Form 10-Q period ending 9/30/2002

-----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, IaCIxFT3vEXUm38+ftOoPm6GpZVMSH9ISQIOL1HaARs+3WnYSrrQL9gGiNOQXvVT VoFTFYow8UY8ituSU9zNTw== 0000898430-02-003799.txt : 20021024 0000898430-02-003799.hdr.sgml : 20021024 20021024082719 ACCESSION NUMBER: 0000898430-02-003799 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021024 FILER: COMPANY DATA: COMPANY CONFORMED NAME: K SWISS INC CENTRAL INDEX KEY: 0000862480 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 954265988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18490 FILM NUMBER: 02796628 BUSINESS ADDRESS: STREET 1: 31248 OAK CREST DRIVE CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91361 BUSINESS PHONE: 8187065100 MAIL ADDRESS: STREET 1: 31248 OAK CREST DR CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91361 10-Q 1 d10q.htm FORM 10-Q PERIOD ENDING 9/30/2002 Form 10-Q period ending 9/30/2002

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the period ended September 30, 2002

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 (State or other jurisdiction of incorporation or organization)		95-4265988 (I.R.S. Employer Identification No.)

31248 Oak Crest Drive, Westlake Village, CA (Address of principal executive offices)		91361 (Zip code)

818-706-5100

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Shares of common stock outstanding at October 17, 2002:

Class A		12,270,464
Class B		5,670,956

PART 1—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

K-SWISS INC.

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)

	September 30, 2002			December 31, 2001
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	65,431		$	61,579
Accounts receivable, less allowance for doubtful accounts of $1,236 and $993 as of		47,794			30,478
September 30, 2002 and December 31, 2001, respectively
Inventories		36,128			43,995
Prepaid expenses and other		3,149			3,014
Deferred taxes		1,876			1,822

Total current assets		154,378			140,888
Property, plant and equipment, net		7,815			8,140
Other assets
Intangible assets		8,173			8,362
Other		3,580			3,409

		11,753			11,771

	$	173,946		$	160,799

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Trade accounts payable	$	7,653		$	10,728
Accrued income taxes		106			129
Accrued liabilities		17,013			11,077

Total current liabilities		24,772			21,934
Other liabilities		7,433			6,794
Deferred taxes		6,317			7,712
Stockholders’ equity
Preferred stock-authorized 2,000,000 shares of $.01 par value; none issued and outstanding		—			—
Common stock:
Class A-authorized 36,000,000 shares of $.01 par value; 22,872,928 shares issued, 12,270,464 shares outstanding and 10,602,464 shares held in treasury at September 30, 2002 and 22,456,794 shares issued, 12,688,730 shares outstanding and 9,768,064 shares held in treasury at December 31, 2001		229			225
Class B-authorized 10,000,000 shares of $.01 par value; issued and outstanding 5,670,956 shares at September 30, 2002 and 5,806,956 shares at December 31, 2001		57			58
Additional paid-in capital		43,864			41,222
Treasury stock		(84,414	)		(68,686	)
Retained earnings		175,711			152,308
Accumulated other comprehensive earnings—Foreign currency translation		(23	)		(768	)

		135,424			124,359

	$	173,946		$	160,799

The accompanying notes are an integral part of these statements.

K-SWISS INC.

CONSOLIDATED STATEMENTS OF EARNINGS

AND COMPREHENSIVE EARNINGS

(Amounts in thousands, except per share amounts)

(Unaudited)

	Nine Months Ended September 30,					Three Months Ended September 30,
	2002		2001			2002			2001
Revenues	$	236,005	$	191,454		$	81,165		$	67,786
Cost of goods sold		131,013		112,523			44,134			38,518

Gross profit		104,992		78,931			37,031			29,268
Selling, general and administrative expenses		66,021		49,143			23,654			16,422

Operating profit		38,971		29,788			13,377			12,846
Interest income, net		610		1,447			159			468

Earnings before income taxes		39,581		31,235			13,536			13,314
Income tax expense		15,672		12,468			5,363			5,245

Net earnings	$	23,909	$	18,767		$	8,173		$	8,069

Earnings per common share (Note 5)
Basic	$	1.30	$	.96		$	.45		$	.42

Diluted	$	1.21	$	.90		$	.42		$	.40

Net earnings	$	23,909	$	18,767		$	8,173		$	8,069
Other comprehensive earnings (loss), net of tax—Foreign currency translation adjustments		745		(122	)		(227	)		(6	)

Comprehensive net earnings	$	24,654	$	18,645		$	7,946		$	8,063

The accompanying notes are an integral part of these statements.

K-SWISS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2002			2001
Net cash provided by operating activities	$	19,627		$	35,012
Cash flows from investing activities:
Cash paid for interest in licensing agreement		—			(1,000	)
Purchase of property, plant and equipment		(925	)		(829	)
Proceeds from sale of property		7			8

Net cash used in investing activities		(918	)		(1,821	)
Cash flows from financing activities:
Net repayments under bank lines of credit		—			(526	)
Purchase of treasury stock		(15,728	)		(18,171	)
Proceeds from stock options exercised		812			285
Payment of dividends		(506	)		(432	)

Net cash used in financing activities		(15,422	)		(18,844	)
Effect of exchange rate changes on cash		565			(128	)

Net increase in cash and cash equivalents		3,852			14,219
Cash and cash equivalents at beginning of period		61,579			67,350

Cash and cash equivalents at end of period	$	65,431		$	81,569

Supplemental disclosure of cash flow information:
Non-cash investing and financing activities:
Contribution of assets by minority member	$	—		$	333
Income tax benefit of options exercised	$	1,631		$	481
Cash paid during the period for:
Interest	$	772		$	1,034
Income taxes	$	15,691		$	5,823

The accompanying notes are an integral part of these statements.

