-----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, T+EzbZMYqvt/6cJGAOpCqk39qi9ElGEHC8iOTRlcEiwHLtnCPOTJsEnycsxI5sBv 91cSjdzTSKl780C1NLSoQw== /in/edgar/work/20000720/0000898430-00-002070/0000898430-00-002070.txt : 20000920 0000898430-00-002070.hdr.sgml : 20000920 ACCESSION NUMBER: 0000898430-00-002070 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000720 FILER: COMPANY DATA: COMPANY CONFORMED NAME: K SWISS INC CENTRAL INDEX KEY: 0000862480 STANDARD INDUSTRIAL CLASSIFICATION: [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: 676188 BUSINESS ADDRESS: STREET 1: 31248 OAK CREST DRIVE CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91361 BUSINESS PHONE: 8187065100 MAIL ADDRESS: STREET 1: 31248 OAK CREST DR CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91361 10-Q 1 0001.txt 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, 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 ------- 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 July 18, 2000: Class A 7,165,785 Class B 3,013,978 1 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ------ K-SWISS INC. CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands)
June 30, December 31, 2000 1999 -------- ------------ (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 68,465 $ 53,119 Accounts receivable, less allowance for doubtful accounts of $1,909 and $1,740 as of June 30, 2000 and December 31, 1999, respectively 31,546 27,950 Inventories 31,729 44,164 Prepaid expenses and other 1,227 4,051 Deferred taxes 1,671 1,946 -------- -------- Total current assets 134,638 131,230 PROPERTY, PLANT AND EQUIPMENT, net 8,810 8,848 OTHER ASSETS Intangible assets 4,067 4,179 Other 2,518 2,515 -------- -------- 6,585 6,694 -------- -------- $150,033 $146,772 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank lines of credit $ 641 $ 353 Current maturities of subordinated debentures 500 500 Trade accounts payable 7,020 4,588 Accrued liabilities 10,342 12,001 -------- -------- Total current liabilities 18,503 17,442 OTHER LIABILITIES 8,252 10,196 DEFERRED TAXES 7,565 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; 11,012,884 shares issued, 7,165,452 shares outstanding and 3,847,432 shares held in treasury at June 30, 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 June 30, 2000 and December 31, 1999 30 30 Additional paid-in capital 40,080 40,017 Treasury stock (44,128) (36,766) Retained earnings 120,120 109,122 Accumulated other comprehensive earnings - Foreign currency translation (499) (483) -------- -------- 115,713 112,030 -------- -------- $150,033 $146,772 ======== ========
The accompanying notes are an integral part of these statements. 2 K-SWISS INC. CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS (Amounts in thousands, except per share amounts) (Unaudited) SIX MONTHS THREE MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------- ----------------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenues $122,464 $155,750 $51,006 $67,173 Cost of goods sold 73,702 87,082 29,264 36,880 -------- -------- ------- ------- Gross profit 48,762 68,668 21,742 30,293 Selling, general and administrative expenses 31,534 36,019 16,006 19,394 -------- -------- ------- ------- Operating profit 17,228 32,649 5,736 10,899 Interest income, net 1,662 618 946 345 -------- -------- ------- ------- Earnings before income taxes 18,890 33,267 6,682 11,244 Income tax expense 7,582 13,245 2,711 4,508 -------- -------- ------- ------- NET EARNINGS $ 11,308 $ 20,022 $ 3,971 $ 6,736 ======== ======== ======= ======= Earnings per common share (Note 3) Basic $ 1.08 $ 1.83 $ .38 $ .61 ======== ======== ======= ======= Diluted $ 1.04 $ 1.75 $ .37 $ .58 ======== ======== ======= ======= Net earnings $ 11,308 $ 20,022 $ 3,971 $ 6,736 Other comprehensive (loss) earnings, net of tax - Foreign currency translation adjustments (16) (38) (45) 20 -------- -------- ------- ------- Comprehensive earnings $ 11,292 $ 19,984 $ 3,926 $ 6,756 ======== ======== ======= ======= 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, ---------------- 2000 1999 ------- ------- Net cash provided by operating activities $23,348 $ 9,347 Cash flows from investing activities: Purchase of property, plant and equipment (640) (1,101) Proceeds from sale of property 9 23 ------- ------- Net cash used in investing activities (631) (1,078) Cash flows from financing activities: Net borrowings under bank lines of credit 322 172 Purchase of treasury stock (7,362) (5,645) Proceeds from stock options exercised 35 5,731 Payment of dividends (310) (334) ------- ------- Net cash used in financing activities (7,315) (76) Effect of exchange rate changes on cash (56) (44) ------- ------- Net increase in cash and cash equivalents 15,346 8,149 Cash and cash equivalents at beginning of period 53,119 37,360 ------- ------- Cash and cash equivalents at end of period $68,465 $45,509 ======= ======= Supplemental disclosure of cash flow information: Non-cash investing and financing activities: Income tax benefit of options exercised $ 28 $ 8,932 Cash paid during the period for: Interest $ 47 $ 54 Income taxes $ 4,259 $ 2,027 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, 2000 and the results of its operations and its cash flows for the six and three months ended June 30, 2000 and 1999. The results of operations and cash flows for the six and three months ended June 30, 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. Certain reclassifications have been made in the six and three months ended June 30, 1999 presentation to conform to the six and three months ended June 30, 2000 presentation. 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):
