UNITED STATES SECURITIES AND EXCHANGE COMMISSION  Washington, D.C. 20549  Form 10-Q  (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended September 30, 2006   (  )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  Commission File Number 1-13082  KENNETH COLE PRODUCTIONS, INC. (Exact name of registrant as specified in its charter)  New York13-3131650(State or other jurisdiction of
incorporation or organization)(I.R.S. Employer
Identification Number)   603 West 50th Street, New York, NY10019(Address of principal executive offices)(Zip Code)    Registrants telephone number, including area code (212) 265-1500  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes (X)   No (  )  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Large accelerated filer ( )   Accelerated filer (X) Non-accelerated filer ( ) as defined in Rule 12b-2 of the Exchange Act.  Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ( ) No (X)  Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:  ClassNovember 2, 2006Class A Common Stock ($.01 par value)11,980,384Class B Common Stock ($.01 par value)8,010,497          Kenneth Cole Productions, Inc. Index to 10-Q  Part I.FINANCIAL INFORMATIONItem 1.Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of September 30, 2006 and
December 31, 20053Condensed Consolidated Statements of Income for the three and nine-month periods
ended September 30, 2006 and 20055Condensed Consolidated Statement of Changes in Shareholders Equity
for the nine-month period ended September 30, 20066Condensed Consolidated Statements of Cash Flows for the nine-month periods
ended September 30, 2006 and 20057Notes to Condensed Consolidated Financial Statements8Item 2.Managements Discussion and Analysis of Financial Condition  and
Results of Operations23Item 3.Quantitative and Qualitative Disclosures about Market Risk31Item 4.Controls and Procedures31Part II.OTHER INFORMATIONItem 1.Legal Proceedings32Item 1A.Risk Factors32Item 1B.Unresolved Staff Comments33Item 2.Unregistered Sales of Equity Securities and Use of Proceeds33Item 3.Defaults Upon Senior Securities33Item 4.Submission of Matters to a Vote of Security Holders33Item 5.Other Information33Item 6.Exhibits34Signatures35   2       Part I. FINANCIAL INFORMATION  Item 1.  Financial Statements    Kenneth Cole Productions, Inc. and Subsidiaries  Condensed Consolidated Balance Sheets (Unaudited)   September 30,
2006December 31,
2005AssetsCurrent assets:Cash and cash equivalents$  75,860,000$  63,747,000Marketable securities13,500,00066,400,000Due from factors52,724,00033,975,000Accounts receivable, net15,334,00018,691,000Inventories, net54,155,00045,465,000Prepaid expenses and other current assets2,569,0006,059,000Deferred taxes, net3,050,0003,340,000Total current assets217,192,000237,677,000Property and equipment, at cost, less accumulateddepreciation and amortization72,084,00042,975,000  Other assets:Deferred taxes, net14,445,00014,832,000Investments, deposits and sundry16,334,00016,776,000Deferred compensation plans assets31,517,00028,411,000Total other assets62,296,00060,019,000Total assets$351,572,000$ 340,671,000    See accompanying notes to condensed consolidated financial statements.  3     Kenneth Cole Productions, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (continued) (Unaudited)  September 30,
2006December 31,
2005Liabilities and shareholders equityCurrent liabilities:Accounts payable$  33,513,000$  31,129,000Accrued expenses and other current liabilities12,341,0008,775,000Short-term borrowings-3,000,000Deferred income5,255,0003,835,000Income taxes payable1,229,0003,832,000Total current liabilities52,338,00050,571,000Accrued rent and other long-term liabilities16,513,00017,029,000Deferred compensation plans liabilities31,517,00028,411,000Commitments and contingenciesShareholders' equity:Series A Convertible Preferred Stock, par value
$1.00, 1,000,000 shares authorized,
none outstandingClass A Common Stock, par value $.01,
20,000,000 shares authorized;  15,581,364
and 15,573,961 issued as of September 30, 2006 and December 31, 2005, respectively156,000156,000Class B Common Stock, par value $.01,
9,000,000 shares authorized; 8,010,497 issued
and outstanding as of  September 30, 2006
and December 31, 2005, respectively80,00080,000Additional paid-in capital90,498,00089,351,000Deferred compensation-(3,397,000)Accumulated other comprehensive income1,633,0001,257,000Retained earnings245,261,000237,369,000337,628,000324,816,000Class A Common Stock in treasury, at cost,
3,618,667 and 3,388,400 shares as of September 30, 2006 and December 31, 2005 , respectively(86,424,000)(80,156,000)Total Shareholders Equity251,204,000244,660,000Total Liabilities and Shareholders Equity$ 351,572,000$ 340,671,000  See accompanying notes to condensed consolidated financial statements.  4  Kenneth Cole Productions, Inc. and Subsidiaries  Condensed Consolidated Statements of Income (Unaudited)    Three Months Ended
September 30,Nine Months Ended
September 30,2006200520062005Net sales$  132,839,000$ 124,720,000$  369,917,000$ 354,293,000Royalty revenue10,850,00011,059,00031,608,00030,719,000Net revenues143,689,000135,779,000401,525,000385,012,000Cost of goods sold81,317,00075,246,000231,120,000212,944,000Gross profit62,372,00060,533,000170,405,000172,068,000Selling, general and administrative expenses48,750,00047,915,000144,988,000137,058,000Operating income13,622,00012,618,00025,417,00035,010,000Interest and other
income, net1,130,0001,952,0003,656,0003,304,000Income before provision for income taxes14,752,00014,570,00029,073,00038,314,000Provision for income taxes5,532,0003,717,00010,302,00012,264,000Net income$  9,220,000$   10,853,000$18,771,000$ 26,050,000Earnings per share:Basic$0.46$0.54$0.94$1.31Diluted$0.45$0.53$0.92$1.28Dividends declared per
share$0.18$0.16$0.54$0.48Shares used to compute earnings per share:Basic19,951,00019,954,00020,064,00019,845,000Diluted20,460,00020,406,00020,431,00020,303,000    See accompanying notes to condensed consolidated financial statements.  5     Kenneth Cole Productions, Inc. and Subsidiaries  Condensed Consolidated Statement of Changes in Shareholders Equity (Unaudited) Class A
Common StockClass B
Common StockAdditionalAccumulated
OtherTreasury StockNumber
of sharesAmountNumber
of sharesAmountPaid-in
CapitalDeferred
CompensationComprehensive
IncomeRetained
EarningsNumber of
SharesAmountTotalShareholders equity
January 1, 200615,573,961$156,0008,010,497$80,000$89,351,000($3,397,000)$1,257,000$237,369,000(3,388,400)($80,156,000)$244,660,000Net income18,771,00018,771,000Translation adjustment for
foreign currency, net of taxes of  $24,00040,00040,000Forward contracts, net of taxes of  $122,400204,000204,000Unrealized gain on available for sale securities, net of taxes of $79,200132,000132,000Comprehensive income19,147,000Reversal of deferred compensation upon adoption of SFAS 123R(138,182)(1,000)(3,396,000)3,397,000Stock-based compensation expense2,003,0002,003,000Exercise of stock options, and related tax benefits of $421,000181,2081,0003,417,0003,418,000Issuance of Restricted Stock30,705Shares surrendered by employees to pay taxes on restricted stock(10,616)(267,000)(267,000)Issuance of Class A Common Stock for ESPP13,637282,000282,000Purchase of Class A Stock(300,000)(7,169,000)(7,169,000)Reissuance of Treasury Shares(69,733)(901,000)69,733901,000Dividends paid on Common Stock Class A and B3849,000(10,879,000)(10,870,000)Shareholders equity
September 30, 200615,581,364$156,0008,010,497$80,000$90,498,000--$1,633,000$245,261,000(3,618,667)$(86,424,000)$251,204,000 See accompanying notes to condensed consolidated financial statements  6     Kenneth Cole Productions, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended
September 30,20062005Cash flows from operating activitiesNet income$18,771,000$26,050,000Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization7,659,0006,756,000Unrealized gain on deferred compensation plans(1,805,000)(405,000)Provision for doubtful accounts93,000160,000Provision for/(benefit from) deferred taxes677,000(5,735,000)Unrealized gain from available-for-sale securities(132,000)(753,000)Realized gain on sale of marketable securities--(1,246,000)Stock-based compensation expense2,003,000800,000Changes in operating assets and liabilities:Increase in due from factors(18,749,000)(14,314,000)Decrease in accounts receivable3,264,0006,144,000Increase in inventories(8,486,000)(9,846,000)Decrease/(increase)  in prepaid expenses and other current assets3,490,000(4,011,000)Increase in other assets(595,000)(3,615,000)Increase/(decrease) in accounts payable2,384,000(5,663,000)Increase in deferred income, accrued expenses and other current liabilities5,065,0001,633,000Decrease in income taxes payable(2,603,000)(545,000)Increase in other long-term liabilities2,590,0008,365,000Net cash provided by operating activities13,626,0003,775,000Cash flows from investing activitiesAcquisition of property and equipment(36,768,000)(9,550,000)Proceeds from sale of marketable securities53,150,00016,755,000Purchases of marketable securities and other investments(250,000)(37,509,000)Net cash provided by/ (used in) investing activities16,132,000(30,304,000)Cash flows from financing activitiesShares surrendered by employees to pay taxes on restricted stock(267,000)(134,000)Tax benefit from stock option exercises421,0001,178,000Proceeds from exercise of stock options2,997,0003,663,000Proceeds from employee stock purchase plan282,000247,000Proceeds from short-term borrowings--3,000,000Payments of short-term borrowings(3,000,000)--Dividends paid to shareholders(10,870,000)(9,531,000)Acquisition of treasury shares(7,169,000)--Net cash used in financing activities(17,606,000)(1,577,000)Effect of exchange rate changes on cash(39,000)8,000Net increase/(decrease) in cash12,113,000(28,098,000)Cash, beginning of period63,747,00080,014,000Cash, end of period$75,860,000$51,916,000Supplemental disclosures of cash flow informationCash paid during the period for:Interest$158,000$14,000Income taxes, net$13,964,000$17,356,000 See accompanying notes to condensed consolidated financial statements 7    Kenneth Cole Productions, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)   1.  Basis of Presentation  The accompanying unaudited condensed consolidated financial statements have been prepared by Kenneth Cole Productions, Inc. (the Company) in accordance with accounting principles generally accepted in the United States for interim financial information.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  Certain items contained in these financial statements are based on estimates.  In the opinion of the Companys management, the accompanying unaudited condensed consolidated financial statements reflect all significant adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and results of operations and cash flows for the periods presented.  All significant intercompany transactions have been eliminated.  Operating results for the nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006.  These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and footnotes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2005.  The consolidated balance sheet at December 31, 2005, as presented, was derived from the audited financial statements included in the Companys Annual Report on Form 10-K for the period ended December 31, 2005.  Certain amounts in the Companys previous financial statements have been reclassified to conform to the 2006 presentation.   8      Kenneth Cole Productions, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)  2.  Stock-Based Compensation  Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, Share Based Payment (SFAS 123R). The Company elected to use the modified prospective transition method to record stock-based compensation expense; therefore, prior period results were not restated. Prior to the adoption of SFAS 123R, stock-based compensation expense related to stock options was not recognized in the results of operations if the exercise price was at least equal to the market value of the common stock on the grant date, in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. As a result, the recognition of stock-based compensation expense was generally limited to the expense attributed to restricted stock unit awards and stock option modifications.  SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values. Under the modified prospective method, awards that were granted, modified, or settled on or after January 1, 2006 are measured and accounted for in accordance with SFAS 123R. Unvested equity-based awards that were granted prior to January 1, 2006 will continue to be accounted for in accordance with SFAS 123, except that all awards are recognized in the results of operations over the remaining vesting periods. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized. Also, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized in the Consolidated Statement of Cash Flows as a financing activity rather than an operating activity as it was classified in the past.  In addition, the Companys Employee Stock Purchase Plan (the Plan) is now considered compensatory under SFAS 123R, due to the Plans lookback feature and 15% purchase price discount.  The Company has stock-based compensation plans under which directors, officers and other eligible employees receive stock options and other equity-based awards. The plans provide for the grant of stock options, restricted stock awards and other stock unit awards.  Historically, stock options have been granted to broad groups of employees on a discretionary basis. Recently, the Companys equity-based compensation program has migrated toward an emphasis on restricted stock awards.  Stock options are granted with an exercise price equal to the market value of a share of common stock on the date of grant. Stock option grants expire within 10 years and vest on a graded basis within two to five years from the date of grant.  Restricted stock unit awards generally vest on a graded basis over a three to four year period.  9     Kenneth Cole Productions, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)  2.  Stock-Based Compensation (continued)  The following table summarizes stock option activity for the three and nine months ended September 30, 2006:  SharesWeighted- average exercise price per shareOutstanding as of January 1, 20062,600,717$23.64Granted----Exercised(96,033)$19.03Forfeited(195,699)$28.08Outstanding as of March 31, 20062,308,985$23.44Granted27,000$24.73Exercised(46,742)$14.07Forfeited(23,350)$31.72Outstanding as of June 30, 20062,265,893$23.56Granted----Exercised(38,433)$13.29Forfeited(47,333)$30.90Outstanding as of September 30, 20062,180,127$23.58Exercisable as of September 30, 20061,861,796$23.67  The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2006 and September 30, 2005 was $0.3 million and $0.6 million, respectively. The weighted-average remaining term for stock options outstanding and exercisable, as of September 30, 2006, was 5.1 years and 4.9 years, respectively. The aggregate intrinsic value of stock options outstanding and exercisable as of September 30, 2006 was $7.5 million and $6.5 million, respectively. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of the Companys common stock as of the reporting date.  The total fair value of options vested during the nine months ended September 30, 2006 and September 30, 2005 was $2.0 million and $2.5 million, respectively.  The intrinsic value related to the exercise of stock options was $1.6 million for the nine months ended September 30, 2006, which is currently deductible for tax purposes. The intrinsic value related to the exercise of stock options was $3.3 million for the nine months ended September 30, 2005. In addition, 69,733 treasury shares were issued for options exercised during the nine months ended September 30, 2006.  