K-SWISS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of K-Swiss Inc. (the “Company”) as of September 30, 2002 and the results of its operations and its cash flows for the nine and three months ended September 30, 2002 and 2001, have been included for the periods presented. The results of operations and cash flows for the nine and three months ended September 30, 2002 are not necessarily indicative of the results to be expected for any other interim period or the full year. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements should be read in combination with the audited consolidated financial statements and notes thereto for the year ended December 31, 2001. Certain reclassifications have been made in the nine and three months ended September 30, 2001 presentation to conform to the nine and three months ended September 30, 2002 presentation.

The federal income tax returns of the Company for the years ended 1993, 1995 and 1996 were examined by the Internal Revenue Service (“IRS”). In August 2000, the IRS issued its 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. In May 2002, the IRS amended its report proposing final adjustments for these years, resulting in approximately an aggregate $849,000 of taxes plus interest, to which the Company has agreed. Of the $849,000 in taxes that the Company will pay, $742,000 will be refunded to the company, due to the timing differences of these adjustments, for later years as amended returns are filed for 1997 through 2000. 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. The Company has already recorded interest expense as these adjustments were agreed to during the quarter ended June 30, 2001. There were no penalties assessed in the May 2002 IRS report.

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 meritorious defenses against the trustee’s claim. No provision for this claim has been made in the Company’s financial statements as of September 30, 2002.

In response to K-Swiss’ opposition to Swiss Army Brands, Inc.’s registration and intended use of Swiss Army as a trademark on footwear, Swiss Army Brands has petitioned for cancellation of the Company’s U.S. registrations for the K-Swiss trademark. The Company believes it has meritorious defenses to the petitions, but the outcome cannot be predicted at this time. An unfavorable decision could have a material adverse impact on the Company.

The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings per share computations (shares in thousands):

	Nine Months Ended September 30,								Three Months Ended September 30,
	2002				2001				2002				2001
	Shares	Per Share Amount			Shares	Per Share Amount			Shares	Per Share Amount			Shares	Per Share Amount
Basic EPS	18,421	$	1.30		19,564	$	.96		18,220	$	.45		19,096	$	.42
Effect of dilutive stock options	1,297		(.09	)	1,175		(.06	)	1,300		(.03	)	1,270		(.02	)

Diluted EPS	19,718	$	1.21		20,739	$	.90		19,520	$	.42		20,366	$	.40

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:

		Nine and Three Months Ended September 30, 2002
Options to purchase shares of common stock (in thousands)		35
Exercise price		$22.75–$23.69
Expiration date		May 2009–May 2012

	Nine Months Ended September 30, 2001	Three Months Ended September 30, 2001
Options to purchase shares of common stock (in thousands)	234	174
Exercise price	$14.10–$23.69	$16.06–$23.69
Expiration date	April 2009–August 2011	April 2009–August 2011

On May 23, 2002, the Company’s Board of Directors declared 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 which was distributed on June 21, 2002 to stockholders of record at the close of business on June 7, 2002. The amounts above reflect the effect of this two-for-one stock split.

6. 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 2002 and 2001 presentations. The following tables summarize segment information (in thousands):

	Nine Months Ended September 30,						Three Months Ended September 30,
	2002			2001			2002			2001
Revenues from unrelated entities:
United States	$	202,797		$	167,152		$	68,691		$	59,019
Europe		14,491			11,844			4,873			4,043
Other International		18,717			12,458			7,601			4,724

	$	236,005		$	191,454		$	81,165		$	67,786

Inter-geographic revenues:
United States	$	1,848		$	1,330		$	720		$	397
Europe		142			75			65			41
Other International		5,256			5,125			1,950			1,782

	$	7,246		$	6,530		$	2,735		$	2,220

Total revenues:
United States	$	204,645		$	168,482		$	69,411		$	59,416
Europe		14,633			11,919			4,938			4,084
Other International		23,973			17,583			9,551			6,506
Less inter-geographic revenues		(7,246	)		(6,530	)		(2,735	)		(2,220	)

	$	236,005		$	191,454		$	81,165		$	67,786

Operating profit (loss):
United States	$	48,643		$	36,797		$	16,325		$	15,525
Europe		(4,284	)		(2,041	)		(1,982	)		(488	)
Other International		3,142			1,203			1,744			449
Less corporate expenses and eliminations		(8,530	)		(6,171	)		(2,710	)		(2,640	)

	$	38,971		$	29,788		$	13,377		$	12,846

	September 30, 2002		December 31, 2001
Identifiable assets:
United States	$	84,255	$	79,875
Europe		13,394		11,886
Other International		9,249		7,172
Corporate assets and eliminations(1)		67,048		61,866

	$	173,946	$	160,799

(1)

Corporate assets include cash and cash equivalents and intangible assets.

During the nine months ended September 30, 2002 and 2001, approximately 23% and 17%, respectively of revenues were made to one customer. During the three months ended September 30, 2002 and 2001, approximately 28% and 19%, respectively of revenues were made to this same customer.

