer is looking for.
The Company's brands are currently licensed for a range of
products consistent with the Company's image (see "Licensing" in
Item 1).
Products
The Company markets its products principally under its Kenneth
Cole New York, Reaction Kenneth Cole and Unlisted.com brand
names; each are targeted to appeal to different consumers. The
Company believes that the Kenneth Cole brand name has developed
into a true aspirational lifestyle brand; while having similar
designer cache as other international designer brands, it has
value credibility most do not.
Kenneth Cole New York
Kenneth Cole New York products are generally designed for the
fashion conscious consumer and reflect the relaxed urban
sophistication that is the hallmark of the Kenneth Cole New York
image. The distinctive hip styling of this line has established
Kenneth Cole as a fashion authority for sophisticated urban men
and women who are seeking a value alternative to other designer
brands. As a result of strong brand recognition and reputation
for style, quality and value, the Company believes that Kenneth
Cole New York has become a core resource for better department
and specialty stores, continuing to provide significant growth
opportunities. The product offering has evolved from a very
trendy line to one with broad appeal, including both fashion
forward styling and core basics. The Company continues to
leverage the strength of the name through brand extensions (e.g.,
Kenneth Cole Collection), in-store shops and the licensing of
many new product categories.
Kenneth Cole New York men's footwear, primarily manufactured in
Italy, is designed as contemporary, comfortable fashion footwear
and is sold to the bridge-designer market at retail price points
ranging from $150 to $190. As versatile as it is sophisticated,
Kenneth Cole New York men's footwear may be worn to work, for a
special occasion or on weekends with casual clothes.
Kenneth Cole New York women's footwear, primarily manufactured
in Italy and Spain, includes sophisticated and elegant dress,
casual and special occasion (e.g., bridal) and is sold to the
bridge-designer market at retail price points ranging from $130
to $200. Women's footwear is generally constructed with leather
soles and linings and fabric uppers.
Kenneth Cole New York handbags are sleek designer bags offered
at affordable prices, generally made of quality leathers and are
sold to the bridge-designer market at retail price points ranging
from $70 to $295. Certain updated styles offer the customer high
fashion day bags, while evening bags make strong sophisticated
statements in satins and updated silhouettes.
Reaction Kenneth Cole
Reaction Kenneth Cole consists of a variety of product
classifications, which address the growing trend toward flexible
lifestyle dressing. Originally introduced as a comfort-oriented
casual line, Reaction Kenneth Cole now includes more dressy
styles. Reaction Kenneth Cole women's footwear is designed for
the workplace as well as outside the office, with an emphasis on
comfort, contemporary styling and perceived value. It is
targeted to compete in the largest single category of footwear
sold in department stores, "women's better" casual, and the
majority of the line retails in the $70 to $110 price range.
Reaction Kenneth Cole men's footwear combines fashionable and
versatile styling with affordable pricing and is positioned in
the fastest growing classification in the men's market as
consumer preferences lean away from athletic constructed footwear
toward regular constructed footwear. This line retails in the
$100 to $135 price range.
Reaction Kenneth Cole handbags are designed to be
multifunctional with a contemporary look and are primarily made
of non-leather technical fabrications, such as nylon, microfiber
and canvas. Reaction Kenneth Cole Reaction handbags, including
Essentials, Itemize and the Reactive collections, are one of the
fastest growing product classifications and have been created to
meet the varying needs of the Company's customers. This line
generally retails at price points ranging from $25 to $90.
Reaction Kenneth Cole children's footwear, primarily
manufactured in Brazil, includes dress and casual footwear sold
at price points ranging from $45 to $75 and is targeted to boys
and girls ages 5 to 16 who are making more of their own fashion
choices than ever before. The Company believes that the
expansion into children's footwear is a natural extension of its
footwear business and, by utilizing takedowns of successful
performers of existing men's and women's styles, greatly enhances
the likelihood of product performance.
Unlisted.com
Unlisted.com products are designed and targeted to the younger
trendier consumer market, the country's largest consumer base of
fashion merchandise. The Unlisted.com brand was developed to
expand the Company's sales into a younger more moderately priced
business and includes approximately 50 styles of women's casual
and dress shoes and approximately 70 styles of handbags per
season.
Unlisted.com footwear provides the junior consumer with a wide
selection of footwear with contemporary styling and quality at
affordable prices. Unlisted.com women's footwear includes not
only fashion styles, but also evening styles, basic pumps and
loafers that generally retail at price points ranging from $30 to
$65. In the first quarter of 1999, the Company launched
Unlisted.com men's footwear and is exploring distribution
channels and licensing agreements to further expand this brand.
The line includes casual and evening assortments with a variety
of fashion styles to compliment the selection of approximately 50
styles per season. The shoes range at retail price points from
$60 to $90.
Unlisted.com handbags are designed for the younger price-
conscious trend-driven consumer and consist of trendy bags in
vinyl, straw and other exciting fabrications. Unlisted.com
handbags generally retail at price points ranging from $20 to
$50.
Business Segments
The Company primarily distributes its products through
Wholesale and its own Consumer Direct distribution channels.
During the periods presented below, the percentage of net
revenues contributed by the Company's business segments were as
follows:
Year Ended
December 31,
1999 1998 1997
------ ------ ------
Wholesale 60% 66% 71%
Consumer Direct 35 30 26
Licensing 5 4 3
------ ------ ------
Total 100% 100% 100%
====== ====== ======
Wholesale Operations
The Company strives to provide affordable fashion footwear,
handbags 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 independent
wholesale agents as well as corporate account specialists to sell
its products and to manage its relationships with its wholesale
customers, including analyzing and monitoring their selling
information.
The Company's products are distributed in more than 1,200
wholesale accounts for sale in more than 3,700 store locations in
the United States. The Company markets its branded products to
major department stores and chains, such as the department store
divisions of Dayton Hudson Corporation, Dillard Department
Stores, Inc., Federated Department Stores (including Macy's,
Bloomingdales, and Burdines), and upscale specialty retailers,
including Saks Fifth Avenue and Nordstrom, Inc. In addition, the
Company sells out-of-season branded products and overruns through
the Company's outlet stores and to off-price retailers. The
Company also sells its products, directly or through distributors,
to wholesale customers in Canada, Hong Kong, Japan, Taiwan, the
Philippines and Singapore.
The Company markets its product lines and introduces new styles
at separate industry-wide footwear and handbag tradeshows that
occur several times throughout the year in New York, Las Vegas
and at various regional shows. These shows also afford the
Company the opportunity to assess preliminary demand for its
products. After each show, the Company's wholesale agents and
corporate account specialists visit customers to review the
Company's product lines and to secure purchase commitments. The
Company's products also are displayed at separate handbag and
footwear showrooms in New York.
Private Label
The Company also 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 incur
any costs related to importing, shipping or warehousing of
inventory, all of which are borne by the customer.
Consumer Direct Operations
Retail Operations
The Company continues to pursue several opportunities to
enhance and expand its retail operations. At December 31, 1999,
the Company operated 41 specialty retail stores and 20 outlet
stores under the Kenneth Cole New York name.
The Company's retail stores are operated to develop consumer
recognition of its brand names, to provide a showcase for Kenneth
Cole branded products marketed by the Company and its licensees
and to enhance the Company's overall profitability. The Company
believes that these stores complement its wholesale business by
building brand awareness. In addition, Kenneth Cole retail stores
enable the Company to reach consumers who prefer the environment
of a specialty store. In addition to its Kenneth Cole stores, the
Company plans on testing its first Reaction stand-alone store in
New York City during the second half of 2000. Approximately 20%
to 25% of the Company's retail store products are sourced
exclusively for such stores which differentiate the product mix
of its stores from that of its wholesale customers. The Company
opened three retail stores in 1999, and plans to open or expand
five to seven new stores in 2000.
At December 31, 1999, the Company operated 20 outlet stores.
The Company establishes its outlet stores to enable it to sell a
portion of its excess wholesale, retail and catalog inventory in
a manner which it believes does not have an adverse impact on its
wholesale customers and the Company's retail operations. The
Company generally does not make a style available in its outlet
stores or to off-price retailers until wholesale customers have
taken their first markdown on that style. The Company anticipates
that it will require additional outlet stores as higher levels of
sales are achieved and additional retail stores are opened. The
Company opened four outlet stores and plans to open or expand
three or four stores in 2000.
The success of the Company's new and existing stores will
depend on various factors, including general economic and
business conditions affecting consumer spending, the acceptance
by consumers of the Company's retail concept, the ability of the
Company to successfully manage such expansion, hire and train
personnel, the availability of desirable locations, the
negotiation of acceptable lease terms for new locations and the
expansion of the Company's management information systems to
support the growth of its retail operations. The Company
believes that its retail stores, further enhance its image, and
represent an opportunity for revenue and earnings growth.
Catalog, Website and Customer Service
The Company produces consumer catalogs that feature a variety
of Kenneth Cole New York and Reaction Kenneth Cole branded
products. Catalog order-taking and fulfillment of accessories and
apparel is performed by a third party service located in
Virginia. In 1999, the Company began performing fulfillment of
footwear and handbags from its distribution center in New Jersey
and plans to perform fulfillment of all products in 2000.
The Company maintains a website to provide information
regarding the Company and its products, as well as to develop a
profitable e-commerce business. In 1999, the Company relaunched
its improved e-commerce site Kennethcole.com, and launched
Unlisted.com, a marketing site without e-commerce, targeting
younger Generation Y (age 12 to 24) consumers. The Company
plans to continue to invest in the internet and emerging
technologies and believes that based on its existing
merchandising, fulfillment and marketing capabilities, it is well
positioned to deliver an on-line commerce solution with nonpareil
customer service. The Company also maintains two toll-free
telephone numbers (1-800-KEN-COLE and 1-800-UNLISTED) which
provide customer service and answer product-related questions.
Licensing
The Company views its licensing agreements as a vehicle to
better service its customers by extending its product offerings
to meet more of their fashion accessory needs without
compromising on price, value or style. The Company considers
entering into licensing, joint venture 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 which
are believed to be complementary to its existing product lines.
Licensees range from small to medium size 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, Reaction Kenneth Cole
and Unlisted.com brand images. The Company communicates its
design ideas and coordinates all marketing efforts with its
licensees. The Company generally grants licenses for three to
five years with renewal options, limits licensees to certain
territorial rights, and retains the right to terminate the
license 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 as any
use of its trademarks in packaging, advertising and marketing.
In 1999, the Company captured significant shelf space in better
department stores for its men's apparel collection as it further
rolled out tailored clothing, men's sportswear and dress shirts.
This was an important step in further defining Kenneth Cole as a
premier lifestyle brand as its distinctive image is consistently
developed across an expanding number of products, brands and
markets. Through its licensing agreement with industry expert
Liz Claiborne Inc., the Company will be launching Kenneth Cole
women's sportswear in Fall 2000. This highly anticipated debut
into womens fashion will be followed by the launch of Reaction
Kenneth Cole in Spring 2001, followed by Unlisted.com in Fall
2001. The Company believes the addition of womenswear will
further define and differentiate its brands, enabling the Company
to better meet its customer's needs.
The following table summarizes the Company's licensed product
categories:
Kenneth Cole Reaction
Product Category New York Kenneth Cole Unlisted.com
Men's Tailored Clothing X
Men's Sportswear X X
Men's Neckwear X X
Men's Underwear, Robes, Loungewear X X
Men's Dress Shirts X X
Men's Hosiery X X
Men's Leather & Fabric Outerwear X X
Men's Small Leather Goods X X X
Men's Belts X X X
Women's Sportswear X X X
Women's Small Leather Goods X X X
Women's Leather & Fabric Outerwear X X
Men's/Women's Scarves & Wraps X X
Men's/Women's Hats & Gloves X X
Men's/Women's Jewelry X
Men's/Women's Watches X X
Men's/Women's Optical Frames X X
Men's/Women's Luggage/Briefcases X X X
Men's/Women's Sunglasses X X X
Kid's Leather Outerwear X X
Kid's Belts X X
Kid's Legwear X X
Kid's Sunglasses X X
All of the Company's licensees are required to contribute to
the Company a percentage of their net sales of licensed product,
subject to minimum amounts, for the ongoing marketing of the
Kenneth Cole brands.
