-----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, RKQUBsU2GWsprsbVAMztZuYaoIxb3fo88Po7rzdwL00wpCK2dp2Q1OvFwHfbp5L3 oVAnPM8GWNJbmA4Cl7g3kA== 0000898430-02-000380.txt : 20020414 0000898430-02-000380.hdr.sgml : 20020414 ACCESSION NUMBER: 0000898430-02-000380 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020207 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-18490 FILM NUMBER: 02529218 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-K405 1 d10k405.txt FORM 10-K405 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) [X] OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 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 Number) 31248 Oak Crest Drive, Westlake 91361 Village, California (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (818) 706-5100 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each Class on which registered ------------------- --------------------- None None
Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, par value $.01 per share (Title of class) 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Class A Common Stock of the Registrant held by non-affiliates of the Registrant on February 1, 2002 based on the closing price of the Class A Common Stock on the Nasdaq National Market on such date was $240,975,509. The number of shares of the Registrant's Class A Common Stock outstanding at February 1, 2002 was 6,344,035 shares. The number of shares of the Registrant's Class B Common Stock outstanding at February 1, 2002 was 2,903,478 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the Registrant's 2002 Annual Stockholders Meeting are incorporated by reference into Part III. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- K-SWISS INC. INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 ----------------
Caption Page ------- ---- PART I Item 1. Business..................................................... 3 Item 2. Properties................................................... 10 Item 3. Legal Proceedings............................................ 10 Item 4. Submission of Matters to a Vote of Security Holders.......... 11 Item 4(a). Executive Officers of the Registrant......................... 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................................... 13 Item 6. Selected Financial Data...................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 15 Item 8. Financial Statements and Supplementary Data.................. 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 43 PART III Item 10. Directors and Executive Officers of the Registrant........... 43 Item 11. Executive Compensation....................................... 43 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................... 43 Item 13. Certain Relationships and Related Transactions............... 43 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................................................... 43
PART I Item 1. Business Company History and General Strategy K-Swiss Inc. designs, develops and markets a growing array of athletic footwear for high performance sports use, fitness activities and casual wear under the K-Swiss brand. During 2001, the Company acquired two additional footwear brands: (1) National Geographic (via license) and (2) Royal Elastics. Sales of these two brands were insignificant during 2001. In May 2001, the Company formed a joint venture with Rugged Shark, a designer and manufacturer of young, active-oriented footwear, to license, produce and market a men's, women's and children's collection of National Geographic outdoor-oriented and casual footwear. The joint venture will launch a full-scale line of outdoor and casual footwear in fall 2002. Under the terms of the joint venture, the Company owns 75% of the new company and provides the infrastructure to design, develop, manufacture, distribute and market the line of National Geographic footwear. Rugged Shark owns 25% of the venture. The new joint venture has hired a president and two senior sales executives and has engaged eight independent sales representatives. The joint venture has been primarily involved in developing a line of footwear for delivery in fall 2002. In November 2001, the Company acquired the worldwide rights and business of Royal Elastics ("Royal"), an Australian-based designer and manufacturer of elasticated footwear. The purchase excludes distribution rights in Australia, which were retained by Royal Management Pty, Ltd. The principal employees of Royal are co-Presidents and founders, Rodney Adler and Tull Price, who have relocated to K-Swiss' corporate offices in Westlake Village. Product design, marketing and positioning of the Royal brand will be managed by Messrs. Adler and Price, while back office, distribution, product development and production resources will be provided through K-Swiss' existing infrastructure. Royal has hired a marketing person, an experienced sales executive, and three product development personnel. Royal has also engaged six independent sales representatives. Product will be delivered to the market place during the first quarter of 2002. Royal's backlog at December 31, 2001 was $1,870,000. The discussion during the remainder of this Item 1., other than backlog, trademarks and patents, and employees, relates solely to the K-Swiss brand. The Company was founded in 1966 by two Swiss brothers, who introduced one of the first leather tennis shoes in the United States. The shoe, the K-Swiss "Classic", has remained relatively unchanged from its original design, and accounts for a significant portion of the Company's sales. The Classic has evolved from a high-performance shoe into a casual, lifestyle shoe. The Company has emphasized in its marketing the commitment to produce products of high quality and enduring style. The Company plans to continue to emphasize the high quality and classic design of its products as it introduces new models of athletic footwear. On December 30, 1986, the Company was purchased by an investment group led by the Company's current President. The Company thereafter recruited experienced management and reduced manufacturing costs by increasing offshore production and entering into new, lower cost purchasing arrangements. The Company's products are manufactured to its specifications by overseas suppliers predominately in China. In June 1991 and September 1992, K-Swiss International Ltd. and K-Swiss B.V. (located in the Netherlands), respectively, commenced operations to broaden the Company's distribution on a global scale. In addition, in August 1992, K-Swiss Inc. completed the acquisition of K-Swiss Europe Limited (renamed to K-Swiss (UK) Ltd.) which handles distribution in the United Kingdom. 3 The Company's product strategy is two pronged. The first combines classic styling with high quality components and technical features designed to meet performance requirements of specific sports. The Company endeavors to use classic styling to reduce the impact of changes in consumer preferences and believes that this strategy leads to longer product life cycles than are typical of the products of certain of its competitors. Management believes that long product life cycles reduce total markdowns over the life of the products, thereby enhancing their attractiveness to retailers. This strategy also enables the Company to maintain inventory with less risk of obsolescence than is typical of more fashion-oriented products. The second product strategy uses fashion-oriented footwear sold principally on a futures only basis usually with little or no planned inventory position taken on these products. This strategy allows the Company to take advantage of trends in the marketplace that it identifies while attempting to minimize the risk generally associated with this type of product. The Company sells its products in the United States through independent sales representatives primarily to specialty athletic footwear stores, pro shops, sporting good stores and department stores. The Company also sells its products to a number of foreign distributors. The Company now has sales offices or distributors throughout the world. In 1992, the Company established sales offices and now has appointed exclusive distributors in much of Europe. The Company believes that its overseas sales offices and foreign distributors provide an opportunity for future growth. The Company was organized under the laws of the State of Delaware on April 16, 1990. The Company is successor in interest to K-Swiss Inc., a Massachusetts corporation, which in turn was successor in interest to K-Swiss Inc., a California corporation. The Company's principal executive offices are located at 31248 Oak Crest Drive, Westlake Village, California 91361, and its telephone number is (818) 706-5100. Unless the context otherwise requires, the term the "Company" as used herein refers to K-Swiss Inc. and its consolidated subsidiaries. Products The following table summarizes the Company's product lines and sets forth the approximate contribution to revenues (in dollars and as a percentage of revenues) attributable to each footwear category for the periods indicated. All footwear categories come in both men's (approximately 52% of 2001 revenues) and women's (approximately 27% of 2001 revenues). Most styles within each footwear category are offered in men's, women's and children's.
Revenues (1) ---------------------------------------- Year Ended December 31, ---------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Product Category $ % $ % $ % ---------------- -------- --- -------- --- -------- --- (Dollar amounts in thousands) Classic............................ $154,988 66% $142,122 64% $186,477 66% Tennis/Court....................... 15,916 7 15,383 7 22,107 8 Training........................... 13,762 6 10,293 5 -- -- Children's......................... 45,283 19 45,347 21 64,434 22 Other (2).......................... 4,501 2 7,263 3 11,652 4 -------- --- -------- --- -------- --- Total.............................. $234,450 100% $220,408 100% $284,670 100% ======== === ======== === ======== === Domestic (3)....................... $204,566 87% $196,730 89% $263,728 93% ======== === ======== === ======== ===
- -------- (1) For purposes of this table, revenues do not include other domestic income and fees earned by the Company on sales by foreign licensees and distributors. (2) Other consists of outdoor shoes, apparel, accessories, sport sandals and blemished shoes. (3) Included in totals on previous line. 4 Footwear The Company's product line through 1987 consisted primarily of the Classic. The Classic was originally developed in 1966 as a high-performance tennis shoe. Since that time, the Classic has become a popular casual shoe, by realizing strong sales as the original Classic shoe. The upper of the Classic includes only three separate pieces of leather, which allows for a relatively simple manufacturing process and yields a product with few seams. This simple construction improves the shoe's comfort, fit and durability. The Company has from time to time incorporated certain technical advances in materials and construction, but the Classic has remained relatively unchanged in style since 1966. In 2000, the Company launched Classic Luxury Edition, which sells for slightly more than the original version. The Classic, fueled by new products, has evolved into a category of shoes referred to as the Classic category. The Classic category is comprised of the Classic originals as described above, the K-S Collection, the Limited Edition series and the Davos Collection. The Classic originals segment contains shoes that the Company intends to carry in its product assortment for several years. They generally have shoe characteristics such as d-rings and five stripes, and, because they are multiple season shoes, the Company maintains significant inventory positions of this segment. Significant inventory positions allow for effective EDI programs with retailers which fits into the Company's strategy of attempting to become the retailers most profitable vendor. The K-S Collection comprises shoes offered for several seasons and they generally do not contain d-rings and have diffused or no stripes. Sometimes inventory is maintained on these products. The Limited Edition segment is generally meant as a one-season offering. They are generally fashionable type shoes that are purchased from factories based only on futures orders received from retailers. In 2000, the Company entered a performance category, training. To further differentiate the line of shoes from the Company's competitors, the Company created three distinct segments: Speed, Strength and Endurance. The speed shoes compete with moderately priced running shoes, while strength shoes compete with moderately priced cross training shoes and endurance shoes are marketed against trail running shoes. Presently, the Company competes in the Classic category (casual), training, tennis and children's footwear. Each product category has certain styles designated as core products. The Company's core products offer style continuity and often include on-going improvement. The Company believes its core product program is a critical factor in attempting to achieve the Company's goal of becoming the "retailers' most profitable vendor". The core program tends to minimize retailers' markdowns and maximizes the effectiveness of marketing expenditures because of longer product life cycles. Apparel and Accessories The Company markets a limited line of K-Swiss branded apparel and accessories. The products are designed with the same classic strategies used in the footwear line. Classic styling allows the Company to appeal to a variety of new markets from an urban distribution to an upscale suburban consumer. The products represent high quality with an exceptional value. In 1999, the Company introduced a new 7.0 line of high tech tennis apparel to complement its performance 7.0 footwear. The product line consists of world class apparel (skirts, shorts, tops, polo's, dresses and warm-ups) for both Men and Women. The Company also offers a collection for the casual athletic consumer consisting of tee shirts, caps, socks and bags. The apparel line is distributed through the large chain sporting goods stores as well as independent shoe and sporting goods dealers nationwide. The tennis apparel line is sold primarily through tennis specialty and tennis pro shops. It also offers the Company visible promotional opportunities. 