-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WDqOrkPlhsuSmaj0UkeYzeB4oZs9KxC2fPpL5qtQavSZuXQR4nvDy7ozHUekTmnn BBHP6fgQgG5+IAvj3brcAg== 0000898430-98-002650.txt : 19980724 0000898430-98-002650.hdr.sgml : 19980724 ACCESSION NUMBER: 0000898430-98-002650 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980723 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: K SWISS INC CENTRAL INDEX KEY: 0000862480 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 954265988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18490 FILM NUMBER: 98670360 BUSINESS ADDRESS: STREET 1: 20664 BAHAMA ST CITY: CATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8189983388 MAIL ADDRESS: STREET 1: 20664 BAHAMA ST CITY: CATSWORTH STATE: CA ZIP: 91311 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities - --- Exchange Act of 1934 For the period ended June 30, 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 ------- K-SWISS INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-4265988 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20664 Bahama Street, Chatsworth, CA 91311 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) 818-998-3388 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) ________________________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares of common stock outstanding at July 23, 1998: Class A 3,227,570 Class B 2,219,672 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ------ K-SWISS INC. CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands)
June 30, December 31, 1998 1997 ----------- -------------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 39,587 $ 36,123 Investment securities 2,504 5,995 Accounts receivable, less allowance for doubtful accounts of $738 and $477 as of June 30, 1998 and December 31, 1997, respectively 26,637 15,657 Inventories 22,965 27,214 Prepaid expenses and other 975 4,299 Deferred taxes 3,357 2,256 -------- -------- Total current assets 96,025 91,544 PROPERTY, PLANT AND EQUIPMENT, net 5,951 4,885 OTHER ASSETS Intangible assets 4,581 4,712 Other 1,142 545 -------- -------- 5,723 5,257 -------- -------- $107,699 $101,686 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank lines of credit $ 208 $ 642 Current maturities of subordinated debentures 450 400 Trade accounts payable 5,278 4,379 Accrued liabilities 13,311 10,530 -------- -------- Total current liabilities 19,247 15,951 SUBORDINATED DEBENTURES 50 100 DEFERRED TAXES 9,825 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; 4,376,115 shares issued, 3,218,415 shares outstanding and 1,157,700 shares held in treasury at June 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 2,224,672 shares at June 30, 1998 and 2,485,572 shares at December 31, 1997 22 25 Additional paid-in capital 25,355 25,271 Treasury stock (15,221) (12,389) Retained earnings 68,969 63,387 Accumulated other comprehensive income - Foreign currency translation (592) (470) -------- -------- 78,577 75,865 -------- -------- $107,699 $101,686 ======== ========
The accompanying notes are an integral part of these statements. 2 K-SWISS INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Amounts in thousands, except per share amounts) (Unaudited)
SIX MONTHS THREE MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues $83,289 $59,614 $41,015 $28,415 Cost of goods sold 48,543 38,282 23,415 18,805 ------- ------- ------- ------- Gross profit 34,746 21,332 17,600 9,610 Selling, general and administrative expenses 25,987 20,174 14,374 10,620 ------- ------- ------- ------- Operating profit (loss) 8,759 1,158 3,226 (1,010) Interest income, net 899 814 466 435 ------- ------- ------- ------- Earnings (loss) before income taxes 9,658 1,972 3,692 (575) Income tax expense (benefit) 3,858 812 1,437 (196) ------- ------- ------- ------- NET EARNINGS (LOSS) $ 5,800 $ 1,160 $ 2,255 $ (379) ======= ======= ======= ======= Earnings (loss) per common share (Note 3) Basic $1.06 $.19 $.41 $(.06) ======= ======= ======= ======= Diluted $1.02 $.19 $.40 $(.06) ======= ======= ======= ======= Net earnings (loss) $ 5,800 $ 1,160 $ 2,255 $ (379) Other comprehensive income, net of tax - Foreign currency translation adjustments (122) (130) (92) (38) ------- ------- ------- ------- Comprehensive net earnings (loss) $ 5,678 $ 1,030 $ 2,163 $ (417) ======= ======= ======= =======
The accompanying notes are an integral part of these statements. 3 K-SWISS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
