<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 September 30, 1998
-------------------------------
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
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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.)
31248 Oak Crest Drive, Westlake Village, CA 91361
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
818-706-5100
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
20664 Bahama Street, Chatsworth, CA 91311
- --------------------------------------------------------------------------------
(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 October 21, 1998:
Class A 3,254,870
Class B 2,168,372
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------
K-SWISS INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 46,928 $ 36,123
Investment securities - 5,995
Accounts receivable, less allowance for doubtful
accounts of $766 and $477 as of September 30,
1998 and December 31, 1997, respectively 20,727 15,657
Inventories 22,264 27,214
Prepaid expenses and other 2,161 4,299
Deferred taxes 3,564 2,256
-------- --------
Total current assets 95,644 91,544
PROPERTY, PLANT AND EQUIPMENT, net 7,792 4,885
OTHER ASSETS
Intangible assets 4,515 4,712
Other 1,021 545
-------- --------
5,536 5,257
-------- --------
$108,972 $101,686
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT LIABILITIES
Bank lines of credit $ - $ 642
Current maturities of subordinated debentures 450 400
Trade accounts payable 3,641 4,379
Accrued liabilities 13,858 10,530
-------- --------
Total current liabilities 17,949 15,951
SUBORDINATED DEBENTURES 50 100
DEFERRED TAXES 9,956 9,770
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;
4,436,570 shares issued, 3,254,870 shares outstanding
and 1,181,700 shares held in treasury at September 30, 1998
and 4,110,586 shares issued, 3,107,886 shares outstanding
and 1,002,700 shares held in treasury at December 31, 1997 44 41
Class B-authorized 10,000,000 shares of $.01 par value;
issued and outstanding 2,168,372 shares at September 30,
1998 and 2,485,572 shares at December 31, 1997 22 25
Additional paid-in capital 25,431 25,271
Treasury Stock (15,760) (12,389)
Retained earnings 71,892 63,387
Accumulated other comprehensive income -
Foreign currency translation (612) (470)
-------- --------
81,017 75,865
-------- --------
$108,972 $101,686
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
K-SWISS INC.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $121,501 $92,449 $38,212 $32,835
Cost of goods sold 69,149 57,699 20,606 19,417
-------- ------- ------- -------
Gross profit 52,352 34,750 17,606 13,418
Selling, general and administrative
expenses 39,266 30,767 13,279 10,593
-------- ------- ------- -------
Operating profit 13,086 3,983 4,327 2,825
Interest income, net 1,471 1,277 572 463
-------- ------- ------- -------
Earnings before income taxes 14,557 5,260 4,899 3,288
Income tax expense 5,726 2,386 1,868 1,574
-------- ------- ------- -------
NET EARNINGS $ 8,831 $ 2,874 $ 3,031 $ 1,714
======== ======= ======= =======
Earnings per common share (Note 3)
Basic $1.61 $.49 $.56 $.30
======== ======= ======= =======
Diluted $1.54 $.48 $.53 $.29
======== ======= ======= =======
Net earnings $ 8,831 $ 2,874 $ 3,032 $ 1,714
Other comprehensive income, net of tax -
Foreign currency translation adjustments (142) (211) (20) (81)
-------- ------- ------- -------
Comprehensive net earnings $ 8,689 $ 2,663 $ 3,012 $ 1,633
======== ======= ======= =======
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1998 1997
---- ----
<S> <C> <C>
Net cash provided by operating activities $12,043 $ 15,095
Cash flows from investing activities:
Proceeds from the maturity of investment securities 5,995 -
Purchase of investment securities - (9,619)
Purchase of property, plant and equipment (5,159) (775)
Proceeds from disposal of property, plant and equipment 2,267 8
------- --------
Net cash provided by (used in) investing activities 3,103 (10,386)
Cash flows from financing activities:
Net repayments under the bank lines of credit and capital leases (640) (578)
Purchase of treasury stock (3,371) (5,988)
Proceeds from stock options exercised 83 63
Income tax benefit of options exercised 50 12
Payment of dividends (326) (349)
------- --------
Net cash used in financing activities (4,204) (6,840)
Effect of exchange rate changes on cash (137) (214)
------- --------
Net increase (decrease) in cash and cash equivalents 10,805 (2,345)
Cash and cash equivalents at beginning of period 36,123 34,314
------- --------
Cash and cash equivalents at end of period $46,928 $ 31,969
======= ========
</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 September 30, 1998
and the results of its operations and its cash flows for the nine and three
months ended September 30, 1998 and 1997. The results of operations and
cash flows for the nine and three months ended September 30, 1998 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, 1997.