Six Months Ended June 30, Three Months Ended June 30, ----------------------------- --------------------------------- 2000 1999 2000 1999 ------------- ---------- ------------ -------------- Per Per Per Per Share Share Share Share Shares Amount Shares Amount Shares Amount Shares Amount ------ ------ ------ ------ ------ ------ ------ ------ Basic EPS 10,498 $1.08 10,970 $1.83 10,334 $ .38 11,113 $ .61 Effect of dilutive stock options 397 (.04) 484 (.08) 439 (.01) 509 (.03) ------ ----- ------ ----- ------ ----- ------ ----- Diluted EPS 10,895 $1.04 11,454 $1.75 10,773 $ .37 11,622 $ .58 ====== ===== ====== ===== ====== ===== ====== =====
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: Six and Three Months Ended June 30, -------------------- 2000 --------------------- Options to purchase shares of common stock (in thousands) 99 Exercise prices $17.06 - $47.38 Expiration dates April 2009 - October 2009 5 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):
SIX MONTHS THREE MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------- -------------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenues from unrelated entities: United States $109,872 $143,900 $46,239 $ 62,913 Europe 8,383 7,267 2,669 1,830 Other International 4,209 4,583 2,098 2,430 -------- -------- ------- -------- $122,464 $155,750 $51,006 $ 67,173 ======== ======== ======= ======== Inter-geographic revenues: United States $ 539 $ 2,445 $ 199 $ 2,089 Europe 14 1,803 14 1,800 Other International 2,320 2,664 1,023 1,500 -------- -------- ------- -------- $ 2,873 $ 6,912 $ 1,236 $ 5,389 ======== ======== ======= ======== Total revenues: United States $110,411 $146,345 $46,438 $ 65,002 Europe 8,397 9,070 2,683 3,630 Other International 6,529 7,247 3,121 3,930 Less inter-geographic revenues (2,873) (6,912) (1,236) (5,389) -------- -------- ------- -------- $122,464 $155,750 $51,006 $ 67,173 ======== ======== ======= ======== Operating profit (loss): United States $ 21,135 $ 36,599 $ 8,545 $ 12,014 Europe (250) (46) (794) (555) Other International 383 2,776 379 1,442 Less corporate expenses and eliminations (4,040) (6,680) (2,394) (2,002) -------- -------- ------- -------- $ 17,228 $ 32,649 $ 5,736 $ 10,899 ======== ======== ======= ========
June 30, December 31, 2000 1999 ---- ---- Identifiable assets: United States $ 70,977 $ 82,114 Europe 6,780 6,777 Other International 17,496 17,213 Corporate assets and eliminations (1) 54,780 40,668 --------- -------- $ 150,033 $146,772 ========= ========
(1) Corporate assets include cash and cash equivalents and intangible assets. 6 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; market acceptance of non- performance product in Europe; 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 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. SIX MONTHS THREE MONTHS ENDED JUNE 30 ENDED JUNE 30, ------------- -------------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenues 100.0% 100.0% 100.0% 100.0% Cost of goods sold 60.2 55.9 57.4 54.9 Gross profit 39.8 44.1 42.6 45.1 Selling, general and administrative expenses 25.8 23.1 31.4 28.9 Interest income, net 1.4 0.4 1.9 0.5 Earnings before income taxes 15.4 21.4 13.1 16.7 Income tax expense 6.2 8.5 5.3 6.7 Net earnings 9.2 12.9 7.8 10.0 Revenues decreased to $51,006,000 for the quarter ended June 30, 2000 from $67,173,000 for the quarter ended June 30, 1999, a decrease of $16,167,000 or 24.1%. Revenues decreased to $122,464,000 for the six months ended June 30, 2000 from $155,750,000 for the six months ended June 30, 1999, a decrease of $33,286,000 or 21.4%. The decreases for the quarter and six months ended June 30, 2000 were the result of a decrease in the volume of footwear sold partially offset by higher average wholesale prices per pair. The volume of footwear sold decreased to 1,811,000 and 4,449,000 pair for the quarter and six months ended June 30, 2000 from 2,540,000 and 5,732,000 pair for the quarter and six months ended June 30, 1999. The decrease in the volume of footwear sold for the quarter ended June 30, 2000 was primarily the result of decreased sales of the Classic, children's and tennis/court categories of shoes of 22.5%, 36.6% and 44.9%, respectively, partially offset by sales of the training category, a new category for the Company. The average wholesale price per pair increased to $27.21 and $26.39 for the quarter and six months ended June 30, 2000 from $25.39 and $25.87 for the quarter and six months ended June 30, 1999, increases of 7.2% and 2.0%, respectively. The increase in the average wholesale price per pair for the quarter and six months ended June 30, 2000, is primarily attributable to the introduction of new styles in the Classic and training categories at higher average wholesale prices, and a decrease in the children's category which carries a lower average wholesale price. Domestic revenues decreased 26.5% to $46,239,000 for the