<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the period ended June 30, 1996
----------------------------------------------------
OR
___ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________________to____________________
Commission File number 0-18490
-------
K-SWISS INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-4265988
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20664 Bahama Street, Chatsworth, CA 91311
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
818-998-3388
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Shares of common stock outstanding at July 24, 1996:
Class A 4,085,851
Class B 2,495,572
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------
K-SWISS INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 41,407 $ 31,431
Accounts receivable, less allowance for doubtful
accounts of $682 and $873 as of June 30, 1996
and December 31, 1995, respectively 19,064 14,764
Inventories 30,037 41,203
Prepaid expenses 1,160 1,197
Deferred taxes 4,563 4,191
-------- --------
Total current assets 96,231 92,786
PROPERTY, PLANT AND EQUIPMENT, net 3,500 3,570
OTHER ASSETS
Intangible assets 5,136 5,096
Other 856 926
-------- --------
5,992 6,022
-------- --------
$105,723 $102,378
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank lines of credit $ 535 $ 371
Current maturities of capital lease obligations
and subordinated debentures 205 43
Trade accounts payable 4,159 4,529
Accrued liabilities 5,918 4,660
------- -------
Total current liabilities 10,817 9,603
CAPITAL LEASE OBLIGATIONS 5 6
SUBORDINATED DEBENTURES 300 500
DEFERRED TAXES 8,910 8,200
STOCKHOLDERS' EQUITY
Preferred Stock-authorized 2,000,000 shares of
$.01 par value; none issued and outstanding - -
Common Stock:
Class A-authorized 18,000,000 shares of $.01 par
value; issued and outstanding 4,085,851 shares
at June 30, 1996 and December 31, 1995 41 41
Class B-authorized 10,000,000 shares of $.01 par
value; issued and outstanding 2,495,572 shares
at June 30, 1996 and December 31, 1995 25 25
Additional paid-in capital 25,088 25,088
Retained earnings 60,592 59,460
Foreign currency translation (55) (545)
-------- --------
85,691 84,069
-------- --------
$105,723 $102,378
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
K-SWISS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $60,384 $72,492 $26,019 $29,731
Cost of goods sold 40,199 43,951 18,279 18,214
------- ------- ------- -------
Gross profit 20,185 28,541 7,740 11,517
Selling, general and administrative
expenses 17,267 19,564 8,091 9,148
------- ------- ------- -------
Operating profit (loss) 2,918 8,977 (351) 2,369
Interest income, net 576 240 212 133
------- ------- ------- -------
Earnings (loss) before income taxes 3,494 9,217 (139) 2,502
Income tax expense 2,098 3,683 592 999
------- ------- ------- -------
NET EARNINGS (LOSS) $ 1,396 $ 5,534 $ (731) $ 1,503
======= ======= ======= =======
Earnings (loss) per share $ .21 $ .83 $ (.11) $ .23
======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding 6,593 6,671 6,581 6,634
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
K-SWISS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1996 1995
-------- --------
<S> <C> <C>
Net cash provided by operating activities $10,733 $ 7,047
Cash flows from investing activities:
Cash paid for acquisition of certain assets and rights of Robey Sportswear (436) -
Proceeds from maturity of investment securities - 5,102
Purchase of property, plant and equipment (270) (225)
------- -------
Net cash (used in) provided by investing activities (706) 4,877
Cash flows from financing activities:
Net borrowings (repayments) under the bank lines of credit and capital leases 123 (2,454)
Proceeds from stock options exercised - 55
Income tax benefit of options exercised - 9
Payment of dividends (264) (264)
------- -------
Net cash used in financing activities (141) (2,654)
Effect of exchange rate changes on cash 90 (110)
------- -------
Net increase in cash and cash equivalents 9,976 9,160
Cash and cash equivalents at beginning of period 31,431 10,717
------- -------
Cash and cash equivalents at end of period $41,407 $19,877
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
K-SWISS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the consolidated
financial position of K-Swiss Inc. (the "Company") as of June 30, 1996 and
the results of its operations and its cash flows for the six and three
months ended June 30, 1996 and 1995. The results of operations and cash
flows for the six and three months ended June 30, 1996 are not necessarily
indicative of the results to be expected for any other interim period or
the full year. These consolidated financial statements should be read in
combination with the audited consolidated financial statements and notes
thereto for the year ended December 31, 1995.
