<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, 1997
-------------
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 22, 1997:
Class A 3,269,035
Class B 2,490,572
<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,
1997 1996
-------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $27,163 $ 34,314
Investment securities 9,619 -
Accounts receivable, less allowance for doubtful
accounts of $882 and $630 as of June 30, 1997
and December 31, 1996, respectively 20,503 14,702
Inventories 21,972 23,789
Prepaid expenses 9,250 15,674
Deferred taxes 1,745 2,058
------- --------
Total current assets 90,252 90,537
PROPERTY, PLANT AND EQUIPMENT, net 3,869 3,910
OTHER ASSETS
Intangible assets 4,844 5,005
Other 543 823
------- --------
5,387 5,828
------- --------
$99,508 $100,275
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank lines of credit $ 840 $ 1,209
Current maturities of capital lease obligations
and subordinated debentures 351 302
Trade accounts payable 4,210 3,239
Accrued liabilities 8,630 6,490
------- -------
Total current liabilities 14,031 11,240
SUBORDINATED DEBENTURES 150 200
DEFERRED TAXES 9,109 9,266
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;
4,090,235 shares issued, 3,271,535 shares outstanding
and 818,700 shares held in treasury at June 30, 1997
and 4,087,018 shares issued, 3,585,018 shares
outstanding and 502,000 shares held in treasury
at December 31, 1996 41 41
Class B-authorized 10,000,000 shares of $.01 par value;
issued and outstanding 2,495,572 shares at June 30, 1997
and December 31, 1996 25 25
Additional paid-in capital 25,135 25,100
Treasury stock (9,401) (5,221)
Retained earnings 60,599 59,675
Foreign currency translation (181) (51)
-------- --------
76,218 79,569
-------- --------
$99,508 $100,275
======= ========
</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,
----------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $59,614 $60,384 $28,415 $26,019
Cost of goods sold 38,282 40,199 18,805 18,279
------- ------- ------- -------
Gross profit 21,332 20,185 9,610 7,740
Selling, general and administrative
expenses 20,174 17,267 10,620 8,091
------- ------- ------- -------
Operating profit (loss) 1,158 2,918 (1,010) (351)
Interest income, net 814 576 435 212
------- ------- ------- -------
Earnings (loss) before income taxes 1,972 3,494 (575) (139)
Income tax expense (benefit) 812 2,098 (196) 592
------- ------- ------- -------
NET EARNINGS (LOSS) $ 1,160 $ 1,396 $ (379) $ (731)
======= ======= ======= =======
Earnings (loss) per share $.19 $.21 $(.06) $(.11)
======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding 6,031 6,593 5,938 6,581
</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,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Net cash provided by operating activities $ 7,645 $10,733
Cash flows from investing activities:
Cash paid for acquisition of certain assets and rights of Robey Sportswear - (436)
Purchase of investment securities (9,619) -
Purchase of property, plant and equipment (307) (270)
------- -------
Net cash used in investing activities (9,926) (706)
Cash flows from financing activities:
Net (repayments) borrowings under bank lines of credit and capital leases (370) 123
Purchase of treasury stock (4,180) -
Proceeds from stock options exercised 31 -
Income tax benefit of options exercised 4 -
Payment of dividends (236) (264)
------- -------
Net cash used in financing activities (4,751) (141)
Effect of exchange rate changes on cash (119) 90
------- -------
Net (decrease) increase in cash and cash equivalents (7,151) 9,976
Cash and cash equivalents at beginning of period 34,314 31,431
------- -------
Cash and cash equivalents at end of period $27,163 $41,407
======= =======
</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, 1997 and
the results of its operations and its cash flows for the six and three
months ended June 30, 1997 and 1996. The results of operations and cash
flows for the six and three months ended June 30, 1997 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, 1996.
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 foreseeable
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.
3. In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS No. 128), Earnings Per
Share. SFAS No. 128 establishes standards of computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock. SFAS No. 128 simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15 and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the statement of earnings for all
entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997; earlier application is not permitted. The
pro forma basic and diluted EPS calculated under SFAS No. 128 would equal
the primary earnings per share for the periods ended June 30, 1997 and
1996.