International
The Company sells its products, directly or through
distributors, to wholesale customers in Canada, Hong Kong, Japan,
Taiwan, the Philippines and Singapore. The Company plans to
continue to expand its international licensing and wholesale
distribution programs as a means of developing global brand
recognition and creating additional wholesale markets for its
products. The Company also operates one retail store in the
Netherlands.
The Company has a licensing agreement with Dickson Concepts,
Ltd. ("Dickson") to retail Kenneth Cole New York and Reaction
Kenneth Cole branded products throughout Hong Kong, Taiwan and
Singapore through free standing Kenneth Cole retail stores,
leased departments and shop-in-shops. Dickson currently operates
nine free standing Kenneth Cole stores throughout the region and
for the first time is placing men's sportswear in its Hong Kong
and Singapore locations for the Spring 2000 season. During 1998,
the Company entered into an agreement to sell the Company's
branded products throughout the Philippines through leased
departments and shop-in-shops. In 1999 the first free standing
retail store was opened in Manila. The international stores'
format and product mix are consistent with that of the Company's
Kenneth Cole New York domestic retail stores. In connection with
the Company's business strategy of enhancing and expanding its
international operations, the Company is considering other
licensing and distribution opportunities.
The Company, through license agreements, sells most product
classifications in Canada. In 1999, the Company entered into an
agreement to distribute Reaction Kenneth Cole sportswear,
tailored clothing and dress shirts for launch in Fall 2000.
Design
Kenneth D. Cole, Chief Executive Officer and President, founded
the Company and its success to date is largely attributable to
his design talent, creativity and marketing abilities. Mr. Cole
selects designers to join a design team to work with him in the
creation and development of new product styles. Members of each
design team work together with Mr. Cole to create a design that
they believe fits the Company's image, reflects 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 extensively to assess fashion trends in Europe, the United
States and Asia and work closely with retailers to monitor
consumer preferences. The process of designing and introducing a
new product takes approximately three to four months. Once the
initial design is 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 profitability of
the Company's products, the Company continuously seeks to develop
new core basic product styles that remain fashionable from season
to season without significant changes in design or styling.
Since these core basic products are seasonless, retailers'
inventories of core basic products tend to be maintained
throughout the year and reordered as necessary, primarily through
electronic data interchange.
Sourcing
The Company does not own or operate any manufacturing
facilities and sources its branded and private label products
directly or indirectly through independently owned manufacturers
in Italy, Spain, Brazil, India, China and Korea. The Company
maintains offices in Florence, Italy and Hong Kong and generally
has long-standing relationships with several independent buying
agents to monitor the production, quality and timely distribution
of the Company's products from its manufacturers. The Company
sources each of its product lines separately based on the
individual design, styling and quality specifications of such
products.
The Company attempts to limit the concentration of
manufacturing with any one manufacturer. However, approximately
58% and 46% of the dollar value of total handbag purchases by the
Company were produced by one manufacturer through many different
factories in China in 1999 and 1998, respectively. In addition,
43% and 58% of men's footwear was produced by one manufacturer
utilizing several different factories in Italy in 1999 and 1998,
respectively. These manufacturers, however, subcontract a
significant portion of such purchases to ensure the consistent
and timely delivery of quality products. The Company is the
largest customer 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
from 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 trade shows. 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 trade shows and initial purchasing
commitments from wholesalers, the Company places production
orders with the manufacturers. 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. Once an order has been
placed, the manufacturing and delivery time ranges from three
weeks to four months depending on whether it is currently in
production or a new product. Throughout the production process,
the Company monitors product quality through inspections at both
the factories and upon receipt at its warehouses. To reduce the
risk of overstocking, the Company monitors sell-through data on a
weekly basis and seeks input on product demand from wholesale
customers to adjust production when needed.
Advertising and Marketing
The Company believes that advertising to promote and enhance
the Kenneth Cole New York and Reaction Kenneth Cole brands is an
intricate part of its long-term growth strategy. The Company
believes that its advertising campaigns, which have brought it
national recognition for their timely focus on current events and
social issues, have resulted in increased sales and consumer
awareness of its branded products. The Company's advertising
appears in magazines such as Vogue, Vanity Fair, Details, GQ,
Glamour and Marie Claire, newspapers, and outdoor and electronic
advertising media. All of the Company's licensees are required to
contribute to the Company a percentage of their net sales of
licensed product, subject to minimums, for the advertising and
promotion of the Kenneth Cole trademark. In addition, personal
appearances by Kenneth D. Cole have been utilized to further
enhance the Company's image.
The Company utilizes in-house advertising and public relations
staff for all media placement, which includes approval of all
advertising campaigns from its licensees. By retaining control
over its advertising and marketing programs, the Company is able
to maintain the integrity of its brands while realizing
substantial cost savings when compared to outsourcing.
In order to continue to strengthen brand awareness of its
products and increase sales, the Company is actively involved in
the development, marketing and merchandising programs for its
customers. As part of this effort, the Company utilizes
cooperative advertising programs, sales promotions and produces
consumer catalogs which feature a variety of Kenneth Cole New
York and Reaction Kenneth Cole branded products marketed by the
Company and its licensees. In addition, the Company has, on a
limited basis, worked with customers to develop distinctive
catalogs that market the Company's products and to develop point
of sale displays. Because all this work is done internally, there
is a singular focus, a strong synergy and a consistency in all
communications.
An important developing aspect of the Company's marketing
efforts is the creation of shop-in-shops, where an entire
collection of the Company's branded products is featured, along
with focus areas, where specific product categories are
highlighted. These shop-in-shops and 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. In addition,
these shop-in-shops and focus areas encourage longer-term
commitment by retailers to the Company's products and enhance
consumer brand awareness.
Distribution
To facilitate distribution, the Company's products are
inspected, bar coded, packed and shipped from manufacturers by
ocean or air to either the Company's distribution facilities
located in Secaucus, New Jersey or a public warehouse located in
California. The Company utilizes fully integrated information
systems and bar code technology to facilitate the receipt,
processing and distribution of product through both distribution
facilities. The products are then shipped to the Company's
wholesale customers either in bulk or under its open stock
program. The Company's open stock program allows its wholesale
customers to reorder, typically via electronic data interchange
("EDI"), core basic styles in a range of colors and sizes 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 believes that affording customers improved flexibility in
ordering specific SKUs in smaller quantities will ultimately
reduce the incidence of markdowns and allowances.
Management Information Systems
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. During 1999 the Company replaced its wholesale
distribution and financial systems with newer technologically
advanced systems that offer greater functionality and enhanced
reporting. These new systems are Year 2000 compliant and were
implemented prior to any impact on the current operating system.
The Company also utilizes an EDI system which provides a computer
link between the Company and many of its wholesale customers that
enables the Company to receive on-line orders and to accumulate
sales information on its products. 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 and track
inventories.
The Company regularly evaluates the adequacy of its management
information systems and upgrades such systems to support its
growth. However, the Company's failure to continue to upgrade
its management information systems necessary to support growth or
expansion, which could arise either with its internal systems or
systems of its third parties, could have a material adverse
effect on the Company's financial condition and its results of
operations (see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
Trademarks
The Company, through its wholly-owned subsidiary, K.C.P.L.,
Inc., owns federal registrations for its principal trademarks
Kenneth Cole, Kenneth Cole New York, Kenneth Cole Reaction,
Reaction, Kenneth Cole Collection and Unlisted as well as several
other ancillary and derivative trademarks. 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 pending federal applications in the United States
Patent and Trademark office for trademarks and service marks,
including Reaction Kenneth Cole, Unlisted.com and several
ancillary trademarks. Moreover, the Company continues to expand
its current international registrations in numerous countries in
Asia, South America, the Middle East and Europe. 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 trademarks against
infringements.
Competition
Competition in the footwear and handbags industries is intense
and is subject to rapidly changing consumer demands. The Company
competes with numerous designers, brands and manufacturers of
footwear, handbags, apparel and accessories, some of which may be
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 the
consumer 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 risks of doing business
abroad, such as fluctuations in currency exchange rates, local
market conditions, labor unrest, political instability and the
imposition of additional regulations relating to imports,
including quotas, duties or taxes and other charges on imports.
While these factors have not had a material adverse impact on the
Company's operations to date, there can be no assurance that they
will not have a material adverse affect on the Company's
operations in the future.
In order to reduce the risk of exchange rate fluctuations, the
Company routinely enters into forward exchange contracts to
protect the future purchase price of inventory denominated in
foreign currencies. These 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
(see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations").
Import Restrictions
Although the majority 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 affect on the Company's operations
and its ability to import its products at the Company's 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 ranging
from approximately 6% to 37.5%, depending on the principal
component of the product. Other restrictions on the importation
of footwear 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.
A significant portion of the Company's products is manufactured
in and imported from China. The Company's operations and its
ability to import products from China at current tariff levels
could be materially and adversely affected if the ''most favored
nation'' status granted to China by the United States government
for trade and tariff purposes is terminated. As a result of such
status, products imported by the Company from China currently
receive the lower tariff rates made available to most of the
United States' major trading partners. While China has been
granted "most favored nation" status in every year since 1979,
there can be no assurance that the United States will continue to
grant China "most favored nation" status in the future. In the
event that such status is not renewed in future years, tariff
levels on imports from China could rise significantly and could
have a material adverse effect on the Company's results of
operations. However, the Company believes that it would be able
to shift production of certain goods to other countries on a cost
effective basis and to continue to produce in China those goods
subject to lower tariff rates.
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 within the retail industry: sales and earnings are
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, the results for any one
quarter may not be indicative of the results for the full year.
Customers
The Company's department store customers include major United
States retailers, certain of which are under common ownership.
In 1999 and 1998, the Company had no customer or group under
common ownership account for more than 10% of sales. The
Company's ten largest customers represented 40.1% and 44.5% of
the Company's net sales for the years ended December 31, 1999 and
1998, respectively. While the Company believes that purchasing
decisions have generally been made independently by each division
within a department store group, there is a trend among
department store groups toward centralized purchasing decisions
of their divisions.
Backlog
The Company had unfilled wholesale customer orders of $69.8
million and $50.3 million, at March 27, 2000 and March 26, 1999
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 basic
products through the Company's open stock program. Accordingly, a
comparison of backlog from period to period may not be indicative
of eventual shipments.
Employees
At December 31, 1999, the Company had approximately 1200
employees, 140 of whom are covered under a collective bargaining
agreement with a local affiliate of the International Leather
Goods, Plastics, Handbags and Novelty Workers' Union, Local 1,
Division of Local 342-50 United Food and Commercial Workers
Union. The Company considers its relationships with its employees
to be satisfactory. The collective bargaining agreement expires
in April 2000. While the Company believes it will be able to
renew the agreement with similar terms and conditions, there can
be no assurance a new agreement will be reached and that failure
to reach a new collective bargaining agreement can have a
material effect on the Company.
Directors and Executive Officers
Name Age Present Position
Kenneth D. Cole 46 President and Chief Executive Officer
Paul Blum 40 Executive Vice President and Chief Operating Officer
Stanley A. Mayer 52 Executive Vice President and Chief Financial Officer
Harry Kubetz 46 Senior Vice President
Susan Hudson 40 Senior Vice President
Robert Grayson 55 Director
Denis F. Kelly 50 Director
Jeffrey G. Lynn 50 Director
Philip B. Miller 62 Director
Kenneth D. Cole has served as the Company's President and Chief
Executive Officer since its inception in 1982. 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 Candie's women's shoes. Mr. Cole is on the Boards of
Directors of the American Foundation for AIDS Research
(''AmFAR'') and H.E.L.P., a New York agency that provides
temporary housing for the homeless. In addition, Mr. Cole is a
Director and President of each of the wholly-owned subsidiaries
of the Company.