10      Kenneth Cole Productions, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)  2.  Stock-Based Compensation (continued)  The following table summarizes restricted stock unit activity for the three and nine months ended September 30, 2006:  SharesUnvested as of January 1, 2006138,182Granted--Vested--Forfeited(26,000)Unvested as of March 31, 2006112,182Granted278,316Vested(20,375)Forfeited(4,294)Unvested as of June 30, 2006365,829Granted--Vested(10,330)Forfeited(4,417)Unvested as of September 30, 2006351,082Vested as of September 30, 200645,487  The weighted-average grant-date fair value of restricted stock awards granted during the nine months ended September 30, 2006 and 2005 was $6.9 million and $4.4 million, respectively.  The total grant-date fair value of restricted shares vested during the nine months ended September 30, 2006 and 2005 was $0.2 million and $0.3 million, respectively.  The weighted-average remaining contractual term of unvested shares of restricted stock as of September 30, 2006 and 2005 was 2.6 years and 3.2 years, respectively.  11      Kenneth Cole Productions, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)  2. Stock-Based Compensation (continued)  The following table summarizes the pro forma effect of stock-based compensation as if the fair value method of accounting for stock compensation had been applied for the three- and nine- month periods ended September 30, 2005. Three Months Ended        Nine Months Ended September 30,               September 30, 20052005Net income, as reported$  10,853,000$ 26,050,000Add: Stockbased compensation included in reported net income, net of related tax effects288,000512,000Deduct: Stock-based employee compensation expense determined under fair value method, net of related tax effects(1,077,000)(5,097,000)Pro forma net income$  10,064,000$ 21,465,000Earnings per share:Basic - as reported$         0.54$        1.31Basic - pro forma$         0.50$        1.08Diluted - as reported$         0.53$        1.28Diluted - pro forma$         0.49$        1.06  In April 2005, the Company accelerated the vesting of 250,000 out-of-the-money stock options held by Kenneth D. Cole.  The estimated future expense recognition that was eliminated was approximately $2,115,000.  Also, in December 2005, the Company accelerated the vesting of 224,500 stock options held by various employees.  The estimated future expense recognition that was eliminated was approximately $1,400,000.  12     Kenneth Cole Productions, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)  2. Stock-Based Compensation (continued)  The following table summarizes the components and classification of stock-based compensation expense for the three and nine months ended September 30, 2006.  Stock-based compensation expense of $450,000 ($288,000 net of taxes) and $800,000 ($512,000 net of taxes) was recorded during the three and nine months ended September 30, 2005, respectively.  Three months ended September 30, 2006Nine months ended September 30, 2006Stock options$(284,000)$714,000Restricted stock units and employee stock purchase plan654,0001,289,000Total stock-based compensation expense (1)$370,000$2,003,000  (1) Total stock-based compensation expense is recorded in selling, general, and administrative expenses in the Consolidated Statements of Income.  Tax benefits were attributed to the stock-based compensation expense. The Company elected to adopt the alternative method of calculating the historical pool of windfall tax benefits as permitted by FASB Staff Position (FSP) No. SFAS 123R-c, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. This is a simplified method to determine the pool of windfall tax benefits that is used in determining the tax effects of stock compensation in the results of operations and cash flow reporting for awards that were outstanding as of the adoption of SFAS 123R.  The fair value of stock options was estimated using the Black-Scholes option-pricing model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. The assumptions for the current period grants were developed based on SFAS 123R and SEC guidance contained in Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment.  The following table summarizes the assumptions used to compute the weighted-average fair value of stock option grants. Stock options were not granted during the three months ended September 30, 2006. Nine months ended  September 30, 2006Weighted-average volatility65.6%Risk-free interest rate3.2% - 5.2%Weighted-average dividend yield0.5%Expected Term3-9 years   13      Kenneth Cole Productions, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)  2.  Stock-Based Compensation (continued)  The weighted-average volatility for the options granted during the current period was developed using historical volatility for periods equal to the expected term of the options. Prior to fiscal 2006, historical volatility was also used. An increase in the weighted-average volatility assumption will increase stock compensation expense.  The expected volatility used in the calculation of the Companys stock-based compensation expense for the nine months ended September 30, 2006 ranged from 32.4% to 69.4%.  The risk-free interest rate was developed using the U.S. Treasury yield curve for periods equal to the expected term of the options on the grant date. An increase in the risk-free interest rate will increase stock compensation expense.  The dividend yield is a ratio that estimates the expected dividend payments to shareholders.  The dividend yield is calculated by using the dividends declared per share and the Companys stock price on the date of grant.  An increase in the dividend yield will increase stock compensation expense.  The yields used in the calculations of the Companys stock-based compensation expense for the nine months ended September 30, 2006 ranged from 0% to 2.9%.  The expected term of the stock option grants was developed after considering vesting schedules, life of the option, historical experience and estimates of future exercise behavior patterns. An increase in the expected holding period will increase stock compensation expense.  The fair value of restricted stock was calculated by multiplying the Companys stock price on the date of grant by the number of shares granted.  This is currently being amortized over the vesting periods of the individual grants.  SFAS 123R requires the recognition of stock-based compensation for the number of awards that are ultimately expected to vest. As a result, for most awards, recognized stock compensation was reduced for estimated forfeitures prior to vesting primarily based on historical annual forfeiture rates and by employee classification ranging from 20% to 100% for stock options, and 10% to 15% for restricted stock. As part of the Companys quarterly forfeiture evaluation, the Company recorded a
favorable adjustment of approximately $0.7 million.  Estimated forfeitures will continue to be reassessed in subsequent periods and may change based on new facts and circumstances.  As of September 30, 2006, approximately $9.6 million of unrecognized stock compensation related to unvested awards (net of estimated forfeitures) is expected to be recognized over a weighted-average period of 2.3 years.  In accordance with the guidance set forth in SFAS 123R, the Company reversed the deferred compensation amount in Shareholders Equity related to restricted stock as of January 1, 2006, and as such, all future compensation cost will be charged to compensation expense.  14      Kenneth Cole Productions, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)  3. Earnings Per Share  The Company calculates earnings per share in accordance with SFAS No. 128, Earnings Per Share.  Basic earnings per share is calculated by dividing net income by weighted-average common shares outstanding.  Diluted earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of securities under the Companys stock compensation incentive plans. Three Months Ended                 Nine Months Ended September  30, 2006September
30, 2005September  30, 2006September
30, 2005Weighted-average commonshares outstanding19,951,00019,954,00020,064,00019,845,000Effect of dilutive securities:Restricted stock & employee     stock purchase plan321,00014,000122,00019,000Stock options188,000438,000245,000439,000Weighted-average commonshares outstanding and commonshare equivalents20,460,00020,406,00020,431,00020,303,000  Stock options amounting to 1,347,000 and 896,000 as of September 30, 2006 and 2005, respectively, have not been included in the diluted per share calculations since their effect would be antidilutive.  4.  Comprehensive Income  Comprehensive income is comprised of net income, the effect of foreign currency translation, changes in unrealized gains and losses on forward exchange contracts and available-for-sale securities.   Comprehensive income for the nine-month periods ended September 30, 2006 and 2005 amounted to $19,147,000 and $26,239,000, respectively.   Comprehensive income for the three-month periods ended September 30, 2006 and 2005 amounted to $9,435,000 and $11,311,000, respectively.  15     Kenneth Cole Productions, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)  5. Derivative Instruments and Hedging Activities  In the normal course of business, the Company routinely enters into forward contracts in anticipation of future purchases of inventory denominated in Euros.  These forward contracts are used to hedge against the Companys exposure to changes in Euro exchange rates to protect the purchase price of merchandise under such commitments and are not held for the purpose of trading or speculation. The Company has classified these contracts as cash flow hedges in accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedge Activities.  The Company had outstanding forward contracts of $2,000,000 at September 30, 2006 with maturity dates through October 2006.  All terms and conditions of the Companys forward contracts are included in the measurement of the related hedge effectiveness.  The critical terms of the forward contracts are the same as the underlying forecasted transactions. As a result, changes in the fair value of the contracts should be highly effective in offsetting changes in the expected cash flows from the forecasted transactions.  No gains or losses related to ineffectiveness of cash flow hedges were recognized in earnings during the three- and nine-month periods ended September 30, 2006.  At September 30, 2006, the notional amount of the Companys forward contracts was $2,000,000, and resulted in an unrealized gain of approximately $20,000, net of taxes, which was included in Accumulated Other Comprehensive Income in the Companys Condensed Consolidated Statement of Changes in Shareholders Equity and as a decrease to inventory, the underlying exposure on the Companys Balance Sheet.  The Company expects to reclassify all of the unrealized gain from Accumulated Other Comprehensive Income into earnings within the next  month due to the actual executions of foreign exchange contracts to purchase merchandise and the ultimate sale of that merchandise.  16     Kenneth Cole Productions, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)  6. Segment Information  The Company has three reportable segments: Wholesale, Consumer Direct and Licensing.  The Companys reportable segments are business units that offer different products and services or similar products through different channels of distribution.  The Wholesale segment designs, sources and markets a broad range of quality footwear and handbags for wholesale distribution.  The Consumer Direct segment markets a broad selection of the Companys branded products, including licensee products for sale directly to the consumer through its own channels of distribution, which include full price retail stores, outlet stores, catalogs and e-commerce (at website addresses www.kennethcole.com and www.kennethcolereaction.com).  The Licensing segment earns royalties on licensee sales to third parties of the Companys branded products and royalties on the purchase by and sale to third parties by foreign retailers or by distributors in foreign countries.  The Company maintains control over quality and image and allows licensees to sell primarily to channels of distribution the same as, similar to, or otherwise consistent with those of the Companys Wholesale segment.  The Company evaluates performance of each of its segments and allocates resources based on profit or loss before elimination of intersegment profit, unallocated corporate overhead, stock-based compensation expense and income taxes for each segment.  Intersegment sales between the Wholesale and Consumer Direct segments include a markup, which is eliminated in consolidation.  17      Kenneth Cole Productions, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)  6.  Segment Information (continued) Financial information of the Companys reportable segments is as follows (in thousands):  Three Months EndedNine Months EndedSeptember 30, 2006September 30, 2006ConsumerConsumerWholesaleDirectLicensingTotalsWholesaleDirectLicensingTotalsRevenue from external customers91,47141,36810,850143,689251,058118,85931,608401,525Intersegment revenues8,8008,80028,92428,924Segment income (1)15,429(4,281)8,47619,62437,125(16,655)24,47744,947Segment assets250,13567,86637,550355,551  Three Months EndedNine Months EndedSeptember 30, 2005September 30, 2005ConsumerConsumerWholesaleDirectLicensingTotalsWholesaleDirectLicensingTotalsRevenue from external customers82,00142,71911,059135,779225,437128,85630,719385,012Intersegment revenues10,34710,34729,09329,093Segment income (1)10,817(89)9,22219,95027,9271,15024,88353,960Segment assets267,08159,79210,463337,336  (1) Before elimination of intersegment profit, unallocated corporate overhead, stock-based compensation expense and income taxes.   18      Kenneth Cole Productions, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)   5. Segment Information (continued)  The reconciliation of the Companys reportable segment revenues, profit and loss, and assets are as follows (in thousands):  Three Months Ended                                               Nine Months Ended September 30, 2006September 30, 2005September 30, 2006September 30, 2005RevenuesRevenues for external customers$143,689$135,779$401,525$385,012Intersegment revenues8,80010,34728,92429,093Elimination of intersegment revenues(8,800)(10,347)(28,924)(29,093)Total consolidated revenues$143,689$135,779$401,525$385,012IncomeTotal profit for reportable segments$19,624$19,950$44,94753,960Elimination of intersegment profit, stock-based compensation expense and unallocated overhead(4,872)(5,380)(15,874)(15,646)Total income before income taxes$14,752$14,570$29,073$38,314AssetsTotal assets for reportable segments$355,551$337,336Elimination of intersegment inventory profit(3,979)(3,791)Total consolidated assets$351,572$333,545   Revenues from international customers were approximately 2.3% and 2.6% of the Companys consolidated revenues for the three months ended September 30, 2006 and 2005, respectively, and approximately 2.1% and 2.6% of the Companys consolidated revenues for the nine months ended September 30, 2006 and 2005, respectively.   19      Kenneth Cole Productions, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)  7. Purchase of Corporate Headquarters Building  In June 2006, the Company finalized the purchase of its corporate headquarters building, located in New York, for a purchase price of approximately $24 million.  