<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 March 31, 2000
--------------
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 April 18, 2000:
Class A 7,369,444
Class B 3,013,978
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------
K-SWISS INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 59,600 $ 53,119
Accounts receivable, less allowance for doubtful
accounts of $1,863 and $1,740 as of March 31,
2000 and December 31, 1999, respectively 45,921 27,950
Inventories 28,561 44,164
Prepaid expenses and other 1,224 4,051
Deferred taxes 1,555 1,946
------------- -------------
Total current assets 136,861 131,230
PROPERTY, PLANT AND EQUIPMENT, net 8,934 8,848
OTHER ASSETS
Intangible assets 4,124 4,179
Other 2,507 2,515
------------- -------------
6,631 6,694
------------- -------------
$ 152,426 $ 146,772
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank lines of credit $ 905 $ 353
Current maturities of subordinated debentures 500 500
Trade accounts payable 3,970 4,588
Accrued income taxes 1,178 796
Accrued liabilities 13,363 11,205
------------- -------------
Total current liabilities 19,916 17,442
OTHER LIABILITIES 8,161 10,196
DEFERRED TAXES 8,084 7,104
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;
11,009,554 shares issued, 7,480,622 shares outstanding
and 3,528,932 shares held in treasury at March 31,
2000 and 11,006,155 shares issued, 7,727,223 shares
outstanding and 3,278,932 shares held in treasury at
December 31, 1999 110 110
Class B-authorized 10,000,000 shares of $.01 par value;
issued and outstanding 3,013,978 shares at March 31,
2000 and December 31, 1999 30 30
Additional paid-in capital 40,056 40,017
Treasury stock (39,779) (36,766)
Retained earnings 116,302 109,122
Accumulated other comprehensive earnings -
Foreign currency translation (454) (483)
------------- -------------
116,265 112,030
------------- -------------
$ 152,426 $ 146,772
============= =============
</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)
THREE MONTHS
ENDED MARCH 31,
---------------------
2000 1999
---- ----
Revenues $ 71,458 $ 88,577
Cost of goods sold 44,438 50,202
-------- --------
Gross profit 27,020 38,375
Selling, general and administrative expenses 15,528 16,625
-------- --------
Operating profit 11,492 21,750
Interest income, net 716 273
-------- --------
Earnings before income taxes 12,208 22,023
Income tax expense 4,871 8,737
-------- --------
NET EARNINGS $ 7,337 $ 13,286
======== ========
Earnings per common share (Note 3)
Basic $ 0.69 $ 1.23
======== ========
Diluted $ 0.67 $ 1.15
======== ========
Net Earnings $ 7,337 $ 13,286
Other comprehensive earnings (loss), net of tax -
Foreign currency translation adjustments 29 (58)
-------- --------
Comprehensive earnings $ 7,366 $ 13,228
======== ========
The accompanying notes are an integral part of these statements.
3
<PAGE>
K-SWISS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
THREE MONTHS
ENDED MARCH 31,
------------------
2000 1999
---- ----
Net cash provided by (used in) operating activities $ 9,453 $(13,923)
Cash flows from investing activities:
Purchase of property, plant and equipment (420) (666)
Proceeds from sale of property 9 3
-------- --------
Net cash used in investing activities (411) (663)
Cash flows from financing activities:
Net borrowings under bank lines of credit 538 1,140
Purchase of treasury stock (3,013) (2,992)
Payment of dividends (157) (164)
Proceeds from stock options exercised 17 2,147
-------- --------
Net cash (used in) provided by financing activities (2,615) 131
Effect of exchange rate changes on cash 54 (62)
-------- --------
Net increase(decrease) in cash and cash equivalents 6,481 (14,517)
Cash and cash equivalents at beginning of period 53,119 37,360
-------- --------
Cash and cash equivalents at end of period $ 59,600 $ 22,843
======== ========
Supplemental disclosure of cash flow information:
Non-cash investing and financing activities:
Income tax benefit of options exercised $ 22 $ 2,186
Cash paid during the period for:
Interest $ 21 $ 20
Income taxes $ 121 $ 89
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 March 31, 2000 and
the results of its operations and its cash flows for the three months ended
March 31, 2000 and 1999. The results of operations and cash flows for the
three months ended March 31, 2000 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, 1999.