Paul Blum has served as Chief Operating Officer since February
1998. Prior he served as Executive Vice President of the Company
since May 1996 and as Senior Vice President from August 1992
until May 1996. Mr. Blum joined the Company in 1990. From 1982
until 1990, Mr. Blum served as Vice President and was a principal
shareholder of The Blum Co., a fashion accessory firm, the assets
of which were purchased in 1990 by the Company.
Stanley A. Mayer has served as Executive Vice President, Chief
Financial Officer, Treasurer and Secretary of the Company since
March 1988. From 1986 until joining the Company, Mr. Mayer held
the position of Vice President-Finance and Administration of
Swatch Watch USA, Inc. Mr. Mayer was the Controller of the Ralph
Lauren and Karl Lagerfeld womenswear divisions of Bidermann
Industries, USA, Inc. from 1979 until 1986. In addition, Mr.
Mayer is the Vice President and Secretary of each of the wholly-
owned subsidiaries of the Company.
Harry Kubetz has served as Senior Vice President of Operations
since joining the Company in April 1996. Mr. Kubetz was President
of "No Fear" Footwear, Inc. from 1994 until 1996. From 1992
until 1994 Mr. Kubetz was Executive Vice President of Asco
General Supplies, a wholly owned subsidiary of Pentland, PLC.
Susan Q. Hudson has served as Senior Vice President -
Wholesale since February 1998. Prior, Ms. Hudson served as
Divisional President - Men's Footwear since 1996 and as Vice
President in charge of men's footwear since 1990. Prior to
joining the Company, Ms. Hudson was at LA Gear, where she served
as Regional Sales Manager.
Robert C. Grayson is President of Robert C. Grayson &
Associates, Inc. and Vice Chairman of Berglass-Grayson,
consulting firms. 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 1983 to 1985.
Denis F. Kelly is a Managing Director and the head of the
Mergers and Acquisitions Department at Prudential Securities
Incorporated since July 1993. From 1991 until 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.
Jeffrey G. Lynn has been the Chairman, President and Chief
Executive Officer of Dunham's Athleisure Corp., a specialty
retailer of sportswear, since 1987. Mr. Lynn joined Dunham's
Athleisure Corp. in 1985 and served as president until 1987.
Prior to 1985, he served as Executive Vice President of the
Musicland Group, a specialty retailer of audio/video
entertainment software. Mr. Lynn is a director of English
Gardens and Fairlane Florists, Inc.
Philip B. Miller was appointed to serve on the Company's Board
of Directors on March 23, 2000. Mr. Miller is Chairman of Saks
Fifth Avenue, an upscale specialty retailer, and serves as
Co-Chairman of Saks Direct, a subsidiary comprising e-commerce
and direct mail businesses. Mr. Miller served as Chairman and
Chief Executive Officer at Saks Fifth Avenue from 1993 to January
2000. Mr. Miller was formerly Chairman and Chief Executive
Officer at Marshall Fields, joining that company in 1983 from
Neiman Marcus, where he had been President since 1977. Mr.
Miller serves as Senior Vice Chairman of the Board of Directors
of The Lighthouse and also serves on the Board of Directors of
Saks Incorporated, the Metropolitan Opera Guild of New York and
the New York Botanical Gardens.
Item 2. Properties
The Company's executive offices and showrooms are located at
152 West 57th Street, New York, N.Y., and occupy approximately
30,000 square feet under leases that expire between April 2000
and December 31, 2006.
The Company's administrative offices and distribution
facilities are located in Secaucus, New Jersey under leases that
expire in June, 2002. The main facility comprises 244,000 square
feet, of which, approximately 30,000 square feet is used for
administrative offices. In March 2000, the Company leased an
additional 77,000 square feet to expand its current distribution
capacity. The lease expires simultaneously with the other
distribution facility located in Secaucus, New Jersey. In
addition to these two leases, the Company also leases a 23,500
square foot facility in Secaucus used for outlet store space as
well as an additional distribution warehousing facility. The
Company also utilizes a public warehouse on the west coast and
has technical and administrative offices in Florence, Italy and
Hong Kong. The Company does not own or operate any manufacturing
facilities.
The Company leases space for all of its 41 full price retail
stores (aggregating approximately 110,000 square feet) and 20
outlet stores (aggregating approximately 63,000 square feet).
Generally, the leases provide for an initial term of five to ten
years, with renewal options permitting the Company to extend the
term thereafter.
In December 1998, the Company entered into a 15-year lease,
which over a period of two to five years, will provide the
Company with approximately 126,000 square feet of office space,
enabling it to relocate its corporate headquarters to a larger
location in New York City and consolidate various satellite
office space. The Company is currently renovating portions of
the facility for the initial phase of relocation expected in mid-
2000.
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 such litigation that
would have a material adverse effect on its business or
operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters
The Company's Class A Common Stock is listed and traded
(trading symbol KCP) on the New York Stock Exchange ("NYSE"). On
March 27, 2000 the closing sale price for the Class A Common
Stock was $60.25. The following table sets forth the high and low
sale prices for the Class A Common Stock for each quarterly
period for 1998 and 1999 (adjusted to give effect to the
Company's three-for-two Common Stock split on March 6, 2000), as
reported on the NYSE Composite Tape:
1998: High Low
First Quarter 14.92 10.29
Second Quarter 17.83 12.79
Third Quarter 17.63 8.63
Fourth Quarter 14.25 9.25
1999: High Low
First Quarter 17.58 12.21
Second Quarter 22.67 17.33
Third Quarter 25.29 18.58
Fourth Quarter 33.00 23.71
The number of shareholders of record of the Class A Common
Stock on March 27, 2000 was 50.
There are three holders of record of Class B Common Stock and
5,785,390 shares of Class B Common Stock are issued and
outstanding. As a result of an insufficient number of additional
authorized shares of Class B Common Stock required to be issued
in order to effectuate the Company's three-for-two stock split,
on March 6, 2000 the holders of record of Class B Common Stock
were issued 28,927 shares of Series A Convertible Preferred stock
in lieu of shares of Class B Common Stock. Upon shareholder
approval, the shares of Series A Convertible Preferred Stock will
automatically convert to 2,892,700 shares of Class B Common stock
that should have been issued pursuant to the Company's stock
split. There is no established public trading market for the
Company's Series A Convertible Preferred Stock or Class B Common
Stock.
Dividend Policy
The Company intends to retain its earnings to finance the
development, expansion and growth of its existing business.
Accordingly, the Company does not anticipate paying cash
dividends on its Class A Common Stock in the foreseeable future.
The payment of any future dividends will be at the discretion of
the Company's Board of Directors and will depend upon, among
other things, future earnings, operations, capital requirements,
the financial condition of the Company and general business
conditions.
<PAGE>
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. All earnings per
share and shares outstanding amounts have been adjusted to give
effect to the Company's three-for-two Common Stock split on March
6, 2000.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
(dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $295,353 $219,781 $185,278 $148,258 $113,828
Licensing revenue 14,955 8,357 6,028 3,575 1,855
Net revenue 310,308 228,138 191,306 151,833 115,683
Cost of goods sold 168,856 129,403 112,183 86,919 67,382
Gross profit 141,452 98,735 79,123 64,914 48,301
Selling and general
administrative expenses(1) 100,836 72,145 58,330 44,354 31,957
Operating income 40,616 26,590 20,793 20,560 16,344
Interest income(expenese),net 1,280 404 (202) (22) 30
Income before provision for
income taxes 41,896 26,994 20,591 20,538 16,374
Provision for income taxes 16,968 10,663 8,189 8,251 6,550
Net income 24,928 16,331 12,402 12,287 9,824
Earnings per share:
Basic $1.24 $.82 $.63 $.62 $.50
Diluted $1.18 $.80 $.61 $.60 $.48
Weighted average shares outstanding:
Basic 20,102,000 19,833,000 19,743,000 19,664,000 19,532,000
Diluted 21,059,000 20,456,000 20,408,000 20,367,000 20,274,000
</TABLE>
<TABLE>
<CAPTION>
At December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $106,057 $56,644 $46,949 $37,023 $27,309
Total assets 176,859 96,680 77,528 65,255 43,307
Total debt,including
current maturities 758 927 0 489 102
Total shareholders' equity 125,331 73,689 59,740 46,599 33,489
</TABLE>
(1) Includes shipping and warehousing expenses.
<PAGE>
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.
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:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Net sales 95.2% 96.3% 96.8%
Licensing revenue 4.8 3.7 3.2
--------------------
Net revenues 100.0 100.0 100.0
Cost of goods sold 54.4 56.7 58.6
--------------------
Gross profit 45.6 43.3 41.4
Selling, general and administrative expenses 32.5 31.6 30.5
Operating income 13.1 11.7 10.9
Income before provision for income taxes 13.5 11.9 10.8
Provision for income taxes 5.5 4.7 4.3
--------------------
Net income 8.0% 7.2% 6.5%
====================
</TABLE>
Year Ended December 31,1999 Compared to Year Ended December
31,1998
Net revenues increased to $310.3 million in 1999 compared to
$228.1 million in 1998, an increase of 36.0%. This increase is
due to increases in each of the Company's business segments:
wholesale, consumer direct and licensing.
Wholesale net sales (including sales to its consumer direct
business segment) increased $39.0 million or 22.9% to $209.1
million in 1999 from $170.1 million in 1998. This increase is
primarily attributable to an increase in sales of men's and
ladies branded footwear. The overall increase is due to
increased sales to new and existing customers due to increased
brand awareness and continued growing consumer demand of Kenneth
Cole New York as a premier lifestyle brand. The Company believes
its advertising campaigns, marketing efforts, website, catalogs
and growing retail presence, combined with the marketing efforts
of its licensees, continue to be significant factors in
increasing consumer demand and the strengthening of its three
distinct brands, Kenneth Cole New York, Reaction Kenneth Cole and
Unlisted.com across all product classifications.
Net sales in the Company's Consumer Direct segment increased
$41.4 million or 60.6% to $109.8 million in 1999 from $68.4
million in 1998. The increase in the number of stores, as well
as a comparable stores sales increase of approximately 20%
contributed to the increase in net sales. Of the total increase,
$12.4 million was attributable to the comparable store sales
increase, and $29.0 million was attributable to that portion of
1999 sales of stores not open for all of 1998 and new stores in
1999. The Company believes that the retail stores convey the
Company's image and seamlessly showcase both Company and licensee
products, and that this comprehensive presentation reinforces the
lifestyle brand, thus increasing consumer demand, not only in the
retail stores but also across all channels of distribution.
Licensing revenue increased 79.0% to $15.0 million in 1999 from
$8.4 million in 1998. The increase reflects incremental revenues
from sales from existing licensees. The most significant
increases, however, were due to the roll out of recently
introduced men's apparel product classifications including dress
shirts, sportswear and tailored clothing. The Company believes
its recent entry into men's apparel and the upcoming highly
anticipated debut into women's sportswear comes at an opportune
time as consumers look toward brands they know and feel
comfortable with. The Company believes the synergies from its
efforts to reinforce its brand identities through greater
marketing efforts, by itself and its licensees across all product
categories, will continue to propel licensee sales.
Gross profit as a percentage of net revenues increased to 45.6%
in 1999 from 43.3% in 1998. This increase is due to an increase
in the proportion of revenue from the retail and licensing
divisions, each of which produces higher margins than the
Company's consolidated gross profit percentage. Sales from the
Consumer Direct segment were 35.4% of consolidated net revenue in
1999 compared with 30.0% in 1998. Licensing revenue, which has
no associated cost of goods sold, increased as a percentage of
net revenues to 4.8% in 1999 from 3.7% in 1998. The Company's
wholesale gross profit increased across all brands in men's
footwear, handbags and ladies footwear which also experienced an
improvement in its sell through at retail.
