<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, 1999
--------------------------------
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)
- --------------------------------------------------------------------------------
(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 20, 1999:
Class A 7,777,223
Class B 3,013,978
1
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------
K-SWISS INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 55,674 $ 37,360
Accounts receivable, less allowance for doubtful
accounts of $1,279 and $825 as of September 30, 1999
and December 31, 1998, respectively 34,153 26,478
Inventories 40,417 33,535
Prepaid expenses and other 4,116 2,883
Deferred taxes 1,931 1,746
-------- --------
Total current assets 136,291 102,002
PROPERTY, PLANT AND EQUIPMENT, net 8,855 8,009
OTHER ASSETS
Intangible assets 4,235 4,429
Other 1,769 1,025
-------- --------
6,004 5,454
-------- --------
$151,150 $115,465
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank lines of credit $ 1,974 $ 155
Current maturities of subordinated debentures 500 500
Trade accounts payable 4,705 7,783
Accrued liabilities 12,698 10,265
-------- --------
Total current liabilities 19,877 18,703
OTHER LIABILITIES 10,441 5,267
DEFERRED TAXES 6,941 8,227
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;
11,006,155 shares issued, 8,087,223 shares outstanding and
2,918,932 shares held in treasury at September 30, 1999 and
9,832,728 shares issued, 7,313,796 shares outstanding and
2,518,932 shares held in treasury at December 31, 1998 110 98
Class B-authorized 10,000,000 shares of $.01 par value; issued
and outstanding 3,013,978 shares at September 30, 1999 and
3,426,556 shares at December 31, 1998 30 34
Additional paid-in capital 40,607 25,830
Treasury stock (30,749) (17,760)
Retained earnings 104,358 75,500
Accumulated other Comprehensive Income -
Foreign currency translation (465) (434)
-------- --------
113,891 83,268
-------- --------
$151,150 $115,465
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
K-SWISS INC.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $235,884 $121,501 $80,134 $38,212
Cost of goods sold 132,707 69,149 45,625 20,606
-------- -------- ------- -------
Gross profit 103,177 52,352 34,509 17,606
Selling, general and administrative
expenses 55,462 39,266 19,443 13,279
-------- -------- ------- -------
Operating profit 47,715 13,086 15,066 4,327
Interest income, net 1,101 1,471 483 572
-------- -------- ------- -------
Earnings before income taxes 48,816 14,557 15,549 4,899
Income tax expense 19,457 5,726 6,212 1,868
-------- -------- ------- -------
NET EARNINGS $ 29,359 $ 8,831 $ 9,337 $ 3,031
======== ======== ======= =======
Earnings per common share (Note 3)
Basic $ 2.66 $ .81 $ .84 $ .28
======== ======== ======= =======
Diluted $ 2.55 $ .77 $ .80 $ .26
======== ======== ======= =======
Net earnings $ 29,359 $ 8,831 $ 9,337 $ 3,031
Other comprehensive (loss) income, net of tax -
Foreign currency translation adjustments (31) (142) 7 (20)
-------- -------- ------- -------
Comprehensive net earnings $ 29,328 $ 8,689 $ 9,344 $ 3,011
======== ======== ======= =======
</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,
----------------------
1999 1998
-------- -------
<S> <C> <C>
Net cash provided by operating activities $ 25,888 $12,093
Cash flows from investing activities:
Proceeds from the maturity of investment securities - 5,995
Purchase of property, plant and equipment (1,686) (5,159)
Proceeds from sale of property 16 2,267
-------- -------
Net cash (used in) provided by investing activities (1,670) 3,103
Cash flows from financing activities:
Net borrowings (repayments) under bank lines of credit 1,827 (640)
Purchase of treasury stock (12,989) (3,371)
Proceeds from stock options exercised 5,785 83
Payment of dividends (501) (326)
-------- -------
Net cash used in financing activities (5,878) (4,254)
Effect of exchange rate changes on cash (26) (137)
-------- -------
Net increase in cash and cash equivalents 18,314 10,805
Cash and cash equivalents at beginning of period 37,360 36,123
-------- -------
Cash and cash equivalents at end of period $ 55,674 $46,928
======== =======
Supplemental disclosure of cash flow information:
Non-cash investing and financing activities:
Income tax benefit of options exercised $ 9,000 $ 50
Cash paid during the period for:
Interest $ 71 $ 76
Income taxes $ 12,968 $ 6,901
</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, 1999
and the results of its operations and its cash flows for the nine and three
months ended September 30, 1999 and 1998. The results of operations and
cash flows for the nine and three months ended September 30, 1999 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, 1998.