The land and building were recorded at cost in Property and Equipment in the accompanying Condensed Consolidated Balance Sheet.  The building is being depreciated for financial reporting purposes using the straight-line method over its estimated useful life.  8.  Short-term Borrowing  In 2005, one of the Companys foreign subsidiaries entered into a promissory note with a financial institution, which provided the foreign subsidiary with $3,000,000. In addition, the Company entered into a Cash Collateral Pledge Agreement, for $3,000,000, with a financial institution, which served as collateral on the loan to the foreign subsidiary. During the three months ended September 30, 2006, the foreign subsidiary repaid the promissory note and, as a result, the collateral was released back to the Company.  9.  Income Taxes  In June 2006, the Company reached agreements with various taxing authorities which closed certain outstanding audit periods, for which the Company had previously established reserves. The Company recorded a tax benefit of approximately $600,000, net of certain tax liabilities that were established.  10.  Common Stock Repurchase  During the nine months ended September 30, 2006, the Company repurchased 300,000 of its shares at an aggregate price of $7.2 million.  The Company has 1.7 million shares available for repurchase as of September 30, 2006 under the Companys Board-authorized repurchase plans.  11.  Related Party  The Company has an exclusive license agreement with Iconix Brand Group, Inc., formerly Candies, Inc., and its trademark holding company, IP Holdings, LLC (Candies), to use the Bongo trademark in connection with worldwide manufacture, sale and distribution of womens, mens and childrens footwear.  The Chief Executive Officer and Chairman of Candies is the brother of the Companys Chief Executive Officer and Chairman.  The initial term of the agreement is through December 31, 2007, with options to renew through December 31, 2016 based upon the Company reaching certain sales thresholds.  Management believes that the license agreement with Candies was entered into at arms length.  During these periods, the Company is obligated to pay Candies a percentage of net sales based upon the terms of the agreement.  20      Kenneth Cole Productions, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)   11.  Related Party (continued)  The Company recorded approximately $364,000 and $1,064,000 in aggregate royalty and advertising expense to Candies for the three- and nine-month periods ended September 30, 2006 respectively.  The Company recorded approximately $315,000 and $945,000 in aggregate royalty and advertising expense to Candies for the three- and nine-month periods ended September 30, 2005, respectively.  12. Legal Proceedings  In April 2005, a purported class action lawsuit was filed against the Company in the Superior Court of California for the County of San Diego.  The individual plaintiff was a floor supervisor in one of the Companys retail stores who purported to bring suit on behalf of himself and other similarly situated current and former floor supervisors.  Among other claims, the plaintiff alleged that he and other floor supervisors worked hours for which they were entitled to receive, but did not receive, overtime compensation under California law.  The lawsuit sought damages, penalties, restitution, equitable relief, interest and attorneys fees and costs.  In September 2006, counsel for the plaintiffs agreed to dismiss the purported class action.  In October 2006, the individual plaintiff and the Company executed a settlement agreement, for a nominal amount, for his individual claims.  In September 2004, a purported class action lawsuit was filed against the Company in the Superior Court of California for the County of Los Angeles.  The individual plaintiffs were current or former store managers or assistant managers who brought a suit on behalf of themselves and other similarly situated store managers and assistant managers.  Among other claims, the plaintiffs alleged that they worked hours for which they were entitled to receive, but did not receive, overtime compensation under California law.  The lawsuit sought damages, penalties, restitution, reclassification and attorneys fees and costs.  In January 2006, the Company reached an agreement in principle to settle the matter, and the parties filed a fully executed Stipulation of Class Settlement and Release.  On June 21, 2006, the Court entered final judgment in the case, which settlement included the plaintiffs attorneys fees as well as court and claims administration costs.  All amounts due under the final judgment have now been paid and the period for any appeal has now been exhausted.  The settlement did not have a material impact on the Companys financial statements.  In July 2006, an Italian footwear manufacturer served the Company with a complaint claiming that the Company is selling certain styles of footwear that infringe on its patents.  The complaint seeks unspecified monetary relief and an injunction to prohibit the Company from selling allegedly infringing shoes.  The plaintiff and the Company have reached an agreement in principle to settle the matter and such settlement, if consummated, would not have a material impact on the Companys financial statements.  21     Kenneth Cole Productions, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)  12. Legal Proceedings (continued)   The Company is, from time to time, a party to other litigation that arises in the normal course of its business operations.  The Company is not presently a party to any other litigation that it believes might have a material adverse effect on its business operations.  13.  New Accounting Pronouncements  In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Companys financial statements in accordance with FASB Statement No. 109 Accounting for Income Taxes.FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a return, as well as guidance on derecognition, classification, interest and penalties and financial statement reporting disclosures.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company is currently evaluating the requirements and impact of FIN 48 on the Companys consolidated financial statements, and will adopt the provisions on January 1, 2007.  In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (FAS 157), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. The FASB believes that the new standard will make the measurement of fair value more consistent and comparable and improve disclosures about those measures. FAS 157 is effective for fiscal years beginning after November 15, 2007.  The Company is currently evaluating the requirements and impact of FAS 157 on the Companys consolidated financial statements, and will adopt the provisions on January 1, 2008.  14.  Subsequent Events  On October 25, 2006, the Companys Board of Directors declared a quarterly cash dividend of $0.18 per share payable on December 14, 2006, which will be paid to shareholders of record at the close of business on November 22, 2006.  In November 2006, the Company amended its license agreement with Paul Davril Inc. (PDI), which covers the manufacture and distribution of mens and womens sportwear under the Kenneth Cole New York trademark and mens sportswear under the Kenneth Cole Reaction trademark. The amended agreement will allow the Company to assume control of its Kenneth Cole New York sportswear categories in 2007, and extends the license for the Kenneth Cole Reaction mens sportwear category to December 31, 2008.  The Company believes that theamendment of the PDI license will cause a reduction in licensing royalties of $5 million to $6 million before considering any 2007 growth in other licenses.  In addition, the Company expects incremental advertising and infrastructure costs of $3 million to $5 million before implementing any mitigating actions.   22     Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  Forward-Looking Statements Disclosure  The statements contained in this report which are not historical facts, including, without limitation, statements that relate to future performance and/or statements regarding the Companys anticipated results or level of business for the year ended December 31, 2006 or any other future period, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements are based on current expectations only, and actual future results might differ materially from those projected in such statements due to a number of risks and uncertainties, including, but not limited to, demand and competition for the Companys products, the ability to enter into new licensee agreements, to maintain and renew existing licensing agreements, and to open new stores, changes in consumer preferences or fashion trends, events causing disruption in product shipment, change in import regulations, dependence on certain large customers, changes in the Companys relationships with vendors and other resources, the launching or prospective development of new business initiatives, future licensee sales growth, gross margins, store expansion and openings, changes in distribution centers, and the implementation of management information systems.  The forward-looking statements contained herein are also subject to other risks and uncertainties that are described in the Companys reports and registration statements filed with the Securities and Exchange Commission.  The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future results or otherwise.  Update on Critical Accounting Policies and Estimates  The Companys consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates in the application of its accounting policies based on the best assumptions, judgments and opinions of management.  For a summary of the Companys significant accounting policies, see the Companys consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2005.  Overview  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, Kenneth Cole Reaction, Unlisted, and Tribeca brand names.  In addition, the Company has the rights to use the Bongo trademark for footwear under a license agreement, as well as Gentle Souls for footwear under a proprietary trademark.  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 that generally remain in demand from season to season and fashion products that are designed to establish or capitalize on market trends. The combination of basic products and fashion styles provides freshness in assortments and maintains a fashion-forward image, while a multiple brand strategy helps diversify business risk.  The Company markets its products to more than 6,000 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 websites, including online e-commerce.  The Company believes the diversity of its product  23     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 and styling, and also provides 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 expand its product offerings and channels of distribution through licensing agreements.  The Company offers through these agreements a lifestyle collection of mens product categories, including tailored clothing, dress shirts, dress pants, sportswear, neckwear, briefcases, portfolios, jewelry, belts, leather and fabric outerwear, sunglasses, prescription eyewear, watches, fragrance, swimwear, luggage, hosiery and small leather goods.  Womens product categories currently being sold pursuant to license agreements include sportswear, small leather goods, belts, scarves and wraps, hosiery, leather and fabric outerwear, sunglasses, prescription eyewear, watches, jewelry, fragrance, swimwear, and luggage.  In addition, the Company licenses its home collection and boys and girls apparel under the Kenneth Cole Reaction brand and several product categories under the Unlisted brand.  The Company recorded net revenues of $143.7 million for the three months ended September 30, 2006; a 5.8% increase over the three months ended September 30, 2005, and diluted earnings per share decreased 15.1% to $0.45 from $0.53 in the three months ended September 30, 2005.  The Company also recorded net revenues of $401.5 for the nine months ended September 30, 2006, a 4.3% increase over the nine months ended September 30, 2005 and diluted earnings per share declined 28.1% to $0.92 from $1.28 in the nine months ended September 30, 2005.  The Companys Balance Sheet reflected $89.4 million in cash and marketable securities, and the Company had no borrowings as of September 30, 2006.  The Company is in the midst of a strategic initiative to elevate and reposition its brands. The Company believes that the repositioning of its brands will place the Company in the best position to grow both domestically and internationally and to enable the Companys brands to reach their potential. As such, the Company continues to focus on designing and delivering high quality, fashionable products, creating efficient and compelling retail environments, and continuing to develop its partnerships with its licensees to ensure brand quality and distribution integrity.  Results of Operations  The following table sets forth the Companys Condensed Consolidated Statements of Income in thousands of dollars and as a percentage of net revenues for the three and nine months ended September 30, 2006 and September 30, 2005.  Three Months Ended  Nine Months Ended  September 30, September 30, 2006200520062005Net sales$132,83992.4%$124,72091.9%$369,91792.1%$354,29392.0%Royalty revenue10,8507.611,0598.131,6087.930,7198.0Net revenues143,689100.0135,779100.0401,525100.0385,012100.0Gross profit (1)62,37243.460,53344.6170,40542.4172,06844.7Selling, general
    and
administrative expenses48,75033.947,91535.3144,98836.1137,05835.6Operating income13,6229.512,6189.325,4176.335,0109.1Interest income, net1,1300.81,9521.43,6560.93,3040.9Income
    before
    income