7. In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which supersedes APB Opinion No. 17, “Intangible Assets.” SFAS 142 eliminates the requirement to amortize goodwill and indefinite-lived intangible assets, requiring instead that those assets be measured for impairment at least annually, and more often when events indicate that an impairment exists. Intangible assets with a defined life will continue to be amortized over their useful lives. SFAS 142 applies to goodwill and intangible assets arising from transactions completed before and after the Statement’s effective date. The Company has adopted this Standard as of January 1, 2002. In applying SFAS 142, the Company has performed the transitional reassessment and impairment tests required as of January 1, 2002, and determined that the goodwill and trademarks of the Company have indefinite lives and that there was no impairment on these assets. The Company discontinued amortizing these assets on January 1, 2002. At the time of adoption, the Company had accumulated amortization pertaining to goodwill and trademarks of $2,976,000. The license agreement concerning National Geographic is considered to have a finite life and is being amortized over the remaining term of the agreement that extends through December 2005. Below is the calculation of reported net earnings adjusted for the effect of amortization expense for the September 30, 2001 periods (in thousands):

	Nine Months Ended September 30,								Three Months Ended September 30,
	2002		2001						2002		2001
	$		$		Per Share Amount				$		$		Per Share Amount
	$		$		Basic		Diluted		$		$		Basic		Diluted
Reported net earnings	$	23,909	$	18,767	$	.96	$	.90	$	8,173	$	8,069	$	.42	$	.40
Add back amortization expense of goodwill and trademarks		—		149		.01		.01		—		50		.01		—

Adjusted net earnings	$	23,909	$	18,916	$	.97	$	.91	$	8,173	$	8,119	$	.43	$	.40

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Notes 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 the new Limited Edition product; market acceptance of the 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, including, without limitation, the Company’s ability to successfully defend against trademark cancellation claims made by Swiss Army Brands, Inc.; difficulties in implementing, operating and maintaining the Company’s increasingly complex information systems and controls; concentration of production in China; potential earthquake disruption due to the location of the Company’s domestic warehouse and headquarters; performance and reliability of products; customer service; adverse publicity; the loss of significant customers or suppliers; dependence on distributors; business disruptions; increased costs of freight and transportation to meet delivery deadlines; changes in business strategy or development plans; general risks associated with doing business outside the United States, including, without limitation, import duties, tariffs, quotas and political and economic instability; the effects and after effects of the strike by the longshoremen’s union on west coast ports; the effects of terrorist actions on business activities, customer orders and cancellations, and the United States and international governments’ responses to these terrorist actions; the lack of terrorism insurance; changes in government regulations; liability and other claims asserted against the Company; the ability to attract and retain qualified personnel; and other factors referenced or incorporated by reference in this report and other reports.

The Company operates in a very competitive and rapidly changing environment. New risk factors can arise and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Investors should also be aware that while the Company does, from time to time, communicate with securities analysts, it is against the Company’s policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, investors should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts or others contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

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.

	Nine Months Ended September 30,				Three Months Ended September 30,
	2002		2001		2002		2001
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	55.5		58.8		54.4		56.8
Gross profit	44.5		41.2		45.6		43.2
Selling, general and administrative expenses	28.0		25.7		29.1		24.3
Interest income, net	0.3		0.8		0.2		0.7
Earnings before income taxes	16.8		16.3		16.7		19.6
Income tax expense	6.7		6.5		6.6		7.7
Net earnings	10.1		9.8		10.1		11.9

K-Swiss brand revenues increased to $79,098,000 for the quarter ended September 30, 2002 from $67,786,000 for the quarter ended September 30, 2001, an increase of $11,312,000 or 16.7%. K-Swiss brand revenues increased to $231,932,000 for the nine months ended September 30, 2002 from $191,454,000 for the nine months ended September 30, 2001, an increase of $40,478,000 or 21.1%. The increase for the quarter and nine months ended September 30, 2002 was the result of an increase in the volume of footwear sold at slightly lower average wholesale prices per pair. The volume of footwear sold increased to 3,098,000 pair and 9,053,000 pair for the quarter and nine months ended September 30, 2002 from 2,504,000 and 7,159,000 pair for the quarter and nine months ended September 30, 2001. The increase in the volume of footwear sold for the quarter ended September 30, 2002 was primarily the result of increased sales of the Classic and children’s categories of shoes of 32.9% and 17.0%, respectively, partially offset by a decrease in the training category of 29.3%. The average wholesale price per pair was $24.96 and $24.99 for the quarter and nine months ended September 30, 2002 compared with $26.54 and $26.07 for the quarter and nine months ended September 30, 2001, respectively.

The breakdown of revenues (dollar amounts in thousands) is as follows. “Other” as shown below includes Royal Elastics and National Geographic brand revenues.

	Nine Months Ended September 30,						Three Months Ended September 30,
	2002		2001		% Change		2002		2001		% Change
Domestic
K-Swiss brand	$	201,171	$	167,152	20.4	%	$	67,877	$	59,019	15.0	%
Other domestic		1,626		—	N/A			814		—	N/A

Total domestic		202,797		167,152	21.3	%		68,691		59,019	16.4	%
International
K-Swiss brand		30,761		24,302	26.6	%		11,221		8,767	28.0	%
Other international		2,447		—	N/A			1,253		—	N/A

Total international		33,208		24,302	36.6	%		12,474		8,767	42.3	%

Total Revenues	$	236,005	$	191,454	23.3	%	$	81,165	$	67,786	19.7	%

Overall gross profit margins, as a percentage of revenues, increased to 45.6% for the quarter ended September 30, 2002, from 43.2% for the quarter ended September 30, 2001. Gross profit margins, as a percentage of revenues, increased to 44.5% from 41.2% for the nine months ended September 30, 2002 and 2001, respectively. Gross profit margins increased for the quarter and nine months ended September 30, 2002, primarily due to achievement of target costing objectives and higher levels of at-once business than in the prior year period.

Overall selling, general and administrative expenses increased to $23,654,000 (29.1% of revenues) and $66,021,000 (28.0% of revenues) for the quarter and nine months ended September 30, 2002, respectively, from $16,422,000 (24.3% of revenues) and $49,143,000 (25.7% of revenues) for the quarter and nine months ended September 30, 2001, respectively, increases of $7,232,000 and $16,878,000 or 44.0% and 34.3%, respectively. The increase in these expenses for the quarter and nine months ended September 30, 2002 was primarily the result of increases in advertising, payroll and related expenses (approximately half of which related to payroll due to the Royal Elastics and National Geographic brands), bonus expense for an employee incentive program and development expenses resulting from an increase in product development activities.