5 Sales Financial information relating to international and domestic operations is presented as part of Item 8 of this report. See Note N to the Company's Consolidated Financial Statements. Marketing Advertising and Promotion Management believes that its strategy of designing products with longer life cycles and introducing fewer new models relative to its competition enhances the effectiveness of its advertising and promotions. In 2001, K-Swiss used television as its largest single marketing expenditure. The campaign was run primarily on network and cable television, and was supported by several sports, music and general interest/fashion magazines. The campaign supported K-Swiss' launch of training products. Advertising and promotion efforts in foreign markets are directed by local distributors. The Company's agreements with foreign distributors generally require such distributors to spend a certain percentage of their sales of the Company's products on advertising and promotion. The Company controls the nature and content of these promotions. Domestic Marketing The Company's current marketing strategy emphasizes distribution to retailers whose marketing strategies are consistent with the Company's reputation for quality and service. The Company's footwear products are sold domestically through approximately 42 independent regional sales representatives and seven Company-employed sales managers. The independent sales representatives are paid on a commission basis, and are prohibited by contract from representing other brands of athletic footwear and related products. These representatives sold to approximately 2,900, 3,000 and 3,100 separate accounts as of December 31, 2001, 2000 and 1999. During 2001, the Venator group of stores and affiliates accounted for approximately 18% of total revenues. See Note L to the Company's Consolidated Financial Statements. No other domestic customer accounted for more than 10% of total revenues during this period. The Company offers a "futures" program, under which retailers are offered discounts on orders scheduled for delivery more than five months after the order is made. There is no guarantee that such orders will not be canceled prior to acceptance by the customer. This program is similar to programs offered by other athletic shoe companies. The futures program has a positive effect on inventory costs, planning and production scheduling. See "Distribution". In addition, the Company engages in certain marketing programs from time to time that provide for extended terms on initial domestic orders of new styles. The Company maintains a customer service department consisting of 15 persons at its Westlake Village, California facility. The customer service department accepts orders for the Company's products, handles inquiries and notifies retailers of the status of their orders. The Company has made a substantial investment in computer equipment for general customer support and service, as well as for distribution. See "Distribution". In 1999, seeking to expand the brand's reach, provide product distribution to consumers that do not otherwise have the ability to purchase its products and to take advantage of the new advances in technology and the internet, the Company initiated an effort to better utilize the internet and the World Wide Web. The approach was two pronged. The K-Swiss website (www.kswiss.com) was enhanced 6 and is visually integrated with the television campaign on training. The second part of the strategy led to the creation of a new entity called K-Swiss Direct. K-Swiss Direct's function is to provide the end consumers an alternate method of acquiring its products when they cannot find the product in their local retail outlets or do not have reasonable access to retail outlets carrying the product. Using the internet, consumers can purchase select footwear and apparel, at prices competitive with the Company's retailers, and have it shipped directly to them. International Marketing In 1991, the Company established a sales management team in Asia. The Company has exclusive distributors in certain Pacific Rim countries. Exclusive distributors of the Company's products are generally contractually obligated to spend specific amounts on advertising and promotion of the Company's products. The Company has also established exclusive distributors in other international markets. To expand the marketing of its products into Europe, the Company opened its own office in Amsterdam, the Netherlands in 1992. By the end of 2001, K-Swiss was working through 5 international subsidiaries and 22 distributors to market K-Swiss products in potentially 38 countries. Distribution During December 1997, the Company relocated its distribution facility. The Company now maintains 309,000 square feet of warehouse space at a leased facility in Mira Loma, California. Approximately 90,000 square feet of this facility is subleased to a tenant. See "Item 2. Properties". The Company purchases footwear from independent manufacturers located predominantly in China. The time required to fill new orders placed by the Company with its manufacturers is approximately five months. Such footwear is generally shipped in ocean containers and delivered to the Company's facility in California. In some cases, large customers of the Company may receive containers of footwear directly from the manufacturer. Distribution to European and certain other distributors is based out of the Netherlands office public distribution facility. The Company generally arranges shipment of other international orders directly from its independent manufacturers. The Company maintains an open-stock inventory on certain products which permits it to ship to retailers on an "at once" basis in response to orders placed by mail, fax or toll-free telephone call. The Company has made a significant investment in computer equipment that provides on-line capability to determine open-stock availability for shipment. Additionally, products can be ordered under the Company's "futures" program. See "Marketing--Domestic Marketing". The Company ships by package express or truck from California, depending upon size of order, customer location and availability of inventory. Product Design and Development The Company maintains offices in Westlake Village, California and Taichung, Taiwan that include a staff of individuals responsible for the design and development of new styles for all global regions. This staff receives guidance from the Company's management team in California, who meet regularly to review sales, consumer and market trends. Manufacturing In 2001, approximately 83% of the Company's footwear products were manufactured in China, 15% in Thailand, and 2% in Taiwan. Although the Company has no long-term manufacturing 7 agreements and competes with other athletic shoe companies for production facilities (including companies that are much larger than the Company), management believes that the Company's relationships with its footwear producers are satisfactory and that it has the ability to develop, over time, alternative sources for its footwear. The Company's operations, however, could be materially and adversely affected if a substantial delay occurred in locating and obtaining alternative producers. All manufacturing of footwear is performed in accordance with detailed specifications furnished by the Company and is subject to quality control standards, with the Company retaining the right to reject products that do not meet specifications. The bulk of all raw materials used in such production is purchased by manufacturers at the Company's direction. The Company's inspectors at the manufacturing facilities conduct testing and inspection of footwear products prior to shipment from those facilities. During 2001, the Company's apparel and accessory products were manufactured in Macau, China, Thailand, Taiwan, Korea and the United States by certain manufacturers selected by the Company. The Company's operations are subject to compliance with relevant laws and regulations enforced by the United States Customs Service and to the customary risks of doing business abroad, including fluctuations in the value of currencies, increases in customs duties and related fees resulting from position changes by the United States Customs Service, import controls and trade barriers (including the unilateral imposition of import quotas), restrictions on the transfer of funds, work stoppages and, in certain parts of the world, political instability causing disruption of trade. These factors have not had a material adverse impact upon the Company's operations to date. Imports into the United States are also affected by the cost of transportation, the imposition of import duties, and increased competition from greater production demands abroad. The United States or the countries in which the Company's products are manufactured may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adjust presently prevailing quotas, duty or tariff levels, which could affect the Company's operations and its ability to import products at current or increased levels. The Company cannot predict the likelihood or frequency of any such events occurring. A change in any such duties, quotas or restrictions could result in increases in the costs of such products generally and might adversely affect the sales or profitability of the Company and the athletic footwear industry as a whole. The Company's use of common elements in raw materials, lasts and dies gives the Company flexibility to duplicate sourcing in various countries in order to reduce the risk that the Company may not be able to obtain products from a particular country. The Company's footwear products are subject to the United States customs duties which range from 8.5% to 10.0% on footwear made principally of leather to duties on synthetic shoes ranging from 6.0% to 37.5% plus, for certain styles, $.90 per pair and moderately priced textile shoes of 20.0% to 37.5% plus, for certain styles, $.90 per pair. Currently, approximately 89% of the Company's footwear volume is derived from sales of leather footwear and approximately 11% of the Company's footwear volume is derived from sales of synthetic and textile footwear. A large portion of the Company's imported products are manufactured in the People's Republic of China ("China"). As a result of a previous dispute with China over the protection of intellectual property rights, the United States Trade Representative ("USTR") is currently monitoring China's adherence to an agreement to enforce intellectual property protections, and the failure of China to meet its obligations could result in the imposition of trade sanctions by USTR. Any such sanctions could affect the ability of the Company to continue to import products from China. 8 Backlog At December 31, 2001 and 2000, domestic futures orders with start ship dates from January through June 2002 and 2001 were approximately $103,329,000 and $93,364,000, respectively, an increase of 11%. At December 31, 2001 and 2000, international futures orders with start ship dates from January through June 2002 and 2001 were approximately $14,823,000 and $10,514,000, respectively, an increase of 41%. At December 31, 2001 and 2000 total futures orders with start ship dates from January through June 2002 and 2001 were approximately $118,152,000 and $103,878,000, respectively, an increase of 14%. The 14% increase in total futures orders is comprised of an 18% increase in the first quarter 2002 futures orders and a 6% increase in the second quarter 2002 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. The mix of "futures" and "at once" orders can vary significantly from quarter to quarter and year to year and therefore "futures" are not necessarily indicative of revenues for subsequent periods. Orders generally may be canceled by customers without financial penalty. The Company believes its rate of net customer cancellations of domestic orders approximates industry averages for similar companies. Customers may also reject nonconforming goods. To date, the Company believes it has not experienced returns of its products or bad debts of customers materially in excess of industry averages for similar companies. Competition The athletic footwear industry is highly competitive, and sales growth of athletic and athletic-style leisure footwear slowed considerably in 2001, increasing competition. The largest domestic marketers of footwear are Nike and adidas, while the international market is dominated by Nike, adidas and Reebok. Each of these companies has substantially greater financial, distribution and marketing resources as well as greater brand awareness than the Company. The Company has recently increased its emphasis on product lines beyond the Company's Classic tennis model. In the past, the Company has introduced products in such highly competitive categories such as court, boating, outdoor and children's shoes. See "Products". There can be no assurance that the Company will penetrate these or other new markets or increase the market share it has established to date. The principal elements of competition in the athletic footwear market include brand awareness, product quality, design, pricing, fashion appeal, marketing, distribution, performance and brand positioning. The Company's products compete primarily on the basis of technological innovations, quality, style, and brand awareness among consumers. While the Company believes that its competitive strategy has resulted in increased brand awareness and market share, there can be no assurance that the Company will be able to retain or increase its market share or respond to changing consumer preferences. Trademarks and Patents The Company utilizes trademarks on all of its products and believes that its products are more marketable on a long-term basis when identified with distinctive markings. K-Swiss(R) is a registered trademark in the United States and certain other countries. The Company's name is not registered as a trademark in certain countries because of restrictions on registering names having geographic connotations. However, since K-Swiss is not a geographic name, the Company has often secured registrations despite such objections. The Company's shield emblem and the five-stripe design are also registered in the United States and certain foreign countries. The five-stripe design is not presently 9 registered in some countries because it has been deemed ornamental by regulatory authorities. The five-stripe design has not been registered in Germany because of a possible conflict with adidas' three-stripe design mark. The Company selectively seeks to register the names of its shoes, its logos and the names given to certain of its technical and performance innovations, including Aosta(R) rubber and Silicone Formula 18(R). The ROYAL ELASTICS and Fleur de Lis trademarks used on ROYAL ELASTICS products are registered in many countries. The Fleur de Lis mark is registered in the United States, and the Company believes the ROYAL ELASTICS mark would already have been registered in the United States but for a clerical error in the Patent and Trademark Office that is in process of correction. The National Geographic Society ("NGS") is responsible for registering the marks that it has licensed E.R.E. Footwear, the Company's joint venture, to use in manufacture and sale of NATIONAL GEOGRAPHIC footwear. Those marks are registered in many countries, and the NGS has filed applications for registration in all major markets where the marks are not already registered. The Company has obtained patents in the United States regarding the Bio Feedback(R) ankle support system, the Shock Spring(R) cushioning system incorporated into K-Swiss' 7.0 System(R) performance tennis shoes and training line, the D.R. Cinch System(R), the stability design incorporated in the Si-18(R) tennis shoe, and other features. The Company vigorously defends its trademarks and patent rights against infringement worldwide and employs independent security consultants to assist in such protection. To date, the Company is not aware of any significant counterfeiting problems regarding its products. Employees At December 31, 2001, the Company employed 180 persons in the United States, 126 persons in Taiwan, China and Thailand, 40 persons in England and the Netherlands and 6 persons elsewhere. Item 2. Properties In August 1998, the Company moved into its new headquarters facility in Westlake Village, California. This facility, which is owned by the Company, is approximately 50,000 square feet. The Company occupies approximately one-half of this facility and leases the remaining portion. The Company leases a 309,000 square foot distribution facility in Mira Loma, California. This lease expires in January 2003, subject to two options, each of which would extend the term of the lease for three years. Approximately 90,000 square feet of this facility is subleased to a tenant through January 2003. The Company uses the Mira Loma facility as its main distribution center. The effective monthly commitment for the Mira Loma facility is approximately $78,000. Item 3. Legal Proceedings In June 2001, the Company was notified by counsel representing the trustee appointed to oversee the liquidation of assets of a previous customer of the Company, which filed for bankruptcy protection in 1999, that they are seeking reimbursement of all payments made to the Company during the 90 day period prior to the bankruptcy filing. The aggregate amount of these payments, which the trustee's counsel is claiming to be preferential transfers, is approximately $4,315,000. The Company believes these payments were received in the ordinary course of business and that it has a meritorious defense against the trustee's claims. In November 2001, the trustee filed suit against K-Swiss (and other creditors) to recover payments made to K-Swiss during the 90 days prior to the customer's bankruptcy filing. The Company continues to believe that it has a meritorious "ordinary course of business" defense against these claims and will assert that defense in detail at the appropriate time in the litigation. No provision for this claim has been made in the Company's financial statements as of December 31, 2001. 10 Item 4. Submission of Matters to a Vote of Security Holders None. Item 4(a). Executive Officers of the Registrant The executive officers of the Company are as follows:
Age at December 31, Name 2001 Position ---- ------------ -------- Steven Nichols 59 Chairman of the Board and President Preston Davis 57 Vice President--Sales Edward Flora 50 Vice President--Operations Lee Green 48 Corporate Counsel Thomas Harrison 59 Senior Vice President Deborah Mitchell 40 Vice President--Marketing George Powlick 57 Vice President--Finance, Chief Financial Officer, Secretary and Director Janice Smith 40 Corporate Controller Brian Sullivan 48 Vice President--National Accounts Peter Worley 41 Vice President--Product Development
Officers are appointed by and serve at the discretion of the Board of Directors. Steven Nichols has been President and Chairman of the Board of the Company since 1987. From 1980 to 1986, Mr. Nichols was a director and Vice President-- Merchandise of Stride Rite Corp., a footwear manufacturer and holding company. In addition, Mr. Nichols was President of Stride Rite Footwear from 1982 to 1986. From 1979 to 1982, Mr. Nichols served as an officer and President of Stride Rite Retail Corp., the largest retailer of branded children's shoes in the United States. From 1962 through 1979, he was an officer of Nichols Foot Form Corp., which operated a chain of New York retail footwear stores. Preston Davis, Vice President--Sales, joined the Company in March 1987 as a consultant and served as Vice President--Sales from June 1987 to January 1989 and Vice President--Marketing from February 1989 to February 1991. Prior to joining the Company, Mr. Davis owned and managed Preston Davis Associates, a marketing and sales consulting firm, specializing in sporting goods. From June 1982 through December 1985, Mr. Davis was Vice President--Sales for Kaepa, Inc., another athletic shoe company. Edward Flora, Vice President--Operations, joined the Company as a consultant in June 1990 and served as Director--Administration from October 1990 to February 1994. Prior to joining the Company, Mr. Flora was Vice President-- Distribution for Bugle Boy Industries, a manufacturer and distributor of Men's, Women's, and Children's apparel, from 1987 through May 1990. Lee Green, Corporate Counsel, joined the Company in December 1992. Mr. Green was formerly a partner in the international law firm of Baker & McKenzie. He worked in the firm's Taipei office from 1985 to 1988 and its Palo Alto office from 1988 to 1992. Thomas Harrison, Senior Vice President, joined the Company in January 1989. From 1987 through 1988, Mr. Harrison was President of Osh Kosh Footwear, a manufacturer and wholesaler of casual footwear. From 1985 to 1987, Mr. Harrison was President of Keds Corp., a division of Stride Rite Corp. From 1984 to 1985, Mr. Harrison was national account representative for Osh Kosh Footwear. From 1977 through 1984, Mr. Harrison was manager of the consumer products division of 11 Uniroyal, Inc., which included the footwear lines of Keds, Pro-Keds and Sperry Topsider. Mr. Harrison joined Uniroyal in 1967 as a sales representative for its Keds Division. Deborah Mitchell, Vice President--Marketing, joined the Company in October 1994. Ms. Mitchell served as Director of Marketing for Fruit of the Loom, the largest manufacturer of men's underwear, from December 1993 through October 1994. Ms. Mitchell worked at Procter and Gamble in various positions ending in brand management from 1984 through 1993 except while she was earning her degree from Harvard Business School. George Powlick, Director, Vice President--Finance, Chief Financial Officer and Secretary, joined the Company in January 1988. Mr. Powlick is a certified public accountant and was an audit partner in the independent public accounting firm of Grant Thornton from 1975 to 1987. Janice Smith, Corporate Controller, joined the Company in August 1987. Ms. Smith is a certified public accountant. From 1984 to July 1987, Ms. Smith was an auditor with the independent public accounting firm of Grant Thornton. Brian Sullivan, Vice President--National Accounts, joined the Company in December 1989. From 1986 to 1989, he was Vice-President and General Manager of Tretorn, Inc., a manufacturer and distributor of tennis shoes. From 1984 through 1985, Mr. Sullivan was Vice-President of Sales of Bancroft/Tretorn, a tennis shoe manufacturer and distributor and predecessor to Tretorn. From 1978 to 1984, Mr. Sullivan held various positions at Bancroft/Tretorn, including Field Salesperson, Marketing and Sales Planning Manager and National Sales Manager. Peter Worley, Vice President--Product Development, joined the Company in May 1996. Mr. Worley worked for Reebok International, Ltd. from May 1986 through October 1989, and again from July 1991 through April 1996 in various merchandising and product line management positions, including Director of Classic, Director of Cross Training and Director of Tennis. From October 1989 through July 1991, Mr. Worley was Sport Product Manager of Bausch & Lomb's Ray-ban Sunglass Division. 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Class A Common Stock began trading June 4, 1990 on the National Market System maintained by the National Association of Securities Dealers (now the Nasdaq National Market) upon completion of the Company's initial public offering. Per share high and low sales prices (in dollars) for the quarterly periods during 2001 and 2000 as reported by Nasdaq were as follows:
March 31, June 30, September 30, December 31, --------- -------- ------------- ------------ 2001 Low........................ 20.00 21.00 21.96 22.64 High....................... 34.56 29.65 35.60 35.89 2000 Low........................ 10.00 11.75 15.38 21.38 High 18.75 16.06 23.88 28.50
The Company announced on February 8, 1999 that the Company's Board of Directors approved a two-for-one stock split for both Class A and Class B common stock. This stock split was in the form of a 100 percent stock dividend that was distributed on March 26, 1999 to stockholders of record at the close of business on March 15, 1999. The Class A Common Stock is listed on the Nasdaq National Market under the symbol KSWS. The number of stockholders of record of the Class A Common Stock on December 31, 2001 was 84. However, based on available information, the Company believes that the total number of Class A Common stockholders, including beneficial stockholders, is approximately 4,000. There is currently no established public trading market for the Company's Class B Common Stock. The number of stockholders of record of the Class B Common Stock on December 31, 2001 was 11. Dividend Policy The Company announced on February 16, 1994 that the Company's Board of Directors was initiating a cash dividend program payable at an annual rate of 4 cents per common share. On February 8, 1999, the Company announced an increase in the cash dividend per share to an annual rate of 6 cents per common share. The Board declared quarterly dividends of 1.5 cents per share to stockholders of record as of the close of business on the last day of each quarter in 2001 and 2000, respectively. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, the general financial condition of the Company and general business conditions. The Company is currently limited in the extent to which it is able to pay dividends under the Company's revolving credit agreement. See Note D to the Company's Consolidated Financial Statements. 13 Item 6. Selected Financial Data The selected consolidated financial data presented below for each of the five years in the period ended December 31, 2001 have been derived from audited financial statements which for the most recent three years appear elsewhere herein. The data presented below should be read in conjunction with such financial statements, including the related notes thereto and the other information included herein.
Year ended December 31, -------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (In thousands, except per share data) Income Statement Data Revenues.......................... $236,073 $221,629 $285,497 $161,540 $116,213 Cost of goods sold................ 138,371 132,888 162,658 90,925 70,769 -------- -------- -------- -------- -------- Gross Profit.................... 97,702 88,741 122,839 70,615 45,444 Selling, general and administrative expenses.......... 60,757 57,300 67,885 51,220 40,074 -------- -------- -------- -------- -------- Operating profit................ 36,945 31,441 54,954 19,395 5,370 Interest income, net.............. 1,804 3,597 1,784 1,853 1,823 -------- -------- -------- -------- -------- Earnings before income taxes.... 38,749 35,038 56,738 21,248 7,193 Income tax expense................ 15,440 13,979 22,454 8,702 3,020 -------- -------- -------- -------- -------- Net earnings.................... $ 23,309 $ 21,059 $ 34,284 $ 12,546 $ 4,173 ======== ======== ======== ======== ======== Earnings per share Basic............................. $ 2.42 $ 2.05 $ 3.12 $ 1.15 $ .36 ======== ======== ======== ======== ======== Diluted........................... $ 2.28 $ 1.96 $ 2.99 $ 1.10 $ .35 ======== ======== ======== ======== ======== Weighted average number of shares outstanding Basic............................. 9,648 10,283 10,972 10,914 11,688 Diluted (1)....................... 10,237 10,750 11,452 11,432 11,927 Balance Sheet Data (at period end) Current assets.................... $140,888 $142,677 $131,230 $102,002 $ 91,053 Current liabilities............... 21,934 22,109 17,442 18,703 14,662 Total assets...................... 160,799 157,427 146,772 115,465 101,195 Total debt (2).................... 0 1,046 853 655 1,142 Stockholders' equity.............. 124,359 120,219 112,030 83,268 75,865
- -------- (1) Includes common stock and dilutive potential common stock (options). (2) Includes all interest-bearing debt and capital lease obligations, but excludes outstanding letters of credit ($3,517,000, $5,021,000, $8,765,000, $7,703,000 and $12,156,000 as of December 31, 2001, 2000, 1999, 1998 and 1997). 14 Item 7. 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; 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 training shoe line; market acceptance of new Limited Edition product; market acceptance of non-performance product in Europe; market acceptance of National Geographic footwear; market acceptance of Royal Elastics footwear; 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; potential cancellation of future 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; the effects of terrorist actions on business activities, customer orders and cancellations, and the United States and international governments' responses to these terrorist actions; 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 15 forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company. 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.
Year ended December 31, ------------------------- 2001 2000 1999 ------- ------- ------- Revenues........................................ 100.0% 100.0% 100.0% Cost of goods sold.............................. 58.6 60.0 57.0 Gross profit.................................... 41.4 40.0 43.0 Selling, general and administrative expenses.... 25.7 25.8 23.7 Interest income, net............................ 0.7 1.6 0.6 Earnings before income taxes.................... 16.4 15.8 19.9 Income tax expense.............................. 6.5 6.3 7.9 Net Earnings.................................... 9.9 9.5 12.0
2001 Compared to 2000 Total revenues increased 6.5% to $236,073,000 in 2001 from $221,629,000 in 2000. This increase was attributable to an increase in the volume of footwear sold partially offset by a slight decrease in the average underlying wholesale price per pair. The volume of footwear sold increased 8.2% to 8,821,000 pair in 2001 from 8,156,000 pair in 2000. The average wholesale price per pair was $26.09 in 2001 and $26.21 in 2000. The major changes in volume for footwear categories are as follows: Classics and training categories increased 9% and 42%, respectively. Domestic revenues increased 4.0% to $205,237,000 in 2001 from $197,262,000 in 2000. International product revenues increased 26.2% in 2001 to $29,884,000 from $23,679,000 in 2000. Fees earned by the Company on sales by foreign licensees and distributors were $952,000 for 2001 and $688,000 for 2000. International revenues, as a percentage of total revenues, increased to 13.1% in 2001 from 11.0% in 2000. The Company believes that the athletic and casual footwear industry experiences seasonal fluctuations, due to increased domestic sales during certain selling seasons, including Easter, back-to-school and the year-end holiday seasons. The Company presents full-line offerings for the Easter and back-to-school seasons, for delivery during the first and third quarters, respectively, but not for the year-end holiday season. At December 31, 2001 domestic and international futures orders with start ship dates from January through June 2002 were approximately $103,329,000 and $14,823,000, respectively, 11% and 41% higher, respectively, than such orders were at December 31, 2000 for start ship dates of the comparable period of the prior year. These orders are not necessarily indicative of revenues for subsequent periods because: (1) the mix of "future" 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. Gross profit margins increased, as a percentage of revenues, to 41.4% in 2001 from 40.0% in 2000. Gross profit margins increased primarily due to changes in the product mix of sales. Selling, general and administrative expenses increased 6.0% to $60,757,000 (25.7% of revenues) in 2001 from $57,300,000 (25.8% of revenues) in 2000. The increase in the amounts for the year 16 ended December 31, 2001 compared to the year ended December 31, 2000 was primarily the result of an increase in payroll and related expenses, partially the result of the decrease in the expense related to an employee incentive bonus during 2000 that did not also occur in 2001. In 2000, there was a reduction of employee incentive bonus accruals due to diminished financial performance in that year compared to the previous year. The decrease in selling, general and administrative expenses, as a percentage of revenues, was due primarily to these expenses increasing at a slower rate than revenues during 2001. Net interest income was $1,804,000 (0.7% of revenues) in 2001 compared to $3,597,000 (1.6% of revenues) in 2000, a decrease of $1,793,000 or 49.8%. This decrease in net interest income was the result of decreased rates earned on commercial paper investments partially offset by higher average balances on commercial paper investments. Also, during 2001 the Company recorded interest expense related to the 1993, 1995 and 1996 Internal Revenue Service examinations. The Company has agreed to certain adjustments for these tax years, none of which will require the Company to record additional income tax expense, as the Company has recorded deferred taxes on the untaxed portion of unremitted earnings of a foreign subsidiary. The Company's effective tax rate decreased to 39.8% in 2001 from 39.9% in 2000. The $529,000 and $197,000 income tax benefit of options exercised during 2001 and 2000, respectively, were credited to additional paid-in capital and therefore did not impact the effective tax rate. Net earnings increased 10.7% to $23,309,000 or $2.28 per share (diluted earnings per share) in 2001 from $21,059,000 or $1.96 per share (diluted earnings per share) in 2000. 