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, 1995 and 1996 are currently under examination by the IRS. The IRS has
issued a preliminary examination report covering the 1993 fiscal year
proposing adjustments to income of approximately $3,426,000 for this year.
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, Three Months Ended September 30,
--------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- ---------------- ---------------- ---------------
Per Per Per Per
Share Share Share Share
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS 11,036 $ 2.66 10,939 $ .81 11,164 $ .84 10,877 $ .28
Effect of dilutive
stock options 493 ( .11) 494 (.04) 521 (.04) 603 (.02)
------ ------ ------ ------- ------ ------ ------ ------
Diluted EPS 11,529 $ 2.55 11,433 $ .77 11,685 $ .80 11,480 $ .26
====== ====== ====== ======= ====== ====== ====== ======
</TABLE>
The following options were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1999
------------- --------------
<S> <C> <C>
Options to purchase shares
of common stock (in thousands) 1 1
Exercise price $47.38 $47.38
Expiration date May 2009 May 2009
</TABLE>
5
<PAGE>
The following options were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market
price of the common shares:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1998
------------- -------------
<S> <C> <C>
Options to purchase shares
of common stock (in thousands) 121 -
Exercise prices $10.63 - $ 11.50 -
Expiration dates August 2001 - -
November 2004
</TABLE>
4. The Company's predominant business is the design, development and
distribution of athletic footwear. The Company is organized into three
geographic regions: the United States, Europe and other international
operations. Certain reclassifications have been made in the 1999 and 1998
presentations. The following tables summarize segment information (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues from unrelated entities:
United States $ 218,245 $ 108,618 $ 74,078 $ 33,820
Europe 10,545 8,378 3,278 2,752
Other International 7,094 4,505 2,778 1,640
-------- -------- ------- -------
$ 235,884 $ 121,501 $ 80,134 $ 38,212
======== ======== ======= =======
Inter-geographic revenues:
United States $ 1,950 $ 1,340 $ 818 $ 512
Europe 21 18 18 11
Other International 2,909 2,756 245 725
-------- -------- ------- -------
$ 4,880 $ 4,114 $ 1,081 $ 1,248
======== ======== ======= =======
Total revenues:
United States $ 220,195 $ 109,958 $ 74,896 $ 34,332
Europe 10,566 8,396 3,296 2,763
Other International 10,003 7,261 3,023 2,365
Less inter-geographic revenues (4,880) (4,114) (1,081) (1,248)
-------- -------- ------- -------
$ 235,884 $ 121,501 $ 80,134 $ 38,212
======== ======== ======= =======
Operating profit (loss):
United States $ 53,677 $ 19,691 $ 17,120 $ 6,163
Europe (752) (607) (706) (232)
Other International 3,305 199 487 88
Less corporate expenses and
eliminations (8,515) (6,197) (1,835) (1,692)
-------- -------- ------- -------
$ 47,715 $ 13,086 $ 15,066 $ 4,327
======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Identifiable assets:
United States $ 86,005 $ 67,487
Europe 6,937 6,299
Other International 14,413 15,720
Corporate assets and
eliminations (1) 43,795 25,959
-------- -------
$ 151,150 $ 115,465
======== =======
</TABLE>
(1) Corporate assets include cash and cash equivalents, investments and
intangible assets.
6
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements and Analyst Reports
"Forward-looking statements", within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act"), include certain written
and oral statements made, or incorporated by reference, by the Company or its
representatives in this report, other reports, filings with the Securities and
Exchange Commission ("the S.E.C."), press releases, conferences or otherwise.