Overall net interest income was $159,000 (0.2% of revenues) and $610,000 (0.3% of revenues) for the quarter and nine months ended September 30, 2002, respectively, compared to $468,000 (0.7% of revenues) and $1,447,000 (0.8% of revenues) for the quarter and nine months ended September 30, 2001, respectively, representing decreases of $309,000 and $837,000, or 66.0% and 57.8%, respectively. There was a decrease in net interest income for both the quarter and nine months ended September 30, 2002 compared to the prior year periods due to significantly lower average interest rates along with lower average balances.

The Company’s effective tax rate for the nine months ended September 30, 2002 decreased to 39.6% of earnings before income tax from 39.9% for the nine months ended September 30, 2001. The income tax benefit of options exercised of $1,631,000 and $481,000 for the nine months ended September 30, 2002 and 2001, respectively, was credited to additional paid-in capital and therefore did not impact the effective tax rate.

Net earnings increased 1.3% to $8,173,000 for the quarter ended September 30, 2002 from $8,069,000 for the quarter ended September 30, 2001. Net earnings increased 27.4% to $23,909,000 for the nine months ended September 30, 2002 from $18,767,000 for the nine months ended September 30, 2001.

At September 30, 2002 and 2001, domestic futures orders with start ship dates from October 2002 and 2001 through March 2003 and 2002 were approximately $116,981,000 and $92,993,000, respectively, an increase of 25.8%. At September 30, 2002 and 2001, international futures orders with start ship dates from October 2002 and 2001 through March 2003 and 2002 were approximately $15,063,000 and $10,999,000, respectively, an increase of 36.9%. At September 30, 2002 and 2001 total futures orders with start ship dates from October 2002 and 2001 through March 2003 and 2003 were approximately $132,043,000 and $103,992,000, respectively, an increase of 27.0%. The 27.0% increase in total futures orders is comprised of a 13.6% increase in the fourth quarter 2002 futures orders and a 36.2% increase in the first quarter 2003 futures orders. “Backlog”, as of any date, represents orders scheduled to be shipped within the next six months. Backlog does not include orders scheduled to be shipped on or prior to the date of determination of backlog. These orders are not necessarily indicative of revenues for subsequent periods because: (1) the mix of “futures” and “at-once” orders can vary significantly from quarter to quarter and year to year and (2) the rate of customer order cancellations can also vary from quarter to quarter and year to year.

We did not experience any significant delays in delivering retailer orders for footwear in the United States as a result of the recent closure of west coast ports. However, since the majority of the product we sell in the United States moves through these ports, and shippers could not divert product already in transit, we expect that the port closure and subsequent transportation backlog will create delivery delays. Since the labor issues leading to the port closures have not yet been resolved, it is unclear when the current transportation backlog will be eliminated and the ports will return to normal operation. We currently estimate some delays on our early December shipments to retailers. These delivery delays may affect the timing of revenues, or if more prolonged, may result in order cancellations. However, at this time we are unable to fully assess the impact of these factors on our future financial results.

Liquidity and Capital Resources

The Company generated cash of $19,627,000 and $35,012,000 from its operating activities during the nine months ended September 30, 2002 and 2001, respectively. Cash provided by operations for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001 varied primarily due a larger increase in accounts receivable and a smaller decrease in inventories, partially offset by an increase in net earnings.

The Company had a net outflow of cash from its investing activities for the nine months ended September 30, 2002 and 2001 due to the purchase of property, plant and equipment and for the nine months ended September 30, 2001 due to a payment for an interest in a licensing agreement.

The Company had a net outflow of cash from its financing activities for the nine months ended September 30, 2002 primarily due to the purchase of treasury stock.

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 to October 24, 2002 (the date of filing of this Form 10-Q) of 10,602,464 shares at an aggregate cost totaling approximately $84,414,000.

In the opinion of management, no material capital commitments exist at September 30, 2002. The Company maintains an agreement with a bank whereby the Company may borrow, in the form of an unsecured revolving credit facility, up to $15,000,000. This facility 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. We are currently in compliance with each of these covenants. Depending on the Company’s future growth rate, funds may be required by operating activities. With continued use of its revolving credit facility and internally generated funds, the Company believes its present and currently anticipated sources of capital are sufficient to sustain its anticipated capital needs for the remainder of 2002.

The Company’s working capital increased $10,652,000 to $129,606,000 at September 30, 2002 from $118,954,000 at December 31, 2001.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes from the information previously reported under Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.

ITEM 4.

CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Vice President of Finance and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company’s President and Chief Executive Officer along with the Company’s Vice President of Finance and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

PART II—OTHER INFORMATION

ITEM 1:

Legal Proceedings.

None.

ITEM 2:

Changes in Securities.

None.

ITEM 3:

Defaults Upon Senior Securities.

None.

ITEM 4:

Submission of Matters to a Vote of Security Holders.

None.

ITEM 5:

Other Information.

None.

ITEM 6:

Exhibits and Reports on Form 8-K:

(a) Exhibits


3.1		Restated Certificate of Incorporation of K-Swiss Inc.

3.2		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)

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)

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 5-1 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		Amendment to K-Swiss Inc. 401(k) and Profit Sharing Plan (incorporated by reference to exhibit 10 to the Registrant’s Form 10-Q for the quarter ended March 31, 2002).

10.10		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).

10.11		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).

10.12		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)

10.13		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)

10.14		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).

10.15		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)

10.16		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)

10.17		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)

10.18		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)

10.19		Business Loan Agreement (incorporated by reference to exhibit 10 to the Registrant’s Form 10-Q for the quarter ended June 30, 2001)

10.20		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)

10.21		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)

99.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	K-Swiss Inc.