Selling, general and administrative expenses, including
shipping and warehousing, increased 39.8% to $100.8 million (or
32.5% of net revenues) in 1999 from $72.1 million (or 31.6% of
net revenues) in 1998. The increase was primarily attributable
to investment in organizational infrastructure to support growth,
marketing and public relations expenditures to build the
Company's brands, hiring of personnel and the expansion of the
Company's Consumer Direct operations. Included in SG&A expenses
in 1999 was approximately $3.0 million, or 1% of sales, in
internet and year 2000 related costs. The increase in SG&A as a
percentage of net revenue is due to the increased level of
spending on the internet and information systems and expansion of
the Company's retail and outlet stores, which operate at a higher
cost structure than its Wholesale operations.
Interest income increased to $1.3 million in 1999 from $0.4
million last year. The increase is primarily due to higher
average cash levels due to improved cash flows and the receipt of
$29.0 million in proceeds from selling stock to Liz Claiborne
Inc. as part of the womenswear licensing agreement.
As a result of the foregoing, operating income increased 52.7%
in 1999 to $40.6 million (13.1% of net revenue) from $26.6
million (11.7% of net revenue) in 1998.
Year Ended December 31,1998 Compared to Year Ended December
31,1997
Consolidated net revenues were $228.1 million in 1998 compared
to $191.3 million in 1997, an increase of 19.3%. This
improvement is principally due to volume increases in each of the
Company's business segments: wholesale, consumer direct and
licensing.
Wholesale net sales (including sales to its consumer direct
business segment) increased $20.1 million or 13.4% to $170.1
million in 1998 from $150.0 million in 1997. This increase is
primarily attributable to an increase in sales of men's footwear,
an increase in handbag sales, an increase in sales of private
label products, and sales of children's footwear, which was a new
product classification introduced at the end of 1997, partially
offset by a reduction in sales of women's footwear due to an
extremely challenging women's footwear retail environment. The
overall increase is due to increased sales to new and existing
customers due to increased brand awareness and continued growing
consumer acceptance of Kenneth Cole New York as a premier
lifestyle brand. The Company believes its advertising campaigns,
marketing efforts, website, catalogs and growing retail presence,
combined with the marketing efforts of its licensees, continue to
be significant factors in increasing consumer demand and the
strengthening of its three distinct brands, Kenneth Cole New
York, Kenneth Cole Reaction and Unlisted across all product
classifications.
Net sales in the Company's Consumer Direct segment increased
$18.4 million or 36.8% to $68.4 million in 1998 from $50.0
million in 1997. The increase in the number of stores, as well
as a comparable stores sales increase of 13.5% contributed to the
increase in net sales. Of the total increase, $6.7 million was
attributable to the comparable store sales increase, and $11.7
million was attributable to that portion of 1998 sales of stores
not opened for all of 1997 and new stores in 1998. The Company
believes that the retail stores convey the image of the Company
and seamlessly showcase both Company and licensee products, and
that this comprehensive presentation reinforces the lifestyle
brand, thus increasing consumer demand, not only in the retail
stores but also across all channels of distribution.
Licensing revenue increased 38.6% to $8.4 million in 1998 from
$6.0 million in 1997, and sales of licensee product represented
approximately half of the total brand sales at retail. The
increase primarily reflects incremental revenues from sales from
existing licensees. The Company believes its recent entry into
men's apparel comes at an opportune time as consumers look toward
brands they know and feel comfortable with. During 1998, the
Company continued its roll out of men's tailored clothing,
launched Kenneth Cole men's sportswear and dress shirts, and
prepared for its early 1999 launch of loungewear. The Company
believes the synergies from its efforts to reinforce its brand
identities through greater marketing efforts, by itself and its
licensees across all product categories, will continue to propel
licensee sales.
Consolidated gross profit as a percentage of net revenues
increased to 43.3% in 1998 from 41.4% in 1997. The Company's
wholesale gross profit, excluding gross profit on sales to the
Consumer Direct segment, increased 18.9% to $51.6 million in 1998
from $43.4 million in 1997. Wholesale gross profit as a
percentage of net wholesale revenues increased substantially as a
result of increased sales of men's footwear, which have the
highest gross profit percentages within Wholesale product
categories, and better margins on sales of women's footwear,
compared to 1997 when the Company disposed of, at significant
discounts, excess Spring 1997 merchandise. The increase in sales
of men's footwear was partially attributable to improved
fulfillment of customer orders due to the enhancement of the
Company's open stock inventory program combined with EDI
replenishment.
Consumer Direct's gross profit percentage was 49.7% in 1998
compared with 52.1% in 1997. The decrease in Consumer Direct
gross profit percentage was attributable to a change in product
mix, with a greater amount of merchandise sourced from the
Company's licensees, which carry lower initial markups than
footwear and handbags and the closing out of excess inventories
relating to catalog operations. However, the Consumer Direct
gross profit percentage is significantly higher than the
Company's Wholesale gross profit percentage. Accordingly, as
sales of the Consumer Direct segment represent a larger
percentage of consolidated net sales, it increases the
consolidated gross profit percentage. Sales from the Consumer
Direct segment were 30.0% of consolidated net revenue in 1998
compared with 26.1% in 1997. Licensing revenue, which has no
associated cost of goods sold, increased as a percentage of net
revenues to 3.7% in 1998 from 3.2% in 1997.
Selling, general and administrative expenses, including
shipping and warehousing, increased 23.7% to $72.1 million (or
31.6% of net revenues) in 1998 from $58.3 million (or 30.5% of
net revenues) in 1997. The increase was primarily attributable
to investment in organizational infrastructure to support growth,
marketing and public relations expenditures to build the
Company's brands, hiring of personnel and the expansion of the
Company's consumer direct operations. The increase as a
percentage of net revenue is due to the expansion of the
Company's retail and outlet stores, which operate at a higher
cost structure than its Wholesale operations.
As a result of the foregoing, operating income increased 27.9%
in 1998 to $26.6 million (11.7% of net revenue) from $20.8
million (10.9% of net revenue) in 1997.
Liquidity and Capital Resources
The Company's capital requirements are generated primarily from
working capital needs and the continued growth of the business.
These include the purchase of wholesale and retail inventories in
anticipation of increased wholesale sales and new store openings
and capital expenditures related to the expansion, renovation and
construction of retail and outlet stores. During 2000, the
Company will incur significant capital expenditures in connection
with relocating its executive offices and showrooms within New
York City. The Company primarily relies upon internally
generated cash flows from operations to finance its operations
and growth however it also has the ability to borrow up to $25.0
million under its line of credit facility. Cash flows may vary
from time to time as a result of seasonal requirements of
inventory, the Company's open stock inventory program which
requires increased inventory levels and the level of accounts
receivable and payable balances. At December 31, 1999, working
capital was $106.1 million compared to $56.6 million at December
31, 1998.
Net cash provided by operating activities increased to $40.3
million in 1999 from $14.3 million in 1998. This increase was
primarily attributable to higher earnings and timing of payables
offset by increased inventory levels required to support sales
growth in footwear and for the initial inventory requirements of
the new retail and outlet stores.
Net cash used in investing activities was $8.5 million in 1999
compared to $5.8 million in 1998. This increase reflects an
increase in capital expenditures primarily for new retail store
openings.
Net cash provided by financing activities was $25.6 million in
1999. Net cash used in financing activities was $3.5 million in
1998. The changes in net cash provided by financing activities
principally reflect the issuance of 1,500,000 shares to Liz
Claiborne Inc. at the market price of $19.33 per share in
conjunction with the signing of the license agreement for
womenswear offset by the amounts expended in the Company's stock
repurchase program. As of March 27, 2000, the Company had
purchased 1,020,000 shares of the 2,250,000 shares authorized
under its stock repurchase program.
The Company currently sells substantially all of its account
receivables to one factor 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 currently has a line of credit, as amended, under
which up to $25.0 million is available to finance working capital
requirements and letters of credit to finance the Company's
inventory purchases. Borrowings available under the line of
credit are determined by a specified percentage of eligible
accounts receivable and inventories and bear interest at (i) the
higher of The Bank of New York's prime lending rate or the
Federal Funds rate plus 0.5% at the date of borrowing or (ii) a
negotiated rate. In connection with the line of credit, the
Company has agreed to eliminate all the outstanding borrowings
under the facility for at least 30 consecutive days during each
calendar year. In addition, borrowings under the line of credit
are secured by certain receivables of the Company. The Company
has no outstanding advances under this line of credit, however
amounts available under the line were reduced by $3.0 million to
$22.0 million for open letters of credit.
Capital expenditures were approximately $8.5 million, $5.8
million and $4.8 million for 1999, 1998 and 1997, respectively.
Expenditures on furniture, fixtures and leasehold improvements
for new retail store openings and expansions were $6.7 million,
$4.9 million and $3.3 million in 1999, 1998 and 1997,
respectively. The remaining expenditures were primarily for
leasehold improvements, information systems and equipment for the
company's offices and warehouses. During 2000, the Company
anticipates opening or expanding approximately 8 to 11 retail and
outlet stores that will require aggregate capital expenditures of
approximately $12.0 million. The Company also expects to spend
approximately $6.0 million for the initial inventory requirements
of these new stores. These requirements include the opening of
the Company's New York City and Seattle, Washington larger format
retail stores to showcase the Company's products and image.
The Company also anticipates that it will require increased
capital expenditures to support its continued growth including an
increase in its office and warehouse space and enhancements to
its information systems and website development.
In December 1998, the Company entered into a 15-year lease
which, over a period of three to five years, will provide the
Company with approximately 126,000 square feet of office space,
enabling it to relocate its corporate headquarters to a larger
location in New York City and consolidate various satellite
office space. The Company commenced renovations and expects to
begin its relocation in mid-2000. Currently, the Company expects
to incur capital expenditures of approximately $10 to $15 million
over the next two to three years.
The Company believes that it will be able to satisfy its cash
requirements for 1999, including requirements for its retail
expansion, new corporate office space and information systems
improvements, primarily with cash flow from operations,
supplemented by borrowings under its line of credit.
Year 2000
In prior years, the Company discussed the nature and
progress of its plans to become Year 2000 compliant. 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 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.
Exchange Rates
The Company routinely enters into forward exchange contracts
for its future purchases of inventory denominated in foreign
currencies, primarily the Italian Lira and Spanish Peseta. At
December 31, 1999, forward exchange contracts totaling $10.5
million were outstanding with settlement dates ranging from
January 2000 through May 2000. Gains and losses on forward
exchange contracts are deferred and accounted for as part of the
purchase price of imported merchandise. At December 31, 1999,
the unrealized loss on these forward contracts is approximately
$272,000. The Company expects to continue to routinely enter
into additional foreign exchange contracts throughout the year.
While the Company believes that its current procedures with
respect to the reduction of risk associated with currency
exchange rate fluctuations is 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.
On January 1, 1999, the Euro became the official single
currency of the European Economic and Monetary Union. As of this
date, the conversion rates of the national currencies of the
union members were fixed irrevocably. During the transition
period between January 1999 and January 2002, parties may pay for
goods using either the Euro or the national currency. The
Company believes conversion to the Euro will not have a material
effect on the Company's financial condition or results of
operation.
Inventory purchases from contract manufacturers in the Far
East and Brazil are denominated in United States dollars and the
recent devaluation 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 effect the Company's cost of
goods in the future. The Company does not believe the potential
effects of such fluctuations would have a material adverse affect
on the Company.
Effects of Inflation
The Company does not believe that the relatively moderate 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.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk
The Company does not believe it has a material exposure to
market risk. The Company is primarily exposed to currency
exchange rate risks with respect to its inventory transactions
denominated in Italian Lira and Spanish Pesetas, both of which
have 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 December 31,
1999, the Company had forward exchange contracts totaling $10.5
million with an unrealized loss of approximately $272,000. 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. A two or less percentage point increase in interest
rates affecting the Company's credit facility would not have had
a material effect on the Company's 1999 and 1998 net income.
Item 8. Financial Statements and Supplementary Data
See page F-1 for a listing of the consolidated financial
statements submitted as part of this report.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Except for the information regarding directors and executive
officers of the registrant, which is included in Part I, the
information required by this item will be contained in the
Company's Proxy Statement for its Annual Shareholders Meeting to
be held May 25, 2000 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 1999 and 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 25, 2000 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 1999 and is
incorporated herein by reference in response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information required by this item will be contained in the
Company's Proxy Statement for its Annual Shareholders Meeting to
be held May 25, 2000 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 1999 and is
incorporated herein by reference in response to this item.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be contained in the
Company's Proxy Statement for its Annual Shareholders Meeting to
be held May 25, 2000 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 1999, and is
incorporated herein by reference in response to this item.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) See page F-1 for a listing of consolidated financial
statements submitted as part of this report.