Such forward-looking statements include, without limitation, any statement that
may predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe", "anticipate", "expect",
"estimate", "intend", "plan", "project", "will be", "will continue", "will
likely result", or any variations of such words with similar meaning. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict; therefore,
actual results may differ materially from those expressed or forecasted in any
such forward-looking statements. Investors should carefully review the risk
factors set forth in other reports or documents the Company files with the
S.E.C., including Forms 10-Q, 10-K and 8-K. Some of the other risks and
uncertainties that should be considered include, but are not limited to, the
following: international, national and local general economic and market
conditions (including the current Asian economic situation)the size and growth
of the overall athletic footwear and apparel markets; the size of the Company's
competitors; intense competition among designers, marketers, distributors and
sellers of athletic footwear and apparel for consumers and endorsers; market
acceptance of the Company's new training shoe line; demographic changes; changes
in consumer preferences; popularity of particular designs, categories of
products, and sports; seasonal and geographic demand for the Company's products;
the size, timing and mix of purchases of the Company's products; fluctuations
and difficulty in forecasting operating results, including, without limitation,
the fact that advance "futures" orders may not be indicative of future revenues
due to the changing mix of futures and at-once orders; the ability of the
Company to continue, manage or forecast its growth and inventories; new product
development and commercialization; the ability to secure and protect trademarks,
patents, and other intellectual property; performance and reliability of
products; customer service; year 2000 compliance issues; adverse publicity; the
loss of significant customers or suppliers; dependence on distributors; business
disruptions; increased costs of freight and transportation to meet delivery
deadlines; changes in business strategy or development plans; general risks
associated with doing business outside the United States, including, without
limitation, import duties, tariffs, quotas and political and economic
instability; changes in government regulations; liability and other claims
asserted against the Company; the ability to attract and retain qualified
personnel; and other factors referenced or incorporated by reference in this
report and other reports.
The Company operates in a very competitive and rapidly changing
environment. New risk factors can arise and it is not possible for management to
predict all such risk factors, nor can it assess the impact of all such risk
factors on the Company's business or the extent to which any factor, or
combination of factors, may cause results to differ materially from those
contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results.
Investors should also be aware that while the Company does, from time
to time, communicate with securities analysts, it is against the Company's
policy to disclose to them any material non-public information or other
confidential commercial information. Accordingly, investors should not assume
that the Company agrees with any statement or report issued by any analyst
irrespective of the content of the statement or report. Furthermore, the Company
has a policy against issuing or confirming financial forecasts or projections
issued by others. Thus, to the extent that reports issued by securities analysts
or others contain any projections, forecasts or opinions, such reports are not
the responsibility of the Company.
7
<PAGE>
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,
------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 56.3 56.9 56.9 53.9
Gross profit 43.7 43.1 43.1 46.1
Selling, general and administrative
Expenses 23.5 32.3 24.3 34.8
Interest income, net 0.5 1.2 0.6 1.5
Earnings before income taxes 20.7 12.0 19.4 12.8
Income tax expense 8.3 4.7 7.7 4.9
Net earnings 12.4 7.3 11.7 7.9
</TABLE>
Revenues increased to $80,134,000 for the quarter ended September 30, 1999 from
$38,212,000 for the quarter ended September 30, 1998, an increase of $41,922,000
or 109.7%. Revenues increased to $235,884,000 for the nine months ended
September 30, 1999 from $121,501,000 for the nine months ended September 30,
1998, an increase of $114,383,000 or 94.1%. The increases for the quarter and
nine months ended September 30, 1999 were the result of an increase in the
volume of footwear sold and higher average wholesale prices per pair. The volume
of footwear sold increased to 2,897,000 and 8,629,000 pair for the quarter and
nine months ended September 30, 1999 from 1,472,000 and 4,760,000 pair for the
quarter and nine months ended September 30, 1998. The increase in the volume of
footwear sold for the quarter ended September 30, 1999 was primarily the result
of increased sales of the Classic and children's categories of shoes of 118.6%
and 89.4%, respectively. The average wholesale price per pair increased to
$26.77 and $26.18 for the quarter and nine months ended September 30, 1999 from
$24.93 and $24.46 for the quarter and nine months ended September 30, 1998,
increases of 7.4% and 7.0%, respectively. The increase in the average wholesale
price per pair for the quarter and nine months ended September 30, 1999, is
primarily attributable to the introduction of new styles in the Classic and
children's category at higher average wholesale prices.