Date: October 23, 2002	By:	/s/ GEORGE POWLICK
		George Powlick, Vice President Finance and Chief Financial Officer

I, Steven Nichols, certify that:

I have reviewed this quarterly report on Form 10-Q of K-Swiss Inc.;

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: October 23, 2002


By:		/s/ STEVEN NICHOLS
		Steven Nichols President and Chief Executive Officer

I, George Powlick, certify that:

I have reviewed this quarterly report on Form 10-Q of K-Swiss Inc.;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: October 23, 2002


By:		/s/ GEORGE POWLICK
		George Powlick Vice President of Finance and Chief Financial Officer

EXHIBIT INDEX

Exhibit Number	Description	Page

3.1	Restated Certificate of Incorporation of K-Swiss Inc.

10.9	Amendment to K-Swiss Inc. 401(k) and Profit Sharing Plan (incorporated by reference to exhibit 10 to the Registrant’s Form 10-Q for the quarter ended March 31, 2002).

99.1	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to the Sarbanes-Oxley Act of 2002.

EX-3.1 3 dex31.htm RESTATED CERTIFICATION OF INCORPORATION 8/7/2002 Restated Certification of Incorporation 8/7/2002

EXHIBIT 3.1

RESTATED

CERTIFICATE OF INCORPORATION

K-SWISS INC.

Steven B. Nichols certifies that:

He is the President of K-Swiss Inc., a Delaware corporation (the “Corporation”).

The Corporation’s original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on April 16, 1990.

The Certificate of Incorporation is restated as set forth in the Restated Certificate of Incorporation attached hereto, as Exhibit A (the “Restated Certificate”).

The foregoing Restated Certificate has been duly approved by the Board of Directors of the Corporation in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware.

The Restated Certificate only restates and integrates and does not further amend the provisions of the Corporation’s Certificate of Incorporation as amended or supplemented, and that there is no discrepancy between those provisions and the provisions of the Restated Certificate.

In accordance with Section 245(b) of the General Corporation Law of the State of Delaware, the Restated Certificate merely restates and integrates, but does not further amend, the Corporation’s Certificate of Incorporation; therefore the Restated Certificate may be adopted by the Board of Directors without a vote of the stockholders of the Corporation.

I further declare under penalty of perjury that the matters set forth in this Certificate are true and correct of my own knowledge.


Date: August 7, 2002	By:	/s/ STEVEN B. NICHOLS
		Steven B. Nichols, President

EXHIBIT A

RESTATED

CERTIFICATE OF INCORPORATION

K-SWISS INC.

ARTICLE I: Name

The name of the Corporation is K-Swiss Inc.

ARTICLE II: Definitions

For purposes of this Certificate of Incorporation, the following terms shall have the meanings indicated:

(A) “Board” shall mean the Board of Directors of the Corporation.

(B) “Sale” shall mean any merger or consolidation of the Corporation or any sale, lease or other disposition of all or substantially all of the Corporation’s assets.

(C) “Voting Power,” with respect to any matter, means the aggregate number of votes of all classes or series of capital stock of the Corporation eligible to be cast with respect to such matter voting as a single class.

ARTICLE III: Registered Office

The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, and the name of its registered agent at that address is The Corporation Trust Company.

ARTICLE IV: Purpose

The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law.

ARTICLE V: Authorized Capital Stock

SECTION 1. Number of Authorized Shares. The total number of shares of all classes of stock that the Corporation shall have authority to issue is forty-eight million (48,000,000) shares, consisting of forty-six million (46,000,000) shares of common stock, par value $.01 per share (the “Common Stock”), and two million (2,000,000) shares of preferred stock, par value $.01 per share (the “Preferred Stock”).

SECTION 2. Common Stock.

The Common Stock shall consist solely of “Class A Common Stock” and “Class B Common Stock.” The authorized number of shares of Class A Common Stock shall be thirty-six million (36,000,000) and the authorized number of shares of Class B Common Stock shall be ten million (10,000,000); provided that (a) the authorized number of shares of Class A Common Stock shall be increased by any concurrent decrease determined by the Board in the authorized number of shares of Class B Common Stock and (b) the authorized number of shares of Class A Common Stock shall not be reduced and the authorized number of shares of Class B Common Stock shall not be increased. Subject to the foregoing, the Board is hereby authorized to fix the designations, powers and preferences, and relative, participating, optional or other rights, if any, of the Class A Common Stock and of the Class B Common Stock and qualifications, limitations or restrictions thereof, including, without limitation, dividend rights (and whether dividends are cumulative), conversion rights, if any, voting rights (including the number of votes, if any, per share, as well as the number of members, if any, of the Board or the percentage of members, if any, of the Board each class or series of Common Stock may be entitled to elect), rights and terms of redemption (including sinking fund provisions,

if any), redemption price and liquidation preferences of the Class A Common Stock and the Class B Common Stock. The Board of Directors of the Corporation may authorize the issuance of shares of Class A Common Stock and shares of Class B Common Stock, from time to time, subject to the foregoing and to provisions of the Certificate of Designations of Class A Common Stock and the Certificate of Designations of Class B Common Stock, respectively. Notwithstanding the foregoing, the Board shall have no power to alter the rights with respect to Class A Common Stock or Class B Common Stock once such rights have been fixed by the Board. The Board of Directors of the Corporation has previously fixed the designations, powers and preferences, and relative, participating, optional and other rights of the Class A Common Stock and the Class B Common Stock, and the qualifications, limitations or restrictions thereof, as follows:

SECTION 2.1 Designations of Class A Common Stock.