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 May 1998, the IRS issued its final report proposing additional
taxes of an aggregate of approximately $1,561,000 plus penalties and
interest for these years. The Company is protesting the IRS assessment.
Also, the federal income tax returns of the Company for the years ended
1993 through 1996 are currently under examination by the IRS. The IRS has
issued a preliminary examination report covering the 1993 and 1994 fiscal
years proposing adjustments to income of approximately $10,490,000 for
these years combined. 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 these examinations 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. The following is a reconciliation of the number of shares (denominator)
used in the basic and diluted earnings per share computations (shares in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------
1998 1997
---------------- -----------------
Per Share Per Share
Shares Amount Shares Amount
------ ------ ------ -------
<S> <C> <C> <C> <C>
Basic EPS 5,469 $1.61 5,919 $ .49
Effect of dilutive stock options 247 (.07) 110 (.01)
------ ------ ------ -------
Diluted EPS 5,716 $1.54 6,029 $ .48
====== ====== ====== =======
</TABLE>
The following options were not included in the computation of diluted EPS
because the exercise prices of such options were greater than the average
market price of the common shares:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Options to purchase shares of common stock
(in thousands) 60 328
Exercise prices $21.25 - $23.00 $13.75 - $23.00
Expiration dates August 2001 - June 2000 -
November 2004 November 2004
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------
1998 1997
----------------- -----------------
Per Share Per Share
Shares Amount Shares Amount
------ ------ ------- ------
<S> <C> <C> <C> <C>
Basic EPS 5,439 $ .56 5,741 $ .30
Effect of dilutive stock options 301 (.03) 160 (.01)
------ ------ ------- ------
Diluted EPS 5,740 $ .53 5,901 $ .29
====== ====== ======= ======
</TABLE>
The following options were not included in the computation of diluted EPS
because the exercise prices of such options were greater than the average
market price of the common shares:
<TABLE>
<CAPTION>
1998 1997
------------- ---------------
<S> <C> <C>
Options to purchase shares of common stock
(in thousands) - 194
Exercise prices - $16.25 - $23.00
Expiration dates - June 2000 -
November 2004
</TABLE>
6
<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 earnings relative to revenues.
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 56.9 62.4 53.9 59.1
Gross profit 43.1 37.6 46.1 40.9
Selling, general and administrative
expenses 32.3 33.3 34.8 32.3
Interest income, net 1.2 1.4 1.5 1.4
Earnings before income taxes 12.0 5.7 12.8 10.0
Income tax expense 4.7 2.6 4.9 4.8
Net earnings 7.3 3.1 7.9 5.2
</TABLE>
Revenues increased to $38,212,000 for the quarter ended September 30, 1998 from
$32,835,000 for the quarter ended September 30, 1997, an increase of $5,377,000
or 16.4%. Revenues increased to $121,501,000 for the nine months ended September
30, 1998 from $92,449,000 for the nine months ended September 30, 1997, an
increase of $29,052,000 or 31.4%. These increases for the quarter and nine
months were the result of higher average wholesale prices per pair and increases
in the volume of footwear sold. The volume of footwear sold increased to
1,472,000 pair and 4,760,000 pair for the quarter and nine months ended
September 30, 1998 from 1,315,000 pair and 3,926,000 pair for the quarter and
nine months ended September 30, 1997. The increase in the volume of footwear
sold for the quarter ended September 30, 1998 was primarily due to an increase
in the children's category of 45.4% and an increase in the tennis/court category
of 16.8%. The average wholesale price per pair increased to $24.93 and $24.46
for the quarter and nine months ended September 30, 1998 from $24.47 and $22.44
for the quarter and nine months ended September 30, 1997, increases of 1.9% and
9.0% respectively. The increases in the average wholesale prices per pair were
primarily attributable to changes in the product and geographic mix of sales.