    taxes14,75210.314,57010.729,0737.238,31410.0Income tax expense5,5323.93,7172.710,3022.512,2643.2Net income9,2206.410,8538.018,7714.726,0506.8   24   (1) Gross Profit may not be comparable to other entities, since some entities include the costs related to their distribution network in cost of goods sold and others entities, similar to the Company, exclude these costs from gross profit, including them instead in a line item such as selling, general and administrative expenses.  Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005  REVENUES:  Consolidated net revenues increased $7.9 million, or 5.8%, to $143.7 million for the three months ended September 30, 2006 from $135.8 million for the three months ended September 30, 2005.  The increase in revenues occurred primarily in the Companys Wholesale segment, offset by a decline in its Consumer Direct and Licensing businesses, as further described below.  NET SALES: Wholesale net sales (excluding sales to the Companys Consumer Direct business segment) increased $9.5 million, or 11.5%, to $91.5 million, for the three months ended September 30, 2006 from $82.0 million for the three months ended September 30, 2005.  The increase is primarily due to growth in the Kenneth Cole Reactionbranded footwear products, offset by declines in the Companys handbag businesses during the three months ended September 30, 2006 as compared to the three months ended September 30, 2005.  In addition, sales improved in Unlisted, Bongo and Tribeca footwear in excess of 10%, offset by declines in sales of Kenneth Cole New York womens footwear.  Net sales in the Companys Consumer Direct segment decreased $1.4 million, or 3.2%, to $41.4 million for the three months ended September 30, 2006 from $42.7 million for the three months ended September 30, 2005.  The decrease in net sales is due primarily to a decrease in comparable store sales of $4.1 million or 10.3%, offset by an increase of $2.6 million primarily related to new stores opened in 2006 and that portion of 2006 sales for stores not open for all of 2005. Comparable stores are defined as new stores that are open for longer than thirteen months.  A store that stops operations is included in the comparable sales calculation through the date of closing.  The Company believes that the lack of an effective execution of its brand elevation strategy for the Companys retail stores contributed significantly to the decline in Consumer Direct results. The Company believes it may have elevated its prices too abruptly to create an appropriate transition for its customers.  The Company is taking measures to address these issues, including certain organizational and management changes, as well as merchandising improvements.  The Company has segregated the management and philosophy between the Companys outlet stores, which it now refers to as Company Stores, and its full-priced retail stores.  As a result, the Company believes it can initiate more effective business and merchandising practices for these stores.  The initial stage of the Companys plan has been to eliminate the use of the Companys outlet stores as clearance centers.  This has improved the Companys presentation, margins, and resulted in positive outlet (Company Store) comparative store sales in September 2006.  In addition, the Company is controlling inventory levels to reduce clearance product, is adjusting product mix to incorporate a wider range of price points, and is evaluating its real estate portfolio with plans to close several stores. As part of management changes, the Company has hired a Kenneth Cole New York Brand President and a President of the Companys outlet stores.  The Company believes it now has both the right strategy and leadership to lead the effort toward better retail performance.  LICENSING REVENUE:  Royalty revenue decreased 1.9% to $10.8 million for the three months ended September 30, 2006 from $11.1 million for the three months ended September 30, 2005.   The decrease in licensing revenues was primarily attributable to slight declines in domestic royalty revenue resulting from mens and womens Kenneth Cole New York sportswear, offset by incremental minimum royalties from existing licensees and additional royalities from Kenneth Cole Reaction womens sportswear.  25     The Company believes sportswear is a critical component in the visibility of its brands in both its Consumer Direct and Wholesale business segments.  Since the elevated Kenneth Cole New York sportswear line is currently nearly exclusively distributed in the Companys own retail stores, the Company does not believe a licensing model is practical at this time.  As the Companys present license with Paul Davril Inc. (PDI) enters its final year, the Company has reached an agreement to assume control of the Kenneth Cole New York mens and womens sportswear businesses by the end of 2007, while extending its license on Kenneth Cole Reactionmens sportswear through 2008.  The Company will immediately begin transitioning the Kenneth Cole New York womens sportswear business, some of which the Company has already been sourcing over the past two seasons and plans to assume control of the Keneth Cole New York mens sportswear business during 2007.  Once the Company has absorbed the infrastructure and made this transition, it will make a determination as to the strategic alternatives of Kenneth Cole Reaction mens sportswear.  This decision will, in part, be driven by the strong belief that the Kenneth Cole Reaction mens sportswear business continues to have significant untapped opportunity.  To help realize the potential in all of the Companys Kenneth Cole Reaction businesses, the Company has promoted its Senior Vice President of Kenneth Cole Reaction to the position of Brand President of Kenneth Cole Reaction. The Company believes that taking control of the Kenneth Cole New York mens and womens sportswear business by the end of 2007 will result in the reduction of licensing revenue along with reduced advertising contributions and some additional infrastructure costs in the short term, but will have meaningful long-term benefits.  The Company believes that controlling the Kenneth Cole New York sportswear classification will allow it to better reinforce each of its brands and all of the associated businesses, most particularly the Consumer Direct business. The Company believes that theamendment of the PDI license will cause a reduction in licensing royalties of $5 million to $6 million before considering any 2007 growth in other licenses.  In addition, the Company expects incremental advertising and infrastructure costs of $3 million to $5 million before implementing mitigating actions.  GROSS PROFIT:  Consolidated gross profit, as a percentage of net revenues, decreased to 43.4% for the three months ended September 30, 2006 from 44.6% for the three months ended September 30, 2005.  This decrease was primarily a result of decreases in the Consumer Direct margins, partially offset by an increase in Wholesale margins, and the change in mix of the Companys net revenues from its Wholesale and Consumer Direct segments.  The Consumer Direct segment, which typically operates at a higher gross profit level than the Wholesale segment, had decreased revenues as a percentage of net revenues of 28.8% for the three months ended September 30, 2006 compared to 31.5% for the three months ended September 30, 2005, while the Wholesale segment revenues as a percentage of net revenues increased to 63.7% for the three months ended September 30, 2006 from 60.4% for the three months ended September 30, 2005.   The revenues in the Licensing segment, which carries no cost of goods sold, decreased as a percentage of revenue to 7.6% for the three months ended September 30, 2006 compared to 8.1% for the three months ended September 30, 2005.  The increase in Wholesale margins is primarily due to strong sell-thrus of Kenneth Cole Reaction branded product at retail, while the margins in Consumer Direct decreased due to additional clearance activity, as the segment continued to sell through excess inventories.  SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:  Selling, general and administrative expenses, including warehousing and receiving expenses, decreased to 33.9% as a percentage of net revenues ($48.8 million) for the three months ended September 30, 2006 from 35.3% as a percentage of net revenues ($47.9 million) for the three months ended September 30, 2005.  Expenses, as a percentage of net revenues, decreased primarily due to leverage created by the increase in sales, as well as the Companys continued focus on cost containment and budgetary controls.
In accordance with SFAS 123R, the Company performed its quarterly forfeiture evaluation, which resulted in a
favorable adjustment of approximately $0.7 million.  The increase in  26     total selling, general and administrative expense of $0.8 million resulted from variable expenses and fixed costs from new and expanded retail stores.  INTEREST AND OTHER INCOME:  Interest and other income decreased to $1.1 million for the three months ended September 30, 2006 from $2.0 million for the three months ended September 30, 2005.  While interest income increased, the decrease was primarily due to recognizing a $1.2 million gain on the sale of marketable securities during the three months ended September 30, 2005.  INCOME TAXES:  The Companys effective tax rate increased to 37.5% for the three months ended September 30, 2006, as compared to 25.5% for the three months ended September 30, 2005.  The increase was primarily the result of a temporary provision that allowed U.S. companies to repatriate earnings from their foreign subsidiaries at a reduced tax rate.  The Company repatriated prior years foreign earnings, which resulted in approximately $1.5 million in tax savings during the three months ended September 30, 2005.  NET INCOME:  As a result of the foregoing, net income decreased 15.0% for the three months ended September 30, 2006 to $9.2 million (6.4% of net revenues) from $10.9 million (8.0% of net revenues) for the three months ended September 30, 2005.  Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005  REVENUES:  Consolidated net revenues increased $16.5 million, or 4.3%, to $401.5 million for the nine months ended September 30, 2006 from $385.0 million for the nine months ended September 30, 2005.  The increase in revenues occurred in the Companys Wholesale and Licensing segments, partially offset by a decline in its Consumer Direct business, as further described below.  NET SALES: Wholesale net sales (excluding sales to the Companys Consumer Direct business segment) increased $25.6 million, or 11.4% to $251.0 million, for the nine months ended September 30, 2006 from $225.4 million for the nine months ended September 30, 2005.  The increase is primarily due to a growth in sales in Kenneth Cole Reaction footwear products, offset by declines in the Companys handbag businesses.  In addition, Bongo, TribecaandUnlisted footwear generated sales increases greater than 5%.  Net sales in the Companys Consumer Direct segment decreased $10.0 million, or 7.8%, to $118.9 million for the nine months ended September 30, 2006 from $128.9 million for the nine months ended September 30, 2005.  The decrease in net sales is due primarily to a decrease in comparable store sales of $14.3 million, or 12.3%, offset by an increase of $4.4 million related to new stores opened in 2006 and that portion of 2006 sales for stores not open for all of 2005.  Comparable store sales are defined as new stores that are open for longer than thirteen months.  A store that stops operations is included in the comparable sales calculation through the date of the stores closing.  The Company believes that the lack of an effective execution of its brand elevation strategy for the Companys retail stores contributed significantly to the decline in Consumer Direct results.  The Company believes it may have elevated its prices too abruptly to create an appropriate transition for its customers.  The Company is taking measures to address these issues, including certain organizational and management changes, as well as merchandising improvements.  The Company believes it now has both the right strategy and leadership to lead the effort toward better retail performance.  See NET SALES in Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005 discussion.  27     LICENSING REVENUE:  Royalty revenue increased 2.9% to $31.6 million for the nine months ended September 30, 2006 from $30.7 million for the nine months ended September 30, 2005.   The increase in licensing revenues was primarily attributable to the incremental minimum royalties from the Companys existing licensees, as well as additional royalties from two Reaction licensees related to womens sportswear and the home collection, offset by slight declines in domestic royalty revenue from mens and womens Kenneth Cole New York sportswear.  The Company believes sportswear is a critical component in the visibility of its brands in both its Consumer Direct and Wholesale business segments.  Since the elevated Kenneth Cole New York sportswear line is currently nearly exclusively distributed in the Companys own retail stores, the Company does not believe a licensing model is practical at this time.  As the Companys present license with Paul Davril Inc. (PDI) enters its final year, the Company has reached an agreement to assume control of the Kenneth Cole New York mens and womens sportswear businesses by the end of 2007, while extending its license on Kenneth Cole Reactionmens sportswear through 2008.  See LICENSING REVENUE in Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005 discussion.  GROSS PROFIT:  Consolidated gross profit, as a percentage of net revenues, decreased to 42.4% for the nine months ended September 30, 2006 from 44.7% for the nine months ended September 30, 2005.  This decrease was primarily a result of decreases in the Consumer Direct margins, offset by an increase in Wholesale margins, and the change in mix of the Companys net revenues from its Wholesale and Consumer Direct segments.  The Consumer Direct segment, which typically operates at a higher gross profit level than the Wholesale segment, had decreased revenues as a percentage of net revenues of 29.6% for the nine months ended September 30, 2006 compared to 33.5% for the nine months ended September 30, 2005, while the Wholesale segment revenues as a percentage of net revenues increased to 62.5% for the nine months ended September 30, 2006 from 58.6% for the nine months ended September 30, 2005.   The revenues in the Licensing segment, which carries no cost of goods sold, also decreased as a percentage of revenue to 7.9% for the nine months ended September 30, 2006 compared to 8.0% for the nine months ended September 30, 2005. The increase in Wholesale margins is primarily due to strong sell-thrus at retail of Kenneth Cole Reaction branded product, while the margins in Consumer Direct decreased due to additional clearance activity, as the segment continues to sell through excess inventories.  SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:  Selling, general and administrative (SG&A) expenses, including warehousing and receiving expenses, increased to 36.1% as a percentage of net revenues ($145.0 million) for the nine months ended September 30, 2006 from 35.6% as a percentage of net revenues ($137.1 million) for the nine months ended September 30, 2005.  The impact of the adoption of SFAS 123R resulted in a $2.0 million increase to SG&A expense. Excluding the impact of stock-based compensation expense, SG&A expense as a percentage of net revenues would have been 35.6% for the nine months ended September 30, 2006, as compared to 35.4% in 2005.  Expenses, as a percentage of net revenues, increased primarily due increases in fixed costs from new and expanding retail stores and the Companys loss of leverage on its comparable stores sales base, offset by leverage from the Companys improvement in sales from Wholesale operations.  INTEREST AND OTHER INCOME:  Interest and other income increased to $3.7 million for the nine months ended September 30, 2006 from $3.3 million for the nine months ended September 30, 2005.  The increase was primarily due to higher average cash balances and a higher rate of return on investments.  28     INCOME TAXES:  The Companys effective tax rate increased to 35.4% for the nine months ended September 30, 2006 from 32.0% for the nine months ended September 30, 2005.  The increase was primarily the result of a temporary provision that allowed U.S. companies to repatriate earnings from their foreign subsidiaries at a reduced tax rate in 2005, which resulted in approximately $1.5 million in tax savings for the nine months ended September 30, 2005.  This was offset by a tax benefit recognized during the nine months ended September 30, 2006 of approximately $600,000, net of certain tax liabilities that were established, which resulted from the agreements reached with various taxing authorities that closed certain outstanding audit periods, for which the Company had previously established reserves.  NET INCOME:As a result of the foregoing, net income decreased 27.9% for the nine months ended September 30, 2006 to $18.8 million (4.7% of net revenues) from $26.1 million (6.8% of net revenues) for the nine months ended September 30, 2005.  New Accounting Pronouncements  See Note 2 in the Notes to the Condensed Consolidation Financial Statements for disclosures related to SFAS 123R.  