SECTION 2.1.1 Dividends and Distributions. The holders of shares of Class A Common Stock, along with holders of shares of Class B Common Stock and the holders of any other duly designated class or series of the Corporation’s Common Stock shall be entitled to receive such dividends, payable in cash or otherwise, as may be declared thereon by the Board from time to time out of assets or funds of the Corporation legally available therefor, provided that each share of Class A Common Stock and Class B Common Stock shall be equal in respect of rights to dividends and other distributions in cash, stock or property of the Corporation, and provided that in the case of dividends or other distributions payable in Class A Common Stock or Class B Common Stock, including distributions pursuant to stock split-ups or divisions of Class A Common Stock or Class B Common Stock which occur after the first date upon which the Corporation has issued shares of both Class A Common Stock and Class B Common Stock, only shares of Class A Common Stock shall be distributed with respect to Class A Common Stock and only shares of Class B Common Stock shall be distributed with respect to Class B Common Stock, unless the Board of Directors of the Corporation determines in its discretion that it is more desirable to distribute shares of Class A Common Stock with respect to Class B Common Stock, in which case shares of Class A Common Stock shall be distributed with respect to Class B Common Stock.

SECTION 2.1.2 Voting Rights. The holders of shares of Class A Common Stock shall have the following voting rights:

(a) Each share of Class A Common Stock shall entitle the holder thereof to one vote on all matters submitted to a vote of the stockholders of the Corporation.

(b) Except as otherwise provided in this Certificate of Incorporation or by law, the holders of shares of Class A Common Stock and the holders of shares of Class B Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation; provided, however, that in the election of directors the holders of shares of Class A Common Stock shall vote as one separate class and the holders of shares of Class B Common Stock shall vote as one separate class.

Commencing with the first annual meeting of stockholders held after the issuance of shares of Class A Common Stock, the holders of shares of Class A Common Stock shall be entitled to elect two of the directors of the Corporation; provided, however, that (A) if the authorized number of directors of the Corporation, excluding the number of directors, if any, authorized pursuant to the second sentence of Article VIII of this Certificate of Incorporation, is greater than or equal to 11 and less than or equal to 15, the holders of shares of Class A Common Stock shall be entitled to elect three of the directors of the Corporation; and (B) if the authorized number of directors of the Corporation, excluding the number of directors, if any, authorized pursuant to the second sentence of Article VIII of this Certificate of Incorporation, is greater than 15, the holders of shares of Class A Common Stock shall be entitled to elect four of the directors of the Corporation. Notwithstanding the foregoing, if at any time no shares of Class B Common Stock are outstanding, holders of Class A Common Stock shall be entitled to elect all of the directors of the Corporation (excluding directors, if any, authorized pursuant to the second sentence of Article VIII of this Certificate of Incorporation). The directors so elected by holders of shares of Class A Common Stock, voting as a class, shall serve until the annual meeting at which the term of office of such director’s class shall expire or until such director’s successor shall be elected and shall qualify, and at each subsequent meeting of stockholders at which the directorship of any director elected by the vote of holders of shares of Class A Common Stock under the voting rights set forth in this paragraph is up for election, said class voting rights shall apply in the reelection of such director or in the election of such director’s successor.

(d) Nothing herein shall prevent the Board of Directors from taking any action (i) to fix or alter the voting powers, designations, preferences and relative, participating, optional or other rights, if any, or the qualifications, limitations or restrictions of the Class A Common Stock, provided that at the time such action becomes effective, no shares of Class A Common Stock shall have been issued, or (ii) to increase the number of authorized shares of Class A Common Stock in a number equal to any concurrent decrease in the number of authorized shares of Class B Common Stock; provided that the Board of Directors may not take any action to decrease the number of authorized shares of Class A Common Stock. Any shares of Class A Common Stock purchased or otherwise acquired by the Corporation may be held as treasury shares or may be retired and canceled and reissued.

SECTION 2.1.3 Liquidation, Dissolution or Winding Up. In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation, the holders of each series of Preferred Stock shall be entitled to receive, out of the net assets of the Corporation, an amount for each share of such series of Preferred Stock equal to the amount fixed and determined by the Board in any resolution or resolutions provided for the issuance of such series, plus an amount equal to all dividends accrued and unpaid on shares of such series to the date fixed for distribution, before any of the assets of the Corporation shall be distributed or paid over to the holders of Class A Common Stock or Class B Common Stock. After payment in full of said amounts to the holders of Preferred Stock of all series, the remaining assets of the Corporation shall be divided among and paid ratably to the holders of Class A Common Stock and Class B Common Stock.

SECTION 2.1.4 No Redemption. The shares of Class A Common Stock shall not be redeemable. Notwithstanding the foregoing, the Corporation may acquire shares of Class A Common Stock in any other manner permitted by law or by this Certificate of Incorporation.

SECTION 2.1.5 Nonconvertibility of Class A Common Stock. The shares of Class A Common Stock shall not be convertible into any other class or series of the Corporation’s securities.

SECTION 2.1.6 Amendment. This Certificate of Incorporation shall not be amended in any manner that would materially and adversely alter or change the powers or special rights of the Class A Common Stock without the affirmative vote of the holders of at least 66-2/3% of the outstanding shares of Class A Common Stock.

SECTION 2.2 Designations of Class B Common Stock.

SECTION 2.2.1 Dividends and Distributions. The holders of shares of Class B Common Stock, along with holders of shares of Class A Common Stock and the holders of any other duly designated class or series of Common Stock shall be entitled to receive such dividends, payable in cash or otherwise, as may be declared thereon by the Board from time to time out of assets or funds of the Corporation legally available therefor, provided that each share of Class A Common Stock and Class B Common Stock shall be equal in respect of rights to dividends and other distributions in cash, stock or property of the Corporation, and provided that in the case of dividends or other distributions payable in Class B Common Stock or Class A Common Stock, including distributions pursuant to stock split-ups or divisions of Class B Common Stock or Class A Common Stock which occur after the first date upon which the Corporation has issued shares of both Class B Common Stock and Class A Common Stock, only shares of Class A Common Stock shall be distributed with respect to Class A Common Stock and only shares of Class B Common Stock shall be distributed with respect to Class B Common Stock, unless the Board of Directors of the Corporation determines in its discretion that it is more desirable to distribute shares of Class A Common Stock with respect to Class B Common Stock, in which case shares of Class A Common Stock shall be distributed with respect to Class B Common Stock.