Domestic revenues increased 24.0% to $33,674,000 for the quarter ended September
30, 1998 from $27,148,000 for the quarter ended September 30, 1997. Domestic
revenues increased 49.3% to $108,423,000 for the nine months ended September 30,
1998 from $72,635,000 for the nine months ended September 30, 1997.
International revenues decreased 20.2% to $4,538,000 for the quarter ended
September 30, 1998 from $5,687,000 for the quarter ended September 30, 1997.
International revenues decreased 34.0% to $13,078,000 for the nine months ended
September 30, 1998 from $19,814,000 for the nine months ended September 30,
1997. The decrease in international revenues was primarily due to lower sales in
the Company's Asian markets due to the Asian financial crisis. International
revenues, as a percentage of total revenues, decreased to 11.9% for the quarter
ended September 30, 1998 as compared with 17.3% for the quarter ended September
30, 1997. International revenues, as a percentage of total revenues, decreased
to 10.8% for the nine months ended September 30, 1998 as compared with 21.4% for
the nine months ended September 30, 1997.
Gross profit margins, as a percentage of revenues, increased to 46.1% for the
quarter ended September 30, 1998, from 40.9% for the quarter ended September 30,
1997. Gross profit margins, as a percentage of revenues, increased to 43.1% from
37.6% for the nine months ended September 30, 1998 and 1997, respectively. Gross
profit margins increased primarily due to the Company introducing new styles at
relatively higher margins and a decrease in close-out sales.
7
<PAGE>
Selling, general and administrative expenses increased to $13,279,000 (34.8% of
revenues) for the quarter ended September 30, 1998, from $10,593,000 (32.3% of
revenues) for the quarter ended September 30, 1997, an increase of $2,686,000 or
25.4%. Selling, general and administrative expenses increased to $39,266,000
(32.3% of revenues) for the nine months ended September 30, 1998, from
$30,767,000 (33.3% of revenues) for the nine months ended September 30, 1997, an
increase of $8,499,000 or 27.6%. The increase in the amount for the quarter
ended September 30, 1998 was primarily the result of an increase in direct
advertising costs. The increase in the amount for the nine months ended
September 30, 1998 was primarily the result of an increase in direct advertising
costs and commissions, as well as an increase in the bonus accrual for an
employee incentive program. These increases were partially offset by a bad debt
recovery of a 1995 write-off.
Net interest income was $572,000 (1.5% of revenues) and $1,471,000 (1.2% of
revenues) for the quarter and nine months ended September 30, 1998,
respectively, compared to $463,000 (1.4% of revenues) and $1,277,000 (1.4% of
revenues) for the quarter and nine months ended September 30, 1997,
respectively, an increase of $109,000 and $194,000 respectively. The increase in
net interest income was primarily due to higher average balances and rates for
the quarter and nine months ended September 30, 1998 as compared to the quarter
and nine months ended September 30, 1997.
The Company's effective tax rate decreased to 39.3% of earnings before income
tax from 45.4% for the nine months ended September 30, 1998 and 1997,
respectively, due to a reduction of certain non-deductible expenses as a
percentage of earnings before income taxes.
Net earnings increased 76.8% to $3,031,000 for the quarter ended September 30,
1998 from $1,714,000 for the quarter ended September 30, 1997. Net earnings
increased 207.3% to $8,831,000 for the nine months ended September 30, 1998 from
$2,874,000 for the nine months ended September 30, 1997. Net earnings for the
quarter and nine months ended September 30, 1998 included net losses of the
Company's European operations of $119,000 and $318,000, respectively. Net
earnings for the quarter and nine months ended September 30, 1997 included net
losses of the Company's European operations of $262,000 and $1,536,000,
respectively.
At September 30, 1998 and 1997, domestic futures orders with start ship dates
from October 1998 and 1997 through March 1999 and 1998 were approximately
$106,176,000 and $46,955,000, respectively At September 30, 1998 and 1997,
international futures orders with start ship dates from October 1998 and 1997
through March 1999 and 1998 were approximately $7,578,000 and $8,716,000,
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. The 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.