quarter ended June 30, 2000 from $62,913,000 for the quarter ended June 30, 1999. Domestic revenues decreased 23.7% to $109,872,000 for the six months ended June 30, 2000 from $143,900,000 for the six months ended June 30, 1999. International revenues increased 11.9% to $4,767,000 for the quarter ended June 30, 2000 from $4,260,000 for the quarter ended June 30, 1999. International revenues increased 6.3% to $12,592,000 for the six months ended June 30, 2000 from $11,850,000 for the six months ended June 30, 1999. International revenues, as a percentage of total revenues, increased to 9.4% and 10.3% for the quarter and six months ended June 30, 2000 as compared with 6.3% and 7.6% for the quarter and six months ended June 30, 1999. Gross profit margins, as a percentage of revenues, decreased to 42.6% for the quarter ended June 30, 2000, from 45.1% for the quarter ended June 30, 1999. Gross profit margins, as a percentage of revenues, decreased to 39.8% from 44.1% for the six months ended June 30, 2000 and 1999, respectively. Gross profit margins decreased for the quarter ended June 30, 2000 primarily due to changes in the geographic mix of sales as well as less favorable operating efficiencies in the Company's sourcing operations due to lower contract manufacturing volume during the quarter. Gross profit margins decreased for the six months ended June 30, 2000 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 $16,006,000 (31.4% of revenues) and $31,534,000 (25.8% of revenues) for the quarter and six months ended June 30, 2000, respectively, from $19,394,000 (28.9% of revenues) and $36,019,000 (23.1% of revenues) for the quarter and six months ended June 30, 1999, respectively, decreases of $3,388,000 and $4,485,000 or 17.5% and 12.5%, respectively. The decreases in these expenses for the quarter ended June 30, 2000 were primarily the result of decreases in advertising costs, bonus expense and commissions. In the quarter ended June 30, 2000, the Company decided to suspend for the remainder of 2000 the reversal provisions of the Company's EVA bonus system which resulted in higher than expected selling, general and administrative expenses for the second quarter of 2000. The decreases in these selling, general and administrative expenses for the six months ended June 30, 2000 were primarily the result of reductions of the accruals for an employee incentive bonus system due to diminished financial performance in the first three months of 2000 compared to the first three months of 1999 plus the Company's decision in the second quarter of 2000 to suspend the reversal provisions of the Company's EVA bonus system, along with decreased commissions, partially offset by an increase in advertising costs. 8 Net interest income was $946,000 (1.9% of revenues) and $1,662,000 (1.4% of revenues) for the quarter and six months ended June 30, 2000, respectively, compared to $345,000 (0.5% of revenues) and $618,000 (0.4% of revenues) for the quarter and six months ended June 30, 1999, respectively, increases of $601,000 and $1,044,000, 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, 2000 as compared to the quarter and six months ended June 30, 1999. The Company's effective tax rate increased to 40.1% of earnings before income tax from 39.8% for the six months ended June 30, 2000 and 1999, respectively. Net earnings decreased 41.0% to $3,971,000 for the quarter ended June 30, 2000 from $6,736,000 for the quarter ended June 30, 1999. Net earnings decreased 43.5% to $11,308,000 for the six months ended June 30, 2000 from $20,022,000 for the six months ended June 30, 1999. At June 30, 2000 and 1999, domestic futures orders with start ship dates from July through December 2000 and 1999 were approximately $65,113,000 and $115,313,000, respectively, a decrease of 43.5%. At June 30, 2000 and 1999, international futures orders with start ship dates from July through December 2000 and 1999 were approximately $7,406,000 and $6,514,000, respectively, an increase of 13.7%. At June 30, 2000 and 1999 total futures orders with start ship dates from July through December 2000 and 1999 were approximately $72,519,000 and $121,827,000, respectively, a decrease of 40.5%. The 40.5% decrease in total futures orders is comprised of a 26.8% decrease in the third quarter futures orders and a 62.8% decrease in the fourth quarter 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 $23,348,000 and $9,347,000 from its operating activities during the six months ended June 30, 2000 and 1999, respectively. Cash provided by operations for the six months ended June 30, 2000 as compared to the six months ended June 30, 1999 varied primarily due to changes in net earnings, accounts receivable, inventories, accounts payable and accrued liabilities. The Company had a net outflow of cash from its investing activities for the six months ended June 30, 2000 and 1999 due to the purchase of property, plant and equipment. The Company had a net outflow of cash from its financing activities for the six months ended June 30, 2000 primarily due to the purchase of treasury stock. In October 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 July 20, 2000 (the date of filing of this Form 10-Q) of 3,847,432 shares at an aggregate cost totaling approximately $44,128,000. No other material capital commitments exist at June 30, 2000. Depending on the Company's future growth rate, funds may be required by operating activities. 