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):
Three Months Ended March 31,
----------------------------------------
2000 1999
------------------- -------------------
Per Share Per Share
Shares Amount Shares Amount
-------- --------- -------- ---------
Basic EPS 10,662 $ .69 10,827 $ 1.23
Effect of Dilutive Stock Options 368 (.02) 714 (.08)
-------- --------- -------- ---------
Diluted EPS 11,030 $ .67 11,541 $ 1.15
======== ========= ======== =========
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:
2000 1999
--------------- ------------
Options to purchase shares of common stock
(in thousands) 99 -
Exercise prices $17.06 - $47.38 -
Expiration dates April 2009- -
October 2009
5
<PAGE>
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. The following tables summarize segment information (in
thousands):
Three Months Ended March 31,
----------------------------
2000 1999
-------- --------
Revenues from unrelated entities:
United States $ 63,293 $ 81,131
Europe 5,714 5,437
Other International 2,451 2,009
-------- --------
$ 71,458 $ 88,577
======== ========
Inter-geographic revenues:
United States $ 340 $ 356
Europe - 3
Other International 1,298 1,164
-------- --------
$ 1,638 $ 1,523
======== ========
Total revenues:
United States $ 63,633 $ 81,487
Europe 5,714 5,440
Other International 3,749 3,173
Less inter-geographic revenues (1,638) (1,523)
-------- --------
$ 71,458 $ 88,577
======== ========
Operating profit:
United States $ 12,703 $ 24,585
Europe 471 509
Other International 4 1,334
Less corporate expenses and
eliminations (1,686) (4,678)
-------- --------
$ 11,492 $ 21,750
======== ========
March 31, December 31,
2000 1999
-------- --------
Identifiable assets:
United States $ 79,189 $ 82,935
Europe 8,367 6,777
Other International 18,204 16,392
Corporate assets and
eliminations (1) 46,666 40,668
-------- --------
$152,426 $146,772
======== ========
(1) Corporate assets include cash and cash equivalents, 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; 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 actual 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.
THREE MONTHS
ENDED MARCH 31,
---------------
2000 1999
---- ----
Revenues 100.0% 100.0%
Cost of goods sold 62.2 56.7
Gross profit 37.8 43.3
Selling, general and administrative expenses 21.7 18.8
Interest income, net 1.0 0.3
Earnings before income taxes 17.1 24.8
Income tax expense 6.8 9.8
Net earnings 10.3 15.0
Revenues decreased to $71,458,000 for the quarter ended March 31, 2000 from
$88,577,000 for the quarter ended March 31, 1999, a decrease of $17,119,000 or
19.3%. This decrease resulted primarily from an decrease in the volume of
footwear sold to approximately 2,638,000 pair for the quarter ended March 31,
2000 from approximately 3,192,000 pair for the quarter ended March 31, 1999.
Also, the average wholesale price per pair decreased to $25.83 for the quarter
ended March 31, 2000 from $26.26 for the quarter ended March 31, 1999. The
decrease in the volume of footwear sold was primarily the result of decreased
sales of the Classic, children's and tennis/court categories of shoes of 20.2%,
18.4% and 29.3%, respectively, partially offset by sales of the training
category, a new category for the Company. The average wholesale price per pair
decreased primarily due to close-out sales, which carry a lower average price
per pair. The overall decline in sales was due to a difficult retail environment
during the first quarter of 2000.
Domestic revenues decreased 21.4% to $63,633,000 for the quarter ended March 31,
2000 from $80,987,000 for the quarter ended March 31, 1999. International
revenues increased 3.1% to $7,825,000 for the quarter ended March 31, 2000 from
$7,590,000 for the quarter ended March 31, 1999. International revenues, as a
percentage of total revenues, increased to 11.0% for the quarter ended March 31,
2000 from 8.6% for the quarter ended March 31, 1999.
Gross profit margins, as a percentage of revenues, decreased to 37.8% for the
quarter ended March 31, 2000, from 43.3% for the quarter ended March 31, 1999.
Gross profit margins decreased primarily due to close-out sales, which carry
lower margins. In addition gross profit margins also decreased due to changes in
the geographic and product mix of sales.