Liquidity and Capital Resources
The Company generated cash of $12,043,000 and $15,095,000 from its operating
activities during the nine months ended September 30, 1998 and 1997,
respectively. Cash provided by operating activities for the nine months ended
September 30, 1998 as compared to the nine months ended September 30, 1997
varied primarily due to changes in accounts receivable, prepaid expenses
(principally a prepayment to secure inventory purchases) and other assets, and
accounts payable and accrued liabilities, as well as an increase in net
earnings.
The Company had a net inflow of cash from its investing activities for the nine
months ended September 30, 1998 due to proceeds from the maturity of investment
securities, partially offset by net purchases of property, plant and equipment.
The Company had a net outflow of cash from its investing activities for the nine
months ended September 30, 1997 due to the purchase of investment securities and
property, plant and equipment.
The Company had a net outflow of cash from its financing activities for the nine
months ended September 30, 1998 primarily due to the purchase of treasury stock
and repayments under the bank lines of credit.
8
<PAGE>
On April 23, 1998, the Company announced a new share repurchase program. The
Board of Directors has authorized the Company to purchase up to $20 million of
its Class A Common Stock on the open market through April 2002. Such open market
purchases, if any, will occur from time to time as market conditions warrant.
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.
From inception under its new share repurchase program, the Company purchased
24,000 shares of Class A Common Stock at a cost totaling approximately $539,000.
The Company maintains revolving credit facilities with Bank of America whereby
it may borrow up to an aggregate of $35,000,000 including outstanding letters of
credit and bankers' acceptances. This facility currently expires in July 2001.
Substantially all of the Company's assets (other than real estate) are pledged
as security for this facility.
No other material capital commitments exist at September 30, 1998. 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 1998.
The Company owned a 56,000 square foot facility in Pacoima, California, which
was used as the Company's principal executive offices through December 1992.
This facility was sold in January 1998.
The Company's working capital increased $2,102,000 to $77,695,000 at September
30, 1998 from $75,593,000 at December 31, 1997.
Impact of Year 2000
The Year 2000 Issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date ending in "00"
as the year 1900 rather than the year 2000. This could result in system failure
or miscalculations causing disruptions of operations including, among other
things, an inability to process transactions, send invoices, or engage in
similar normal business activities. If the Company, its significant customers,
or suppliers fail to make necessary modifications and conversions on a timely
basis, the Year 2000 Issue could have a material adverse effect on Company
operations. However, the impact cannot be quantified at this time.
To address these Year 2000 Issues with its internal systems, the Company has
initiated a comprehensive program which is designed to deal with the most
critical systems first. Assessment and remediation are proceeding in tandem, and
the Company currently plans to have changes to critical systems completed and
tested by December 31, 1998. These activities are intended to encompass all
major categories of systems in use by the Company, including manufacturing,
sales and finance. Beginning the first quarter of 1999, the Company will work
with critical suppliers of products and services, and customers to determine
that they are year 2000 capable or to monitor their progress toward year 2000
capability. Once supplier and customer capability is determined, the Company
will commence work on various types of contingency planning to address potential
problem areas with internal systems and with suppliers, customers, and other
third parties. Nevertheless, there can be no absolute assurance that there will
not be a material adverse effect on the Company if third party governmental or
business entities do not convert or replace their systems in a timely manner and
in a way that is compatible with the Company's systems.
Costs related to the Year 2000 Issue are funded through operating cash flows.
Currently, the Company has expended approximately $250,000 in remediation
efforts, principally the cost of modifying the applicable code of existing
software. The Company estimates remaining costs to be approximately $200,000.
The Company presently believes that the total cost of achieving Year 2000
compliant systems is not expected to be material to financial condition,
liquidity, or results of operations.
Time and cost estimates are based on currently available information.
Developments that could affect estimates include, but are not limited to, the
availability and cost of trained personnel; the ability to locate and correct
all relevant computer code and systems; and remediation success of the Company's
suppliers and customers.
9
<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.
---------------------------------------------------
None
ITEM 5: Other Information.
-----------------
None
ITEM 6: Exhibits
--------
(a) Exhibits
10- Fourth Amendment to Credit Agreement
27- Financial Data Schedule
(b) Reports on Form 8-K
There were two reports filed on Form 8-K during the third quarter
of 1998. On July 28, 1998, the Company issued a press release
regarding the filing by the Company of a Form S-3 Registration
Statement covering shares of the Company's Class A Common Stock
held by one of its principal stockholders. On August 21, 1998, the
Company issued a press release relating to the resignation of two
members of the Company's Board of Directors.