In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Companys financial statements in accordance with FASB Statement No. 109 Accounting for Income Taxes.FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a return, as well as guidance on derecognition, classification, interest and penalties and financial statement reporting disclosures.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company is currently evaluating the requirements and impact of FIN 48 on the Companys consolidated financial statements, and will adopt the provisions on January 1, 2007.  In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (FAS 157), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. The FASB believes that the new standard will make the measurement of fair value more consistent and comparable and improve disclosures about those measures. FAS 157 is effective for fiscal years beginning after November 15, 2007.  The Company is currently evaluating the requirements and impact of FAS 157 on the Companys consolidated financial statements, and will adopt the provisions on January 1, 2008.  Liquidity and Capital Resources The Company uses cash from operations as the primary source of financing for its expansion and seasonal requirements.  Cash requirements vary from time to time as a result of the timing of the receipt of merchandise from suppliers, the delivery by the Company of merchandise to its customers, and the level of accounts receivable and due from factors balances.  At September 30, 2006 and December 31, 2005 working capital was $164.9 million and $187.1 million, respectively.  Cash provided by operating activities was $13.6 million for the nine months ended September 30, 2006, compared to $3.8 million for the nine months ended September 30, 2005. Theincrease in cash flows provided  29     by operations is primarily attributable to the timings of payables and receivables and a decrease in tax benefits, offset by the decrease in net income.  Net cash provided by investing activities totaled $16.1 million for the nine months ended September 30, 2006 compared to $30.3 million of net cash used in investing activities for the nine months ended September 30, 2005.  The increase was primarily attributable to $53.1 million in proceeds received from the sale of marketable securities, in connection with the shift in the Companys portfolio holdings of auction-rate securities to overnight money market funds in 2006, compared to purchases of $37.5 million of marketable securities during the nine months ended September 30, 2005.  In addition, capital expenditures for the nine months ended September 30, 2006 were $36.8 million, compared to $9.6 million for the nine months ended September 30, 2005, which includes the purchase of the Companys corporate headquarters building for a purchase price of approximately $24 million in 2006.  Also included in capital expenditures were expenditures on furniture, fixtures, and leasehold improvements for new retail store openings and expansions of $9.4 million and $5.2 million for the nine months ended September 30, 2006 and 2005, respectively.  The remaining increase in expenditures was primarily due to investments in management information systems related to the implementation of the SAP integrated business platform for the Companys retail and outlet stores.  Net cash used in financing activities was $17.6 million for the nine months ended September 30, 2006 compared to $1.6 million for the nine months ended September 30, 2005.   During the nine months ended September 30, 2006, the Company repaid its short-term borrowing for $3.0 million.  Also, the Company declared and paid quarterly cash dividends of approximately $10.9 million to common stock shareholders compared to $9.5 million of dividends declared and paid during the nine months ended September 30, 2005. In addition, the Company repurchased 300,000 treasury shares at an aggregate price of $7.2 million, which was primarily offset by proceeds from the exercise of stock options of $3.0 million during the nine months ended September 30, 2006 compared to $3.7 million of proceeds from exercises during the nine months ended September 30, 2005.  The Companys material obligations under contractual agreements, primarily commitments for future payments under operating lease agreements as of September 30, 2006, are summarized as follows:  Payments Due by Period Total1 year or less2-3 years4-5 yearsAfter 5 yearsOperating Leases and Other Obligations$184,407,000$27,986,000$50,344,000$42,694,000$63,383,000Purchase Obligations29,025,00029,025,000Total Contractual
Obligations$213,432,000$57,011,000$50,344,000$42,694,000$63,383,000  The Company utilizes forward contracts to hedge its cost on certain future purchases of inventory in Euros. These forward contracts are used to hedge against the Companys exposure to changes in the Euro exchange rates to protect the purchase price of merchandise under such commitments and are not held for the purpose of trading or speculation. At September 30, 2006, the Company had forward contracts totaling $2.0 million in notional value, with an unrealized gain of approximately $20,000 net of taxes.  The Company currently has a line of credit, which allows for borrowings and letters of credit up to a maximum of $25.0 million to finance working capital requirements.  The Company has no outstanding advances  30     under this line of credit; however, amounts available under the line of credit were reduced by $3.3 million to $21.7 million at September 30, 2006 from stand-by letters of credit.  Also, in 2005, one of the Companys foreign subsidiaries entered into a promissory note with a financial institution, which provided the foreign subsidiary with $3,000,000. The note was repaid during the three months ended September 30, 2006.  The Company believes that it will be able to satisfy its cash requirements for the next year, including requirements for its retail expansion and renovations, office build-out of its corporate headquarters, dividend payments, short-term borrowings, and implementations of new information systems, primarily with cash flow from operations and current cash levels.  The foregoing commentary should be considered to fall within the coverage of the Safe Harbor Statement under the Private Securities Litigation reform Act of 1995 included in this report.   Item 3.  Quantitative and Qualitative Disclosures About Market Risk  The Company is primarily exposed to currency exchange rate risks with respect to its inventory transactions denominated in Euros.  Business activities in various currencies expose the Company to the risk that the eventual net dollar cash flows from transactions with foreign suppliers denominated in foreign currencies may be adversely affected by changes in currency rates.  The Company manages these risks by utilizing forward contracts to hedge its cost on future purchases.  The Company does not enter into foreign currency transactions for speculative purposes.   At September 30, 2006, the Company had forward contracts totaling $2.0 million in notional value with an unrealized gain of approximately $20,000 net of taxes. The Companys earnings may also be affected by changes in short-term interest rates as a result of borrowings under its line of credit facility.  At the Companys current borrowing levels, a two percent increase in interest rates affecting the Companys credit facility would not have a material effect on the Companys year-to-date earnings.   Item 4.  Controls and Procedures  Evaluation of disclosure controls and procedures  The Companys Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act), as amended) as of the end of the period covered by this quarterly report, and have concluded that the Companys disclosure controls and procedures were effective and designed to ensure that all material information required to be disclosed by the Company in reports filed or submitted  under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.   Changes in internal control over financial reporting  There were no changes in the Companys internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.   31     Part II - OTHER INFORMATION   Item 1. Legal Proceedings.  There have been no material changes during the nine-month period ended September 30, 2006 from the legal proceedings previously disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2005, other than the following:  In April 2005, a purported class action lawsuit was filed against the Company in the Superior Court of California for the County of San Diego.  The individual plaintiff was a floor supervisor in one of the Companys retail stores who purported to bring suit on behalf of himself and other similarly situated current and former floor supervisors.  Among other claims, the plaintiff alleged that he and other floor supervisors worked hours for which they were entitled to receive, but did not receive, overtime compensation under California law.  The lawsuit sought damages, penalties, restitution, equitable relief, interest and attorneys fees and costs.  In September 2006, counsel for the plaintiffs agreed to dismiss the purported class action.  In October 2006, the individual plaintiff and the Company executed a settlement agreement, for a nominal amount, for his individual claims.  In September 2004, a purported class action lawsuit was filed against the Company in the Superior Court of California for the County of Los Angeles.  The individual plaintiffs were current or former store managers or assistant managers who brought a suit on behalf of themselves and other similarly situated store managers and assistant managers.  Among other claims, the plaintiffs alleged that they worked hours for which they were entitled to receive, but did not receive, overtime compensation under California law.  The lawsuit sought damages, penalties, restitution, reclassification and attorneys fees and costs.  In January 2006, the Company reached an agreement in principle to settle the matter, and the parties filed a fully executed Stipulation of Class Settlement and Release.  On June 21, 2006, the Court entered final judgment in the case, which settlement included the plaintiffs attorneys fees as well as court and claims administration costs.  All amounts due under the final judgment have now been paid and the period for any appeal has now been exhausted.  The settlement did not have a material impact on the Companys financial statements.  In July 2006, an Italian footwear manufacturer served the Company with a complaint claiming that the Company is selling certain styles of footwear that infringe on its patents.  The complaint seeks unspecified monetary relief and an injunction to prohibit the Company from selling allegedly infringing shoes.  The plaintiff and the Company have reached an agreement in principle to settle the matter and such settlement, if consummated, would not have a material impact on the Companys financial statements.   Item 1A.  Risk Factors.  There have been no material changes during the three- and nine-month periods ended September 30, 2006 from the risk factors previously disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2005, other than the following:  The effects of recent hurricanes and other natural disasters have increased insurance costs for which the Company expects to take on higher deductibles if losses occur.  The Company has operations in flood, hurricane and earthquake zones.  As such, the Company has insured itself against losses from natural disasters.  The cost of such insurance has risen significantly as a result of the effects of recent disasters throughout the United States.  To offset such costs, the Company has taken on larger deductibles which, if aggregated through multiple disaster locations, could have a material effect on our results of operations.  32       Item 1B. Unresolved Staff Comments.  None.   Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.  During the nine months ended September 30, 2006, the Company repurchased 300,000 shares of its own stock, although no such repurchases were made during the three months ended September 30, 2006.  As of December 31, 2005 the Company had 861,600 shares available for repurchase. On March 2 2006, the Companys Board of Directors increased the authorization for the Companys repurchase plan by 1,138,400 shares to 2 million shares available for repurchase.  As of September 30, 2006, the remaining amount of shares that could be repurchased was approximately 1.7 million shares.   Item 3. Defaults Upon Senior Securities. None   Item 4. Submission of Matters to a Vote of Security Holders. None   Item 5. Other Information. None                              33      Item 6. Exhibits.  10.29Employment Agreement between Kenneth Cole Productions, Inc. and Joshua G. Shulman dated October 9, 200610.30Employment Agreement between Kenneth Cole Productions, Inc. and Douglas Jakubowski dated October 12, 200631.1Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   34      SIGNATURES   Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.   Kenneth Cole Productions, Inc. Registrant    November 6, 2006 /s/ DAVID P. EDELMAN David P. Edelman Chief Financial Officer                               35      Exhibit 31.1  CERTIFICATION OF CHIEF EXECUTIVE OFFICER  I, Kenneth D. Cole, certify that:  1.  I have reviewed this quarterly report on Form 10-Q being filed by Kenneth Cole Productions, Inc.;  2.  Based on my knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report;  3.  Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the report;  4.  The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  (c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and  (d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and  36      5.  The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants Independent Registered Public Accounting Firm and the Audit Committee of the registrants Board of Directors (or persons performing the equivalent functions):  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.     By: /s/ KENNETH D. COLE   --------------------------------------  Kenneth D. Cole  Chief Executive Officer    November 6, 2006                     37       Exhibit 31.2  CERTIFICATION OF CHIEF FINANCIAL OFFICER  I, David P. Edelman, certify that:  1.  I have reviewed this quarterly report on Form 10-Q being filed by Kenneth Cole Productions, Inc.;  2.   Based on my knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report;  3.  Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the report;  4.  The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;  (c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and  (d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and  38      5.  The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants Independent Registered Public Accounting Firm and the Audit Committee of the registrants Board of Directors (or persons performing the equivalent functions):  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.     By:  /s/ DAVID P. EDELMAN   --------------------------------------  David P. Edelman  Chief Financial Officer    November 6, 2006                     39      Exhibit 32.1 CERTIFICATION PURSUANT TO 
18 U.S.C. SECTION 1350, 
AS ADOPTED PURSUANT TO 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Kenneth Cole Productions, Inc. (the Company) on Form 10-Q for the period ending September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Kenneth D. Cole, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.  /s/ KENNETH D. COLE Kenneth D. Cole
Chairman and Chief Executive Officer
Kenneth Cole Productions, Inc.