SECTION 2.2.2 Voting Rights. The holders of shares of Class B Common Stock shall have the following voting rights:

(a) Each share of Class B Common Stock shall entitle the holder thereof to ten votes on all matters submitted to a vote of the stockholders of the Corporation.

(b) Except as otherwise provided in this Certificate of Incorporation or by law, the holders of shares of Class B Common Stock and the holders of shares of Class A Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation; provided, however, that in the election of directors the holders of shares of Class B Common Stock shall vote as one separate class and the holders of shares of Class A Common Stock shall vote as one separate class.

So long as any shares of Class B Common Stock are outstanding, the holders of shares of Class B Common Stock shall be entitled to elect all of the directors at the first annual meeting of stockholders of the Corporation; provided, however, that so long as any shares of Class B Common Stock are outstanding after the issuance by the Corporation of shares of Class A Common Stock, the holders of Class B Common Stock shall be entitled to elect all of the directors except that number of directors entitled to be elected by holders of Class A Common Stock. The directors so elected by holders of shares of Class B Common Stock, voting as a class, shall serve until the annual meeting at which the term of office of such director’s class shall expire or until such director’s successor shall be elected and shall qualify, and at each subsequent meeting of stockholders at which the directorship of any director elected by the vote of holders of shares of Class B Common Stock under the voting rights set forth in this paragraph is up for election, said class voting rights shall apply in the reelection of such director or in the election of such director’s successor.

(d) Nothing herein shall prevent the Board of Directors from taking any action (i) to fix or alter the voting powers, designations, preferences and relative, participating, optional or other rights, if any, or the qualifications, limitations or restrictions of the Class B Common Stock, provided that at the time such action becomes effective, no shares of Class B Common Stock shall have been issued, or (ii) to decrease the number of authorized shares of Class B Common Stock in a number equal to any concurrent increase in the number of authorized shares of Class A Common Stock, but not below the number of shares of Class B Common Stock then outstanding; provided that the Board of Directors may not take any action to increase the number of authorized shares of Class B Common Stock. Any shares of Class B Common Stock purchased or otherwise acquired by the Corporation shall be retired and canceled and shall not be reissued.

SECTION 2.2.3 Transfer of Class B Stock.

A. Except as provided in Section 2.2.3(B) hereof or pursuant to a written proxy executed on the Record Date (as defined in Section 2.2.3(A)(iii) below) and disclosed in writing to the Corporation on or before the Record Date, no person holding shares of Class B Common Stock or any beneficial interest therein (a “Class B Holder”) may voluntarily or involuntarily transfer (including without limitation the power to vote such Class B Shares by proxy or otherwise), sell, assign, devise or bequeath any of such Class B Holder’s interest in his Class B Shares, and the Corporation and the transfer agent for the Class B Common Stock, if any (the “Transfer Agent”), shall not register the transfer of such shares of Class B Common Stock, whether by sale, grant of proxy, assignment, gift, devise, bequest, appointment or otherwise, except to a “Permitted Transferee” of such Class B Holder which term shall include the Corporation and shall have the following additional meanings in the following cases:

(i) In the case of a Class B Holder who is a natural person holding record and beneficial ownership of the shares of Class B Common Stock in question, “Permitted Transferee” means: (a) the spouse of such Class B Holder (the “Spouse”); (b) a lineal descendant of a great grandparent of such Class B Holder or of the Spouse (a “Descendant”); (c) the trustee of a trust (including a voting trust) for the benefit of such Class B Holder, the Spouse, other Descendant, or an organization contributions to which are deductible for federal income, estate or gift tax purposes (a “Charitable Organization”), and for the benefit of no other person; provided that such trust may grant a general or special power of appointment to the Spouse or to the Descendants and may permit trust assets to be used to pay taxes, legacies and other obligations of the trust or of the estate of such Class B Holder payable by reason of the death of such Class B Holder or the death of the Spouse or a Descendant, and that such trust (subject to the grant of a power of appointment as provided above) must prohibit transfer of shares of Class B Common Stock or a beneficial interest therein to persons other than Permitted Transferees as defined in subparagaph (ii) of this Section 2.2.3(A) (a “Trust”); (d) a Charitable Organization established by such Class B Holder or a Descendant; (e) an Individual Retirement Account, as defined in Section 408(a) of the Internal Revenue Code, of which such Class B Holder is a participant or beneficiary, provided that such Class B Holder is vested with the power to direct the investment of funds deposited into such Individual Retirement Account and to control the voting of securities held by such Individual Retirement Account (an “IRA”); (f) a pension, profit sharing, stock bonus or other type of plan or trust of which such Class B Holder is a participant or beneficiary and which satisfies the requirements for qualification under Section 401 of the Internal Revenue Code, provided that such Class B Holder is vested with the power to direct the investment of funds deposited into such plan or trust and to control the voting of securities held by such plan or trust (a “Plan”); (g) a corporation all of the outstanding capital stock of which is owned by, or a partnership all of the partners of which are, such Class B Holder, the Spouse and/or other Descendants, provided that if any share (or any interest in any share) of capital stock of such a corporation (or of any survivor of a merger or consolidation of such corporation), or any partnership interest in such a partnership, is acquired by any person who is not within such class of persons, all shares

of Class B Common Stock then held by such corporation or partnership, as the case may be, shall be deemed without further act on anyone’s part to be converted into shares of Class A Common Stock and stock certificates formerly representing such shares of Class B Common Stock shall thereupon and thereafter be deemed to represent the like number of shares of Class A Common Stock in the manner set forth in Section 2.2.4(C) hereof; and (h) in the event of the death of such Class B Holder, such Class B Holder’s estate.