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,
--------------- ---------------
1997 1996 1997 1996
---- ---- ----- ----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 64.2 66.6 66.2 70.2
Gross profit 35.8 33.4 33.8 29.8
Selling, general and administrative
expenses 33.9 28.6 37.4 31.1
Interest income, net 1.4 1.0 1.6 0.8
Earnings (loss) before income taxes 3.3 5.8 (2.0) (0.5)
Income tax expense (benefit) 1.4 3.5 (0.7) 2.3
Net earnings (loss) 1.9 2.3 (1.3) (2.8)
</TABLE>
Revenues increased to $28,415,000 for the quarter ended June 30, 1997 from
$26,019,000 for the quarter ended June 30, 1996, an increase of $2,396,000 or
9.2%. Revenues decreased to $59,614,000 for the six months ended June 30, 1997
from $60,384,000 for the six months ended June 30, 1996, a decrease of $770,000
or 1.3%. The increase for the quarter resulted from an increase in the volume
of footwear sold to 1,275,000 pair for the quarter ended June 30, 1997 from
1,181,000 pair for the quarter ended June 30, 1996. The increase in the volume
of footwear sold for the quarter ended June 30, 1997 was primarily the result of
increased sales of the Classic and children's categories of shoes of 14.4% and
12.4%, respectively. The decrease for the six months resulted from a decrease in
apparel sales, partially offset by an increase in footwear sales. The volume of
footwear sold increased to 2,611,000 pair for the six months ended June 30, 1997
from 2,608,000 pair for the six months ended June 30, 1996. The average
wholesale price per pair increased by 2.8% to $20.73 for the quarter ended June
30, 1997 from $20.17 for the quarter ended June 30, 1996. The average wholesale
price per pair was $21.35 for the six months ended June 30, 1997 and $21.16 for
the six months ended June 30, 1996. The increase in the average wholesale price
per pair for the quarter ended June 30, 1997, is primarily attributable to the
change in the product and geographic mix of sales.
Domestic revenues increased 20.1% to $21,727,000 for the quarter ended June 30,
1997 from $18,090,000 for the quarter ended June 30, 1996. Domestic revenues
increased 7.8% to $45,487,000 for the six months ended June 30, 1997 from
$42,206,000 for the six months ended June 30, 1996. International revenues
decreased 15.7% to $6,688,000 for the quarter ended June 30, 1997 from
$7,929,000 for the quarter ended June 30, 1996. International revenues
decreased 22.3% to $14,127,000 for the six months ended June 30, 1997 from
$18,178,000 for the six months ended June 30, 1996. International revenues, as
a percentage of total revenues, decreased to 23.5% and 23.7% for the quarter and
six months ended June 30, 1997 as compared with 30.5% and 30.1% for the quarter
and six months ended June 30, 1996.
Gross profit margins, as a percentage of revenues, increased to 33.8% for the
quarter ended June 30, 1997, from 29.8% for the quarter ended June 30, 1996.
Gross profit margins, as a percentage of revenues, increased to 35.8% from 33.4%
for the six months ended June 30, 1997 and 1996, respectively. Gross profit
margins increased primarily due to changes in the geographic and product mix of
sales.
6
<PAGE>
Selling, general and administrative expenses increased to $10,620,000 (37.4% of
revenues) and $20,174,000 (33.9% of revenues) for the quarter and six months
ended June 30, 1997, respectively, from $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, an increase of $2,529,000 and $2,907,000 or 31.3% and 16.8%,
respectively. The increases in these expenses, in both amounts and as a
percentage of sales, for the quarter and six months ended June 30, 1997 were
primarily the result of increases in advertising costs.
Net interest income was $435,000 (1.6% of revenues) and $814,000 (1.4% of
revenues) for the quarter and six months ended June 30, 1997, respectively,
compared to $212,000 (0.8% of revenues) and $576,000 (1.0% of revenues) for the
quarter and six months ended June 30, 1996, respectively, increases of $223,000
and $238,000 or 105.2% and 41.3% respectively. For the quarter and six months
ended June 30, 1997 as compared to the quarter and six months ended June 30,
1996, the difference in net interest income was primarily related to interest
expense recorded relating to taxes assessed as a result of a state income tax
audit during the quarter ended June 30, 1996.
The Company's effective tax rate decreased to 41.2% of earnings before income
tax from 60.0% for the six months ended June 30, 1997 and 1996, respectively,
due primarily to recording income taxes relating to a state income tax audit for
the six months ended June 30, 1996.
The Company recorded a net loss of $379,000 for the quarter ended June 30, 1997
and a net loss of $731,000 for the quarter ended June 30, 1996. Net earnings
decreased 16.9% to $1,160,000 for the six months ended June 30, 1997 from
$1,396,000 for the six months ended June 30, 1996. Net earnings for the quarter
and six months ended June 30, 1997 included net losses of the Company's European
operations of $1,050,000 and $1,274,000, respectively. 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.