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: October 21, 1998 By:/s/ George Powlick
-----------------------------
George Powlick,
Vice President Finance and
Chief Financial Officer
11
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Page
- ------- ----
10 Fourth Amendment to Credit Agreement 13
27 Financial Data Schedule 16
12
<PAGE>
FOURTH AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10
This Fourth Amendment to Credit Agreement (this "Amendment") is entered
into as of September 9,1998, between Bank of America National Trust and Savings
-----------
Association ("Bank") and K-Swiss, Inc. ("Borrower"), with reference to the
following:
Recitals
--------
A. Bank and Borrower are parties to that certain Credit Agreement dated as
of March 25, 1994, as modified by amendments dated as of June 29, 1995, August
12, 1996, and July 29, 1997 (as amended, the "Credit Agreement").
B. Bank and Borrower now desire to further amend the Credit Agreement on
the terms and conditions set forth below.
Agreement
---------
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. Capitalized terms not otherwise defined in this Amendment
-----------
shall have the meanings ascribed to them in the Credit Agreement.
2. Amendments. The Credit Agreement shall be amended as follows:
----------
(a) In the definition of "Availability Period" in Paragraph 1.1, the
date "July 1, 1999" is amended to read "July 1, 2001."
(b) Paragraph 2.2(d) is amended in full to read as follows:
"(d) Except as provided in Paragraph 2.2 (e), advances under the
Revolving Facility shall bear interest at a rate per annum equal to the
Reference Rate minus three-quarters percent (0.75%). Borrower shall pay
-----
interest monthly on the first day of each month until the last day of the
Availability Period, on which date all accrued and unpaid interest shall be
due and payable."
(c) Subparagraph 2.4(c)(1) is amended in full to read as follows:
"(1) expire on or before two hundred twenty-five (225) days
after the date such letter of credit is issued, but not to extend more than
one hundred eighty (180) days beyond the last day of the Availability
Period;"
(d) Paragraph 2.4(d) is amended in full to read as follows:
"(d) Borrower shall pay Bank negotiation fees of the greater of
two-tenths percent (0.20%) of the amount of each drawing or Seventy Five
Dollars ($75), and other fees at the times and in the amounts Bank advises
Borrower from time to time as being generally applicable to commercial
letters of credit issued by Bank, including without limitation, amendment,
discrepancy, and cancellation fees."
(e) In Paragraph 2.5(d) the percentage of "one and one half percent
(1.5%)" is amended to read "one percent (1.0%)".
(f) Paragraph 3.2 of the Agreement is amended in full to read as
follows:
13
<PAGE>
"3.2 Unused commitment fee. Borrower shall pay Bank a fee on
---------------------
any difference between the Credit Limit and the sum of advances actually
outstanding plus the face amount of letters of credit and acceptances
actually outstanding under this Agreement, determined by the weighted
average of the unused portion of credit provided under the Revolving
Facility that is available for advances, acceptances, and letters of credit
under Paragraphs 2.2, 2.3, 2.4, and 2.5 of this Agreement, respectively
during the specified period. The fee will be calculated at the rate of one
eighth percent (0.125%) per annum. This fee is due on July 31, 1998, and
quarterly in arrears thereafter until the expiration of the Availability
Period."
(g) The following is added as a new Paragraph 7.17:
"7.17 Year 2000 Compliance. Borrower has conducted a
--------------------
comprehensive review and assessment of Borrower's systems and equipment
applications and made inquiry of Borrower's key suppliers, vendors and
customers with respect to the "year 2000 problem" (that is, the inability
of computers, as well as embedded microchips in non-computing devices, to
properly perform date-sensitive functions with respect to certain dates
prior to and after December 31, 1999). Based on that review and inquiry,
Borrower does not believe the year 2000 problem, including costs of
remediation, will result in a material adverse change in Borrower's
business condition (financial or otherwise), operations, properties or
prospects, or ability to repay the credit. Borrower has developed adequate
contingency plans to ensure uninterrupted and unimpaired business operation
in the event of a failure of its own or a third party's systems or
equipment due to the year 2000 problem, including those of vendors,
customers, and suppliers, as well as a general failure of or interruption
in its communications and delivery infrastructure."