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 covenants as agreed upon in the facility. 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 $2,347,000 to $116,135,000 at June 30, 2000 from $113,788,000 at December 31, 1999. 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 18, 2000. (b) The following directors were elected to serve until the 2001 Annual Meeting of Stockholders or until their successors have been duly elected and qualified: Class A Directors Class B Directors ----------------- ----------------- Stephen Fine Steven Nichols Martyn Wilford George Powlick Lawrence Feldman Jonathan K. Layne (c) Of the 6,233,367 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 ---------- --------- ------------------ Stephen Fine 6,178,863 44,504 Martyn Wilford 6,139,114 84,253 Of the 2,884,926 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 28,849,260 - George Powlick 28,849,260 - Lawrence Feldman 28,849,260 - Jonathan K. Layne 28,849,260 - (d) At the Annual Meeting, the Company's stockholders adopted and approved the Company's Economic Value Added Bonus Plan and related performance goals. The number of votes cast for and against such proposal were as follows: No. Of Votes Received Class A and Class B ------------------- In Favor 34,737,702 Opposed 108,799 Abstain 226,126 10 ITEM 5: Other Information. ----------------- None. ITEM 6: Exhibits and Reports on Form 8-K: -------------------------------- (a) Exhibits 10.31 Employment Agreement between the Registrant and Steven B. Nichols dated as of May 18, 2000. 27 - Financial Data Schedule (b) Reports on Form 8-K There were no reports filed on Form 8-K during the second quarter of 2000. 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 19, 2000 By: /s/ George Powlick -------------------------- George Powlick, Vice President Finance and Chief Financial Officer 12 EXHIBIT INDEX -------------
Exhibit Page - ------- ---- 10.31 Employment Agreement between the Registrant and Steven B. Nichols Dated as of May 18, 2000 27 Financial Data Schedule
13 EX-10.31 2 0002.txt EMPLOYMENT AGREEMENT Exhibit 10.31 ------------- EMPLOYMENT AGREEMENT -------------------- Parties ------- The parties to this Agreement, made as of the 18th day of May 2000, are K- Swiss Inc., a Delaware corporation (the "Company" or "K-Swiss"), and Steven B. Nichols (the "Executive"). Recitals -------- WHEREAS, the Executive possesses an intimate knowledge of the footwear business and the business and affairs of the Company, its policies, methods, personnel and operations. WHEREAS, K-Swiss and the Executive are parties to an Employment Agreement made as of March 1, 1995, (the "1995 Agreement"), which expires December 31, 2000 and whereas the Board of Directors of K-Swiss desires to assure K-Swiss of the Executive's continued employment in an executive capacity and to compensate him therefor. WHEREAS, the Executive is willing to commit himself to serve K-Swiss on the terms herein provided. Therefore, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: Agreement --------- 1. Employment. ---------- (a) The Company hereby agrees to employ the Executive, and the Executive hereby agrees to serve the Company, all on the terms and conditions set forth herein. (b) The employment of the Executive by the Company pursuant to this Agreement shall be for the period commencing on January 1, 2001 (the "Commencement Date") and expiring on the date set forth in Section B of Appendix I hereto (the "Expiration Date"), unless such employment shall have been sooner terminated as hereinafter set forth. 2. Position and Duties. ------------------- The Executive shall serve in the capacity or capacities set forth in Section A of Appendix I hereto, shall be accountable to, and shall also have such other powers, duties and responsibilities as may from time to time be prescribed by, the Board of Directors, provided that such other duties and responsibilities are consistent with the Executive's position. The Executive shall perform and discharge, faithfully, diligently and to the best of his ability, such duties and responsibilities. The Executive shall devote substantially all his working time and efforts to the business and affairs of the Company. 3. Compensation. ------------ (a) Salary. During each year of his employment hereunder from the ------ Commencement Date, the Executive shall receive an annual base salary equal to: (i) $767,431 (the annual salary payable to Executive with respect to the year commencing January 1, 2000 pursuant to the 1995 Agreement) (the "2000 Base Salary") plus (ii) the 2000 Base Salary multiplied by a percentage increase, if any, in the Consumer Price Index - Los Angeles - Anaheim - Riverside, California Area - All Items (the "CPI") during the period from January 1, 2000 to December 31, 2000; provided that with respect to each year commencing on January 1, 2002 and thereafter, the base salary in effect for such year shall equal the base salary in effect for the immediately preceding year multiplied by a factor equal to the sum of: (x) 100%, plus (y) the percentage increase, if any, in the CPI during the period of time from January 