2000 Compared to 1999 Total revenues decreased 22.4% to $221,629,000 in 2000 from $285,497,000 in 1999. This decrease was attributable to a decrease in the volume of footwear sold partially offset by a slight increase in the average underlying wholesale price per pair. The volume of footwear sold decreased 22.2% to 8,156,000 pair in 2000 from 10,490,000 pair in 1999. The average wholesale price per pair was $26.21 in 2000 and $26.16 in 1999. The major changes in volume for footwear categories are as follows: Classics, children's and tennis/court categories decreased 23%, 26% and 35%, respectively, partially offset by sales in the training category, a new category for the Company. Domestic revenues decreased 25.3% to $197,262,000 in 2000 from $264,054,000 in 1999. International product revenues increased 13.1% in 2000 to $23,679,000 from $20,943,000 in 1999. International revenues, as a percentage of total revenues, increased to 11.0% in 2000 from 7.5% in 1999. Fees earned by the Company on sales by foreign licensees and distributors were $688,000 for 2000 and $500,000 for 1999. Gross profit margins decreased, as a percentage of revenues, to 40.0% in 2000 from 43.0% in 1999. Gross profit margins decreased primarily due to changes in the domestic/international and product mix of sales. Selling, general and administrative expenses decreased 15.6% to $57,300,000 (25.8% of revenues) in 2000 from $67,885,000 (23.7% of revenues) in 1999. The decrease in the amounts for the year ended December 31, 2000 compared to the year ended December 31, 1999 was primarily the result of a decrease in direct advertising costs, commissions and bonus expense. Also there was additional bad debt expense recorded in 1999 due to the bankruptcy of one of the Company's larger customers. The Company believes the somewhat reduced level of direct advertising and promotion will not have a material impact on future sales levels. The increase in selling, general and administrative expenses, as a percentage of revenues, was due primarily to these expenses decreasing at a slower rate than revenues during 2000. 17 Net interest income was $3,597,000 (1.6% of revenues) in 2000 compared to $1,784,000 (0.6% of revenues) in 1999, an increase of $1,813,000 or 101.6%. This increase in net interest income was the result of increased rates earned on commercial paper investments and higher average balances on commercial paper investments. The Company's effective tax rate increased to 39.9% in 2000 from 39.6% in 1999. The $197,000 and $8,410,000 income tax benefit of options exercised during 2000 and 1999, respectively, were credited to additional paid-in capital and therefore did not impact the effective tax rate. Net earnings decreased 38.6% to $21,059,000 or $1.96 per share (diluted earnings per share) in 2000 from $34,284,000 or $2.99 per share (diluted earnings per share) in 1999. Liquidity and Capital Resources The Company experienced a net cash inflow of approximately $21,041,000, $27,235,000 and $31,536,000 from its operating activities during 2001, 2000 and 1999, respectively. Cash provided by operations in 2001 decreased from 2000, due primarily to differences in the amounts of changes in accounts receivable and accounts payable and accrued liabilities, partially offset by an increase in net earnings. Cash provided by operating activities for the year ended 2000 as compared to 1999 varied primarily due to a decrease in net earnings, as well as differences in the amounts of changes in accounts receivable, inventories, deferred income taxes, prepaid expenses and other assets, and accounts payable and accrued liabilities. The Company had a net outflow of cash from its investing activities during 2001 due to a cash payment for the acquisition of Royal Elastics, a cash payment for interest in a licensing agreement and the net purchase of property, plant and equipment. The Company had a net outflow of cash from its investing activities during 2000 from the net purchase of property, plant and equipment, partially offset by the cash received in the acquisition of 1166789 Ontario Inc. In 2001 and 2000, the net cash provided by operating activities was used for the purchase of treasury stock and to pay cash dividends. Also, in 2001, cash provided by operating activities was used for the repayment of borrowings under bank lines of credit and subordinated debentures along with a payment to a minority member. The Company anticipates future cash needs for principal repayments required pursuant to any borrowings under its lines of credit facilities. In addition, depending on the Company's future growth rate, additional funds may be required by operating activities. Finally, at December 31, 2001, approximately $24,642,000 of foreign subsidiary earnings which are not considered indefinitely invested may eventually be remitted to the parent company as circumstances warrant. Upon receipt of these funds, the Company will use approximately $9,596,000 in cash to pay income taxes previously accrued on these foreign subsidiary earnings. The Company's intention is to repatriate earnings of foreign operations as cash needs and other circumstances require. No other material capital commitments exist at December 31, 2001. With continued use of its revolving credit facility (as discussed below), the Company believes its present and currently anticipated sources of capital are sufficient to sustain its anticipated capital needs for the remainder of 2002. In September 2001, the Company announced the completion of its October 1999 $25 million stock repurchase program and a new authorization by the Board of Directors for the Company to repurchase through December 2006 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 February 6, 2002 (the day prior to the filing of the Form 10-K) of 4,887,532 shares at an aggregate cost totaling approximately $68,804,000. 18 In June 2001, the Company was notified by counsel representing the trustee appointed to oversee the liquidation of assets of a previous customer of the Company, which filed for bankruptcy protection in 1999, that they are seeking reimbursement of all payments made to the Company during the 90 day period prior to the bankruptcy filing. The aggregate amount of these payments, which the trustee's counsel is claiming to be preferential transfers, is approximately $4,315,000. The Company believes these payments were received in the ordinary course of business and that it has a meritorious defense against the trustee's claims. In November 2001, the trustee filed suit against K-Swiss (and other creditors) to recover payments made to K-Swiss during the 90 days prior to the customer's bankruptcy filing. The Company continues to believe that it has a meritorious "ordinary course of business" defense against these claims and will assert that defense in detail at the appropriate time in the litigation. No provision for this claim has been made in the Company's financial statements as of December 31, 2001. In July 2001, the Company signed a new agreement with a bank whereby the Company may borrow, in the form of an unsecured revolving credit facility, up to $15,000,000. The unused portion of this credit facility, which includes letters of credit and bankers acceptances, was $12,074,000 at December 31, 2001. This facility currently expires in July 2003. 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. The Company's European offices have agreements with a bank whereby they can borrow up to $6,000,000 in the form of secured revolving credit facilities. The unused portion of these credit facilities was $5,409,000 at December 31, 2001. These facilities are made available until terminated by either party. There was no debt at December 31, 2001 compared to total debt of $1,046,000 at December 31, 2000 (excluding outstanding letters of credit of $3,517,000 and $5,021,000 at December 31, 2001 and 2000, respectively). The decrease was due to reduced borrowings under bank lines of credit under the Company's credit facilities and repayment of subordinated debentures. The Company's working capital decreased $1,614,000 to $118,954,000 at December 31, 2001 from $120,568,000 at December 31, 2000. The Company has historically maintained higher levels of inventory relative to sales compared to its competitors because (1) it does not ship directly to its major domestic customers from its foreign contract manufacturers to the same extent as its larger competitors, which would reduce inventory levels and increase inventory turns, and (2) unlike many of its competitors, the Company designates certain shoes as core products whereby the Company commits to its retail customers that it will carry core products from season to season and, therefore, the Company attempts to maintain open-stock positions on its core products in the Company's Mira Loma, California distribution center to meet at-once orders. The federal income tax returns of the Company for the years ended 1993, 1995, 1996 and 1998 are currently under examination by the Internal Revenue Service ("IRS"). See Note H to the Company's Consolidated Financial Statements. In August 2000, the IRS issued its final report proposing additional taxes for the years ended 1993, 1995 and 1996 of an aggregate of approximately $4,985,000 plus penalties and interest for these years. Through September 2001, the Company has agreed to certain adjustments for the years ended 1993, 1995 and 1996 resulting in approximately $976,000 of taxes. These tax adjustments did not require the Company to record additional income tax expense as the Company had recorded deferred income taxes on the untaxed portion of unremitted earnings of a foreign subsidiary. Of the remaining balance of the proposed assessments, 19 the Company believes that approximately $1,222,000 of 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 the unremitted earnings of a foreign subsidiary. For the remaining assessed taxes of approximately $2,787,000, for which the Company has not provided deferred income taxes, the Company believes it has meritorious defenses to the IRS challenges although no assurance can be given that the final results of such IRS challenges will not have a material adverse impact on the Company's financial position and results of operations. Quantitative and Qualitative Disclosures About Market Risk Market Risk Market risk is the potential change in an instrument's value caused by, for example, fluctuations in interest and currency exchange rates. The Company's primary market risk exposure is the risk of unfavorable movements in exchange rates between the U.S. dollar and the Euro. Monitoring and managing these risks is a continual process carried out by senior management, which reviews and approves the Company's risk management policies. Market risk is managed based on an ongoing assessment of trends in foreign exchange rates and economic developments, giving consideration to possible effects on both total return and reported earnings. Foreign Exchange Rate Risk Sales denominated in currencies other than the U.S. dollar, which are primarily sales to customers in Europe, expose the Company to market risk from unfavorable movements in foreign exchange rates between the U.S. dollar and the foreign currency. The Company's historical primary risk exposures have been from changes in the rates between the U.S. dollar and each of the following: the British pound, the Dutch guilder, the Euro and the German mark. This trend is expected to continue for the Euro. To fix the U.S. dollar amount it will receive on sales denominated in Euros, the Company enters into forward exchange contracts to sell the foreign currency denominated in that currency. The extent to which forward exchange contracts are used is modified periodically in response to management's estimate of market conditions and the terms and length of specific sales contracts. The Company enters into foreign exchange contracts in order to reduce the impact of foreign currency fluctuations and not to engage in currency speculation. The use of derivative financial instruments allows the Company to reduce its exposure to the risk that the eventual dollar net cash inflow resulting from the sale of products to foreign customers will be adversely affected by changes in exchange rates. The Company does not hold or issue financial instruments for trading purposes. The foreign exchange contracts are designated for firmly committed or forecasted sales. These contracts are generally expected to occur in less than one year. Gains and losses of foreign exchange contracts that are designated for forecasted transactions are recognized as the exchange rates change. The forward exchange contracts generally require the Company to exchange foreign currencies for U.S. dollars at maturity, at rates agreed at the inception of the contracts. The counter party to derivative transactions is a major financial institution with investment grade or better credit rating; however, the Company is exposed to credit risk with this institution. The credit risk is limited to the unrealized gains in such contracts should this counter party fail to perform as contracted. 20 The table below provides information as of December 31, 2001 and 2000 about the Company's foreign currency forward exchange contracts by currency. The information is presented in U.S. dollars:
December 31, ------------------------- 2001 2000 ---------- -------------- Europe (Euro) Notional amount.................................... $2,000,000 $ 2,500,000 Fair value......................................... -- -- Average contractual exchange rate.................. $ .84/Euro $ .93/Euro Netherlands (Dutch guilder) Notional amount.................................... -- $ 2,000,000 Fair value......................................... -- -- Average contractual exchange rate.................. -- $ .40/Dfl United Kingdom (Pound Sterling) Notional amount.................................... -- $ 300,000 Fair value......................................... -- 5,000 Average contractual exchange rate ................. -- $1.52/UK pound