November 6, 2006       40      Exhibit 32.2 CERTIFICATION PURSUANT TO 
18 U.S.C. SECTION 1350, 
AS ADOPTED PURSUANT TO 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002  In connection with the Quarterly Report of Kenneth Cole Productions, Inc. (the Company) on Form 10-Q for the period ending September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David P. Edelman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.  /s/ DAVID P. EDELMANDavid P. Edelman
Chief Financial Officer
Kenneth Cole Productions, Inc.
November 6, 2006            41     Exhibit 10.29 October 9, 2006  Dear Josh,  This proposed letter agreement is our offer to employ you at Kenneth Cole Productions, Inc. (the "Company").  General terms of employment are as stated in the Companys current Employee Handbook.  1. Effective October 30, 2006, the Company will employ you and you agree to serve as President:  Kenneth Cole New YorkBrand.  You agree to devote your full time and best efforts to the satisfactory performance of such services and duties as the position requires.  You will report to the Companys Chief Executive Officer.  You represent to the Company that the execution and performance by you of this letter agreement and your employment hereunder will not breach or constitute a default under any other agreement to which you are a party or by which you are bound.  Your employment is subject to and governed by the terms of the Company Employee Handbook, except to the extent that this letter agreement conflicts with and thus supersedes the terms of the Handbook.  2. As President of the Kenneth Cole New York Brand, you will have the primary responsibility for defining and executing the Kenneth Cole New York brand strategy across all channels (wholesale, retail, licensing), all product categories and all territories.  As such, you will influence all aspects of the Kenneth Cole New York business including retail strategy, retail product mix, merchandising, merchandise planning, retail service model, wholesale distribution strategy, international retail, supply chain, licensing, marketing and public relations for the brand.  In execution of the strategy, your primary responsibilities and reporting relationships shall be as follows:  Wholesale  Primary responsibility for design, merchandising and line building the Companys  Kenneth Cole New York wholesale products, which today include womens handbags and small leather goods and mens and womens footwear;  Retail  Primary responsibility for store design and visual presentation in domestic Kenneth Cole New York full price retail stores; The head of domestic Kenneth Cole New York retail will initially have a dotted line relationship to brand President and throughout the life of the agreement, this person would report either to the brand President or CEO;  Domestic Licensing  Primary responsibility for all the Companys interests with respect to Kenneth Cole New York design services, including design, product approval and merchandising;  International Retail and Licensing  Primary responsibility for all the Companys interests with respect to location approval, store design, visual presentation and merchandising in international Kenneth Cole New York full price retail stores.    42     3. Your compensation shall be as follows:  a. Bi-weekly base salary is $19,230.77 subject to good faith review for possible increase annually.  Salary will be subject to withholding of all taxes payable with respect thereto and deductions for insurance contributions, etc.  b. Effective upon your commencement date, you will be eligible to participate in our discretionary management bonus plan, which provides for annual awards based upon both the Company's financial condition and performance and your own performance.  Each fiscal year, you will be eligible to receive an award up to 50% of the actual base salary paid to you for the prior fiscal year, such bonus paid in the first quarter of the following fiscal year at such time as other similarly situated executives receive their bonuses.  The amount of the bonus shall be at the discretion of the Compensation Committee of the Companys Board of Directors (the Compensation Committee), which shall consider an award based on the following:  (i) one portion of the bonus based on Company performance against certain parameters established by the Company and the Compensation Committee and (ii) another portion of the bonus based on your achievement of individual targets set by the Company and the Compensation Committee in consultation with you.  These parameters and targets will be provided for you during the first quarter of each fiscal year.   For the 2006 fiscal year only, the Company guarantees a minimum bonus of $150,000.00, to be paid on or about March 1, 2007.  For 2007 and each year thereafter, in the event the Company exceeds its bonus plan targets, you will have an opportunity to receive additional bonuses of up to an additional 50% of your actual base salary paid based on terms defined by the Compensation Committee.  Payment for earned bonuses (including the fiscal 2006 bonus) is contingent upon remaining in the employ of the Company through the date on which the bonus is paid, provided, however, that in the event the Company terminates your employment not for cause, you will be eligible to receive a bonus for that fiscal year pro-rated for the number of months worked in that year, such bonus to be based solely on Company performance (that is, (i) above) and payable at the same time other executives receive their bonuses.  c. Together with your first paycheck, the Company will pay you a signing bonus of $150,000.00.  If you voluntarily terminate your employment before the first anniversary of the effective date of this Agreement, the signing bonus must be repaid to the Company in full.  4. While you are employed by the Company, and subject, of course, to the Company's right to amend, modify or terminate any benefit plan or program, you shall be entitled to earn the following benefits/perquisites:  a. Group Health Benefits  participation in the Companys Health Insurance Plan immediately upon continuous full term service.  This is a contributory plan that currently provides medical and dental coverage.  The parties agree that the Company may modify these plans at its sole discretion.  43     b. SERP  participation in the Companys Supplemental Employee Retirement Plan commencing on the first anniversary of your employment and otherwise in keeping with the terms of the Plan and the Plan documents.  c. Profit Sharing Thrift Plan  participation in the Company Employee Profit Sharing Thrift (401(k)) Plan on the first day of the quarter following six months of service.  d. Group Life and Accidental Insurance  coverage under the Companys Basic Life and Accidental Death and Dismemberment Insurance policy on the first day of the month following after two months of continuous full time service.  e. Business Travel Accident Insurance  coverage under the Companys Business Travel Accident Insurance Policy.  f. Business Expense  reimbursement for travel, entertainment and other business expenses incurred by you in connection with the Companys business, all in accordance with the Companys policies and practices for executives with the title of President.  g. Vacation  four weeks per year and otherwise in accordance with current Company policy.  h. Paid Sick Leave  in accordance with current Company policy.  5. You will be eligible to participate in the Companys restricted stock plan with the Companys management recommending to the Compensation Committee an initial grant of 20,000 shares vesting in equal installments over four years from the effective date of this Agreement, subject to all of the terms and conditions set forth in the plan documents. Thereafter, you will be eligible for annual grants of stock options and/or restricted stock if, when and on similar terms as other similarly situated executives receive their grants, subject to all of the terms and conditions set forth in the plan documents of the relevant plans.  The Companys management will also recommend to the Compensation Committee a further performance-based grant of restricted stock having a market value of $1 million vesting based on your own performance on terms defined by the Compensation Committee, subject to all of the terms and conditions set forth in the plan documents.  The restricted stock will vest at once upon the third anniversary of the effective date of this Agreement, provided: (i) you have not voluntarily terminated your employment before such date, and (ii) the Company has not terminated your employment for cause.  In the event the Company terminates your employment not for cause, this restricted stock will vest as follows:  (i) termination prior to the first anniversary of the effective date of this agreement, no vesting, and (ii) termination thereafter, vesting pro rata from the effective date.  6. If you decide to terminate your employment with the Company, you agree:  a. to provide the Company with 75 days prior written notice;  44      b. to make no public announcement concerning your departure prior to your termination date without the consent of the Company;  c. to continue to perform faithfully the duties assigned to you on the date of such notice (or such other duties as the Company may assign to you) from the date of such notice until your termination date.  You acknowledge that the notice period provided for hereunder is for the exclusive benefit of the Company, and does not confer any employment obligation on the Company.  The Company may elect, in its sole discretion and for any reason, to terminate your employment, either immediately or at any point during the 75 day period you have indicated.  Upon such termination you shall be entitled only to the payment of the base salary earned and unpaid through such date and any business expenses otherwise due you, and all insurance, benefits and other arrangements provided by the Company shall cease immediately upon termination of your employment (except as otherwise required by law).  7. In the event your employment with the Company is terminated by the Company for a reason other than cause, as herein defined, the Company agrees to provide, and you agree to accept, as the sole and exclusive remedy for the termination of your employment without cause, the following severance benefits and arrangements:  a. Continuing bi-weekly payments of your base salary, at the rate applicable as of the notice of your termination of employment, for a period of twelve months, minus the deductions required by law and with each bi-weekly payment being subject to a deduction for any salary, compensation or other form of remuneration that you have earned in other employment or self-employment during the month in question, regardless of when such amount(s) shall be payable.  You hereby agree that you have a duty to seek full time work actively and in good faith during the period in which you are collecting salary continuation.  In order to retain your right to receive and keep payments under this subparagraph, you must notify the Company immediately upon engaging in self employment or obtaining alternate employment.  For purposes of calculating appropriate deductions, the Company may require of you all documentation (including payroll, bank, and tax records) reasonably required to verify the amount of your alternate earnings for months for which you claim entitlement under this sub-paragraph. . b. Your group medical and life insurance, as described in Paragraph 4(a) and (d), will be continued until the termination of your severance payments under Paragraph 7(a) or until you become eligible for coverage as the result of your accepting a position with a new employer, whichever shall first occur.  In the event you accept employment or self-employment not inconsistent with Paragraph 9 below, the bi-weekly payments made pursuant to (a) above shall be subject to a deduction for the  45     salary or other compensation that you earn in employment or self-employment during the month in question.  It is understood and agreed that no change in your title, position, or responsibilities shall be deemed a termination of employment within the meaning of this Paragraph, provided your base salary, bonus and perquisites are maintained and provided further that your title and responsibilities will not be materially reduced and will continue to be primarily executive in nature.  The Company acknowledges that any material change in your title, position or responsibilities shall be agreed upon mutually.  In the event you believe the Company has materially changed your title, position or responsibilities without your consent, you will so notify the Companys Chief Executive Officer and Senior Vice President of Human Resources and offer the Company the opportunity to address your concerns and cure any alleged breach of this provision.  It is further understood and agreed that in the event you receive benefits under this Paragraph, you shall not be entitled to receive any other compensation or benefits under this letter agreement as a result of the termination of your employment hereunder and, as a condition to receiving that severance compensation, you hereby agree to execute a Separation Agreement and General Release acceptable to the Company and to make no other claim against the Company or its officers and/or directors by reason of this letter agreement.  In the event of a Change in Control of the Company, you may, in your sole discretion, deem such event a termination not for cause for all purposes under this Agreement, provided, however, that the restrictions in Paragraph 9 below shall not apply and further provided that the restricted stock granted pursuant to Paragraph 5 above shall vest immediately.  Change in Controlshall mean (except as provided below in this definition) (i) a change in (a) the beneficial ownership at any time by an entity or individual, either directly or indirectly, of equity securities or interests of Kenneth Cole Productions, Inc., the voting power of which constitutes more than fifty percent (50%) or more of the aggregate voting power of the outstanding equity securities or interests, as the case may be, of the subject company, or (b) the membership in the Board of Directors of any such party such that more than one-half of the directors are persons whose election has not been previously recommended by the applicable pre-existing Board of Directors, or (ii) any merger, consolidation or reorganization of Kenneth Cole Productions, Inc. in which the stockholders of the subject company immediately before the transaction do not own at least fifty percent (50%) of the combined voting power of the voting securities of the surviving entity or its parent immediately after the transaction, or (iii) any sale or transfer of all or substantially all of the assets of Kenneth Cole Productions, Inc. to a purchaser or other transferee in which the stockholders of the subject company immediately before the transaction do not own at least fifty percent (50%) of the combined voting power of the voting securities of the surviving entity or its parent immediately after the transaction.  