(a) (2) Schedule II - Valuation and Qualifying Accounts
All other schedules, for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions, are shown in the financial statements or are
inapplicable and therefore have been omitted.
(a) (3) The following exhibits are included in this report.
Exhibit
No.
Description
3.01 -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 -Tax Matters Agreement, dated as of June 1, 1994,
among Kenneth Cole Productions, Inc., Kenneth D. Cole, Paul
Blum and Stanley A. Mayer. (Incorporated by reference to
Exhibit 10.01 to the Company's Registration Statement on
Form S-1, Registration No. 33-77636).
10.02 -Term Loan Agreement, dated as of May 26, 1994, by and
among Kenneth Cole Productions, Inc., Kenneth Cole Leather
Goods, Inc., Unlisted, Inc., Cole West, Inc., Kenneth Cole
Financial Services, Inc., Kenneth Cole Woodbury, Inc., Cole
Fifth Avenue, Inc., Cole Union Street, Inc. and The Bank of
New York; Promissory Notes, dated May 26, 1994, issued by
each of Kenneth Cole Leather Goods, Inc., Unlisted, Inc.,
Cole West, Inc., Kenneth Cole Financial Services, Inc.,
Kenneth Cole Woodbury, Inc., Cole Fifth Avenue, Inc., Cole
Union Street, Inc. to The Bank of New York; Shareholder
Guaranty by and between Kenneth D. Cole and The Bank of New
York, dated as of May 26, 1994; Subordination Agreement by
and among Kenneth D. Cole, Kenneth Cole Productions, Inc.,
Kenneth Cole Leather Goods, Inc., Unlisted, Inc., Cole
West, Inc., Kenneth Cole Financial Services, Inc., Kenneth
Cole Woodbury, Inc., Cole Fifth Avenue, Inc., Cole Union
Street, Inc. and The Bank of New York, dated as of April
13, 1994; Reinvestment Agreement by and among Kenneth D.
Cole, Kenneth Cole Productions, Inc., Unlisted, Inc., Cole
West, Inc., Kenneth Cole Financial Services, Inc., Kenneth
Cole Woodbury, Inc., Cole Fifth Avenue, Inc., Cole Union
Street, Inc. and The Bank of New York, dated as of May 26,
1994; Amendment No. 1 to the Term Loan Agreement and the
Reinvestment Agreement by and among Kenneth D. Cole,
Kenneth Cole Productions, Inc., Cole West, Inc., Kenneth
Cole Woodbury, Inc., Cole Fifth Avenue, Inc., Cole Union
Street, Inc., Kenneth Cole Financial Services, Inc. and The
Bank of New York, dated as of May 31, 1994. (Incorporated
by reference to Exhibit 10.02 to the Company's Registration
Statement on Form S-1, Registration No. 33-77636).
10.03-Line of Credit Letter, dated January 13, 1994, from The
Bank of New York to Kenneth Cole Productions, Inc., Kenneth
Cole Leather Goods, Inc. and Unlisted, Inc.; $7,500,000
Promissory Note, dated February 1, 1994 by Kenneth Cole
Productions, Inc., Kenneth Cole Leather Goods, Inc. and
Unlisted, Inc. issued to The Bank of New York; Letter
Agreement, dated December 16, 1993, between The Bank of New
York and Kenneth Cole Productions, Inc., Unlisted, Inc.,
Kenneth Cole Leather Goods, Inc., Cole Productions, Inc.,
Cole West, Inc., Kenneth Cole Financial Services, Inc.,
Cole Woodbury, Inc., Cole Sunset, Inc. and Cole Fifth
Avenue, Inc.; General Guarantees, dated December 16, 1993,
in favor of The Bank of New York by Kenneth Cole Leather
Goods, Inc. for Unlisted, Inc., by Kenneth Cole Leather
Goods, Inc. for Kenneth Cole Productions, Inc., by
Unlisted, Inc. for Kenneth Cole Productions, Inc., by
Unlisted, Inc. for Kenneth Cole Leather Goods, Inc., by
Kenneth Cole Productions, Inc. for Kenneth Cole Leather
Goods, Inc., and by Kenneth Cole Productions, Inc. for
Unlisted, Inc.; General Loan and Security Agreements, dated
December 16, 1993, between The Bank of New York and each of
Kenneth Cole Productions, Inc., Kenneth Cole Leather Goods,
Inc. and Unlisted, Inc.; and Personal Guarantees of Mr.
Kenneth D. Cole, dated December 16, 1993, in favor of The
Bank of New York for Kenneth Cole Productions, Inc.,
Unlisted, Inc. and Kenneth Cole Leather Goods, Inc.
(Incorporated by reference to Exhibit 10.03 to the
Company's Registration Statement on Form S-1, Registration
No. 33-77636).
Line of Credit Letter, dated December 9, 1994
from The Bank of New York to Kenneth Cole Productions,
Inc.; $7,500 Promissory Note, dated December 15, 1994 by
Kenneth Cole Productions, Inc. issued to The Bank of New
York; Letter of Termination of Personal Guarantees of Mr.
Kenneth D. Cole, dated December 8, 1994, in favor of The
Bank of New York for Kenneth Cole Productions, Inc.,
Unlisted, Inc. and Kenneth Cole Leather Goods, Inc.
(Incorporated by reference to Exhibit 10.03 to the
Company's 1994 Form 10-K).
10.03A-$10,000 Promissory Note, dated July 31, 1995 by
Kenneth Cole Productions, Inc. issued to The Bank of New
York. (Previously filed as Exhibit 10.03A to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference).
*10.04-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).
*10.05-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).
*10.06-Employment Agreement, dated as of April 30, 1994,
between Kenneth Cole Productions, Inc. and Paul Blum.
(Incorporated by reference to Exhibit 10.06 to the
Company's Registration Statement on Form S-1, Registration
No. 33-77636).
*10.07 -Employment Agreement, dated as of April 30,
1994, between Kenneth Cole Productions, Inc. and Stanley A.
Mayer; Stock Option Agreement dated as of March 31, 1994
between Kenneth Cole Productions, Inc. and Stanley A.
Mayer. (Incorporated by reference to Exhibit 10.07 to the
Company's Registration Statement on Form S-1, Registration
No. 33-77636).
Stock Option Agreement dated as of June 1, 1994,
between Kenneth Cole Productions, Inc. and Stanley A.
Mayer; Stock Option Agreement dated as of July 7, 1994,
between Kenneth Cole Productions, Inc. and Stanley A. Mayer
(Incorporated by reference to Exhibit 10.07 to the
Company's 1994 Form 10-K).
10.08 -Collective Bargaining Agreement by and between
the New York Industrial Council of the National Fashion
Accessories Association, Inc. and Leather Goods, Plastics,
Handbags and Novelty Workers' Union, Local 1, dated as of
April 25, 1987; Memorandum of Agreement by and between the
New York Industrial Council of the National Fashion
Accessories Association, Inc. and Leather Goods, Plastics,
Handbags and Novelty Workers' Union, Local 1, Division of
Local 342-50 United Food and Commercial Workers Union,
dated as of June 16, 1993. (Incorporated by reference to
Exhibit 10.08 to the Company's Registration Statement on
Form S-1, Registration No. 33-77636).
10.09-Memorandum of Agreement between the New York Industrial
Council of the National Fashion Accessories Association
Inc. and Local 1 Leather Goods, Plastics, Handbags, and
Novelty Workers Union, Division of Local 342-50 United Food
and Commercial Workers Union (Previously filed as Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1996 and incorporated
herein by reference).
*10.10 Employment Agreement between Kenneth Cole
Productions, Inc., and Paul Blum. (Previously filed as
Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1996 and
incorporated herein by reference).
10.11 Sublease Agreement, dated June 17, 1996, between
Kenneth Cole Productions, Inc. and Liz Claiborne
Accessories, Inc. (Incorporated by reference to Exhibit
10.11 to the Company's 1996 Form 10-K).
*10.12 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).
*10.13 Employment Agreement between Kenneth Cole
Productions, Inc. and Susan Hudson (Previously filed as an
Exhibit to the Company's 1997 Form 10-K).
10.14 Lease Agreement, dated December 17, 1998, between
Kenneth Cole Productions, Inc. and SAAR Company, LLC.
(Previously filed as Exhibit 10.14 to the Registrants Annual
Report on Form 10-K for the year ended December 31, 1998 and
incorporated by reference).
10.15 Common Stock Purchase Agreement, dated July 20,
1999, between Liz Claiborne Inc. and Kenneth Cole Productions,
Inc. (Previously filed as Exhibit 10.01 to the Registrants
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999).
10.16 Registration Rights Agreement, dated July 20, 1999,
between Liz Claiborne Inc. and Kenneth Cole Productions, Inc.
(Previously filed as Exhibit 10.02 to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
1999).
10.17 License Agreement, dated July 20, 1999, by and
between L.C.K.L., LLC and K.C.P.L., Inc. (Portions of this
exhibit have been omitted pursuant to a request for confidential
treatment and been filed separately with the Securities and
Exchange Commission. Such portions are designated by a "*".
(Previously filed as Exhibit 10.03 to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
1999).
+21.01 List of Subsidiaries
+23.01 Consent of Ernst & Young LLP
+27.01 Financial Data Schedules
____________________________
* Management contract or compensatory plan or
arrangement required to be identified pursuant to Item
14(a) of this report.
+ Filed herewith.
(b) Reports on Form 8-K
None.
(b) See (a) (3) above for a listing of the exhibits included as
a part of this report.
<PAGE>
Kenneth Cole Productions, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Page
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Kenneth Cole Productions, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Kenneth Cole Productions, Inc. and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. Our
audits also included the financial statement schedule listed at
Item 14(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 auditing standards
generally accepted in the 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, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material
respects the information set forth therein.