2. The federal income tax returns of the Company for the years ended 1990,
1991 and 1992 are under examination by the Internal Revenue Service
("IRS"). In December 1995, the IRS issued its report proposing additional
taxes of approximately $3,850,000 plus penalties and interest. The Company
is appealing the IRS assessment. Also, the federal income tax returns of
the Company for the years ended 1993 and 1994 are currently in preliminary
stages of examination by the IRS. Although no assurance can be given
regarding the outcome of such examinations, the Company believes that any
taxes which might become payable as a result of the proposed assessments
for tax years 1990, 1991 and 1992 as well as any reasonably forseeable
assessments for tax years 1993 and 1994 would not result in additional
expense recognized in the financial statements other than interest and
penalties, if any, as the Company has recorded deferred income taxes on the
untaxed portion of unremitted earnings of a foreign subsidiary. Therefore,
management believes that resolution of the IRS examinations should not have
a material adverse impact on the Company's financial position and results
of operations.
5
<PAGE>
ITEM 2.
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
certain items in the consolidated statements of operations relative to revenues.
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
1996 1995 1996 1995
------- ------ ------- ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 66.6 60.6 70.2 61.3
Gross profit 33.4 39.4 29.8 38.7
Selling, general and administrative
expenses 28.6 27.0 31.1 30.7
Interest income, net 1.0 0.3 0.8 0.4
Earnings (loss) before income taxes 5.8 12.7 (0.5) 8.4
Income tax expense 3.5 5.1 2.3 3.3
Net earnings (loss) 2.3 7.6 (2.8) 5.1
</TABLE>
Revenues decreased to $26,019,000 for the quarter ended June 30, 1996 from
$29,731,000 for the quarter ended June 30, 1995, a decrease of $3,712,000 or
12.5%. Revenues decreased to $60,384,000 for the six months ended June 30, 1996
from $72,492,000 for the six months ended June 30, 1995, a decrease of
$12,108,000 or 16.7%. This decrease resulted from a decrease in the volume of
footwear sold to 1,181,000 pair for the quarter ended June 30, 1996 from
1,348,000 pair for the quarter ended June 30, 1995. The volume of footwear sold
decreased to 2,608,000 pair for the six months ended June 30, 1996 from
3,302,000 pair for the six months ended June 30, 1995. The decrease in the
volume of footwear sold for the quarter ended June 30, 1996 was primarily the
result of decreased sales of the Classic and children's categories of shoes of
21.2%, and 15.8%, respectively, partially offset by an increase in the
tennis/court category of shoes of 37.5%. The average wholesale price per pair
decreased by 3.4% to $20.17 for the quarter ended June 30, 1996 from $20.88 for
the quarter ended June 30, 1995. The average wholesale price per pair was
$21.16 for the six months ended June 30, 1996 and $21.04 for the six months
ended June 30, 1995. The decrease in the average wholesale price per pair for
the quarter ended June 30, 1996, is primarily attributable to the change in the
product and geographic mix of sales.
Domestic revenues decreased 20.7% to $18,090,000 for the quarter ended June 30,
1996 from $22,798,000 for the quarter ended June 30, 1995. Domestic revenues
decreased 25.1% to $42,206,000 for the six months ended June 30, 1996 from
$56,320,000 for the six months ended June 30, 1995. International revenues
increased 14.4% to $7,929,000 for the quarter ended June 30, 1996 from
$6,933,000 for the quarter ended June 30, 1995. International revenues
increased 12.4% to $18,178,000 for the six months ended June 30, 1996 from
$16,172,000 for the six months ended June 30, 1995. International revenues, as
a percentage of total revenues, increased to 30.5% and 30.1% for the quarter and
six months ended June 30, 1996 as compared with 23.3% and 22.3% for the quarter
and six months ended June 30, 1995. International revenues increased due
primarily to the sales of apparel made by the Company's newly acquired
Netherlands' subsidiary.
Gross profit margins, as a percentage of revenues, decreased to 29.8% for the
quarter ended June 30, 1996, from 38.7% for the quarter ended June 30, 1995.
Gross profit margins, as a percentage of revenues, decreased to 33.4% from 39.4%
for the six months ended June 30, 1996 and 1995, respectively. Gross profit
margins decreased primarily due to an increase of $372,000 in the estimated
inventory reserve to reduce the carrying value to net realizable value on
certain styles of shoes in the Classic category. In addition, gross profit
margins decreased primarily due to changes in the geographic and product mix of
sales, including an increase in close-out sales.