It is understood that a going private transaction shall not constitute a Change in Control provided that Mr. Kenneth Cole remains the Chairman and Chief Executive Officer of the Company.  8. Upon any termination of employment, you agree to refrain from soliciting any employee of the Company to terminate his/her employment or from hiring any employee of the Company for a period of 24 months thereafter and to refrain from using any confidential or proprietary information obtained through your employment with the Company.  You further agree to refrain from making any statements or comments of a defamatory or disparaging nature to third parties  46     regarding the Company or its officers, directors, personnel or products.  Any failure to comply with the provisions of this Paragraph shall relieve the Company of any of its obligations pursuant to this letter agreement.  In the event that the Company wishes to issue a press release regarding your employment with the Company or any other press release referencing you by name or title, that announcement and the timing of that announcement will be subject to your prior approval, such approval not to be unreasonably withheld.  9. You agree that during your employment with the Company, and during the period you continue to receive either salary payments during any notice period in Paragraph 6, are eligible to receive severance payments pursuant to Paragraph 7, or for a six month period following termination for cause (the "Non-Competitive Period"), you shall not, directly or indirectly, as owner, partner, joint venture, stockholder, employee, broker, agent, principal, trustee, corporate officer, director, licensor, or in any other capacity engage in, become financially interested in, be employed by, or render any consultation or business advice with respect to any business which is competitive with products or services of the Company, in any geographic area where, at the time of the termination of your employment hereunder, the business of the Company or its affiliates was being conducted or was proposed to be conducted; provided, however, that you may own any securities of any corporation which is engaged in such business and is publicly owned and traded but in an amount not to exceed at any one time one percent of any class of stock or securities of such corporation.  In addition, you shall not, directly or indirectly, during the Non-Competitive Period, request or cause any suppliers or customers with whom the Company or its affiliates has a business relationship to cancel or terminate any such business relationship with the Company or its affiliates.  If any portion of the restrictions set forth in this Paragraph should, for any reason, whatsoever, be declared invalid by a court of competent jurisdiction, the validity or enforceability of the remainder of such restrictions shall not thereby be adversely affected.  You acknowledge that the Company and its affiliates conduct business throughout North, Central and South America, Asia, and Europe, that its sales and marketing prospects are for continued expansion, and that, therefore, the territorial and time limitations set forth in this Paragraph are reasonable and properly required for the adequate protection of the business of the Company and its affiliates.  In the event any such territorial or time limitation is deemed to be unreasonable by a court of competent jurisdiction, you agree to the reduction of the territorial or time limitation to the area or period which such court shall deem reasonable.  The existence of any claim or cause of action by you against the Company shall not constitute a defense to the enforcement by the Company or its affiliates of the foregoing restrictive covenants, but such claim or cause of action shall be determined separately.  10. If you are terminated for "cause" by the Company, you will not be eligible for any benefits under this letter agreement except COBRA or as required by other law.  "Termination for cause" shall be deemed to occur if the Company terminates you for willful misconduct injurious to the Company's interests, willful breach of duty in the course of your employment (after notice and reasonable opportunity to cure, if reasonable under the circumstances), incapacity to perform your duty (for a period of 180 days) or if you are convicted for the commission of a felony.  47      11. Should any disagreement, claim or controversy arise between you and the Company with respect to a termination, the same shall be settled by arbitration in New York, New York before a single arbitrator in accordance with the then-current national rules for resolution of employment disputes of the American Arbitration Association, and the award of the arbitrator with respect to a termination pursuant to this letter agreement shall be enforceable in any court of competent jurisdiction and shall be binding upon the parties hereto, except that the Company may seek equitable relief with respect to any breaches of Paragraphs 6 through 9 of this letter agreement.  12. The invalidity or unenforceability of any particular provision or provisions of this letter agreement shall not affect the other provisions hereof and this letter agreement shall be construed in all respects as if such invalid or unenforceable provisions had been omitted.  13. This letter agreement constitutes the full and complete understanding and agreement of the parties, supersedes all prior representations, understandings and agreements as to your employment by the Company  and cannot be amended, changed, modified in any respect, without the written consent of the parties, except that the Company reserves the right in its sole discretion to make changes at any time to the other documents referenced in this letter agreement.  14. This letter agreement shall be binding upon and shall inure to the benefit of successors and assigns of the Company.  15. This letter agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts entered into and fully performed in the State of New York, without regard to its provisions as to choice of laws, except insofar as the federal Arbitration Act applies.  16. You may not assign your rights or duties under this letter agreement without the prior written consent of the Company (except to a company wholly owed by you, provided you continue to perform all duties personally), but the Company may assign this letter agreement without prior notice to or consent from you.  This offer of employment is contingent upon your review and execution of all of our standard new-hire paperwork, including, but not necessarily limited to:  · The Company Job Application · IRS Form W-4 (for tax withholding purposes) · Form I-9 (concerning legal eligibility for employment) · Acknowledgment of receipt of Employee Handbook and Arbitration Agreement · Employee Code of Conduct  We are enclosing a copy of the requisite new-hire paperwork with this letter agreement.  In any event, you should familiarize yourself with it before you sign this letter agreement or otherwise accept employment with us. If the foregoing is agreeable to you, please sign both copies of this letter agreement and return them to me.  A fully executed original will be returned to you.  48      Very truly yours,  KENNETH COLE PRODUCTIONS, INC.  /s/ Michael F. Colosi Michael F. Colosi Corporate Vice President, General Counsel & Secretary  Agreed to and accepted this 9th day of October, 2006  /s/Joshua G. Schulman Joshua G. Schulman                                49     Exhibit 10.30 October 12, 2006  Dear Doug,  This letter agreement (the Agreement) will serve to confirm our understanding of the terms of your continued employment as President: Kenneth Cole Reaction Brand and Design Services for Kenneth Cole Productions, Inc. (together with its subsidiaries, divisions and affiliates, the "Company").  1. The Company will continue to employ you and you agree to continue to serve as President of the Kenneth Cole Reaction Brand and Design Services.  You agree to devote your full time and best efforts to the satisfactory performance of such services and duties as the position requires.  You will report to the Companys Chief Executive Officer. At no time during the term of this agreement will you report to any title lower than CEO of the company.  Except as expressly provided herein, you and the Company hereby agree that this Agreement replaces and terminates all prior agreements with the Company.  You further expressly agree that this replacement and termination do not give rise to any obligations on the part of the Company and that you do not have, and will not advance, any rights or claims under any prior agreement.  Your employment continues to be subject to and governed by the terms of the Company Employee Handbook (the Handbook), except to the extent that this Agreement conflicts with and thus supersedes the terms of the Handbook.  As President of the Kenneth Cole Reaction Brand and Design Services, you will have the primary responsibility for defining and executing the Kenneth Cole Reaction brand strategy across all channels and product categories.  As such, you will influence all aspects of the Kenneth Cole Reaction business including merchandising, merchandise planning, wholesale distribution strategy, licensing, marketing and public relations for the brand.  In addition, you shall have primary responsibility for direction of Design Services for all current brands with the exception of Kenneth Cole New York.  2.         Your compensation shall be as follows:  a. Bi-weekly base salary is $19,230.77 subject to good faith review for possible increase annually.  Salary will be subject to withholding of all taxes payable with respect thereto and deductions for insurance contributions, etc.  b. Effective upon your commencement date, you will be eligible to participate in our discretionary management bonus plan, which provides for annual awards based upon both the Company's financial condition and performance and your own performance.  Each fiscal year, you will be eligible to receive a target award of 50% of the actual base salary paid to you for the prior fiscal year, such bonus paid in the first quarter of the following fiscal year at such time as other similarly situated executives receive their bonuses.  The amount of the bonus shall be at the discretion of the Compensation Committee of the Companys Board of Directors (the  50     Compensation Committee), which shall consider an award based on the following:  (i) one portion of the bonus based on Company performance against certain parameters established by the Company and the Compensation Committee and (ii) another portion of the bonus based on your achievement of individual targets set by the Company and the Compensation Committee in consultation with you.  These parameters and targets will be provided for you during the first quarter of each fiscal year.   In each fiscal year, in the event the Company exceeds its bonus plan targets, you will have an opportunity to receive additional bonuses of up to an additional 50% of your actual base salary paid based on terms defined by the Compensation Committee.  3.         Payment for earned bonuses is contingent upon remaining in the employ of the Company through the end of the fiscal year on which the bonus is based provided, however, that in the event the Company terminates your employment not for cause pursuant to Paragraph 7 below, you will be eligible to receive a bonus for that fiscal year pro-rated for the number of months worked in that year, such bonus to be based solely on Company performance (that is, (i) above) and payable at the same time other executives receive their bonuses.  4. While you are employed by the Company, and subject, of course, to the Company's right to amend, modify or terminate any benefit plan or program, you shall be entitled to earn the following benefits/perquisites:  a. Group Health Benefits  participation in the Companys Health Insurance Plan.  This is a contributory plan that currently provides medical and dental coverage.  The parties agree that the Company may modify these plans at its sole discretion.  b. SERP  participation in the Companys Supplemental Employee Retirement Plan commencing on the first anniversary of your employment and otherwise in keeping with the terms of the Plan and the Plan documents.  c. Profit Sharing Thrift Plan  participation in the Company Employee Profit Sharing Thrift (401(k)) Plan.  d. Group Life and Accidental Insurance  coverage under the Companys Basic Life and Accidental Death and Dismemberment Insurance policy.  e. Business Travel Accident Insurance  coverage under the Companys Business Travel Accident Insurance Policy.  f. Business Expense  reimbursement for travel, entertainment and other business expenses incurred by you in connection with the Companys business, all in accordance with the Companys policies and practices for executives with the title of President.  g. Vacation  four weeks per year and otherwise in accordance with current Company policy.  h. Paid Sick Leave  in accordance with current Company policy.  51      5. You will be eligible to continue to participate in the Companys restricted stock plan and all prior grants thereunder will remain in effect on their existing terms.  In addition, the Companys management will recommend to the Compensation Committee an additional performance-based grant of restricted stock having a market value of $1 million vesting based on your own performance on terms defined by the Compensation Committee.  The restricted stock will vest upon the third anniversary of the effective date of this Agreement, provided: (i) you have not voluntarily terminated your employment before such date, and (ii) the Company has not terminated your employment for cause.  In the event the Company terminates your employment not for cause pursuant to Paragraph 7 below, this restricted stock will vest as follows:  (i) termination prior to the first anniversary of the effective date of this agreement, no vesting, and (ii) termination thereafter, vesting pro rata from the effective date of this agreement.  6. If you decide to terminate your employment with the Company, you agree:  a. to provide the Company with 90 days prior written notice;  b. to make no public announcement concerning your departure prior to your termination date without the consent of the Company;  c. to continue to perform faithfully the duties assigned to you on the date of such notice (or such other duties as the Company may assign to you) from the date of such notice until your termination date.  You acknowledge that the notice period provided for hereunder is for the exclusive benefit of the Company, and does not confer any employment obligation on the Company.  