New York, New York ERNST & YOUNG LLP
February 25, 2000
<PAGE>
<TABLE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Assets
Current assets:
Cash $ 71,415,000 $ 13,824,000
Due from factors 26,925,000 19,552,000
Accounts receivable, less allowance for doubtful
accounts of $554,000 in 1999 amd $125,000 in 1998 6,990,000 4,874,000
Inventories 39,553,000 32,957,000
Prepaid expenses and other current assets 375,000 1,735,000
Deferred taxes 1,766,000 718,000
------------ ------------
Total current assets 147,024,000 73,660,000
Property and equipment-at cost, less accumulated
depreciation and amortization 19,431,000 16,171,000
Other assets:
Deferred taxes 1,484,000 403,000
Deposits and sundry 1,868,000 2,703,000
Deferred compensation plan assets 7,052,000 3,743,000
------------ ------------
Total other assets 10,404,000 6,849,000
------------ ------------
Total assets $176,859,000 $ 96,680,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Kenneth Cole Productions, Inc. and Subsidiaries
<CAPTION
Consolidated Balance Sheets (continued)
December 31,
1999 1998
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 27,323,000 $ 10,644,000
Accrued expenses and other current liabilities 10,372,000 4,634,000
Income taxes payable 3,272,000 1,738,000
------------ ------------
Total current liabilities 40,967,000 17,016,000
Accrued rent 2,932,000 1,472,000
Deferred compensation plan liabilities 7,052,000 3,743,000
Obligations under capital lease 577,000 760,000
Commitments and contingencies
Shareholders' equity:
Series A Convertible Preferred stock, par value
$1.00, 1,000,000 shares authorized,
28,927 issued in 1999 and 1998 29,000 29,000
Class A Common Stock, par value $.01, 20,000,000
shares authorized, 13,058,057 and 11,414,546
issued in 1999 and 1998 131,000 114,000
Class B Convertible Common Stock, par value $.01,
6,000,000 shares authorized, 5,785,398
outstanding in 1999 and 1998 58,000 58,000
Additional paid-in capital 53,140,000 22,217,000
Cumulative other comprehensive income 235,000 74,000
Retained earnings 81,093,000 56,165,000
------------ ------------
134,686,000 78,657,000
Class A Common Stock in treasury, at cost,
723,750 and 525,000 shares in 1999 and 1998 (9,355,000) (4,968,000)
------------ ------------
Total shareholders' equity 125,331,000 73,689,000
------------ ------------
Total liabilities and shareholders' equity $176,859,000 $ 96,680,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Kenneth Cole Productions, Inc. and Subsidiaries
<CAPTION>
Consolidated Statements of Income
Year ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Net sales $ 295,353,000 $ 219,781,000 $ 185,278,000
Licensing revenue 14,955,000 8,357,000 6,028,000
------------- ------------- -------------
Net revenue 310,308,000 228,138,000 191,306,000
Cost of goods sold 168,856,000 129,403,000 112,183,000
------------- ------------- -------------
Gross profit 141,452,000 98,735,000 79,123,000
Selling, general, and
administrative expenses 100,836,000 72,145,000 58,330,000
------------- ------------- -------------
Operating income 40,616,000 26,590,000 20,793,000
Interest income (expense), net 1,280,000 404,000 (202,000)
------------- ------------- -------------
Income before provision for
income taxes 41,896,000 26,994,000 20,591,000
Provision for income taxes 16,968,000 10,663,000 8,189,000
------------- ------------- -------------
Net income $ 24,928,000 $ 16,331,000 $ 12,402,000
============= ============= =============
Earnings per share:
Basic $1.24 $.82 $.63
Diluted $1.18 $.80 $.61
Shares used to compute earnings per share:
Basic 20,102,000 19,833,000 19,743,000
Diluted 21,059,000 20,456,000 20,408,000
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
<CAPTION>
Class A Common Stock Class B Common Stock
Number Number
of Shares Amount of Shares Amount
<S> <C> <C> <C> <C>
Balance at
December 31,1996 11,029,769 $111,000 5,785,398 $ 58,000
Net income
Foreign currency
translation adjustment
Comprehensive income
Exercise of stock
options and related
tax benefits 85,472 1,000
Amortization of
deferred compensation
----------------------------------------------------
Balance at
December 31, 1997 11,115,241 112,000 5,785,398 58,000
Net income
Foreign currency
translation adjustment
Comprehensive income
Exercise of stock
options and related
tax benefits 299,305 2,000
Purchase of Class A
common stock
----------------------------------------------------
Balance at
December 31, 1998 11,414,546 114,000 5,785,398 58,000
Net income
Foreign currency
traslation adjustment
Comprehensive income
Exercise of stock
options and related
tax benefits 143,511 2,000
Purchase of Class A
common stock
Stock issuance 1,500,000 15,000
----------------------------------------------------
Balance at
December 31, 1999 13,058,057 $131,000 5,785,398 $58,000
====================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Series A
Convertible Accumulated
Preferred Stock Additional Other
Number Paid-In Comprehensive
of Shares Amount Capital Income
<S> <C> <C> <C> <C>
Balance at
December 31, 1996 28,927 $29,000 $19,038,000
Net income
Foreign currency
translation adjustment $ 90,000
Comprehensive income
Exercise of stock
options and related
tax benefits 579,000
Amortization of
deferred compensation
--------------------------------------------------
Balance at
December 31, 1997 28,927 29,000 19,617,000 90,000
Net income
Foreign currency
translation adjustment (16,000)
Comprehensive income
Exercise of stock
options and related
tax benefits 2,600,000
Purchase of Class A
common stock
--------------------------------------------------
Balance at
December 31, 1998 28,927 29,000 22,217,000 74,000
Net income
Foreign currency
translation adjustment 161,000
Comprehensive income
Exercise of Stock
options and related
tax benefits 1,938,000
Purchase of Class A
common stock
Stock issuance 28,985,000
--------------------------------------------------
Balance at
December 31, 1999 28,927 $29,000 $53,140,000 $235,000
==================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Treasury Stock
Retained Number Deferred
Earnings of Shares Amount Compensation Total
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 $27,432,000 $(69,000) $ 43,599,000
Net income 12,402,000 12,402,000
Foreign currency
translation adjustment 90,000
Comprehensive income 12,492,000
Exercise of stock
options and related
tax benefits 580,000
Amortization of
deferred compensation 69,000 69,000
-----------------------------------------------------------
Balance at
December 31, 1997 39,834,000 59,740,000
Net income 16,331,000 16,331,000
Foreign currency
translation adjustment (16,000)
Comprehensive income 16,315,000
Exercise of stock
options and related
tax benefits 2,602,000
Purchase of Class A
common stock (525,000) $(4,968,000) (4,968,000)
----------------------------------------------------------
Balance at
December 31, 1998 56,165,000 (525,000) (4,968,000) 73,689,000
Net income 24,928,000 24,928,000
Foreign currency
translation adjustment 161,000
Comprehensive income 25,089,000
Exercise of stock
options and related
tax benefits 1,940,000
Purchase of Class A
common stock (198,750) (4,387,000) (4,387,000)
Stock issuance 29,000,000
----------------------------------------------------------
Balance at
December 31, 1999 $81,093,000 (723,750) $(9,355,000) 0 $125,331,000
==========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Kenneth Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities
Net income $24,928,000 $16,331,000 $12,402,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,698,000 2,791,000 1,953,000
Impairment of long-lived assets 547,000
Unrealized gain on deferred
compensation plan (1,096,000) (502,000) (153,000)
Provision for doubtful accounts 1,344,000 197,000 157,000
Amortization of deferred compensation 69,000
Provision (benefit) for deferred taxes (2,129,000) (373,000) 152,000
Changes in operating assets and liabilities:
(Increase) decrease in due from factors (7,373,000) 3,740,000 (5,316,000)
Increase in accounts receivable (3,460,000) (1,207,000) (682,000)
(Increase) decrease in inventories (6,596,000) (9,592,000) 5,900,000
Decrease (increase) in prepaid expenses
and other current assets 1,360,000 (315,000) (419,000)
Increase in deposits and deferred
compensation assets (1,378,000) (2,119,000) (1,856,000)
Increase in income taxes payable 2,286,000 1,140,000 632,000
Increase (decrease) in accounts payable 16,679,000 807,000 (2,901,000)
Increase in accrued expenses and
other current liabilities 5,724,000 1,068,000 934,000
Increase in other non-current liabilities 4,769,000 2,357,000 1,141,000
---------- ---------- ----------
Net cash provided by operating activities 40,303,000 14,323,000 12,013,000
Cash flows from investing activities
Acquisition of property and equipment, net (8,505,000) (5,784,000) (4,832,000)
---------- ---------- ----------
Net cash used in investing activities (8,505,000) (5,784,000) (4,832,000)
Cash flows from financing activities
Repayment of revolving line of credit, net (440,000)
Proceeds from exercise of stock options 1,188,000 1,506,000 395,000
Proceeds from issuance of stock 29,000,000
Repayment of long-term debt (49,000)
Principle payments of capital
lease obligations (169,000) (40,000)
Purchase of treasury stock (4,387,000) (4,968,000)
---------- ---------- ----------
Net cash provided by (used in)
financing activities 25,632,000 (3,502,000) (94,000)
Effect of exchange rate changes on cash 161,000 (16,000) 90,000
---------- ---------- ----------
Net increase in cash 57,591,000 5,021,000 7,177,000
Cash, beginning of year 13,824,000 8,803,000 1,626,000
---------- ---------- ----------
Cash, end of year $71,415,000 $13,824,000 $ 8,803,000
========== ========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 109,000 $ 29,000 $ 323,000
Income taxes $16,812,000 $ 9,901,000 $ 7,396,000
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Kenneth Cole Productions, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
Note A - Summary of Significant Accounting Policies
1. Description of business
Kenneth Cole Productions, Inc. and its subsidiaries (the
"Company") designs, sources and markets a broad range of quality
footwear and handbags, and through license agreements, designs
and markets men's and women's apparel and accessories under its
Kenneth Cole New York, Reaction Kenneth Cole and Unlisted.com
brands for the fashion conscious consumer. The Company markets
its products for sale to more than 3,700 department stores and
specialty store locations in the United States and in several
foreign countries, through its retail and outlet store base, and
its interactive website. The Company also distributes consumer
catalogues that feature a variety of Kenneth Cole New York and
Reaction Kenneth Cole branded products.
2. 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 will receive
one additional share of common stock for each two shares held.
The distribution date is on or about March 27, 2000.
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. Accordingly, subject to shareholder
approval on May 25, 2000, the Board of Directors has 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.
All applicable share and per share data have been adjusted for
the stock split. Earnings per share also reflects the conversion
of Series A Convertible Preferred Stock to Class B Common Stock.
3. Principles of consolidation
The consolidated financial statements include the accounts of
Kenneth Cole Productions, Inc. and its wholly-owned subsidiaries.
Intercompany transactions and balances have been eliminated in
consolidation.
4. Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles 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.
5. Cash and cash equivalents
The Company considers all highly liquid investments with a
maturity of three months or less at the time of purchase to be
cash equivalents.
6. Inventories
Inventories, which consist of finished goods, are stated at the
lower of cost or market. Cost is determined by the first-in,
first-out method.
7. Property and equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization,
which includes the amortization of assets recorded under capital
leases, are computed using the straight-line method over
estimated useful lives ranging from three to seven years.
Leasehold improvements are amortized by 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. The Company has recorded a non-cash charge of
$547,000 related to the write down of asset values of one of the
Company's retail stores. Impaired assets are recorded at the
lesser of their carrying value or fair value.
8. Income taxes
The Company accounts for income taxes using the liability
method. Under this method, 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.
9. Revenue recognition
Wholesale revenues are recognized at the time merchandise is
shipped to customers. Retail store revenues are recognized at the
time of sale.
10. Licensing revenue
The Company has 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
period, as defined, in each license agreement. Royalties
exceeding the defined minimum amounts are recognized as income
during the period corresponding to the licensee's sales.
11. Advertising costs
The Company incurred advertising costs, including certain in-
house marketing expenses, of $11.2 million, $7.8 million and $6.8
million for 1999, 1998 and 1997, respectively. The Company
records advertising expense concurrent with the first time the
advertising takes place.
12. Stock-based compensation
The Company measures compensation expense for its stock-based
compensation plans using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25 Accounting for Stock
Issued to Employees ("APB No. 25") and related Interpretations.
Statement of Financial Accounting Standards No. 123 Accounting
for Stock-Based Compensation ("SFAS 123") requires companies
electing to continue using the intrinsic value method under APB
No. 25 to disclose the pro forma effects or net income and
earnings per share had the fair value of options been expensed
(see Note H).
13. Recent accounting 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 January 1, 2001. The new 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 in the earnings and financial position of the
Company.
14. Reclassifications
Certain amounts included in the 1998 and 1997 financial
statements have been reclassified to conform with the year-end
1999 presentation.
Note B - Due from Factors and Line of Credit Facility
The Company sells substantially all of its accounts receivable
to a factor, without recourse, subject to credit limitations
established by the factor for each individual account. Certain
accounts receivable in excess of established limits are factored
with recourse. Included in amounts due from factors at December
31, 1999 and 1998 are accounts receivable subject to recourse
totaling approximately $1,379,000 and $526,000, respectively. The
agreements with the factors provide for payment of a service fee
on receivables sold.
At December 31, 1999 and 1998, the balance due from factors,
which includes chargebacks due from customers, is net of
allowances for returns, discounts, and other deductions of
approximately $8,357,000 and $3,300,000, respectively.