6
<PAGE>
Selling, general and administrative expenses decreased to $8,091,000 (31.1% of
revenues) and $17,267,000 (28.6% of revenues) for the quarter and six months
ended June 30, 1996, respectively, from $9,148,000 (30.7% of revenues) and
$19,564,000 (27.0% of revenues) for the quarter and six months ended June 30,
1995, respectively, a decrease of $1,057,000 and $2,297,000 or 11.6% and 11.7%,
respectively. The decreases in the amounts for the quarter and six months ended
June 30, 1996 were primarily the result of a decrease in payroll and payroll
costs, as well as increased bad debt expense recorded during the six months
ended June 30, 1995, due to the unexpected bankruptcies of two of the Company's
larger customers. In addition, reductions were made for potential contributions
to the employee's profit sharing plan for the quarter ended June 30, 1996. For
the six months ended June 30, 1996, the increase in selling, general and
administrative expenses, as a percentage of sales, was primarily the result of
an increase in direct advertisement and promotion activities.
Net interest income was $212,000 (0.8% of revenues) and $576,000 (1.0% of
revenues) for the quarter and six months ended June 30, 1996, respectively,
compared to $133,000 (0.4% of revenues) and $240,000 (0.3% of revenues) for the
quarter and six months ended June 30, 1995, respectively, a change of $79,000
and $336,000 or 59.4% and 140.0%, respectively. For the quarter and six months
ended June 30, 1996 as compared to the quarter and six months ended June 30,
1995, increases in net interest income was the result of higher average
balances, partially offset by lower average rates, on commercial paper
investments and lower average outstanding balances owed under the Company's
revolving credit facilities. This increase was partially offset by interest
expense recorded relating to taxes assessed as a result of a state income tax
audit.
The Company's effective tax rate increased to 60.0% of earnings before income
tax from 40.0% for the six months ended June 30, 1996 and 1995, respectively,
due primarily to recording income taxes relating to a state income tax audit.
The Company recorded a net loss of $731,000 for the quarter ended June 30, 1996
and net earnings of $1,503,000 for the quarter ended June 30, 1995. Net
earnings decreased 74.8% to $1,396,000 for the six months ended June 30, 1996
from $5,534,000 for the six months ended June 30, 1995. Net earnings for the
quarter and six months ended June 30, 1996 included net losses of the Company's
European operations of $910,000 and $767,000, respectively. Net earnings for the
quarter and six months ended June 30, 1995 included net losses incurred by the
Company's Canadian operations of $85,000 and $325,000, respectively, and net
losses of the Company's European operations of $31,000 and $191,000,
respectively. In January 1996, K-Swiss Canada adopted a voluntary liquidation
program and an independent distributor was appointed to serve the Canadian
market.
At June 30, 1996 and 1995, domestic footwear futures orders with start ship
dates from July through December 1996 and 1995 were approximately $19,645,000
and $24,969,000, respectively. At June 30, 1996 and 1995, international
footwear futures orders with start ship dates from July through December 1996
and 1995 were approximately $6,681,000 and $10,262,000, respectively.
"Backlog", as of any date, represents orders scheduled to be shipped within the
next six months. Backlog does not include orders scheduled to be shipped on or
prior to the date of determination of backlog. These orders are not necessarily
indicative of revenues for subsequent periods because: (1) the mix of "futures"
and "at-once" orders can vary significantly from quarter to quarter and year to
year and (2) the rate of customer order cancellations can also vary from quarter
to quarter and year to year.
7
<PAGE>
Liquidity and Capital Resources
The Company generated cash of $10,733,000 and $7,047,000 from its operating
activities during the six months ended June 30, 1996 and 1995, respectively.
Cash provided by operations for the six months ended June 30, 1996 as compared
to the six months ended June 30, 1995 varied primarily due to changes in
accounts receivable, inventories, and accounts payable and accrued liabilities,
as well as a decrease in net earnings.
The Company had a net outflow of cash from its investing activities for the six
months ended June 30, 1996 due to the purchase of certain assets and rights of a
small apparel brand where products are primarily sold in the Netherlands. The
Company had a net inflow of cash from its investing activities for the six
months ended June 30, 1995 due to the maturity of investment securities.