1 to December 31 of the year immediately preceding the year for which such adjustment is being computed. All amounts payable pursuant to this Section 3(a) at the then applicable rate shall hereinafter be referred to as "Salary." Salary shall be payable in substantially equal monthly installments, less any amount required to be withheld under applicable law. Except as otherwise provided in this Agreement, the Salary shall be pro-rated for any period of service less than a full year. (b) EVA Bonus Awards. The Executive shall be entitled to receive as ---------------- further compensation, in addition to the Salary payable pursuant to Section 3(a), amounts, if any, payable to Executive pursuant to the K-Swiss Inc. EVA Bonus Plan, as it may be amended from time to time by the K-Swiss Inc. Board of Directors ("EVA Awards"). Each year during the term of this Agreement, the Compensation and Stock Option Committee of the Board of Directors (or a similar Board committee) shall establish in writing, not later than 90 days after the commencement of the period of service to which such performance goal relates, objective performance goals for Executive. The Bonus Target Percentage which shall apply to Executive each year during the term of this Agreement pursuant to the EVA Bonus Plan shall be 60% of Executive's Salary. (c) Stock Options. On May 18, 2000, the Company shall grant to the ------------- Executive options to purchase 50,000 shares of the Company's Class A Common Stock. Each such option shall have an exercise price equal to the closing price of the Company's Class A Common Stock on May 18, 2000 on the NASDAQ National Market, which shall be deemed to equal the fair market value of the Corporation's Class A Common Stock on the date of grant. The options so granted shall vest 10% per month, commencing on February 1, 2002. Such options shall be subject to the Company's Non-Qualified Stock Option Agreement in use on the date of grant. (d) Expenses. During the term of his employment hereunder, the Executive -------- shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by him on behalf of the Company (in accordance with the policies and procedures established by the Board of Directors from time to time for the Company's senior executive officers) in performing services hereunder, provided that the Executive properly accounts therefor in accordance with requirements for federal income tax deductibility and the Company's policies and procedures. 2 (e) Fringe Benefits. During the term of his employment hereunder, the --------------- Executive shall be entitled to participate in or receive benefits under any life insurance, health, pension, retirement and accident plans or arrangements made generally available by the Company to its executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Notwithstanding anything else in this Agreement to the contrary the Executive shall receive the following benefits, which shall be in lieu of any similar benefits which may be received by the other executives of the Company: (i) Term Life Insurance. During the term of this Agreement, the ------------------- Company will either: (a) purchase and maintain term life insurance in the policy amount of $1,500,000 (with the proceeds thereof payable to the estate of the Executive or to such other beneficiary or beneficiaries as the Executive may designate in writing), provided that the Executive satisfies any requirements, such as an annual physical examination, that may be required as a condition of obtaining such insurance, or (b) at the Executive's election, pay to the Executive an amount of cash sufficient for the purchase and maintenance of term life insurance as described in subdivision (a) above. In addition, to the extent that, but for subdivision (b) of the immediately preceding sentence, any portion of the cost of the insurance described in subdivision (a) of said sentence would be excluded from the Executive's gross income for federal and/or state income tax purposes, the Company will pay to the Executive an additional amount of cash compensation sufficient to place the Executive in the same after-tax economic position as that in which the Executive would be if subdivision (b) were not a part of said sentence. (ii) Disability. The Company will purchase disability insurance ---------- (with the proceeds thereof payable to the Executive) covering the Executive if the Executive is permanently disabled as a result of any illness, injury or accident, physical or mental, and is unable to perform satisfactorily his duties hereunder on a full time basis for six consecutive months, that will provide for coverage in an amount mutually satisfactory to the parties hereto. (iii) Travel Insurance. The Company will purchase travel insurance ---------------- (with the proceeds thereof payable to the Executive) covering Executive while on Company business in the amount of $1,000,000. (iv) Automobile. The Company shall provide the Executive with the ---------- use of a top-of-the-line General Motors or equivalent car, and the Company shall pay all taxes, insurance, repairs and operating expenses in connection therewith. (v) Health. The Company will purchase health insurance covering ------ Executive and his family with coverage substantially equivalent to the Prudential Out of Area Health Plan. (f) Vacations. During the term of his employment hereunder, the Executive --------- shall be entitled to the number of paid vacation days in each calendar year determined by the Board of Directors from time to time for the Company's senior executive officers, but not less than four weeks in any fiscal year, and shall also be entitled to all paid holidays given by the Company to its employees. 