The Company does not anticipate any material adverse effect on its results of operations or financial position relating to these foreign currency forward exchange contracts. Based on the Company's overall currency rate exposure at December 31, 2001, a 10% change in currency rates would not have had a material effect on the financial position, results of operations and cash flows of the Company. Inflation The Company believes that distributors of footwear in the higher priced end of the footwear market, including the Company, are able to adjust their prices in response to an increase in direct and general and administrative expenses, without a significant loss in sales. Accordingly, to date, inflation and changing prices have not had a material adverse effect on the Company's revenues or earnings. Item 8. Financial Statements and Supplementary Data The Consolidated Financial Statements required in response to this section are submitted as part of Item 14(a) of this Report. 21 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders K-Swiss Inc. We have audited the consolidated balance sheets of K-Swiss Inc. as of December 31, 2001 and 2000, and the related consolidated statements of earnings and comprehensive earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of K-Swiss Inc. as of December 31, 2001 and 2000, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. We have also audited Schedule II of K-Swiss Inc. for each of the three years in the period ended December 31, 2001. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. /s/ GRANT THORNTON LLP Los Angeles, California January 29, 2002 22 K-SWISS INC. CONSOLIDATED BALANCE SHEETS December 31, (Dollar amounts in thousands)
2001 2000 -------- -------- ASSETS ------ CURRENT ASSETS Cash and cash equivalents (Note A4)...................... $ 61,579 $ 67,350 Accounts receivable, less allowance for doubtful accounts of $993 and $852 for 2001 and 2000, respectively (Note L)...................................................... 30,478 25,489 Inventories (Note A5).................................... 43,995 43,815 Prepaid expenses and other............................... 3,014 4,452 Deferred taxes (Notes A8 and H).......................... 1,822 1,571 -------- -------- Total current assets................................... 140,888 142,677 PROPERTY, PLANT AND EQUIPMENT, net (Notes A6 and B)........ 8,140 8,358 OTHER ASSETS Intangible assets (Notes A7, A15, C and M)............... 8,362 3,973 Other.................................................... 3,409 2,419 -------- -------- 11,771 6,392 -------- -------- $160,799 $157,427 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Bank lines of credit (Note D)............................ $ -- $ 546 Current maturities of subordinated debentures (Note E)... -- 500 Trade accounts payable................................... 10,728 9,763 Accrued liabilities (Note F)............................. 11,206 11,300 -------- -------- Total current liabilities.............................. 21,934 22,109 OTHER LIABILITIES (Note G)................................. 6,794 7,590 DEFERRED TAXES (Notes A8 and H)............................ 7,712 7,509 COMMITMENTS AND CONTINGENCIES (Notes H and I).............. -- -- STOCKHOLDERS' EQUITY (Notes D and K) 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; 11,228,397 shares issued, 6,344,365 shares outstanding and 4,884,032 shares held in treasury at December 31, 2001 and 11,080,299 shares issued, 6,992,467 shares outstanding and 4,087,832 shares held in treasury at December 31, 2000....................................... 112 111 Class B--authorized 10,000,000 shares of $.01 par value; issued and outstanding 2,903,478 shares at December 31, 2001 and 2,983,478 shares at December 31, 2000.......... 29 30 Additional paid-in capital............................... 41,364 40,444 Treasury Stock........................................... (68,686) (49,348) Retained earnings........................................ 152,308 129,570 Accumulated other comprehensive earnings-- Foreign currency translation (Note A9).................. (768) (588) -------- -------- 124,359 120,219 -------- -------- $160,799 $157,427 ======== ========
The accompanying notes are an integral part of these statements. 23 K-SWISS INC. CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS Year Ended December 31, (Dollar amounts in thousands, except per share amounts)
2001 2000 1999 -------- -------- -------- Revenues (Notes A12, L and N).................... $236,073 $221,629 $285,497 Cost of goods sold............................... 138,371 132,888 162,658 -------- -------- -------- Gross profit................................... 97,702 88,741 122,839 Selling, general and administrative expenses (Note A13)...................................... 60,757 57,300 67,885 -------- -------- -------- Operating profit............................... 36,945 31,441 54,954 Interest income, net............................. 1,804 3,597 1,784 -------- -------- -------- Earnings before income taxes................... 38,749 35,038 56,738 Income tax expense (Notes A8 and H).............. 15,440 13,979 22,454 -------- -------- -------- NET EARNINGS................................... $ 23,309 $ 21,059 $ 34,284 ======== ======== ======== Earnings per common share (Note A14) Basic.......................................... $ 2.42 $ 2.05 $ 3.12 ======== ======== ======== Diluted........................................ $ 2.28 $ 1.96 $ 2.99 ======== ======== ======== Net Earnings..................................... $ 23,309 $ 21,059 $ 34,284 Other comprehensive loss, net of tax--Foreign currency translation adjustments........................ (180) (105) (49) -------- -------- -------- Comprehensive earnings........................... $ 23,129 $ 20,954 $ 34,235 ======== ======== ========
The accompanying notes are an integral part of these statements. 24 K-SWISS INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Three years ended December 31, 2001 (Dollar amounts in thousands)
Common Stock Treasury Stock ----------------------------------- ------------------ Accumulated Class A Class B Additional Class A other ----------------- ----------------- paid-in ------------------ Retained comprehensive Shares Amount Shares Amount capital Shares Amount earnings earnings Total ---------- ------ --------- ------ ---------- --------- -------- -------- ------------- -------- Balance at January 1, 1999............ 9,832,728 $ 98 3,426,556 $34 $25,830 2,518,932 $(17,760) $ 75,500 $(434) $ 83,268 Conversion of shares (Note K)........... 412,578 4 (412,578) (4) -- -- -- -- -- -- Proceeds from exercise of options (Note K)........... 760,849 8 -- -- 5,777 -- -- -- -- 5,785 Income tax benefit of options exercised.......... -- -- -- -- 8,410 -- -- -- -- 8,410 Purchase of treasury stock.............. -- -- -- -- -- 760,000 (19,006) -- -- (19,006) Dividends paid ($.06 per share)(Note D). -- -- -- -- -- -- -- (662) -- (662) Net earnings for the year............... -- -- -- -- -- -- -- 34,284 -- 34,284 Foreign currency translation (Note A9)................ -- -- -- -- -- -- -- -- (49) (49) ---------- ---- --------- --- ------- --------- -------- -------- ----- -------- Balance at December 31, 1999........... 11,006,155 110 3,013,978 30 40,017 3,278,932 (36,766) 109,122 (483) 112,030 Conversion of shares (Note K)........... 30,500 -- (30,500) -- -- -- -- -- -- -- Proceeds from exercise of options (Note K)........... 43,644 1 -- -- 230 -- -- -- -- 231 Income tax benefit of options exercised.......... -- -- -- -- 197 -- -- -- -- 197 Purchase of treasury stock.............. -- -- -- -- -- 808,900 (12,582) -- -- (12,582) Dividends paid ($.06 per share)(Note D). -- -- -- -- -- -- -- (611) -- (611) Net earnings for the year............... -- -- -- -- -- -- -- 21,059 -- 21,059 Foreign currency translation (Note A9)................ -- -- -- -- -- -- -- -- (105) (105) ---------- ---- --------- --- ------- --------- -------- -------- ----- -------- Balance at December 31, 2000........... 11,080,299 111 2,983,478 30 40,444 4,087,832 (49,348) 129,570 (588) 120,219 Conversion of shares (Note K)........... 80,000 1 (80,000) (1) -- -- -- -- -- -- Proceeds from exercise of options (Note K)........... 68,098 -- -- -- 391 -- -- -- -- 391 Income tax benefit of options exercised.......... -- -- -- -- 529 -- -- -- -- 529 Purchase of treasury stock.............. -- -- -- -- -- 796,200 (19,338) -- -- (19,338) Dividends paid ($.06 per share)(Note D). -- -- -- -- -- -- -- (571) -- (571) Net earnings for the year............... -- -- -- -- -- -- -- 23,309 -- 23,309 Foreign currency translation (Note A9)................ -- -- -- -- -- -- -- -- (180) (180) ---------- ---- --------- --- ------- --------- -------- -------- ----- -------- Balance at December 31, 2001........... 11,228,397 $112 2,903,478 $29 $41,364 4,884,032 $(68,686) $152,308 $(768) $124,359 ========== ==== ========= === ======= ========= ======== ======== ===== ========
The accompanying notes are an integral part of this statement. 25 K-SWISS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, (Dollar amounts in thousands)
2001 2000 1999 -------- -------- -------- Cash flows from operating activities: Net earnings.................................... $ 23,309 $ 21,059 $ 34,284 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization................. 1,809 1,531 1,374 Net loss (gain) on disposal of property, plant and equipment................................ 4 (9) 66 Deferred income taxes......................... (48) 780 (1,323) Minority interest in loss of consolidated subsidiary................................... (333) -- -- (Increase) decrease in accounts receivable.... (5,010) 1,663 (1,511) Decrease (increase) in inventories............ 90 671 (10,636) Decrease (increase) in prepaid expenses and other assets................................. 534 (309) (2,662) Increase in accounts payable and accrued liabilities.................................. 686 1,849 11,944 -------- -------- -------- Net cash provided by operating activities....... 21,041 27,235 31,536 Cash flows from investing activities: Cash paid for acquisition of Royal Elastics..... (3,889) -- -- Cash paid for interest in licensing agreement... (1,000) -- -- Cash received in acquisition of 1166789 Ontario Inc. net of cash paid.......................... -- 361 -- Purchase of property, plant and equipment....... (1,152) (864) (2,086) Proceeds from disposal of property, plant and equipment...................................... 8 22 29 -------- -------- -------- Net cash used in investing activities........... (6,033) (481) (2,057) Cash flows from financing activities: Net (repayments) borrowings under bank lines of credit and subordinated debentures............. (1,006) 216 207 Purchase of treasury stock...................... (19,338) (12,582) (19,006) Payment of dividends............................ (571) (611) (662) Proceeds from stock options exercised........... 315 231 5,785 -------- -------- -------- Net cash used in financing activities........... (20,600) (12,746) (13,676) Effect of exchange rate changes on cash.......... (179) 223 (44) -------- -------- -------- Net (decrease) increase in cash and cash equivalents................................ (5,771) 14,231 15,759 Cash and cash equivalents at beginning of year... 67,350 53,119 37,360 -------- -------- -------- Cash and cash equivalents at end of year......... $ 61,579 $ 67,350 $ 53,119 ======== ======== ======== Supplemental disclosure of cash flow information: Non-cash investing activities: In December 2000, the Company purchased the capital stock of 1166789 Ontario Inc. for one dollar. In connection with the acquisition, liabilities were assumed as follows: Fair value of assets acquired................ $ 1,576 Cash paid for capital stock.................. -- -------- Liabilities assumed......................... $ 1,576 Non-cash financing activities: Contribution of assets by minority member....... $ 333 -- -- Income tax benefit of options exercised......... $ 529 $ 197 $ 8,410 Cash paid during the year for: Interest...................................... $ 1,045 $ 102 $ 98 Income taxes.................................. $ 13,345 $ 13,509 $ 16,302
The accompanying notes are an integral part of these statements. 26 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Nature of Operations The Company designs, develops and markets footwear for high performance use, fitness and casual activities. The Company operates in an industry dominated by a small number of very large competitors. The size of these competitors enables them to lead the product direction of the industry, and therefore, potentially diminish the value of the Company's products. In addition to generally greater resources, these competitors spend substantially more money on advertising and promotion than the Company and therefore dominate market share. The Company's market share is estimated at approximately two percent. Lastly, the retail environment forecasted for the near term is difficult, which could put additional pressure on the Company's ability to maintain margins. The Company purchases a significant portion of its products from a small number of contract manufacturers in China and Thailand. This concentration of suppliers in these locations subjects the Company to the risk of interruptions of product flow for various reasons and possible loss of sales, which would adversely affect operating results. The United States Trade Representative ("USTR") has expressed concern about the protection of intellectual property rights within China. The failure of the Chinese government to make substantial progress with respect to these concerns could result in the imposition of retaliatory duties on imports from China, including footwear, which could affect the cost of products purchased and sold by the Company. 2. Estimates in Financial Statements In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities; the disclosure of contingent assets and liabilities at the date of the financial statements; and revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. Basis of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made in the 2000 presentation to conform to the 2001 presentation. 4. Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. 5. Inventories Inventories, consisting of merchandise held for resale, are stated at the lower of cost (first-in, first-out method) or market. Management continually evaluates its inventory position and implements promotional or other plans to reduce inventories to appropriate levels relative to its sales estimates for particular product styles or lines. Estimated losses are recorded when such plans are implemented. It 27 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued) is at least reasonably possible that management's plans to reduce inventory levels will be less than fully successful, and that such an outcome would result in a change in the inventory reserve in the near-term. 6. Property, Plant and Equipment Property, plant and equipment are carried at cost. For financial reporting and tax purposes, depreciation and amortization are calculated using straight- line and accelerated methods over the estimated service lives of the depreciable assets. The service lives of the Company's building and related improvements are 30 and 5 years, respectively. Equipment is depreciated from 3 to 10 years and leasehold improvements are amortized over the lives of the respective leases. 