The Company has entered into a Line of Credit Facility (the
"Facility") that, as amended, allows for uncommitted borrowings,
letter of credits and banker's acceptances subject to individual
maximums and in the aggregate, an amount not to exceed the lesser
of $25,000,000 or a "Borrowing Base." The Borrowing Base is
calculated on a specified percentage of eligible amounts due
under factoring arrangements, eligible non-factored accounts
receivable, and eligible inventory. Borrowings under the
revolving loan portion of the Facility ("Advances") are due on
demand. The Company may pay down and re-borrow at will under the
Facility. Advances bear interest at the Alternate Base Rate
(defined as the higher of the Prime Rate or the Federal Funds in
effect at borrowing date plus 1/2 of 1%) or the Note Rate (which
will be agreed upon between the lender and the Company). There
were no outstanding advances under this agreement at December 31,
1999 or 1998. Amounts available under the Facility at December
31, 1999 were reduced by $2,989,000 to $22,011,000 for open
letters of credit.
Note C - Property and Equipment
In connection with the line of credit, the Company has agreed
to eliminate all the outstanding advances under the Facility for
at least 30 consecutive days during each calendar year. In
addition, borrowings under the line of credit are secured by
certain assets of the Company.
Property and equipment consist of the following:
December 31,
1999 1998
Property and equipment-at cost:
Furniture and fixtures $ 9,640,000 $ 7,817,000
Machinery and equipment 5,910,000 4,731,000
Leasehold improvements 14,918,000 10,828,000
Leased equipment under capital lease 967,000 967,000
----------- -----------
31,435,000 24,343,000
Less accumulated depreciation and amortization 12,004,000 8,172,000
----------- -----------
Net property and equipment $19,431,000 $16,171,000
=========== ===========
Note D - Accrued Expenses and Other Liabilities
Accrued expenses and other current liabilities consist of the
following:
December 31,
1999 1998
Rent $ 457,000 $ 315,000
Compensation 6,010,000 2,792,000
Customer credits 671,000 414,000
Deferred licensing income 530,000 188,000
Other 2,704,000 925,000
----------- -----------
$10,372,000 $ 4,634,000
=========== ===========
Note E - Segment Reporting
Kenneth Cole Productions, Inc. has three reportable segments:
Wholesale, Consumer Direct, and Licensing. 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 allows licensees to
sell to the same channels of distribution as those of the
Company's wholesale division. The Company earns royalties on the
licensee's sales of branded product.
The Company evaluates performance and allocates resources
based on profit or loss from each segment. The wholesale segment
is evaluated on income from operations before income taxes. The
consumer direct division is evaluated on profit or loss from
operations before unallocated corporate overhead and income
taxes. The licensee division is evaluated based on royalties
earned and pretax segment profit. 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 divisions include a
markup, which is eliminated in consolidation.
The Company's reportable segments are business units that
offer products to overlapping consumers through different
channels of distribution. Each segment is managed separately and
planning, implementation and results are reviewed internally by
the executive management committee.
Financial information of the Company's reportable segments
is as follows:
<TABLE>
<CAPTION>
Consumer
Wholesale Direct Licensing Totals
<S> <C> <C> <C> <C>
Year Ended December 31, 1999
Revenues $185,553 $109,800 $ 14,955 $310,308
Intersegment revenues 23,559 23,559
Interest income, net 1,280 1,280
Depreciation expense 1,690 2,999 9 4,698
Segment income before
provision for income taxes 23,799 19,120 12,266 55,185
Segment assets 143,552 32,415 2,720 178,687
Expenditures for long-lived assets 1,269 6,688 1 7,958
Year Ended December 31, 1998
Revenues $151,402 $ 68,379 $ 8,357 $228,138
Intersegment revenues 18,679 18,679
Interest income, net 404 404
Depreciation expense 1,072 1,715 4 2,791
Segment income before
provision for income taxes 20,880 7,327 6,936 35,143
Segment assets 69,513 26,798 1,690 98,001
Expenditures for long-lived assets 1,803 4,923 25 6,751
Year Ended December 31, 1997
Revenues $135,296 $ 49,982 $ 6,028 $191,306
Intersegment revenues 14,682 14,682
Interest expense, net (202) (202)
Depreciation expense 791 1,161 1 1,953
Segment income before
provision for income taxes 15,016 6,929 4,944 26,889
Segment assets 58,219 19,309 1,253 78,781
Expenditures for long-lived assets 1,479 3,346 7 4,832
</TABLE>
The reconciliation of the Company's reportable segment revenues,
profit and loss, and assets are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Revenues
Revenues for reportable segments $310,308 $228,138 $191,306
Intersegment revenues for reportable segments 23,559 18,679 14,682
Elimination of intersegment revenues (23,559) (18,679) (14,682)
-------- -------- --------
Total consolidated revenues $310,308 $228,138 $191,306
======== ======== ========
Income
Total profit for reportable segments $ 55,185 $ 35,143 $ 26,889
Elimination of intersegment profit (7,808) (4,914) (3,956)
Unallocated corporate overhead (5,481) (3,235) (2,342)
-------- -------- --------
Total income before provision for
income taxes $ 41,896 $ 26,994 $ 20,591
======== ======== ========
Assets
Total assets for reportable segments $178,687 $ 98,001 $ 78,781
Elimination of inventory profit in
consolidation (1,828) (1,321) (1,253)
-------- -------- --------
Total consolidated assets $176,859 $ 96,680 $ 77,528
======== ======== ========
</TABLE>
Revenues from international customers are less than two percent
of the Company's consolidated revenues.
Note F - Foreign Currency Transactions
The Company routinely enters into forward exchange contracts in
anticipation of future purchases of inventory denominated in
foreign currencies. These 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.
The Company had forward exchange contracts of $10,500,000 and
$6,600,000 at December 31, 1999 and 1998, respectively to protect
the purchase price of merchandise under such commitments. Gains
and losses on forward exchange contracts are deferred and
accounted for as part of the purchase price of imported
merchandise. At December 31, 1999, forward exchange contracts
have maturity dates through May 2000. The unrealized loss on
these forward exchange contracts is approximately $272,000.
Note G - Income Taxes
Significant items comprising the Company's deferred tax assets
and liabilities are as follows:
December 31,
1999 1998
Deferred tax assets:
Inventory allowances and capitalization $ 950,000 $ 562,000
Allowance for doubtful accounts and
sales allowances 608,000 75,000
Deferred rent 1,091,000 304,000
Deferred compensation 2,414,000 1,441,000
Other 163,000 40,000
---------- ----------
5,226,000 2,422,000
---------- ----------
Deferred tax liabilities:
Depreciation (1,027,000) (778,000)
Undistributed foreign earnings (949,000) (523,000)
---------- ----------
(1,976,000) (1,301,000)
---------- ----------
Net deferred tax assets $3,250,000 $1,121,000
========== ==========
The provision (benefits) for income taxes consists of the
following:
December 31,
1999 1998 1997
Current:
Federal $ 16,202,000 $ 9,249,000 $ 6,385,000
State and local 2,810,000 1,750,000 1,628,000
Foreign 85,000 37,000 24,000
------------ ------------ ------------
19,097,000 11,036,000 8,037,000
Deferred:
Federal (1,840,000) (330,000) 133,000
State and local (289,000) (43,000) 19,000
------------ ------------ ------------
(2,129,000) (373,000) 152,000
------------ ------------ ------------
$ 16,968,000 $ 10,663,000 $ 8,189,000
============ ============ ============
The reconciliation of income tax computed at the U.S. federal
statutory tax rate to the effective income tax rate for 1999,
1998 and 1997 is as follows:
1999 1998 1997
Federal income tax at statutory rate 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit 5.5 4.5 5.0
----- ----- -----
40.5% 39.5% 40.0%
===== ===== =====
Note H - Stock Options Plans and Grants
1. 1994 stock option plan
The Company's 1994 Incentive Stock Option Plan, as amended on
May 29, 1997, authorizes the grant of options to employees for up
to 3,000,000 shares of the Company's common stock. Certain
options granted under the Plan vest in one-third increments in
each of the first, second and third years following the date of
grant, while certain other options vest over five years. Options
granted have 10-year terms. Non-employee Director options
granted have 10 year terms and vest 50% on the first anniversary
of the date of grant and become fully exercisable at the end of
two years.
The Company has elected to continue to follow Accounting
Principles Board Opinion No. 25, in accounting for its employee
stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation
expense is recognized. Had compensation cost for the stock
options been determined based on the fair value at the grant
dates for awards under the plan, consistent with the alternative
method set forth under SFAS 123, net income and earnings per
share would have been reduced by approximately $1,136,000 and
$.06, $643,000 and $.03, and $441,000 and $.02, in 1999, 1998 and
1997, respectively.
The effects of applying SFAS 123 on this pro forma disclosure
may not be indicative of future results. SFAS 123 does not apply
to grants prior to 1995, and additional awards in future years
may be granted.
Pro forma information regarding net income and earnings per
share is required by Statement 123 and has been determined as if
the Company had accounted for its employee stock options under
the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998, and 1997, respectively: risk-free
interest rate of 5.55%, 5.25% and 5.50%; 0% dividend yields;
expected volatility factors of 48.5%, 54.2% and 34.6% and
expected lives of 4.7, 5.6 and 5.8 years. The weighted-average
fair value of options granted during 1999, 1998, and 1997 were
$13.47, $9.55 and $6.63.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
The following table summarizes all stock option transactions
from December 31, 1996 through December 31, 1999.
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
<S> <C> <C>
Outstanding at December 31, 1996 1,141,988
Granted 488,588 $10.40
Exercised (85,472) $ 4.63
Forfeited (112,284) $ 9.36
----------
Outstanding at December 31, 1997 1,432,820
Granted 503,550 $11.60
Exercised (249,881) $ 5.70
Forfeited (148,332) $ 8.49
----------
Outstanding at December 31, 1998 1,538,157
Granted 431,400 $18.93
Exercised (143,511) $ 8.36
Forfeited (95,348) $10.19
----------
Outstanding at December 31, 1999 1,730,698
==========
</TABLE>
The following table summarizes information concerning
currently outstanding and exercisable stock options at December
31, 1999:
<TABLE>
<CAPTION>
Outstanding Stock Options Exercisable Stock Options
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices Shares Life Price Shares Price
<S> <C> <C> <C> <C> <C>
$ 4.00 to $ 8.00 390,727 4.86 years $ 5.85 238,928 $ 5.38
$ 8.01 to $16.00 912,321 7.43 years $11.23 301,986 $10.99
$16.01 to $25.00 427,650 9.34 years $18.93 0 $ 0.00
</TABLE>
2. Stock option grants
In 1994, the Board of Directors granted non-transferable stock
options to an officer of the Company, for the purchase of 334,425
shares of Class A Common Stock at an exercise price of $1.4583
per share. In 1999, no options were exercised and at December
31, 1999, 180,000 options were outstanding and exercisable.
Note I - Benefit Plans
1. 401(k) Plan
The Company's 401(k) profit-sharing plan covers all non-union
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. The Company is obligated to make a
matching contribution and may make an additional discretionary
contribution, as defined. Contributions to the plan for the years
ended December 31, 1999, 1998 and 1997 were approximately
$120,000, $89,000 and $71,000, respectively.
2. Deferred compensation plan
The Kenneth Cole Productions, Inc. Deferred Compensation Plan
is an unfunded non-qualified plan maintained primarily to provide
deferred compensation benefits for a select group of "highly
compensated employees." The Company accounts for the investments
in the deferred compensation plan in accordance with SFAS 115,
"Accounting for Certain Investments in Debt and Equity
Securities," and such investments have been classified as
trading.
Note J - Commitments and Contingencies
1. Capital lease
Included in property and equipment are assets held under
capital lease of $967,000 less accumulated amortization of
$242,000. At December 31, 1999, future minimum lease payments
consist of the following:
2000 $235,000
2001 235,000
2002 235,000
2003 177,000
2004 0
--------
Total minimum lease payments $882,000
Less amounts representing interest (124,000)
--------
Present value of minimum lease payments 758,000
Less current maturities (181,000)
--------
Capital lease obligation, less current maturities $577,000
========
2. Operating leases
The Company leases office, retail, and warehouse facilities
under non-cancelable operating leases between 5 and 20 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, 1999:
2000 $ 11,833,000
2001 15,808,000
2002 15,602,000
2003 15,377,000
2004 14,933,000
Thereafter 99,264,000
------------
Total minimum cash payments $172,817,000
============
In addition, certain of these leases contain rent escalation and
additional percentage rent payments to be made.