3 4. Offices ------- The Executive agrees to serve without additional compensation, if elected or appointed thereto, in one or more offices and as a director of K-Swiss or of any subsidiary of K-Swiss; provided, however, that the Executive shall not be -------- ------- required to serve as an officer or director of any such subsidiary if such service would expose him to adverse physical hazards or adverse financial consequences. 5. Unauthorized Disclosure; Inventions. ----------------------------------- (a) Unauthorized Disclosure. The Executive shall not, without the written ----------------------- consent of the Board of Directors or a person duly authorized thereby, disclose to any person, other than an employee or professional adviser of the Company or other person to whom disclosure is in the reasonable judgment of the Executive necessary or appropriate in connection with the performance by the Executive of his duties as an executive officer of the Company, any information obtained by him while in the employ of the Company the disclosure of which he knows or, in the exercise of reasonable care, should know may be damaging to the Company; provided, however, that such information shall not include any information known - -------- ------- generally to the public (other than as a result of unauthorized disclosure by the Executive); and provided, further, that the Executive's duties under this -------- ------- subsection (a) shall not extend to any disclosures that may be required by law in connection with any judicial or administrative proceeding or inquiry, as may be required by federal and/or state securities law, or as may otherwise be required by the rules of any exchange or association which lists the Company's securities. (b) Proprietary Rights. Any and all inventions, discoveries, developments, ------------------ methods, processes, compositions, works, concepts and ideas (whether or not patentable or copyrightable) conceived, made, developed, created or reduced to practice by the Executive (whether at the request or suggestion of the Company or otherwise, whether alone or in conjunction with others, and whether during regular hours of work or otherwise) during the period of his employment by the Company and for three months thereafter, which may be directly or indirectly useful in, or relate to, the business of or products manufactured or sold by the Company or any of its subsidiaries of affiliates or any business or products contemplated by the Company while the Executive is employed by the Company, shall be promptly and fully disclosed by the Executive to an appropriate executive officer of the Company and shall be the Company's exclusive property as against the Executive, and the Executive shall promptly deliver to an appropriate executive officer of the Company all papers, drawings, models, data and other material relating to any of the foregoing proprietary rights, conceived, made, developed or created by him as aforesaid. The Executive shall, upon the Company's request and without any payment therefor (except for Company Policy Awards), execute any documents necessary or advisable in the opinion of the Company's counsel to assign his right, title and interest in the foregoing proprietary rights and to direct issuance of patents or copyrights to the Company with respect to such proprietary rights as are to be the Company's exclusive property as against the Executive under this subsection (b) or to vest in the Company title to such proprietary rights as against the Executive, the expense of securing any such patent or copyright, however, to be borne by the Company. 4 6. Non-Competition. --------------- The Executive agrees that for a period of twelve (12) months following the Date of Termination, unless the Date of Termination is the Expiration Date, he will not directly or indirectly own, manage, operate, control or participate in the ownership, management, operation or control of, or be connected as an officer, employee, partner, director or otherwise with, or have any financial interest in, or aid or assist anyone else in the conduct of, or solicit any employees of the Company on behalf of, any entity or business which competes directly with any business conducted by the Company or by any group, division or subsidiary of the Company, in any area where such business is being conducted or is proposed to be conducted at the Date of Termination; provided, however, that -------- ------- this provision shall not apply if Executive or the Company terminates his employment on the Expiration Date. It is understood and agreed that, for the purposes of the foregoing provisions of this Section 6, (i) no business shall be deemed to be a business conducted by the Company or any group, division or subsidiary of the Company, unless not less than five percent (5%) of the Company's