Selling, general and administrative expenses decreased to $15,528,000 (21.7% of
revenues) for the quarter ended March 31, 2000 from $16,625,000 (18.8% of
revenues) for the quarter ended March 31, 1999, a decrease of $1,097,000 or
6.6%. The decreases in these expenses were primarily the result of reductions of
employee incentive bonus system accruals due to diminished financial performance
in the first quarter of 2000 compared to the first quarter of 1999, partially
offset by increases in advertising costs due to an earlier start of the current
year television campaign.
Net interest income was $716,000 (1.0% of revenues) for the quarter ended March
31, 2000 compared to $273,000 (0.3% of revenues) for the quarter ended March 31,
1999, an increase of $443,000 or 162.3%. This increase in net interest income
was the result of higher average balances and higher average interest rates.
The Company's effective tax rate increased to 39.9% of earnings before income
tax from 39.7% for the quarters ended March 31, 2000 and 1999, respectively.
Net earnings decreased 44.8% to $7,337,000 for the quarter ended March 31, 2000
from $13,286,000 for the quarter ended March 31, 1999.
At March 31, 2000 and 1999, domestic futures orders with start ship dates from
April through September 2000 and 1999 were approximately $82,184,000 and
$135,066,000, respectively, a decrease of 39.2%. At March 31, 2000 and 1999,
international futures orders with start ship dates from April through September
2000 and 1999 were approximately
8
<PAGE>
$7,579,000 and $7,012,000, respectively, an increase of 8.1%. At March 31, 2000
and 1999 total futures orders with start ship dates from April 2000 and 1999
through September 2000 and 1999 were approximately $89,763,000 and $142,078,000,
respectively, a decrease of 36.8%. The 36.8% decrease in total futures orders is
comprised of a 27.0% decrease in the second quarter 2000 futures orders and a
44.5% decrease in the third 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 experienced a net cash inflow of approximately $9,453,000 compared
to a net cash outflow of approximately $13,923,000 from its operating activities
for the quarters ended March 31, 2000 and 1999, respectively. Cash provided by
operations for the quarter ended March 31, 2000 increased from the quarter ended
March 31, 1999 primarily due to changes in accounts receivable, inventories and
accounts payable and accrued liabilities, partially offset by a decrease in net
earnings.
The Company had a net outflow of cash from its investing activities for the
quarter ended March 31, 2000 and 1999 primarily due to the purchase of property,
plant and equipment.
The Company had a net outflow of cash from its financing activities for the
quarter ended March 31, 2000 primarily due to the purchase of treasury stock and
the payment of dividends, partially offset by increases in net borrowings under
bank lines of credit.
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, 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. Currently, the Company has made
purchases under all stock repurchase programs from August 1996 through April 19,
2000 (the day prior to the filing of this Form 10-Q) of 3,641,432 shares at an
aggregate cost totaling approximately $41,347,000.
No other material capital commitments exist at March 31, 2000. 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 2000.
The Company's working capital increased $3,157,000 to $116,945,000 at March 31,
2000 from $113,788,000 at December 31, 1999.
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 and Reports on Form 8-K:
--------------------------------
(a) Exhibits
27 - Financial Data Schedule.
(b) Reports on Form 8-K
None.
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: April 19, 2000 By: /s/ GEORGE POWLICK
------------------------------
George Powlick,
Vice President Finance and
Chief Financial Officer
11
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EXHIBIT INDEX
-------------
Exhibit Page
- ------- ----
27 Financial Data Schedule
12
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 59,600
<SECURITIES> 0
<RECEIVABLES> 47,784
<ALLOWANCES> (1,863)
<INVENTORY> 28,561
<CURRENT-ASSETS> 136,861
<PP&E> 8,934
<DEPRECIATION> 0
<TOTAL-ASSETS> 152,426
<CURRENT-LIABILITIES> 19,916
<BONDS> 0
0
0
<COMMON> 140
<OTHER-SE> 116,125
<TOTAL-LIABILITY-AND-EQUITY> 152,426
<SALES> 71,458
<TOTAL-REVENUES> 71,458
<CGS> 44,438
<TOTAL-COSTS> 15,528
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 716<F1>
<INCOME-PRETAX> 12,208
<INCOME-TAX> 4,871
<INCOME-CONTINUING> 7,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,337
<EPS-BASIC> 0.69
<EPS-DILUTED> 0.67
<FN>
<F1>Interest Income net of Interest Expense
</FN>
</TABLE>