SIX MONTHS ENDED JUNE 30, ------------------- 1998 1997 -------- -------- Net cash provided by operating activities $ 4,456 $ 7,645 Cash flows from investing activities: Purchase of investment securities - (9,619) Proceeds from the maturity of investment securities 3,491 - Purchase of property, plant and equipment (3,194) (307) Proceeds from sale of property 2,250 - ------- ------- Net cash provided by (used in) investing activities 2,547 (9,926) Cash flows from financing activities: Net repayments under bank lines of credit and capital leases (433) (370) Purchase of treasury stock (2,832) (4,180) Proceeds from stock options exercised 48 31 Income tax benefit of options exercised 19 4 Payment of dividends (218) (236) ------- ------- Net cash used in financing activities (3,416) (4,751) Effect of exchange rate changes on cash (123) (119) ------- ------- Net increase (decrease) in cash and cash equivalents 3,464 (7,151) Cash and cash equivalents at beginning of period 36,123 34,314 ------- ------- Cash and cash equivalents at end of period $39,587 $27,163 ======= =======
The accompanying notes are an integral part of these statements. 4 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of K-Swiss Inc. (the "Company") as of June 30, 1998 and the results of its operations and its cash flows for the six and three months ended June 30, 1998 and 1997. The results of operations and cash flows for the six and three months ended June 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):
Six Months Ended June 30, ------------------------------------------- 1998 1997 ------------------- -------------------- Per Share Per Share Shares Amount Shares Amount ------ --------- ------ --------- Basic EPS 5,485 $1.06 6,002 $.19 Effect of dilutive stock options 225 (.04) 29 - ----- ----- ----- ----- Diluted EPS 5,710 $1.02 6,031 $.19 ===== ===== ===== =====
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:
1998 1997 --------------- --------------- Options to purchase shares of common stock (in thousands) 60 360 Exercise prices $21.25 - $23.00 $12.00 - $23.00 Expiration dates August 2001 - January 2000 - February 2005 May 2007
5
Three Months Ended June 30, --------------------------------------------- 1998 1997 -------------------- -------------------- Per Share Per Share Shares Amount Shares Amount ------ --------- ------ --------- Basic EPS 5,447 $ .41 5,938 $(.06) Effect of dilutive stock options 247 (.01) - - ------ ----- ------ ----- Diluted EPS 5,694 $ .40 5,938 $(.06) ====== ===== ====== =====
The following options were not included in the computation of diluted EPS because either the exercise prices of the options were greater than the average market price of the common shares or the options would have had an antidulitive effect on loss per share:
1998 1997 --------------- --------------- Options to purchase shares of common stock (in thousands) 60 701 Exercise prices $21.25 - $23.00 $1.00 - $23.00 Expiration dates August 2001 - November 1998 - February 2005 May 2007
6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF - ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth, for the periods indicated, the percentage of certain items in the consolidated statements of operations relative to revenues.
SIX MONTHS THREE MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------- -------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues 100.0% 100.0% 100.0% 100.0% Cost of goods sold 58.3 64.2 57.1 66.2 Gross profit 41.7 35.8 42.9 33.8 Selling, general and administrative expenses 31.2 33.9 35.0 37.4 Interest income, net 1.1 1.4 1.1 1.6 Earnings (loss) before income taxes 11.6 3.3 9.0 (2.0) Income tax expense (benefit) 4.6 1.4 3.5 (0.7) Net earnings (loss) 7.0 1.9 5.5 (1.3)
Revenues increased to $41,015,000 for the quarter ended June 30, 1998 from $28,415,000 for the quarter ended June 30, 1997, an increase of $12,600,000 or 44.3%. Revenues increased to $83,289,000 for the six months ended June 30, 1998 from $59,614,000 for the six months ended June 30, 1997, an increase of $23,675,000 or 39.7%. The increases for the quarter and six months ended June 30, 1998 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 1,619,000 and 3,288,000 pair for the quarter and six months ended June 30, 1998 from 1,275,000 and 2,611,000 pair for the quarter and six months ended June 30, 1997. The increase in the volume of footwear sold for the quarter ended June 30, 1998 was primarily the result of increased sales of the Classic and children's categories of shoes of 27.3% and 85.4%, respectively. The average wholesale price per pair increased to $23.94 and $24.25 for the quarter and six months ended June 30, 1998 from $20.73 and $21.35 for the quarter and six months ended June 30, 1997, increases of 15.5% and 13.6%, respectively. The increase in the average wholesale price per pair for the quarter and six months ended June 30, 1998, is primarily attributable to the introduction of new styles in the Classic category at higher average wholesale prices and a decrease in