Rent expense for the years ended December 31, 1999, 1998 and
1997 was $13,530,000, $9,313,000 and $6,903,000, respectively.
3. Letters of credit
At December 31, 1999 and 1998, the Company was contingently
liable for approximately $2,589,000 and $1,169,000 of open
letters of credit, respectively. In addition, at December 31,
1999 and 1998, the Company was contingently liable for
approximately $400,000 of standby letters of credit.
4. 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. In 1999 and 1998, the Company had no customer account
for more than 10% of net sales. The Company had two customers
that accounted for 12.4% and 10.0% of net sales in 1997.
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, India, China and Korea. The Company attempts to limit
the concentration with any one manufacturer. However,
approximately 58% and 46% of the dollar value of total handbag
purchases by the Company were produced by one manufacturer in
China utilizing many different factories, in 1999 and 1998,
respectively. Approximately 43% and 58% of Kenneth Cole men's
footwear purchases were from one manufacturer in Italy utilizing
many different factories, during 1999 and 1998, 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.
5. Other
The Company, from time to time, is a party to litigation that
arises in the normal course of its business operations. The
Company presently is not a party to any such litigation that
would have a material adverse effect on its business or
operations.
Note K - Shareholders' Equity
1. 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 Class A Common Shareholders vote separately as a class to
elect 25% of the Board of Directors of the Company. Shares of
neither class of common stock have preemptive or cumulative
voting rights.
2. 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, limitations as to dividends, qualifications or
other provisions, as may be fixed by the Board of Directors.
As discussed in note A (2), the Company issued, in a form of a
dividend, 28,927 shares of Series A Convertible Preferred Stock
on March 27, 2000. The financial statements reflect this
dividend.
3. Common Stock repurchase
On August 13, 1999, the Board of Directors of the Company
authorized management to repurchase, from time to time, an
additional 1,000,000 shares up to an aggregate 1,500,000 shares
of the Company's Class A Common Stock. As of December 31, 1999,
723,750 shares were repurchased in the open market at an
aggregate price of $9,355,000 and have been recorded as treasury
stock.
Note L - Licensing Agreement
On July 1, 1999, the Company and Liz Claiborne Inc. (along with
its subsidiaries and affiliates collectively "Liz Claiborne")
entered into a multi-brand initiative to launch Kenneth Cole
Productions, Inc. into the women's apparel market under an
exclusive womenswear license agreement. The agreement granted
Liz Claiborne rights to manufacture, distribute and sell women's
sportswear under the licensed marks of Kenneth Cole, Kenneth Cole
New York, Reaction Kenneth Cole and Unlisted.com. The initial
term is through December 31, 2004, with options to renew through
December 31, 2019 based upon Liz Claiborne reaching certain sales
thresholds. During these periods, Liz Claiborne is obligated to
pay the Company a percentage of net sales based upon the terms of
the agreement. Simultaneously with the licensing agreement, Liz
Claiborne purchased 1.5 million shares of Kenneth Cole
Productions, Inc. Class A Common Stock par value $.01 per
share at a price of $19.33 (adjusted to give effect for the
Company's three-for-two stock split), the fair market value at
the date of the agreement.
Note M - Related Party Transaction
In December 1999, the Board of Directors authorized a $500,000
contribution payable to the Kenneth Cole Foundation.
Note N - Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 1999 and 1998 appear
below (in thousands, except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
1999
Net sales $ 63,533 $ 62,269 $ 81,327 $ 88,224
Licensing revenue 2,510 3,048 4,226 5,171
Net revenues 66,043 65,317 85,553 93,395
Gross profit 29,447 28,669 39,259 44,077
Operating income 7,851 5,846 13,233 13,686
Net income 4,730 3,571 8,067 8,560
Earnings per share basic $ .24 $ .18 $ .40 $ .41
Earnings per share diluted $ .23 $ .17 $ .38 $ .39
1998
Net sales $ 52,029 $ 48,331 $ 62,010 $ 57,411
Licensing revenue 1,656 1,791 2,294 2,616
Net revenues 53,685 50,122 64,304 60,027
Gross profit 23,585 21,165 27,792 26,193
Operating income 6,659 4,008 9,377 6,546
Net income 4,093 2,501 5,731 4,006
Earnings per share basic $ .21 $ .13 $ .29 $ .21
Earnings per share diluted $ .20 $ .12 $ .28 $ .20
</TABLE>
Note O - Subsequent Event
On February 14, 2000, the Board of Directors authorized,
subject to shareholder approval, the establishment of 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 lower of the closing price
at the beginning or end of each quarterly stock purchase period.
The ESPP is expected to commence during the second quarter of
2000.
On March 7, 2000, the Company filed Form S-8 registering
150,000 shares of Class A Common Stock for the ESPP.
<PAGE>
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/ KENNETH D.COLE
Kenneth D. Cole
President and Chief Executive Officer
Date: March 28, 2000
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 President, Chief Executive March 28, 2000
Kenneth D. Cole Officer and Director
/S/ PAUL BLUM Executive Vice President March 28, 2000
Paul Blum Chief Operating Officer and Director
/S/ STANLEY A. MAYER Executive Vice President, March 28, 2000
Stanley A. Mayer Chief Financial Officer, Treasure and Director
/S/ DAVID P. EDELMAN Senior Vice President Finance March 28, 2000
David P. Edelman (Principal Accounting Officer)
/S/ ROBERT C. GRAYSON Director March 28, 2000
Robert C. Grayson
/S/ DENIS F. KELLY Director March 28, 2000
Denis F. Kelly
/S/ JEFFREY G. LYNN Director March 28, 2000
Jeffrey G. Lynn
<PAGE>
Kenneth Productions, Inc.
Schedule II
Valuation and Qualifying Accounts
For the years ended December 31, 1999, 1998, and 1997
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions of Period
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Allowance for doubtful accounts $ (125,000) $(1,344,000) $ 915,000 $ (554,000)
Reserve for returns and
sales allowances (3,300,000) (5,057,000) (8,357,000)
------------ ------------ --------- ------------
$(3,425,000) $(6,401,000) $ 915,000 $(8,911,000)
============ ============ ========= ============
Year ended December 31, 1998
Allowance for doubtful accounts $ (80,000) $ (197,000) $ 152,000 $ (125,000)
Reserve for returns and
sales allowances (2,900,000) (400,000) (3,300,000)
------------ ------------ --------- ------------
(2,980,000) (597,000) 152,000 (3,425,000)
============ ============ ========= ============
Year ended December 31, 1997
Allowance for doubtful accounts $ (65,000) $ (157,000) $ 142,000 $ (80,000)
Reserve for returns and
sales allowances (2,200,000) (700,000) (2,900,000)
------------ ------------ --------- ------------
$(2,265,000) $ (857,000) $ 142,000 $(2,980,000)
============ ============ ========= ============
</TABLE>
<PAGE>
Kenneth Cole Productions, Inc.
Exhibit 21.01
List of Subsidiaries State of Incorporation
Kenneth Cole Productions, Inc. New York
Kenneth Cole Financial Services, Inc. New Jersey
Cole Carnegie, Inc. New York
Kenth Ltd. Hong Kong
Kenneth Cole Catalog, Inc. Virginia
Kenneth Cole Services, Inc. Delaware
K.C.P.L., Inc. Delaware
Cole South Beach, Inc. Florida
Cole Somerset, Inc. Michigan
Kenneth Cole Gilroy, Inc. California
Cole NorthPark, Inc. Texas
Cole Phipps, Inc. Georgia
Cole Westchester, Inc. New York
Cole Tyson, Inc. Virginia
Cole Napa, Inc. California
Cole Destin, Inc. Florida
Cole Prussia, Inc. Pennsylvania
Cole Pentagon, Inc. Virginia
Cole Sawgrass, Inc. Florida
Kenneth Cole, Inc. (Secaucus Outlet) New York
Cole Short Hills, Inc. New Jersey
Cole Cabazon, Inc. California
Cole Copley, Inc. Massachusetts
Cole Stanford, Inc. California
Cole Roosevelt, Inc. New York
Cole Newbury, Inc. Massachusetts
Cole Waikele, Inc. (Hawaii) New York
Cole Reading Outlet, Inc. Pennsylvania
Cole Broadway, Inc. New York
Cole Amsterdam, B.V. Amsterdam
Cole Amsterdam, Inc. Delaware
Cole Clinton, Inc. Connecticut
Cole Boca, Inc. Florida
Cole Century City, Inc. California
Cole Georgetown, Inc. District of Columbia
Cole Dadeland, Inc. Florida
Cole Aspen, Inc. Delaware
Cole Houston, Inc. Delaware
Cole Fashion Valley, Inc. Delaware
Cole Chestnut, Inc. Delaware
Cole Oakbrook, Inc. Delaware
Cole Santa Monica, Inc. Delaware
Cole Garden State, Inc. Delaware
Cole Grand Central, Inc. Delaware
Cole Riverhead, Inc. Delaware
Cole Las Vegas, Inc. Delaware
Cole Carlsbad, Inc. Delaware
Cole Orlando, Inc. Delaware
Cole Forum, Inc. Delaware
<PAGE>
Kenneth Cole Productions, Inc.
Exhibit 21.01 (continued)
List of Subsidiaries State of Incorporation
Cole Grant, Inc. Delaware
Cole Honolulu, Inc. Delaware
Cole Scottsdale, Inc. Delaware
Cole Leesburg, Inc. Delaware(Formerly Cole
Perimeter, Inc.)
Cole Michigan Avenue, Inc. Delaware(Formerly Cole
South Street Seaport, Inc.)
Cole Franklin, Inc. Delaware
Kenneth Cole Woodbury, Inc. Delaware
Cole SFC, LLC Delaware
Cole New Orleans, Inc. Delaware
Cole Walnut Street, Inc. Delaware
Cole Venetian, LLC Delaware
Riviera Holding, LLC (Columbus Lease) Delaware
Cole Viejo, LLC Delaware
Cole Jersey Gardens, LLC Delaware
Kenneth Cole Katy, LLC Delaware
Cole Galleria, Inc. Delaware
Cole Camarillo, LLC Delaware
Cole Tempe, LLC Delaware
Cole Dawsonville, Inc. Delaware
Cole Pike, Inc. Delaware
Cole 57th Street, LLC Delaware
Cole West Palm Beach, LLC Delaware
Cole 610 Fifth Avenue, LLC Delaware
<PAGE>
Exhibit 23.01
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in Registration
Statement (Form S-8 No. 33-92094) pertaining to the Kenneth Cole
Productions, Inc. 1994 Stock Option Plan and Registration
Statement (Form S-8) pertaining to the Kenneth Cole Productions,
Inc. Employee Stock Purchase Plan of our report dated February
25, 2000, with respect to the consolidated financial statements
and schedule of Kenneth Cole Productions, Inc., included in the
Annual Report (Form 10-K) for the year ended December 31, 1999,
filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
New York, New York
March 28, 2000
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 71,415
<SECURITIES> 0
<RECEIVABLES> 34,469
<ALLOWANCES> (554)
<INVENTORY> 39,553
<CURRENT-ASSETS> 147,024
<PP&E> 31,435
<DEPRECIATION> 12,004
<TOTAL-ASSETS> 176,859
<CURRENT-LIABILITIES> 40,967
<BONDS> 0
0
29
<COMMON> 189
<OTHER-SE> 125,113
<TOTAL-LIABILITY-AND-EQUITY> 176,859
<SALES> 295,353
<TOTAL-REVENUES> 310,308
<CGS> 168,856
<TOTAL-COSTS> 168,856
<OTHER-EXPENSES> 100,836
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,280)
<INCOME-PRETAX> 41,896
<INCOME-TAX> 16,968
<INCOME-CONTINUING> 24,928
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,928
<EPS-BASIC> 1.24
<EPS-DILUTED> 1.18
</TABLE>