Domestic revenues increased 119.8% to $74,014,000 for the quarter ended
September 30, 1999 from $33,674,000 for the quarter ended September 30, 1998.
Domestic revenues increased 101.0% to $217,914,000 for the nine months ended
September 30, 1999 from $108,423,000 for the nine months ended September 30,
1998. International revenues increased 34.9% to $6,120,000 for the quarter ended
September 30, 1999 from $4,538,000 for the quarter ended September 30, 1998.
International revenues increased 37.4% to $17,970,000 for the nine months ended
September 30, 1999 from $13,078,000 for the nine months ended September 30,
1998. The increase in international revenues for the nine months ended September
30, 1999 was due to increases in most of the Company's international markets.
International revenues, as a percentage of total revenues, decreased to 7.6% for
the quarter and nine months ended September 30, 1999 as compared with 11.9% and
10.8% for the quarter and nine months ended September 30, 1998.
Gross profit margins, as a percentage of revenues, decreased to 43.1% for the
quarter ended September 30, 1999, from 46.1% for the quarter ended September 30,
1998. Gross profit margins, as a percentage of revenues, increased to 43.7% from
43.1% for the nine months ended September 30, 1999 and 1998, respectively. Gross
profit margins, for the three and nine months ended September 30, 1999,
fluctuated primarily due to changes in the product mix of sales.
Selling, general and administrative expenses increased to $19,443,000 (24.3% of
revenues) and $55,462,000 (23.5% of revenues) for the quarter and nine months
ended September 30, 1999, respectively, from $13,279,000 (34.8% of revenues) and
$39,266,000 (32.3% of revenues) for the quarter and nine months ended September
30, 1998, respectively, increases of $6,164,000 and $16,196,000 or 46.4% and
41.3%, respectively. The increases in these expenses for the quarter and nine
months ended September 30, 1999 were the result of increases in advertising
costs, salaries and commissions as well as an increase in the bonus accrual for
an employee incentive program. The decreases in these expenses as a percentage
of revenues for the quarter and nine months ended September 30, 1999 were the
result of increases in the revenues for the quarter and nine months ended
September 30, 1999 at a faster rate than the increase in the selling, general
and administrative expenses during the same time periods.
Net interest income was $483,000 (0.6% of revenues) and $1,101,000 (0.5% of
revenues) for the quarter and nine months ended September 30, 1999,
respectively, compared to $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, decreases of $89,000 and $370,000, respectively. The decrease in
net interest income was primarily due to lower average balances and rates for
the quarter and nine months ended September 30, 1999 as compared to the quarter
and nine months ended September 30, 1998.
8
<PAGE>
The Company's effective tax rate increased to 39.9% of earnings before income
tax from 39.3% for the nine months ended September 30, 1999 and 1998,
respectively. The $9,000,000 income tax benefit of options exercised for the
nine months ended September 30, 1999 was credited to additional paid-in capital
and therefore did not impact the effective tax rate.
Net earnings increased 208.1% to $9,337,000 for the quarter ended September 30,
1999 from $3,031,000 for the quarter ended September 30, 1998. Net earnings
increased 232.5% to $29,359,000 for the nine months ended September 30, 1999
from $8,831,000 for the nine months ended September 30, 1998.
At September 30, 1999 and 1998, domestic futures orders with start ship dates
from October 1999 and 1998 through March 2000 and 1999 were approximately
$105,054,000 and $106,176,000, respectively, a decrease of 1.1%. At September
30, 1999 and 1998, international futures orders with start ship dates from
October 1999 and 1998 through March 2000 and 1999 were approximately $8,073,000
and $7,578,000, respectively, an increase of 6.5%. At September 30, 1999 and
1998 total futures orders with start ship dates from October 1999 and 1998
through March 2000 and 1999 were approximately $113,127,000 and $113,754,000,
respectively, a decrease of 0.6%. The 0.6% decrease in total futures orders is
comprised of a 44.5% increase in the fourth quarter 1999 futures orders and a
21.4% decrease in the first quarter 2000 futures orders. "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.