close- out sales. Domestic revenues increased 69.0% to $36,717,000 for the quarter ended June 30, 1998 from $21,727,000 for the quarter ended June 30, 1997. Domestic revenues increased 64.3% to $74,749,000 for the six months ended June 30, 1998 from $45,487,000 for the six months ended June 30, 1997. International revenues decreased 35.7% to $4,298,000 for the quarter ended June 30, 1998 from $6,688,000 for the quarter ended June 30, 1997. International revenues decreased 39.5% to $8,540,000 for the six months ended June 30, 1998 from $14,127,000 for the six months ended June 30, 1997. The decrease in international revenues was primarily due to lower sales in the Company's Asian markets due to the Asian currency crisis. International revenues, as a percentage of total revenues, decreased to 10.5% and 10.3% for the quarter and six months ended June 30, 1998 as compared with 23.5% and 23.7% for the quarter and six months ended June 30, 1997. Gross profit margins, as a percentage of revenues, increased to 42.9% for the quarter ended June 30, 1998, from 33.8% for the quarter ended June 30, 1997. Gross profit margins, as a percentage of revenues, increased to 41.7% from 35.8% for the six months ended June 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 Selling, general and administrative expenses increased to $14,374,000 (35.0% of revenues) and $25,987,000 (31.2% of revenues) for the quarter and six months ended June 30, 1998, respectively, from $10,620,000 (37.4% of revenues) and $20,174,000 (33.9% of revenues) for the quarter and six months ended June 30, 1997, respectively, an increase of $3,754,000 and $5,813,000 or 35.3% and 28.8%, respectively. The increases in these expenses for the quarter and six months ended June 30, 1998 were the result of increases in 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 due to an unexpected bankruptcy of one of the Company's larger customers. Net interest income was $466,000 (1.1% of revenues) and $899,000 (1.1% of revenues) for the quarter and six months ended June 30, 1998, respectively, compared to $435,000 (1.6% of revenues) and $814,000 (1.4% of revenues) for the quarter and six months ended June 30, 1997, respectively, an increase of $31,000 and $85,000, respectively. The increase in net interest income was primarily due to higher average balances and rates for the quarter and six months ended June 30, 1998 as compared to the quarter and six months ended June 30, 1997. The Company's effective tax rate decreased to 39.9% of earnings before income tax from 41.2% for the six months ended June 30, 1998 and 1997, respectively, due to a reduction of certain non-deductible expenses as a percentage of earnings before income taxes. The Company recorded net earnings of $2,255,000 for the quarter ended June 30, 1998 and a net loss of $379,000 for the quarter ended June 30, 1997. Net earnings increased 400.0% to $5,800,000 for the six months ended June 30, 1998 from $1,160,000 for the six months ended June 30, 1997. Net earnings for the quarter and six months ended June 30, 1998 included net losses of the Company's European operations of $176,000 and $199,000, respectively. Net earnings for the quarter and six months ended June 30, 1997 included net losses of the Company's European operations of $1,050,000 and $1,274,000, respectively. At June 30, 1998 and 1997, domestic futures orders with start ship dates from July through December 1998 and 1997 were approximately $54,527,000 and $35,834,000, respectively. At June 30, 1998 and 1997, international futures orders with start ship dates from July through December 1998 and 1997 were approximately $5,349,000 and $7,562,000, respectively. "Backlog", as of any date, represents orders scheduled to be shipped within the next six months. Backlog does not include orders scheduled to be shipped on or prior to the date of determination of backlog. These orders are not necessarily indicative of revenues for subsequent periods because: (1) the mix of "futures" and "at- once" orders can vary significantly from quarter to quarter and year to year and (2) the rate of customer order cancellations can also vary from quarter to quarter and year to year. 8 Liquidity and Capital Resources The Company generated cash of $4,456,000 and $7,645,000 from its operating activities during the six months ended June 30, 1998 and 1997, respectively. Cash provided by operations for the six months ended June 30, 1998 as compared to the six months ended June 30, 1997 varied primarily due to changes in net earnings, accounts receivable, inventories, prepaid expenses (principally a prepayment to secure inventory purchases) and other assets and deferred taxes. The Company had a net inflow of cash from its investing activities for the six months ended June 30, 1998 due to proceeds from the maturity of investment securities and proceeds from the sale of property partially offset by the purchase of property, plant and equipment. The Company had a net outflow of cash from its investing activities for the six months ended June 30, 1997 due to the purchase of investment securities and property, plant and equipment. The Company has a net outflow of cash from its financing activities for the six months ended June 30, 1998 primarily due to the purchase of treasury stock. 