7. Intangible Assets Intangible assets are being amortized using the straight-line method over their estimated economic useful lives at the time of acquisition. The intangible assets principally include trademarks and contingent purchase payments and are amortized over 30 to 35 years. 8. Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Provision is made for appropriate United States income taxes on earnings of subsidiary companies which are intended to be remitted to the parent company. 9. Foreign Currency Translation Assets and liabilities of certain foreign operations are translated into U.S. dollars at current exchange rates. Income and expenses are translated into U.S. dollars at average rates of exchange prevailing during the period. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are taken directly to a separate component of stockholders' equity. Foreign currency transaction gains and losses are included in income. 10. Fair Value of Financial Instruments For certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, outstanding borrowings under the line of credit, accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to their short maturities. 11. Financial Risk Management and Derivatives The Company enters into foreign exchange contracts in order to reduce the impact of foreign currency fluctuations (Euro) and not to engage in currency speculation. The use of derivative financial instruments allows the Company to reduce its exposure to the risk that the eventual dollar net 28 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued) cash inflow resulting from the sale of products to foreign customers and purchases from foreign suppliers will be adversely affected by changes in exchange rates. The Company does not hold or issue financial instruments for trading purposes. The foreign exchange contracts are designated for firmly committed or forecasted sales. These transactions are generally expected to occur in less than one year. Gains and losses of foreign exchange contracts that are designated for forecasted transactions are recognized as the exchange rates change. The forward exchange contracts generally require the Company to exchange Eurodollars for U.S. dollars at maturity, at rates agreed to at the inception of the contracts. The counter party to derivative transactions is a major financial institution with investment grade or better credit rating; however, the Company is exposed to credit risk with this institution. The credit risk is limited to the unrealized gains in such contracts should this counter party fail to perform as contracted. The aggregate notional principal amounts and fair values of the Company's derivative financial instruments were $2,000,000 and no fair value at December 31, 2001 respectively, and $4,800,000 and $5,000 at December 31, 2000, respectively. The estimated fair value of derivatives used to hedge the Company's risks will fluctuate over time. The fair value of the forward exchange contracts is estimated by obtaining quoted market prices. 12. Recognition of Revenues Revenues include sales and fees earned on sales by licensees and are recognized upon shipment of goods. 13. Advertising Costs Advertising costs are expensed as incurred and are included in selling, general and administrative expenses. Advertising expenses amounted to $14,811,000, $15,882,000 and $18,461,000 for 2001, 2000 and 1999, respectively. 14.Earnings per Share Basic earnings per share excludes dilution and is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if options to issue common stock were exercised. The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings per share computations (shares in thousands):
2001 2000 1999 ---------------- ---------------- ---------------- Per Share Per Share Per Share Shares Amount Shares Amount Shares Amount ------ --------- ------ --------- ------ --------- Basic EPS................... 9,648 $2.42 10,283 $2.05 10,972 $3.12 Effect of Dilutive Stock Options.................... 589 (.14) 467 (.09) 480 (.13) ------ ----- ------ ----- ------ ----- Diluted EPS................. 10,237 $2.28 10,750 $1.96 11,452 $2.99 ====== ===== ====== ===== ====== =====
29 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued) 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:
2001 2000 1999 ------------- ------------- -------------- Options to purchase shares of common stock (in thousands)............... 104 74 69 Exercise prices..................... $28.20-$47.38 $18.00-$47.38 $29.63-$47.38 Expiration dates.................... April 2009- April 2009- April 2009- July 2011 August 2010 September 2009
15.New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 141, "Business Combinations" (FAS 141). The standard concludes that all business combinations within the scope of the statement will be accounted for using the purchase method. Previously, the pooling-of-interests method was required when certain criteria were met. Because those criteria did not distinguish economically dissimilar transactions, similar business combinations were accounted for using different methods that produced dramatically different financial statement results. FAS 141 requires separate recognition of intangible assets apart from goodwill if they meet one of two criteria, the contractual-legal criterion or the separability criterion. FAS 141 also requires the disclosure of the primary reasons for a business combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption. The provisions of FAS 141 apply to all business combinations initiated after June 30, 2001. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" (FAS 142), which the Company will adopt effective January 1, 2002. As required by FAS 142, the Company will perform a test on goodwill and other intangible assets as of the adoption date to determine if there has been any impairment of goodwill. The Company will perform impairment tests annually and whenever events or circumstances indicate the value of goodwill or other intangible assets might be impaired. No additional amortization of goodwill and certain other intangible assets, including those recorded in past business combinations, will be recorded. As a result of the elimination of this amortization, expenses will decrease by approximately $149,000 annually. The Company has not yet determined the impact of FAS 142's impairment test provisions on its results of operations and financial position. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (FAS 143), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated asset retirement costs. The new rules apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal operation of a long-lived asset. FAS 143 is effective for the Company at the beginning of fiscal 2003. The Company believes the adoption of FAS 143 will not have a material impact on its consolidated financial position or results of operations. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets" (FAS 144). FAS 144 establishes a 30 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued) single accounting model for the Impairment or disposal of long-lived assets, including discontinued operations. FAS 144 superseded Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121), and APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The provisions of FAS 144 are effective in fiscal years beginning after December 15, 2001, with early adoption permitted, and in general are to be applied prospectively. The Company believes the adoption of FAS 144 will not have a material impact on its consolidated financial position or results of operations. NOTE B--PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment as of December 31 consists of the following (in thousands):
2001 2000 ------- ------- Building and improvements................................ $ 6,351 $ 6,173 Furniture, machinery and equipment....................... 7,333 6,735 ------- ------- 13,684 12,908 Less accumulated depreciation and amortization........... (6,239) (5,245) ------- ------- 7,445 7,663 Land..................................................... 695 695 ------- ------- $ 8,140 $ 8,358 ======= =======
NOTE C--INTANGIBLE ASSETS Intangible assets as of December 31 consist of the following (in thousands):
2001 2000 ------- ------- Goodwill................................................. $ 8,073 $ 4,579 Trademarks............................................... 2,081 2,081 Licenses................................................. 1,243 -- Less accumulated amortization............................ (3,035) (2,687) ------- ------- $ 8,362 $ 3,973 ======= =======
NOTE D--BANK LINES OF CREDIT The Company maintains revolving credit facilities whereby it may borrow up to an aggregate of $21,000,000 including outstanding letters of credit and bankers' acceptances. The weighted average interest rate provided under these credit facilities was 7.00% at December 31, 2000. A fee of up to 1/8% of the average unused line is paid for availability of the primary credit facility. One of the credit agreements contains certain covenants and financial ratio requirements, including restrictions on dividend payments. At December 31, 2001, $25,570,000 was unrestricted as to the payment of dividends. 31 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 NOTE D--BANK LINES OF CREDIT--(Continued) Under the most restrictive covenant, the Company must maintain stockholders' equity, including subordinated debt, less intangible assets and exclusive of treasury stock of at least $90,200,000 at December 31, 2001. NOTE E--SUBORDINATED DEBENTURES The subordinated debentures were payable to an officer and a director of the Company. The debentures bore interest at 10%. Interest was due on the unpaid balance quarterly. The debentures were paid in full in 2001. NOTE F--ACCRUED LIABILITIES Accrued liabilities as of December 31 consist of the following (in thousands):
2001 2000 ------- ------- Payroll and related expenses.............................. $ 3,039 $ 2,484 Other..................................................... 8,167 8,816 ------- ------- $11,206 $11,300 ======= =======
NOTE G--OTHER LIABILITIES Other liabilities consist of amounts due under employee benefit plans, including the long-term portion of the Company's Economic Value Added ("EVA") incentive program and deferred compensation. The EVA incentive program amounts are at risk of forfeiture to the plan participants depending on the Company maintaining presently achieved levels of EVA. The amounts as of December 31 are as follows (in thousands):
2001 2000 ------ ------ EVA incentive program........................................ $3,225 $4,640 Deferred Compensation........................................ 3,569 2,950 ------ ------ $6,794 $7,590 ====== ======
32 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 NOTE H--INCOME TAXES The provision for income taxes includes the following for the years ended December 31 (in thousands):
2001 2000 1999 ------- ------- ------- Current United States Federal ....................................... $13,107 $11,107 $20,497 State.......................................... 2,349 2,027 3,125 Foreign......................................... 32 65 155 Deferred United States Federal........................................ (43) 702 (1,184) State.......................................... (5) 78 (139) ------- ------- ------- $15,440 $13,979 $22,454 ======= ======= =======
A reconciliation from the U.S. federal statutory income tax rate to the effective tax rate for the years ended December 31 is as follows:
2001 2000 1999 ---- ---- ---- U.S. Federal statutory rate.............................. 35.0% 35.0% 35.0% State income taxes....................................... 3.9 3.9 4.1 Net results of foreign subsidiaries...................... 0.4 0.9 0.1 Amortization of intangibles.............................. 0.1 0.1 0.1 Other.................................................... 0.4 -- 0.3 ---- ---- ---- 39.8% 39.9% 39.6% ==== ==== ====
Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and the tax basis of assets and liabilities given the provisions of the enacted tax laws. The net current and non-current components of deferred income taxes recognized in the balance sheets are as follows as of December 31 (in thousands):
2001 2000 ------ ------ Net current assets.......................................... $1,822 $1,571 Net non-current liabilities................................. 7,712 7,509 ------ ------ Net liability............................................... $5,890 $5,938 ====== ======
33 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 NOTE H--INCOME TAXES--(Continued) Significant components of the Company's deferred tax assets and liabilities are as follows as of December 31 (in thousands):
2001 2000 ------- ------- Assets State taxes............................................... $ 839 $ 730 Bad debts reserve......................................... 319 271 Inventory reserve and capitalized costs................... 823 786 Bonuses................................................... 1,070 1,805 Deferred compensation plan................................ 1,388 1,147 Other..................................................... 353 90 ------- ------- Gross deferred tax assets................................. 4,792 4,829 Liabilities Unremitted earnings of a foreign subsidiary............... 9,596 9,805 Contingent purchase payments.............................. 156 163 Other..................................................... 930 799 ------- ------- Gross deferred tax liabilities............................ 10,682 10,767 ------- ------- Net deferred tax liability................................ $ 5,890 $ 5,938 ======= =======
The Company did not record any valuation allowances against deferred tax assets at December 31, 2001. Management has determined, based on the Company's history of prior operating earnings and its expectations for the future, that operating income of the Company will more likely than not be sufficient to recognize fully these deferred tax assets. The federal income tax returns of the Company for the years ended 1993, 1995, 1996 and 1998 are currently under examination by the Internal Revenue Service ("IRS"). In August 2000, the IRS issued its final report proposing additional taxes for the years ended 1993, 1995 and 1996 of an aggregate of approximately $4,985,000 plus penalties and interest for these years. Through September 2001, the Company has agreed to certain adjustments for the years ended 1993, 1995 and 1996 resulting in approximately $976,000 of taxes. These tax adjustments did not require the Company to record additional income tax expense as the Company had recorded deferred income taxes on the untaxed portion of unremitted earnings of a foreign subsidiary. Of the remaining balance of the proposed assessments, the Company believes that approximately $1,222,000 of 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 the unremitted earnings of a foreign subsidiary. For the remaining assessed taxes of approximately $2,787,000, for which the Company has not provided deferred income taxes, the Company believes it has meritorious defenses to the IRS challenges although no assurance can be given that the final results of such IRS challenges will not have a material adverse impact on the Company's financial position and results of operations. 34 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 NOTE I--COMMITMENTS AND CONTINGENCIES The Company leases its principal warehouse facility through January 2003, under an agreement which provides for two options, each of which would extend the lease for three years. In addition, certain property and equipment is leased primarily on a month to month basis. Future minimum rental payments under these leases as of December 31, 2001 are as follows (in thousands):
