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.
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.
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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
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.
Item 6.
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.
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:
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.
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.
Item 8. Financial Statements and Supplementary Data
See page for a listing of the consolidated financial statements submitted as part of this report.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
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.
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.
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.
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.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) See page 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.
Kenneth Cole Productions, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Page
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
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
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
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:
The reconciliation of the Company's reportable segment revenues, profit and loss, and assets are as follows:
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.
The following table summarizes information concerning currently outstanding and exercisable stock options at December 31, 1999:
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):
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.
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
Kenneth Productions, Inc. Schedule II Valuation and Qualifying Accounts For the years ended December 31, 1999, 1998, and 1997 (in thousands)
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
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
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