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. To date, the Company has not made any share purchases under this new program. The Company has made purchases under previous stock repurchase programs during the period from August 14, 1996 through April 15, 1998 (the date of the final purchase under previously completed stock repurchase programs) of an aggregate of 1,157,700 shares at an aggregate purchase price totaling approximately $15,221,000. The Company is heavily dependent upon complex computer systems for all phases of its operations, which include production, sales and distribution. The Company's computer software programs recognize only the last two digits of the year in any date (e.g., "98" for "1998"), and therefore some software may inaccurately process data in 1999 or 2000 if the software is not reprogrammed, upgraded or replaced (the "Year 2000 Issue"). The Company has initiated a program intended to timely mitigate and/or prevent the adverse effects of the Year 2000 Issue, and to pursue compliance by suppliers and customers. The Company believes that many of its suppliers and customers may also have Year 2000 Issues. In the event that such suppliers and customers do not address their Year 2000 Issues, the Company could be adversely impacted. At this time, while the Company cannot state with certainty the precise amount of expenditures necessary to resolve the Year 2000 Issue, it appears such expenditures could amount to $200,000 to $300,000 for the Company. However, in any event the Company presently believes that the cost of fixing the Year 2000 Issue will not have a material adverse impact on the Company's financial position and results of operations. During the remainder of 1998, the Company will expend approximately $1,200,000 for the construction of its new headquarters facility. No other material capital commitments exist at June 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 $1,185,000 to $76,778,000 at June 30,1998 from $75,593,000 at December 31, 1997. 9 PART II - OTHER INFORMATION ITEM 1: Legal Proceedings. ----------------- None. ITEM 2: Changes in Securities. --------------------- None. ITEM 3: Defaults Upon Senior Securities. ------------------------------- None. ITEM 4: Submission of Matters to a Vote of Security Holders. --------------------------------------------------- (a) The Annual Meeting of Stockholders was held May 20, 1998. (b) The following directors were elected to serve until the 1999 Annual Meeting of Stockholders or until their successors have been duly elected and qualified:
Class A Directors Class B Directors ----------------- ----------------- Jonathan K. Layne Steven Nichols Martyn Wilford George Powlick Stanley Bernstein Lawrence Feldman Stephen Fine
(c) Of the 2,289,208 shares of Class A Common Stock represented at the meeting, the Class A Directors named in (b) above were elected by the following votes:
No. Of Votes Received --------------------- Name For Withheld Authority ---------- --------- ------------------ Jonathan K. Layne 2,278,061 - Martyn Wilford 2,278,061 -
Of the 1,747,778 shares of Class B Common Stock represented at the meeting, the Class B Directors named in (b) above were elected by the following votes:
No. Of Votes Received --------------------- Name For Withheld Authority ----------- ---------- ------------------ Steven Nichols 17,477,780 - George Powlick 17,477,780 - Stanley Bernstein 17,477,780 - Lawrence Feldman 17,477,780 - Stephen Fine 17,477,780 -
10 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 second quarter of 1998. 11 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. K-Swiss Inc. Date: July 23, 1998 By: /s/ George Powlick -------------------------- George Powlick, Vice President Finance and Chief Financial Officer 12 EXHIBIT INDEX -------------
Exhibit Page - ------- ---- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 1,000 6-MOS DEC-31-1997 JAN-01-1998 JUN-30-1998 39,587 2,504 27,375 (738) 22,965 96,025 5,951 0 107,699 19,247 0 0 0 66 78,511 107,699 83,289 83,289 48,543 25,987 0 0 899 9,658 3,858 5,800 0 0 0 5,800 1.060 1.020 Interest Income net of Interest Expense
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