Year ending December 31, ------------ 2002.............................................................. $1,312 2003.............................................................. 277 2004.............................................................. 89 2005.............................................................. 70 2006.............................................................. 2 ------ $1,750 ======
Rent expense for operating leases was approximately $1,485,000, $1,408,000 and $1,281,000 for the years ended December 31, 2001, 2000, and 1999, respectively. Sublease rental income was approximately $334,000 for the year ended December 31, 2001. The Company has subleased approximately 90,000 square feet of its principal warehouse facility to another company for the remainder of its initial lease term. The total of the future minimum rentals to be received as of December 31, 2001 is $362,000. The Company has outstanding letters of credit totaling approximately $3,517,000 and $5,021,000 at December 31, 2001 and 2000, respectively. These letters of credit, which have original terms from one month to one year, collateralize the Company's obligation to third parties for the purchase of inventory. The fair value of these letters of credit is based on fees currently charged for similar agreements and is not significant at December 31, 2001 and 2000. In June 2001, the Company was notified by counsel representing the trustee appointed to oversee the liquidation of assets of a previous customer of the Company, which filed for bankruptcy protection in 1999, that they are seeking reimbursement of all payments made to the Company during the 90 day period prior to the bankruptcy filing. The aggregate amount of these payments, which the trustee's counsel is claiming to be preferential transfers, is approximately $4,315,000. The Company believes these payments were received in the ordinary course of business and that it has a meritorious defense against the trustee's claims. In November 2001, the trustee filed suit against K-Swiss (and other creditors) to recover payments made to K-Swiss during the 90 days prior to the customer's bankruptcy filing. The Company continues to believe that it has a meritorious "ordinary course of business" defense against these claims and will assert that defense in detail at the appropriate time in the litigation. No provision for this claim has been made in the Company's financial statements as of December 31, 2001. NOTE J--EMPLOYEE BENEFIT PLANS In 1988, the Company adopted a discretionary contribution profit sharing plan covering all employees meeting certain eligibility requirements. In 1993, the plan was amended to include a 401(k) plan. The expense for this plan was approximately $623,000, $562,000 and $477,000 for 2001, 2000 and 1999, respectively. 35 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 NOTE K--STOCKHOLDERS' EQUITY Each share of Class B Common Stock is freely convertible into one share of Class A Common Stock at the option of the Class B stockholder. Holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to ten votes per share for all matters submitted to a vote of the stockholders of the Company, other than the election of directors. Holders of Class A Common Stock are initially entitled to elect two directors and holders of Class B Common Stock are entitled to elect all directors other than directors that the holders of Class A Common Stock are entitled to elect. If the number of members of the Company's Board of Directors is increased to not less than eleven and not greater than fifteen (excluding directors representing holders of Preferred Stock, if any), holders of Class A Common Stock will be entitled to elect three directors. If the number of members of the Company's Board of Directors is increased to a number greater than fifteen (excluding directors representing holders of Preferred Stock, if any), holders of Class A Common Stock will be entitled to elect four directors. During 1990, the Company adopted the 1990 Stock Option Plan under which it was authorized to issue non-qualified stock options, incentive stock options, and warrants to key employees. As amended, the number of options available for issuance under the 1990 Stock Option Plan was 1,650,000 shares of Class A Common Stock. The options have a term of ten years and generally become fully vested by the end of the fifth year. In 1999, the Company adopted the 1999 Stock Incentive Plan under which it was authorized to award up to 600,000 shares or options to employees and directors of the Company. The awards have a term of ten years and generally become fully vested by the end of the fifth year. Combined plan transactions for 2001, 2000 and 1999 are as follows:
2001 2000 1999 ------------------- ----------------- ------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price --------- -------- ------- -------- --------- -------- Options outstanding January 1,............. 937,306 $ 9.36 707,003 $ 8.06 1,335,020 $ 6.48 Granted................. 292,500 24.93 306,450 11.14 147,000 19.88 Exercised............... (68,098) 4.63 (43,644) 4.67 (760,849) 7.48 Canceled................ (22,835) 24.95 (32,503) 4.19 (14,168) 12.73 --------- ------- --------- Options outstanding December 31,........... 1,138,873 13.33 937,306 9.36 707,003 8.06 ========= ======= ========= Options available for grant at December 31,.. 24,050 296,050 650,878
Weighted average fair value of options granted during the year are as follows:
2001 2000 1999 ------ ------ ------ Exercise price is below market price at date of grant.............................................. $24.47 $12.36 $19.01 Exercise price equals market price at date of grant. 16.74 7.39 20.39
36 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 NOTE K--STOCKHOLDERS' EQUITY--(Continued) The following information applies to options outstanding at December 31, 2001:
Options Outstanding Options Exercisable --------------------------------- -------------------- Weighted average Weighted Weighted remaining average average Number contractual exercise Number exercise Range of exercise prices outstanding life (years) price exercisable price ------------------------ ----------- ----------- -------- ----------- -------- $ .01-$ 1.00........... 116,615 7 0.75 15,002 0.53 $ 4.38-$ 6.50........... 268,600 5 4.86 210,936 4.72 $ 6.88-$ 9.88........... 68,141 4 8.31 30,021 8.33 $10.13-$12.75........... 312,017 8 11.12 113,236 11.13 $17.06-$25.56........... 263,500 9 24.09 -- -- $27.13-$47.38........... 110,000 8 31.11 20,000 32.13
The fair value of options at date of grant was estimated using the Black- Scholes model with the following assumptions:
2001 2000 1999 ---- ---- ---- Expected life (years).................................... 8 7 7 Risk-free interest rate.................................. 4.86% 5.90% 6.50% Expected volatility...................................... 59% 60% 59% Expected dividend yield.................................. .2% .3% .2%
Statement of Financial Accounting Standards No. 123, Accounting for Stock- Based Compensation, encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. During 2001, 2000 and 1999, 13,000, 12,000 and 73,000 options, respectively, were granted at exercise prices below fair market value. This resulted in net compensation expense of $313,000, $337,000 and $214,000 for 2001, 2000 and 1999, respectively. All other options were granted at an exercise price equal to the fair market value of the Company's common stock at the date of grant. Accordingly, no compensation cost has been recognized for such options granted. In connection with the exercise of options, the Company realized income tax benefits in 2001, 2000 and 1999 which have been credited to additional paid-in capital. 37 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 NOTE K--STOCKHOLDERS' EQUITY--(Continued) Had compensation cost for the plan been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, the Company's net earnings and earnings per share would have been:
2001 2000 1999 ------- ------- ------- Net earnings (in thousands) As reported..................................... $23,309 $21,059 $34,284 Pro forma....................................... 21,989 20,600 34,150 Basic earnings per share As reported..................................... $ 2.42 $ 2.05 $ 3.12 Pro forma....................................... 2.28 2.00 3.11 Diluted earnings per share As reported..................................... $ 2.28 $ 1.96 $ 2.99 Pro forma....................................... 2.15 1.92 2.98
The effects of applying SFAS 123 in this proforma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. NOTE L--CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, trade accounts receivable and financial instruments used in hedging activities. The Company maintains cash and cash equivalents with high quality institutions and limits the amount of credit exposure to any one institution. As part of its cash and risk management processes, the Company performs periodic evaluations of the relative credit standing of the financial institutions. During the years ended December 31, 2001, 2000 and 1999, approximately 18%, 23% and 24%, respectively, of revenues were from one domestic customer. At December 31, 2001 and 2000 approximately 35% and 34% of accounts receivable were from three customers. Credit risk with respect to other trade accounts receivable is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across many geographies. The Company controls credit risk through credit approvals, credit limits and monitoring procedures and for international receivables, the use of letters of credit and letters of guarantee. 38 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 NOTE M--ACQUISITIONS National Geographic In May 2001, the Company formed a joint venture with Rugged Shark, a designer and manufacturer of young, active-oriented footwear, to license, produce and market a men's, women's, and children's collection of National Geographic outdoor-oriented and casual footwear. Under the terms of the joint venture, the Company owns 75% of the new company and provides the infrastructure to design, develop, manufacture, distribute and market the line of National Geographic footwear. Rugged Shark owns 25% of the venture. Profits and losses of the joint venture will generally be allocated 75% to the Company and 25% to Rugged Shark. Under certain circumstances, Rugged Shark is entitled to a special $1,000,000 profits allocation. Under the terms of the agreement, the Company was granted the right (the "Call") to purchase from the minority member its minority interest in the joint venture. In addition, the Company has granted the minority member the right (the "Put") to sell its minority interest to the Company. The Call and the Put are exercisable at any time during the period April 1, 2005 through March 31, 2007. The exercise price of the Call and Put is based on a multiple of earnings before interest, income taxes and depreciation and amortization of the joint venture. The license agreement requires the Company to make minimum royalty payments through the year 2005 as follows (in thousands):
Year ending December 31, ------------ 2002.............................................................. $ 750 2003.............................................................. 1,155 2004.............................................................. 1,575 2005.............................................................. 1,876 ------ $5,356 ======
Losses applicable to the minority interests of Rugged Shark exceed the equity capital of the minority member. Accordingly, such excess losses applicable to the minority interests have been charged against the majority interest. The amount of excess losses charged to the Company was not material during the year ended December 31, 2001. Royal Elastics In November 2001, the Company acquired the worldwide rights and business of Royal Elastics, an Australian-based designer and manufacturer of elasticated footwear. The purchase excludes distribution rights in Australia, which were retained by the seller. This acquisition was accounted for as a purchase and accordingly, the results of operations of the acquired business are included in the accompanying financial statements from the date of acquisition. On a pro forma basis, as if the business had been acquired at the beginning of 2001, revenue, net earnings and earnings per common share would not differ materially from the amounts reported in the accompanying consolidated financial statements for 2001 and 2000. Goodwill totaling $3,494,000 has been recognized for the amount of the excess of the purchase price paid over the fair market value of the net assets acquired. Contingent purchase payments of approximately $1.5 million are due to the seller if the Company meets certain revenue levels and the Royal Elastics trademark is registered in the United States of America. Contingent purchase payments will be recorded as additional goodwill. Assets acquired and liabilities assumed in the acquisition were not material. 39 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 NOTE M--ACQUISITIONS--(Continued) In connection with the acquisition of Royal Elastics, the Company formed a joint venture with two of the sellers. Profits and losses of the joint venture during the first six years will be allocated 100% to the Company. Following the sixth year, profits and losses will be allocated 70% to the Company and 30% to the minority members. Under the terms of the agreement, the Company was granted the right (the "Call") to purchase from the minority members their minority interest in the joint venture. In addition, the Company has granted the minority members the right (the "Put") to sell their minority interest to the Company. The Call and the Put are exercisable at any time during the period November 15, 2005 through November 15, 2007. The exercise price of the Call and Put is based on a multiple of pre tax earnings of the joint venture less any amounts previously paid by the Company under the purchase agreement. 40 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 NOTE N--SEGMENT INFORMATION The Company's predominant business is the design, development and distribution of athletic footwear. The Company is organized into three geographic regions: the United States, Europe and other international operations. Certain reclassifications have been made in the 2001, 2000 and 1999 presentations. The following tables summarize segment information (in thousands):