At June 30, 1997 and 1996, domestic footwear futures orders with start ship
dates from July through December 1997 and 1996 were approximately $35,834,000
and $19,645,000, respectively. At June 30, 1997 and 1996, international
footwear futures orders with start ship dates from July through December 1997
and 1996 were approximately $7,562,000 and $6,681,000, 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 $7,645,000 and $10,733,000 from its operating
activities during the six months ended June 30, 1997 and 1996, respectively.
Cash provided by operations for the six months ended June 30, 1997 as compared
to the six months ended June 30, 1996 varied primarily due to changes in
accounts receivable, inventories, prepaid expenses (principally a prepayment to
secure inventory purchases) and other assets and accounts payable and accrued
liabilities.
The Company had a net outflow of cash from its investing activities for the six
months ended June 30, 1997 due to the purchase of investment securities and
property, plant and equipment. The Company had a net outflow of cash from its
investing activities for the six months ended June 30, 1996 primarily due to the
purchase of certain assets and rights of a small apparel brand primarily sold in
the Netherlands.
The Company has a net outflow of cash from its financing activities for the six
months ended June 30, 1997 primarily due to the purchase of treasury stock and
repayments under the bank lines of credit.
In November 1996, the Company extended its share repurchase program from
December 1996 to December 1997. Under this program 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. At that time, the authorization was increased
by approximately $5,200,000 from $4,800,000 (the remaining amount of the
previous $10,000,000 authorization) to $10,000,000. The Company adopted this
program because it believes repurchasing its shares can be a good use of excess
cash depending on the Company's array of alternatives. Currently, the Company
has made purchases under this program of 826,200 shares at an aggregate cost
totaling approximately $9,514,000.
During 1997 and 1998, the Company will need approximately $4,900,000 for the
construction of its new headquarters facility. No other material capital
commitments exist at June 30, 1997. 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 currently anticipated sources of capital are sufficient to
sustain its anticipated capital needs for the remainder of 1997.
In March 1997, the Company contracted to sell its Pacoima, California property
and opened escrow regarding such sale. The escrow was expected to close in the
second quarter of 1997 but, due to an uncertainty, was delayed. It is still
uncertain if escrow will close in the third quarter of 1997.
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 22, 1997.
(b) The following directors were elected to serve until the 1998
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 3,478,128 shares of Class A Common Stock represented at
the meeting, the Class A Directors named in (b) above were
elected by the following votes:
<TABLE>
<CAPTION>
No. Of Votes Received
---------------------
Name For Withheld Authority
---- --------- ------------------
<S> <C> <C>
Jonathan K. Layne 3,464,821 13,307
Martyn Wilford 3,465,821 12,307
</TABLE>
Of the 2,384,072 shares of Class B Common Stock represented at the
meeting, the Class B Directors named in (b) above were elected by the
following votes:
<TABLE>
<CAPTION>
No. Of Votes Received
---------------------
Name For Withheld Authority
---- ---------- ------------------
<S> <C> <C>
Steven Nichols 23,840,720 -
George Powlick 23,840,720 -
Stanley Bernstein 23,840,720 -
Lawrence Feldman 23,840,720 -
Stephen Fine 23,840,720 -
</TABLE>
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 1997.
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 22, 1997 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
12
<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,
--------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
PRIMARY
<S> <C> <C> <C> <C>
Earnings (loss) applicable to common stock $1,160 $1,396 $ (379) $ (731)
====== ====== ====== ======
Weighted average shares:
Average shares outstanding 6,002 6,581 5,938 6,581
Net effect of warrants and dilutive
stock options based on application
of treasury stock method using
average market price 29 12 - -
------ ------ ------ ------
Total average shares 6,031 6,593 5,938 6,581
====== ====== ====== ======
Earnings (loss) per share $ .19 $ .21 $ (.06) $ (.11)
====== ====== ====== ======
</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 EARNINGS AND IS QUALIFIED IN ITS
ENIRETY 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-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 27,163
<SECURITIES> 9,619
<RECEIVABLES> 21,385
<ALLOWANCES> 882
<INVENTORY> 21,972
<CURRENT-ASSETS> 90,252
<PP&E> 3,869
<DEPRECIATION> 0
<TOTAL-ASSETS> 99,508
<CURRENT-LIABILITIES> 14,031
<BONDS> 0
0
0
<COMMON> 66
<OTHER-SE> 76,152
<TOTAL-LIABILITY-AND-EQUITY> 99,508
<SALES> 59,614
<TOTAL-REVENUES> 59,614
<CGS> 38,282
<TOTAL-COSTS> 20,174
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 814<F1>
<INCOME-PRETAX> 1,972
<INCOME-TAX> 812
<INCOME-CONTINUING> 1,160
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,160
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
<FN>
<F1>INTEREST INCOME NET OF INTEREST EXPENSE
</FN>
</TABLE>