Depending on the Company's future growth rate, funds may be required by
operating activities. With continued use of its revolving credit facility and
internally generated funds, the Company believes its present and anticipated
sources of capital are sufficient to sustain its capital needs for the remainder
of 1996.
In November 1995, the Company announced a share repurchase program whereby the
Company may purchase, from time to time as market conditions warrant, up to
$10,000,000 of its Class A Common Stock on the open market through December
1996. The Company adopted this program because it believes under appropriate
circumstances repurchasing its shares can be a good use of excess cash depending
on the Company's array of alternatives. To date, the Company has not made any
purchases under this program.
The Company's working capital increased $2,231,000 to $85,414,000 at June
30, 1996 from $83,183,000 at December 31, 1995.
8
<PAGE>
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings.
-----------------
None.
ITEM 2: Changes in Securities.
---------------------
None.
ITEM 3: Defaults Upon Senior Securities.
-------------------------------
None.
ITEM 4: Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
(a) The Annual Meeting of Stockholders was held May 23, 1996.
(b) The following directors were elected to serve until the 1997
Annual Meeting of Stockholders or until their successors have been
duly elected and qualified:
Class A Directors Class B Directors
----------------- -----------------
Jonathan K. Layne Steven Nichols
Martyn Wilford George Powlick
Stanley Bernstein
Lawrence Feldman
Stephen Fine
(c) Of the 3,738,268 shares of Class A Common Stock represented at the
meeting, the Class A Directors named in (b) above were elected by
the following votes:
No. Of Votes Received
------------------------------
Name For Withheld Authority
-------------- --------- ------------------
Jonathan K. Layne 3,707,895 30,373
Martyn Wilford 3,708,595 29,673
Of the 2,382,546 shares of Class B Common Stock represented at the
meeting, the Class B Directors named in (b) above were elected by
the following votes:
No. Of Votes Received
------------------------------
Name For Withheld Authority
-------------- --------- ------------------
Steven Nichols 23,825,460 -
George Powlick 23,825,460 -
Stanley Bernstein 23,825,460 -
Lawrence Feldman 23,825,460 -
Stephen Fine 23,825,460 -
9
<PAGE>
ITEM 5: Other Information.
-----------------
None.
ITEM 6: Exhibits and Reports on Form 8-K:
--------------------------------
(a) Exhibits
11 Computation of Earnings Per Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the second quarter
of 1996.
10
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
K-Swiss Inc.
Date: July 23, 1996 By: /s/ George Powlick
-------------------------------
George Powlick,
Vice President Finance and
Chief Financial Officer
11
<PAGE>
EXHIBIT INDEX
--------------
Exhibit Page
- ------- ----
11 Computation of Earnings Per Share. 13
27 Financial Data Schedule. 14
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- ----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY
Earnings (loss) applicable
to common stock $ 1,396 $5,534 $ (731) $1,503
======= ====== ====== ======
Weighted average shares:
Average shares outstanding 6,581 6,576 6,581 6,577
Net effect of warrants and dilutive
stock options based on application
of treasury stock method using
average market price 12 95 - 57
------ ------ ------ ------
Total average shares 6,593 6,671 6,581 6,634
====== ====== ====== ======
Earnings (loss) per share $ .21 $ .83 $ (.11) $ .23
====== ====== ====== ======
</TABLE>
FULLY DILUTED
Fully diluted earnings per share are considered equal to primary earnings per
share due to immaterial dilution.
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 41,407
<SECURITIES> 0
<RECEIVABLES> 19,746
<ALLOWANCES> (682)
<INVENTORY> 30,037
<CURRENT-ASSETS> 96,231
<PP&E> 3,500
<DEPRECIATION> 0
<TOTAL-ASSETS> 105,723
<CURRENT-LIABILITIES> 10,817
<BONDS> 0
0
0
<COMMON> 66
<OTHER-SE> 85,625
<TOTAL-LIABILITY-AND-EQUITY> 105,723
<SALES> 60,384
<TOTAL-REVENUES> 60,384
<CGS> 40,199
<TOTAL-COSTS> 17,267
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (576)<F1>
<INCOME-PRETAX> 3,494
<INCOME-TAX> 2,098
<INCOME-CONTINUING> 1,396
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,396
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
<FN>
<F1>INTEREST INCOME NET OF INTEREST EXPENSE
</FN>
</TABLE>