Year ended December 31, ---------------------------- 2001 2000 1999 -------- -------- -------- Revenues from unrelated entities: United States.............................. $205,237 $197,262 $264,054 Europe..................................... 13,701 12,862 11,395 Other International........................ 17,135 11,505 10,048 -------- -------- -------- $236,073 $221,629 $285,497 ======== ======== ======== Inter-geographic revenues: United States.............................. $ 1,696 $ 1,014 $ 854 Europe..................................... 77 29 22 Other International........................ 7,634 5,790 5,110 -------- -------- -------- $ 9,407 $ 6,833 $ 5,986 ======== ======== ======== Total revenues: United States.............................. $206,933 $198,276 $264,908 Europe..................................... 13,778 12,891 11,417 Other International........................ 24,769 17,295 15,158 Less inter-geographic revenues............. (9,407) (6,833) (5,986) -------- -------- -------- $236,073 $221,629 $285,497 ======== ======== ======== Operating profit (loss): United States.............................. $ 45,506 $ 41,424 $ 62,410 Europe..................................... (3,192) (2,774) (1,437) Other International........................ 2,812 848 4,268 Less corporate expenses and Eliminations... (8,181) (8,057) (10,287) -------- -------- -------- $ 36,945 $ 31,441 $ 54,954 ======== ======== ======== Interest income: United States.............................. $ 2,310 $ 2,852 $ 1,043 Europe..................................... 33 66 30 Other International........................ 597 1,051 877 -------- -------- -------- Total interest income.................... 2,940 3,969 1,950 Interest expense: United States.............................. 1,094 320 118 Europe..................................... 42 52 48 Other International........................ -- -- -- -------- -------- -------- Total interest expense................... 1,136 372 166 -------- -------- -------- Interest income, net......................... $ 1,804 $ 3,597 $ 1,784 ======== ======== ======== Income tax expense: United States.............................. $ 15,408 $ 13,914 $ 22,334 Europe..................................... 72 65 65 Other International........................ (40) -- 55 -------- -------- -------- $ 15,440 $ 13,979 $ 22,454 ======== ======== ========
41 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 NOTE N--SEGMENT INFORMATION--(Continued)
Year ended December 31, -------------------------- 2001 2000 1999 -------- -------- -------- Identifiable assets: United States..................................... $ 79,875 $ 78,944 $ 82,114 Europe............................................ 11,886 5,770 6,777 Other International............................... 28,290 20,752 17,213 Corporate assets and eliminations (1)............. 40,748 51,961 40,668 -------- -------- -------- $160,799 $157,427 $146,772 ======== ======== ======== Provision for depreciation and amortization: United States..................................... $ 1,637 $ 1,348 $ 1,184 Europe............................................ 113 127 125 Other International............................... 59 56 65 -------- -------- -------- $ 1,809 $ 1,531 $ 1,374 ======== ======== ======== Capital expenditures: United States..................................... $ 913 $ 672 $ 1,891 Europe............................................ 188 91 139 Other International............................... 51 101 56 -------- -------- -------- $ 1,152 $ 864 $ 2,086 ======== ======== ========
- -------- (1) Corporate assets include cash and cash equivalents, investments and intangible assets. NOTE O--QUARTERLY FINANCIAL DATA (Unaudited) Summarized quarterly financial data for 2001 and 2000 follows (in thousands except for per share amounts):
First Second Third Fourth Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- -------- 2001 Revenues............................. $68,249 $55,419 $67,786 $44,619 $236,073 Gross profit......................... 27,509 22,154 29,268 18,771 97,702 Net earnings......................... 6,613 4,085 8,069 4,542 23,309 Earnings per share Basic................................ $ .67 $ .41 $ .85 $ .49 $ 2.42 Diluted.............................. $ .63 $ .39 $ .79 $ .46 $ 2.28 2000 Revenues............................. $71,458 $51,006 $60,466 $38,699 $221,629 Gross profit......................... 27,020 21,742 24,989 14,990 88,741 Net earnings......................... 7,337 3,971 6,346 3,405 21,059 Earnings per share Basic................................ $ .69 $ .38 $ .63 $ .34 $ 2.05 Diluted.............................. $ .67 $ .37 $ .59 $ .32 $ 1.96
42 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Except for the information disclosed in Item 4(a) of this Annual Report on Form 10-K, the information required by this item will be contained in the Company's Proxy Statement for its Annual Stockholders Meeting to be held May 23, 2002 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2001 and is incorporated herein by reference. Item 11. Executive Compensation The information required by this item will be contained in the Company's Proxy Statement for its Annual Stockholders Meeting to be held May 23, 2002 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2001 and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item will be contained in the Company's Proxy Statement for its Annual Stockholders Meeting to be held May 23, 2002 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2001 and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by this item will be contained in the Company's Proxy Statement for its Annual Stockholders Meeting to be held May 23, 2002 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2001 and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Financial Statements:
Page Reference Form 10-K -------------- Report of Independent Certified Public Accountants.............. 22 Consolidated Balance Sheets as of December 31, 2001 and 2000.... 23 Consolidated Statements of Earnings and Comprehensive Earnings for the three years ended December 31, 2001.................... 24 Consolidated Statement of Stockholders' Equity for the three years ended December 31, 2001.................................. 25 Consolidated Statements of Cash Flows for the three years ended December 31, 2001.............................................. 26 Notes to Consolidated Financial Statements...................... 27
(b) Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter of 2001. 43 (c) Exhibits 3.1 Amended and Restated Certificate of Incorporation of K-Swiss Inc. (incorporated by reference to exhibit 3.4 to the Registrant's Form S- 1 Registration Statement No. 33-34369). 3.2 Certificate of Designations of Class A Common Stock of K-Swiss Inc. (incorporated by reference to exhibit 3.2 to the Registrant's Form S- 1 Registration Statement No. 33-34369). 3.3 Certificate of Designations of Class B Common Stock of K-Swiss Inc. (incorporated by reference to exhibit 3.3 to the Registrant's Form S- 1 Registration Statement No. 33-34369). 3.4 Amended and Restated Bylaws of K-Swiss Inc. (incorporated by reference to exhibit 3.4 to the Registrant's Form 10-K for the fiscal year ended December 31, 1991). 4.1 Specimen K-Swiss Inc. Class A Common Stock Certificate (incorporated by reference to exhibit 4.1 to the Registrant's Form S-1 Registration Statement No. 33-34369). 4.2 Specimen K-Swiss Inc. Class B Common Stock Certificate (incorporated by reference to exhibit 4.2 to the Registrant's Form S-1 Registration Statement No. 33-34369). 4.3 $400,000 324 Corp. 10% Junior Subordinated Debenture due December 31, 2001 originally issued to The Rug Warehouse, Inc. Pension Plan and Trust (incorporated by reference to exhibit 4.7 to the Registrant's Form S-1 Registration Statement No. 33-34369). 4.4 $100,000 324 Corp. 10% Junior Subordinated Debenture due December 31, 2001 issued to George E. Powlick (incorporated by reference to exhibit 4.8 to the Registrant's Form S-1 Registration Statement No. 33-34369). 9.1 Stockholders Agreement dated as of December 30, 1986 by and among 324 Corp., Steven B. Nichols, Kenneth J. Zises and The Biltrite Corporation (incorporated by reference to exhibit 9.2 to the Registrant's Form S-1 Registration Statement No. 33-34369). 9.2 Letter Agreement dated May 3, 1990 by and among the Company, Steven B. Nichols, Kenneth J. Zises, The Biltrite Corporation and certain affiliates (incorporated by reference to exhibit 9.3 to the Registrant's Form S-1 Registration Statement No. 33-34369). 9.3 Voting Agreement dated May 3, 1990 by and between The Biltrite Corporation and the Nichols Family Trust (incorporated by reference to exhibit 9.4 to the Registrant's Form S-1 Registration Statement No. 33-34369). 10.1 K-Swiss Inc. 1990 Stock Incentive Plan (incorporated by reference to exhibit 10.1 to the Registrant's Form S-1 Registration Statement No. 33-34369). 10.2 Amendment to K-Swiss Inc. 1990 Stock Incentive Plan (incorporated by reference to exhibit 10.36 to the Registrant's Form 10-K for the fiscal year ended December 31, 1993). 10.3 Amendment to K-Swiss Inc. 1990 Stock Incentive Plan (incorporated by reference to exhibit 10.32 to the Registrant's Form 10-K for the fiscal year ended December 31, 1995).
44 10.4 K-Swiss Inc. 1999 Stock Incentive Plan (incorporated by reference to Exhibit 4.1 of the Registrant's Form S-8 Registration Statement No. 333-79641). 10.5 K-Swiss Inc. Profit Sharing Plan, as amended (incorporated by reference to exhibit 10.3 to the Registrant's Form S-1 Registration Statement No. 33-34369). 10.6 Amendment to K-Swiss Inc. 401(k) and Profit Sharing Plan (incorporated by reference to exhibit 10.35 to the Registrant's Form 10-K for the fiscal year ended December 31, 1993). 10.7 Amendment to K-Swiss Inc. 401(k) and Profit Sharing Plan dated May 26, 1994 (incorporated by reference to exhibit 10.32 to the Registrant's Form 10-K for the fiscal year ended December 31, 1994). 10.8 Amendment to K-Swiss Inc. 401(k) and Profit Sharing Plan dated January 1, 2000 (incorporated by reference to exhibit 10.30 to the Registrant's Form 10-K for the fiscal year ended December 31, 1999). 10.9 Form of Indemnity Agreement entered into by and between K-Swiss Inc. and directors (incorporated by reference to exhibit 10.4 to the Registrant's Form S-1 Registration Statement No. 33-34369). 10.10 Employment Agreement between the Registrant and Steven B. Nichols dated as of May 18, 2000 (incorporated by reference to exhibit 10.31 to the Registrant's Form 10-Q for the quarter ended June 30, 2000). 10.11 Lease Agreement dated March 11, 1997 by and between K-Swiss Inc. and Space Center Mira Loma, Inc. (incorporated by reference to exhibit 10 to the Registrant's Form 10-Q for the quarter ended March 31, 1997). 10.12 Credit Agreement dated March 25, 1994 by and among the Registrant and Bank of America National Trust and Savings Association, with schedules (incorporated by reference to exhibit 10.33 to the Registrant's Form 10-K for the fiscal year ended December 31, 1994). 10.13 Amendment to Credit Agreement dated March 25, 1994 by and among the Registrant and Bank of America National Trust and Savings Association (incorporated by reference to exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended June 30, 1995). 10.14 Second Amendment to Credit Agreement (incorporated by reference to exhibit 10 to the Registrant's Form 10-Q for the quarter ended September 30, 1996). 10.15 Third Amendment to Credit Agreement (incorporated by reference to exhibit 10 to the Registrant's Form 10-Q for the quarter ended September 30, 1997). 10.16 Fourth Amendment to Credit Agreement (incorporated by reference to exhibit 10 to the Registrant's Form 10-Q for the quarter ended September 30, 1998). 10.17 Fifth Amendment to Credit Agreement (incorporated by reference to exhibit 10.31 to the Registrant's Form 10-K for the year ended December 31, 1998). 10.18 Business Loan Agreement (incorporated by reference to exhibit 10 to the Registrant's Form 10-Q for the quarter ended June 30, 2001). 10.19 K-Swiss Inc. Deferred Compensation Plan, Master Plan Document (incorporated by reference to exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended March 31, 1998).
45 10.20 K-Swiss Inc. Deferred Compensation Plan, Master Trust Agreement (incorporated by reference to exhibit 10.2 to the Registrant's Form 10-Q for the quarter ended March 31, 1998). 21 Subsidiaries of K-Swiss Inc. 23 Consent of Grant Thornton LLP.
(d) Schedules
Page ---- Financial Statement Schedules: Schedule II--Valuation and Qualifying Accounts................... 48 All supplemental schedules other than as set forth above are omitted as inapplicable or because the required information is included in the Consolidated Financial Statements or the Notes to Consolidated Financial Statements.
46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. K-Swiss Inc. /s/ George Powlick By __________________________________ George Powlick, Vice-President and Chief Financial Officer February 6, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Steven Nichols February 6, 2002 - ------------------------------------ Steven Nichols Chairman of the Board, President and Chief Executive Officer /s/ George Powlick February 6, 2002 - ------------------------------------ George Powlick Vice President Finance, Chief Financial Officer, Principal Accounting Officer, Secretary and Director /s/ Lawrence Feldman February 6, 2002 - ------------------------------------ Lawrence Feldman Director /s/ David Lewin February 6, 2002 - ------------------------------------ David Lewin Director /s/ Martyn Wilford February 6, 2002 - ------------------------------------ Martyn Wilford Director /s/ Stephen Fine February 6, 2002 - ------------------------------------ Stephen Fine Director
47 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Amounts in thousands)
Column A Column B Column C Column D Column E -------- ------------- ------------------- ----------- -------- Additions ------------------- Write-offs Balance at Charged to Charged and End Balance Beginning of Costs and to Other Deductions, at of Description Period Expenses Accounts Net Period ----------- ------------- ---------- -------- ----------- -------- Allowance for bad debts. (2001) $ 852 $ 537 $ -- $ (396) $ 993 (2000) 1,740 544 -- (1,432) 852 (1999) 825 1,341 -- (426) 1,740 Allowance for inventories............ (2001) $1,417 $1,622 $ -- $(1,527) $1,512 (2000) 966 1,203 -- (752) 1,417 (1999) 1,521 1,171 -- (1,726) 966
48 EXHIBIT INDEX
Number Page ------ ---- 21 Subsidiaries of K-Swiss Inc. ..................................... 23 Consent of Grant Thornton LLP. ...................................
EX-21 3 dex21.txt SUBSIDIARIES OF K-SWISS EXHIBIT 21 LIST OF SUBSIDIARIES All of the entities listed below are wholly owned subsidiaries of K-Swiss Inc. 1. K-Swiss Pacific Inc., a Massachusetts corporation. 2. K-Swiss International Ltd., a corporation organized under the laws of Bermuda. 3. K-Swiss (UK) Ltd., a United Kingdom corporation. 4. K-Swiss Amsterdam B.V., a Dutch corporation. 5. K-Swiss S.A. de C.V., a Mexico corporation. 6. K-Swiss Australia Pty. Ltd., an Australia corporation. 7. K-Swiss International Services (BAARN) B.V., a Dutch corporation. 8. K-Swiss Direct Inc., a California corporation. 9. K-Swiss Sales Corp., a Delaware corporation. 10. K-Swiss NS Inc., a Delaware corporation. 11. K-Swiss Canada Corp., a Nova Scotia company. 12. 1166789 Ontario Inc., an Ontario, Canada corporation. 13. Royal Elastics, LLC, a Delaware limited liability company. EX-23 4 dex23.txt CONSENT OF GRANT THORNTON LLP EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 29, 2002, accompanying the consolidated financial statements and schedule included in the Annual Report of K-Swiss Inc. on Form 10-K for the year ended December 31, 2001. We hereby consent to the incorporation by reference of said report in the Registration Statements of K-Swiss Inc. on Form S-8 (File No. 33-36505, effective August 23, 1990, File No. 33-77258, effective April 4, 1994, File No. 33-95650, effective August 10, 1995 and File No. 333-79641, effective May 28, 1999) and on Form S-3 (File No. 333-37895, effective October 17, 1997 and File No. 333-60043, effective July 28, 1998). /s/ GRANT THORNTON LLP Los Angeles, California January 29, 2002 -----END PRIVACY-ENHANCED MESSAGE-----