The Company may elect, in its sole discretion and for any reason, to terminate your employment, either immediately or at any point during the 90 day period you have indicated.  Upon such termination you shall be entitled only to the payment of the base salary earned and unpaid through such date and any business expenses otherwise due you, and all insurance, benefits and other arrangements provided by the Company shall cease immediately upon termination of your employment (except as otherwise required by law or by the terms of the relevant plan documents).  7. In the event your employment with the Company is terminated by the Company for a reason other than cause, as herein defined, the Company agrees to provide, and you agree to accept, as the sole and exclusive remedy for the termination of your employment without cause, the following severance benefits and arrangements:  a. Continuing bi-weekly payments of your base salary, at the rate applicable as of the notice of your termination of employment, for a period of twelve months, minus the deductions required by law and with each bi-weekly payment being subject to a deduction for any salary, compensation or other form of remuneration that you have earned in other employment or self-employment during the month in question, regardless of when such amount(s) shall be payable.  You hereby agree that you have a duty to seek full time work actively and in good faith during the period in which you are collecting salary continuation.  In order to retain your right to receive and keep payments under this  52     subparagraph, you must notify the Company immediately upon engaging in self employment or obtaining alternate employment.  For purposes of calculating appropriate deductions, the Company may require of you all documentation (including payroll, bank, and tax records) reasonably required to verify the amount of your alternate earnings for months for which you claim entitlement under this sub-paragraph.  b. Your group medical and life insurance, as described in Paragraph 4(a) and (d), will be continued until the termination of your severance payments under Paragraph 7(a) or until you become eligible for coverage as the result of your accepting a position with a new employer, whichever shall first occur.  In the event you accept employment or self-employment not inconsistent with Paragraph 9 below, the bi-weekly payments made pursuant to (a) above shall be subject to a deduction for the salary or other compensation that you earn in employment or self-employment during the month in question.  It is understood and agreed that no change in your title, position, or responsibilities shall be deemed a termination of employment within the meaning of this Paragraph, provided your base salary, bonus and perquisites are maintained and provided further that your title and responsibilities will not be materially reduced and will continue to be primarily executive in nature.  You will not be assigned duties materially inconsistent with your then-current title.  In the event you believe the Company has materially changed your title, duties or responsibilities without your consent, you will so notify the Companys Chief Executive Officer and Senior Vice President of Human Resources and offer the Company the opportunity to address your concerns and cure any alleged breach of this provision.  It is further understood and agreed that in the event you receive benefits under this Paragraph, you shall not be entitled to receive any other compensation or benefits under this letter agreement as a result of the termination of your employment hereunder and, as a condition to receiving that severance compensation, you hereby agree to execute a Separation Agreement and General Release acceptable to the Company and to make no other claim against the Company or its officers and/or directors by reason of this letter agreement.  In the event of a Change in Control of the Company, you may for a period of one year from the date of such event, in your sole discretion, deem such event a termination not for cause for all purposes under this Agreement.  Change in Controlshall mean (except as provided below in this definition) (i) a change in (a) the beneficial ownership at any time by an entity or individual, either directly or indirectly, of equity securities or interests of Kenneth Cole Productions, Inc., the voting power of which constitutes more than fifty percent (50%) or more of the aggregate voting power of the outstanding equity securities or interests, as the case may be, of the subject company, or (b) the membership in the Board of Directors of any such party such that more than one-half of the directors are persons whose election has not been previously recommended by the applicable pre-existing Board of Directors, or (ii) any merger, consolidation or reorganization of Kenneth Cole Productions, Inc. in which the stockholders of the subject company immediately before the transaction do not own at least fifty percent (50%) of the combined voting power of  53     the voting securities of the surviving entity or its parent immediately after the transaction, or (iii) any sale or transfer of all or substantially all of the assets of Kenneth Cole Productions, Inc. to a purchaser or other transferee in which the stockholders of the subject company immediately before the transaction do not own at least fifty percent (50%) of the combined voting power of the voting securities of the surviving entity or its parent immediately after the transaction.  It is understood that a going private transaction shall not constitute a Change in Control provided that Mr. Kenneth Cole remains the Chairman and Chief Executive Officer of the Company.  If any amount, entitlement, or benefit paid or payable to you or provided for your benefit under this Agreement and under any other agreement, plan or program of the Company or any Affiliate (such payments, entitlements and benefits referred to as a "Payment") constitutes an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended from time to time (the "Code") (the aggregate of such Payments being hereinafter referred to as the "Excess Parachute Payments"), and is subject to the excise tax imposed by Section 4999 of the Code, or any similar federal or state law (an "Excise Tax"), then notwithstanding anything contained in this Agreement to the contrary, the Company shall promptly pay to you an additional amount (the "gross-up payment") that after reduction for all taxes (including but not limited to the Excise Tax) with respect to such gross-up payment equals the Excise Tax with respect to the Excess Parachute Payments. The determination as to whether the Executives payments and benefits include Excess Parachute Payments, and, if so, the amount of such payments, the amount of any Excise Tax owed with respect thereto, and the amount of any gross-up payment shall be made at the Company's expense by a nationally recognized certified public accounting firm as the Compensation Committee may designate prior to the Change in Control (the "accounting firm"). As a result of the uncertainty in the application of the Excise Tax at the time of the initial determination by the accounting firm hereunder, it is possible that gross-up payments which will not have been made by the Company should have been made ("Underpayment") or gross-up payments are made by the Company which should not have been made ("Overpayment"), consistent with the calculations required to be made hereunder. In the event that you are required to make a payment of any Excise Tax, the accounting firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of you. In the event the amount of gross-up payment exceeds the amount necessary to reimburse you for your Excise Tax, the accounting firm shall determine the amount of the Overpayment that has been made and any such Overpayment shall be promptly paid by you to or for the benefit of the Company. You shall cooperate with any reasonable requests by the Company in connection with any contests or disputes with the Internal Revenue Service in connection with the Excise Tax.  8. Upon any termination of employment, you agree to refrain from soliciting any employee of the Company to terminate his/her employment or from hiring any employee of the Company for a period of 24 months thereafter and to refrain from using any confidential or proprietary information obtained through your employment with the Company.  You further agree to refrain from making any statements or comments of a defamatory or disparaging nature to third parties regarding the Company or its officers, directors, personnel or products.  Any failure to comply with the provisions of this Paragraph shall relieve the Company of any of its obligations pursuant to this letter agreement.  In the event that the Company wishes to issue a press release regarding your employment with the Company or any other press release referencing you by name or title,  54     that announcement and the timing of that announcement will be subject to your prior approval, such approval not to be unreasonably withheld.  9. You agree that during your employment with the Company, and during the period you continue to receive either salary payments during any notice period in Paragraph 6 or receive severance payments pursuant to Paragraph 7, or for a six month period following termination for cause (the "Non-Competitive Period"), you shall not, directly or indirectly, as owner, partner, joint venture, stockholder, employee, broker, agent, principal, trustee, corporate officer, director, licensor, or in any other capacity engage in, become financially interested in, be employed by, or render any consultation or business advice with respect to any business which is competitive with products or services of the Company, in any geographic area where, at the time of the termination of your employment hereunder, the business of the Company or its affiliates was being conducted or was proposed to be conducted; provided, however, that you may own any securities of any corporation which is engaged in such business and is publicly owned and traded but in an amount not to exceed at any one time one percent of any class of stock or securities of such corporation.  In addition, you shall not, directly or indirectly, during the Non-Competitive Period, request or cause any suppliers or customers with whom the Company or its affiliates has a business relationship to cancel or terminate any such business relationship with the Company or its affiliates.  If any portion of the restrictions set forth in this Paragraph should, for any reason, whatsoever, be declared invalid by a court of competent jurisdiction, the validity or enforceability of the remainder of such restrictions shall not thereby be adversely affected.  You acknowledge that the Company and its affiliates conduct business throughout North, Central and South America, Asia, and Europe, that its sales and marketing prospects are for continued expansion, and that, therefore, the territorial and time limitations set forth in this Paragraph are reasonable and properly required for the adequate protection of the business of the Company and its affiliates.  In the event any such territorial or time limitation is deemed to be unreasonable by a court of competent jurisdiction, you agree to the reduction of the territorial or time limitation to the area or period which such court shall deem reasonable.  The existence of any claim or cause of action by you against the Company shall not constitute a defense to the enforcement by the Company or its affiliates of the foregoing restrictive covenants, but such claim or cause of action shall be determined separately.  10. If you are terminated for "cause" by the Company, you will not be eligible for any benefits under this letter agreement except COBRA or as required by other law.  "Termination for cause" shall be deemed to occur if the Company terminates you for willful misconduct substantially injurious to the Company's interests, material willful breach of duty in the course of your employment (after notice and reasonable opportunity to cure, if reasonable under the circumstances), incapacity to perform your duty (for a period of 180 days) or if you are convicted for the commission of a felony.  11. Should any disagreement, claim or controversy arise between you and the Company with respect to a termination, the same shall be settled by arbitration in New York, New York before a single  55     arbitrator in accordance with the then-current national rules for resolution of employment disputes of the American Arbitration Association, and the award of the arbitrator with respect to a termination pursuant to this letter agreement shall be enforceable in any court of competent jurisdiction and shall be binding upon the parties hereto, except that the Company may seek equitable relief with respect to any breaches of Paragraphs 5 through 8 of this letter agreement.  12. The invalidity or unenforceability of any particular provision or provisions of this letter agreement shall not affect the other provisions hereof and this letter agreement shall be construed in all respects as if such invalid or unenforceable provisions had been omitted.  13. This letter agreement constitutes the full and complete understanding and agreement of the parties, supersedes all prior representations, understandings and agreements as to your employment by the Company  and cannot be amended, changed, modified in any respect, without the written consent of the parties, except that the Company reserves the right in its sole discretion to make changes at any time to the other documents referenced in this letter agreement.  14. This letter agreement shall be binding upon and shall inure to the benefit of successors and assigns of the Company.  15. This letter agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts entered into and fully performed in the State of New York, without regard to its provisions as to choice of laws, except insofar as the federal Arbitration Act applies.  16. You may not assign your rights or duties under this letter agreement without the prior written consent of the Company, but the Company may assign this letter agreement without prior notice to or consent from you.  You hereby confirm that you have executed of all of our standard employment paperwork, including, but not necessarily limited to: · IRS Form W-4 (for tax withholding purposes) · Form I-9 (concerning legal eligibility for employment) · Acknowledgment of receipt of Employee Handbook and Arbitration Agreement · Employee Code of Conduct  If the foregoing is agreeable to you, please sign both copies of this letter agreement and return them to me.  A fully executed original will be returned to you. Very truly yours,  KENNETH COLE PRODUCTIONS, INC. /s/Linda Nash Merker Linda Nash Merker SVP, Human Resources  Agreed to and accepted this /s/Douglas Jakubowski 12th day of October, 2006 Douglas Jakubowski  56