consolidated gross sales or operating revenues is derived from, or not less than five percent (5%) of the Company's consolidated assets are devoted to, such business; and (ii) no business conducted by any entity by which the Executive is employed or in which he is interested or with which he is connected or associated shall be deemed competitive with any business conducted by the Company unless it is one from which five percent (5%) or more of its consolidated gross sales or operating revenues is derived, or to which five percent (5%) or more of its consolidated assets are devoted; provided, however, -------- ------- that if the actual gross sales or operating revenues or assets of such entity derived from or devoted to such business is equal to or in excess of 10% of the most nearly comparable figure for the Company, such business of such entity shall be deemed to be competitive with a business of the Company. Furthermore, ownership of not to exceed five percent (5%) of the voting stock of any publicly held corporation shall not constitute a violation of this Section 6, and ownership of a partial equity interest in Nichols Foot Form also shall not constitute a violation of this Section 6. 7. Termination. ----------- (a) Death. The Executive's employment hereunder shall terminate upon his ----- death. (b) Incapacity. If in the reasonable judgment of the Board of Directors, ---------- as a result of the Executive's incapacity due to physical or mental illness or otherwise, the Executive shall for six consecutive months during the term of this Agreement have been unable to perform satisfactorily all of his duties hereunder on a full-time basis, the Company may, by a unanimous vote of the members of the Board of Directors (other than the Executive), terminate the Executive's employment hereunder by notice to the Executive. (c) Termination by the Executive. The Executive may terminate his ---------------------------- employment hereunder upon thirty days' prior written notice to the Company for Good Reason. For purposes of this Agreement, "Good Reason" shall mean (A) any removal of the Executive from the position indicated in Section A of Appendix I hereof, except in connection with termination of the Executive's employment for Cause, or (B) a reduction in the Executive's Salary or any other willful action by the Company that is materially inconsistent with the terms of this Agreement. 5 (d) Cause. The Company may, by a unanimous vote of the members of the ----- Board of Directors other than the Executive, terminate the Executive's employment hereunder for Cause. The Company shall give the Executive ten (10) days notice of a Board of Directors meeting at which termination for Cause will be considered, and the Executive shall have the opportunity to be heard at such meeting. If appropriate, the Board of Directors shall give the Executive a reasonable period of time in which to cure any deficiencies under this Section 7(d). For the purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder upon the Executive's (A) material failure, refusal or gross neglect to perform and discharge his duties and responsibilities hereunder, or willful action that is materially inconsistent with the terms hereof, or material breach of his fiduciary duties as an officer or member of the Board of Directors of the Company or any subsidiary or affiliate, or (B) gross and willful misconduct that is materially injurious to the Company, or (C) conviction of a felony involving the personal dishonesty of the Executive (unless such conviction is reversed in any final appeal thereof). (e) Date of Termination; Term of Employment. The term "Date of --------------------------------------- Termination" shall mean the earlier of (i) the Expiration Date or (ii) if the Executive's employment is terminated (A) by his death, the date of his death, or (B) for any other reason, the date on which such termination is to be effective pursuant to the notice of termination given by the party terminating the employment relationship. For all purposes of this Agreement, references to the "term" of the Executive's employment hereunder shall mean the period commencing on the Commencement Date and ending on the Date of Termination. 8. Compensation Upon Termination. ----------------------------- (a) Death. Notwithstanding any other provision of this Agreement, if the ----- Executive's employment shall be terminated by reason of his death, the Company shall pay to such person as the Executive shall have designated in a notice filed with the Company, or, if no such person shall have been designated, to his estate, (i) in substantially equal monthly installments, for a period of one year from the date of his death, his full Salary, and (ii) an EVA Award for the year during which the Executive died, and, if his death occurs after June 30 in any year prior to 2005, an EVA Award for the year immediately following the year in which the Executive's death occurred. This amount shall be exclusive of and in addition to any payments the Executive's widow, beneficiaries or estate may be entitled to receive pursuant to any employee benefit plan or life insurance policy maintained by the Company for the benefit of the Executive. (b) Incapacity. Notwithstanding any other provision