Liquidity and Capital Resources
The Company generated cash of $25,888,000 and $12,093,000 from its operating
activities during the nine months ended September 30, 1999 and 1998,
respectively. Cash provided by operations for the nine months ended September
30, 1999 as compared to the nine months ended September 30, 1998 varied
primarily due to changes in net earnings, accounts receivable, inventories,
prepaid expenses and other assets, accounts payable and accrued liabilities.
The Company had a net outflow of cash from its investing activities for the nine
months ended September 30, 1999 due to the purchase of property, plant and
equipment. 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 financing activities for the nine
months ended September 30, 1999 primarily due to the purchase of treasury stock,
partially offset by proceeds from the exercise of stock options.
On October 8, 1999, the Company announced the completion of its April 1998 $20
million stock repurchase program and a new authorization by the Board of
Directors for the Company to repurchase through December 2003 up to an
additional $25 million of its Class A Common Stock from time to time on the open
market. 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 all stock
repurchase programs from August 1996 through October 21, 1999 (the date of
filing of this Form 10-Q) of 3,228,932 shares at an aggregate cost totaling
approximately $36,116,000.
The Company maintains an agreement with a bank whereby the Company may borrow,
in the form of a secured revolving credit facility, up to $30,000,000. 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.
The credit facility provides for interest to be paid at the prime rate less
3/4% or, at the Company's discretion and with certain restrictions, other market
based rates. The Company pays a commitment fee of 1/8% of the unused line for
availability of the credit facility. The Company must meet certain restrictive
financial convenants as agreed upon in the facility.
The Company's European offices have agreements with the bank whereby they can
borrow up to $4,500,000 in the form of secured revolving credit facilities.
These facilities are made available until terminated by either party .
No material capital commitments exist at September 30, 1999. 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 1999.
The Company's working capital increased $33,115,000 to $116,414,000 at September
30, 1999 from $83,299,000 at December 31, 1998.
9
<PAGE>
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. The
Company completed its year 2000 software program conversions for its critical
systems during the first quarter of 1999, which encompass all major categories
of systems in use by the Company, including manufacturing, sales and finance.
During the second and third quarters of 1999, the Company worked with critical
suppliers of products and services and customers to determine whether they are
year 2000 capable and to monitor their progress towards 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 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 Issues are funded through operating cash flows.
Currently, the Company has expended approximately $470,000 in remediation
efforts, principally the cost of modifying the applicable code of existing
software. The Company estimates remaining costs to be minimal. 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.
10
<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 and Reports on Form 8-K:
--------------------------------
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the third quarter
of 1999; however, the Company did file a Current Report on form
8-K on October 8, 1999 relating to the issuance by the Company of
a press release announcing the completion of its April 1998 $20
million stock repurchase program and a new authorization by the
Board of Directors for the Company to repurchase through December
2003 up to an additional $25 million of its Class A Common Stock
from time to time on the open market.
11
<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 20, 1999 By: /s/ George Powlick
-------------------------
George Powlick,
Vice President Finance and
Chief Financial Officer
12
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Page
- ------- ----
27 Financial Data Schedule 14
13
<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
COMPREHENSIVE 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 55,674
<SECURITIES> 0
<RECEIVABLES> 35,432
<ALLOWANCES> (1,279)
<INVENTORY> 40,417
<CURRENT-ASSETS> 136,291
<PP&E> 8,855
<DEPRECIATION> 0
<TOTAL-ASSETS> 151,150
<CURRENT-LIABILITIES> 19,877
<BONDS> 0
0
0
<COMMON> 140
<OTHER-SE> 113,751
<TOTAL-LIABILITY-AND-EQUITY> 151,150
<SALES> 235,884
<TOTAL-REVENUES> 235,884
<CGS> 132,707
<TOTAL-COSTS> 55,462
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,101<F1>
<INCOME-PRETAX> 48,816
<INCOME-TAX> 19,457
<INCOME-CONTINUING> 29,359
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,359
<EPS-BASIC> 2.66
<EPS-DILUTED> 2.55
<FN>
<F1>Interest Income Net of Interest Expense
</FN>
</TABLE>