(h) Paragraph 8.3 is amended in full to read as follows:
"8.3 Audits. Maintain adequate books, accounts and records and
------
prepare all financial statements required hereunder in accordance with
generally accepted accounting principles consistently applied, and in
compliance with the regulations of any governmental regulatory body having
jurisdiction over Borrower or Borrower's business and to allow Bank and its
agents to inspect Borrower's properties (including taking and removing
samples for environmental testing) and examine, audit, and make copies of
books and records at any reasonable time. If any of Borrower's properties,
books or records are in the possession of a third party, Borrower
authorizes that third party to permit Bank or its agents to have access to
perform inspections or audits and to respond to Bank's requests for
information concerning such properties, books and records.
Bank has no duty to inspect Borrower's properties or to examine, audit, or
copy books and records and Bank shall not incur any obligation or liability
by reason of not making any such inspection or inquiry. In the event that
Bank inspects Borrower's properties or examines, audits, or copies books
and records, Bank will be acting solely for the purposes of protecting
Bank's security and preserving Bank's rights under this Agreement. Neither
Borrower nor any other party is entitled to rely on any inspection or other
inquiry by Bank. Bank owes no duty of care to protect Borrower or any other
party against, or to inform Borrower or any other party of, any adverse
condition that may be observed as affecting Borrower's properties or
premises, or Borrower's business. Bank may in its discretion disclose to
Borrower or any other party any findings made as a result of, or in
connection with, any inspection of Borrower's properties."
(i) Paragraph 8.6 is amended in full to read as follows:
14
<PAGE>
"8.6 Effective Tangible Net Worth. Maintain at all times on a
----------------------------
consolidated basis effective Tangible Net Worth plus Subordinated Debt of
at least Sixty Six Million Dollars ($66,000,000) plus the sum of seventy
five percent (75%) of net income after income taxes (without subtracting
losses) earned in each fiscal year commencing after December 31, 1997, less
the sum of purchases of treasury stock up to and including Ten Million
Dollars ($10,000,000) in each fiscal year commencing after December 31,
1997, but not to exceed an aggregate amount of Twenty Million Dollars
($20,000,000)."
(j) The following sentence is added at the end of Paragraph 10.4:
"In the event that any case is
commenced by or against Borrower under the Bankruptcy Code (Title 11,
United States Code) or any similar or successor statute, Bank is entitled
to recover costs and reasonable attorneys' fees incurred by Bank related to
the preservation, protection, or enforcement of any rights of Bank in such
a case."
(k) Except as hereby amended, all of the terms and conditions of the
Credit Agreement shall remain in full force and effect.
3. Representations and Warranties. Borrower represents and warrants to
------------------------------
Bank that: (a) no Event of Default has occurred and is continuing under the
Credit Agreement, (b) the representations and warranties in the Credit Agreement
are true as of the date of this Amendment, (c) this Amendment is within
Borrower's powers, has been duly authorized, and does not conflict with
Borrower's organizational papers, and (d) this Amendment does not conflict with
any law, agreement, or obligation by which Borrower is bound.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
BANK OF AMERICA NATIONAL TRUST K-SWISS, INC.
AND SAVINGS ASSOCIATION
By: /s/Richard J. Pankow By: /s/George Powlick
----------------------------- -----------------------------
Richard J. Pankow George Powlick
Vice President Vice President -Finance
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 46,928
<SECURITIES> 0
<RECEIVABLES> 21,493
<ALLOWANCES> (766)
<INVENTORY> 22,264
<CURRENT-ASSETS> 95,644
<PP&E> 7,792
<DEPRECIATION> 0
<TOTAL-ASSETS> 108,972
<CURRENT-LIABILITIES> 17,949
<BONDS> 0
0
0
<COMMON> 66
<OTHER-SE> 80,951
<TOTAL-LIABILITY-AND-EQUITY> 108,972
<SALES> 121,501
<TOTAL-REVENUES> 121,501
<CGS> 69,149
<TOTAL-COSTS> 39,266
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,471
<INCOME-PRETAX> 14,557
<INCOME-TAX> 5,726
<INCOME-CONTINUING> 8,831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,831
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.54
</TABLE>