of this Agreement, if ---------- the Executive's employment shall be terminated by reason of his incapacity, and such incapacity is not covered by the disability insurance referred to in Section 3(e)(ii) hereof, the Company shall continue to pay the Executive (i) his full Salary for one year, in monthly installments as provided in Section 3 hereof, and (ii) an EVA Award for the year during which he first became incapacitated (the "Initial Incapacity Date"), and, if the Initial Incapacity Date occurs after June 30 in any year prior to 2005, an EVA Award for the year immediately following the year in which the Initial Incapacity Date occurred. (c) Cause. Notwithstanding any other provision of this Agreement, if the ----- Company shall terminate the Executive's employment for Cause, the Company shall pay the Executive his full Salary through the Date of Termination at the rate 6 in effect at the time notice of termination is given as provided in Section 7(e) above, and the Company shall have no further obligations to the Executive under this Agreement. (d) Good Reason. If the Executive shall terminate his employment for Good ----------- Reason, then the Company shall pay to the Executive his Salary and EVA Awards through the Date of Termination at the rate in effect at the time notice of termination is given. In addition, in lieu of any further payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages, or severance pay, or both, to the Executive, in substantially equal monthly installments, from the Date of Termination to the Expiration Date, an amount calculated at an annual rate equal to the annual Salary and EVA Awards that the Executive would have received if his employment had not been terminated. 9. Binding Agreement. ----------------- This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or, if there be no such designee, to the Executive's estate. 10. Board of Directors. ------------------ The term "Board of Directors" shall mean the Board of Directors of K-Swiss. 11. Notices. ------- For purposes of this Agreement, notices and all other communications to either party hereunder provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed, in the case of the Company, to them at K-Swiss Inc., 31248 Oak Crest Drive, Westlake Village, California 91361, Attention: Secretary, or, in the case of the Executive, to the Executive at the address set forth in Section C of Appendix I hereto; or to such other address as either party shall designate by giving like notice of such change to the other party. 12. Miscellaneous. ------------- No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is approved by either a majority of the Compensation and Stock Option Committee of the Board of Directors of the Company (or another Committee of the board fulfilling the same functions) (the "Committee") or by a majority of the Board of Directors of the Company (excluding the Executive) and agreed to in writing signed by the Executive and such officer as may be specifically authorized by the Committee or the Board of Directors, as the case may be. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of 7 similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. Nothing contained in this Agreement shall impair, modify or in any way change the 1995 Agreement or the Amended and Restated Registration Rights Agreement attached as Appendix II to the Employment Agreement made as of April 30, 1993 between Executive and the Company, both of which shall remain in full force and effect. The validity, interpretation, construction and performance of this Agreement shall be governed by the domestic substantive laws of the State of Delaware without giving effect to any choice or conflict of laws provision or rule that would cause the application of the domestic substantive laws of any other state. 13. Validity. -------- The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect, and in the event that any provision hereof shall be determined to be invalid or unenforceable for any reason, such provision shall be construed by limiting it so as to be valid and enforceable to the fullest extent compatible with and possible under applicable law. 14. Counterparts. ------------ This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. K-SWISS INC. By: /s/ George Powlick . ----------------------------- Title: Vice President Finance and Chief Financial Officer EXECUTIVE: /s/ Steven B. Nichols . --------------------------------- Steven B. Nichols 8 APPENDIX I STEVEN B. NICHOLS A. The Executive shall serve the Company as its President, Chief Executive Officer and Chairman of the Board. B. Expiration Date: December 31, 2005. C. Address of Executive: Steven B. Nichols K-Swiss Inc. 31248 Oak Crest Drive Westlake Village, CA 91361 /s/ GP________________________________ __________________________________ __________________________________ 9 EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
5 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. 1,000 6-MOS DEC-31-1999 JAN-01-2000 JUN-30-2000 68,465 0 33,455 (1,909) 31,729 134,638 8,810 0 150,033 18,503 0 0 0 140 115,573 150,033 122,464 122,464 73,702 31,534 0 0 1,662 18,890 7,582 11,308 0 0 0 11,308 1.08 1.04 INTEREST INCOME NET OF INTEREST EXPENSES
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