(ii) In the case of a Class B Holder holding the shares of Class B Common Stock in question as trustee of an IRA, a Plan or a Trust other than a Trust described in subparagraph (iii) of this Section 2.2.3(A), “Permitted Transferee” means: (a) the participant or beneficiary of such IRA, such Plan or such Trust, or the person who transferred such shares of Class B Common Stock to such IRA, such Plan or such Trust, and (b) a Permitted Transferee of any such person or persons determined pursuant to subparagraph (i) of this Section 2.2.3(A).

(iii) In the case of a Class B Holder holding the shares of Class B Common Stock in question as trustee pursuant to a Trust which was irrevocable on the Record Date (as defined below), “Permitted Transferee” means any person as of the Record Date to whom or for whose benefit principal may be distributed either during or at the end of the term of such Trust whether by power of appointment or otherwise. For purposes of this Certificate of Incorporation, there shall be one “Record Date,” which date shall be the record date for determining the persons to whom the Class B Common Stock is first distributed by the Corporation other than the date on which the Corporation first distributed Class B Common Stock to a corporation that immediately after such distribution owned all of the issued and outstanding shares of capital stock of the Corporation.

(iv) In the case of Class B Holder holding record (but not beneficial) ownership of the shares of Class B Common Stock in question as nominee for the person who was the beneficial owner thereof on the Record Date, “Permitted Transferee” means such beneficial owner and a Permitted Transferee of such beneficial owner determined pursuant to subparagraphs (i), (ii), (iii), (v) or (vi) of this Section 2.2.3(A), as the case may be.

(v) In the case of a Class B Holder which is a partnership holding record and beneficial ownership of the shares of Class B Common Stock in question, “Permitted Transferee” means any partner of such partnership, provided that such partner was a partner in the partnership at the time it first became a Class B Holder.

(vi) In the case of a Class B Holder which is a corporation other than a Charitable Organization described in clause (d) of subparagraph (i) of this Section 2.2.3(A) holding record and beneficial ownership of the shares of Class B Common Stock in question (a “Corporate Holder”), “Permitted Transferee” means (a) any shareholder of such Corporate Holder as of the Record Date or any Permitted Transferee of any such shareholder determined pursuant to subparagraph (i) of this Section 2.2.3(A); and (b) the survivor (the “Survivor”) of a merger or consolidation of such Corporate Holder, so long as such Survivor is controlled, directly or indirectly, by those shareholders of the Corporate Holder who were shareholders of such Corporate Holder as of the Record Date or any Permitted Transferees of such shareholders determined pursuant to subparagraph (i) of this Section 2.2.3(A).

(vii) In the case of a Class B Holder which is the estate of a deceased Class B Holder, or which is the estate of a bankrupt or insolvent Class B Holder, and provided such deceased, bankrupt or insolvent Class B Holder, as the case may be, held record and beneficial ownership of the shares of Class B Common Stock in question, “Permitted Transferee” means a Permitted Transferee of such deceased, bankrupt or insolvent Class B Holder as determined pursuant to subparagraphs (i), (v) or (vi) of this Section 2.2.3(A), as the case may be.

B. Notwithstanding anything to the contrary set forth herein, any Class B Holder may pledge such Holder’s shares of Class B Common Stock to a pledgee pursuant to a bona fide pledge of such shares as collateral security for indebtedness due to the pledgee, provided that such shares shall not be transferred to, registered in the name of or voted by the pledgee and shall remain subject to the provisions of this Section 2.2.3. In the event of foreclosure or other similar action by the pledgee, such pledged shares of Class B Common Stock may only be transferred to a Permitted Transferee of the pledgor or converted into shares of Class A Common Stock, as the pledgee may elect.

C. For purpose of this Section 2.2.3:

(i) The relationship of any person that is derived by or through legal adoption shall be considered a natural relationship.

(ii) Each joint owner of shares or owner of a community property interest in shares of Class B Common Stock shall be considered a “Class B Holder” of such shares.

(iii) A minor for whom shares of Class B Common Stock are held pursuant to a Uniform Transfer to Minors Act or similar law shall be considered a Class B Holder of such shares.

(iv) Unless otherwise specified, the term “person” means and includes natural persons, corporations, partnerships, unincorporated associations, firms, joint ventures, trusts and all other entities.

D. Any purported transfer of shares of Class B Common Stock not permitted hereunder shall be void and of no effect, and the purported transferee shall have no rights as a stockholder of the Corporation and no other rights against or with respect to the Corporation. The Corporation may, as a condition to the transfer or the registration of transfer of shares of Class B Common Stock to a purported Permitted Transferee, require the furnishing of such affidavits or other proof as it deems necessary to establish that such transferee is a Permitted Transferee. Each certificate representing shares of Class B Common Stock shall be endorsed with a legend that states that shares of Class B Common stock are not transferable other than to certain transferees and are subject to certain restrictions as set forth in the Certificate of Designations of Class B Common Stock previously filed by the Corporation with the Secretary of State of the State of Delaware.

SECTION 2.2.4 Conversion of Class B Common Stock.

A. Each share of Class B Common Stock, at the option of its holder, may at any time be converted into one (1) fully paid and nonassessable share of Class A Common Stock, subject to adjustment as set forth in paragraph E of this Section 2.2.4. Such right shall be exercised by the surrender of the certificate representing such share of Class B Common Stock to be converted to the Corporation at any time during normal business hours at the principal executive offices of the Corporation or at the office of the Transfer Agent, accompanied by a written notice of the election by the holder thereof to convert and (if so required by the Corporation or the Transfer Agent) by instruments of transfer, in form satisfactory to the Corporation and to the Transfer Agent, duly executed by such holder or such holder’s duly authorized attorney, and transfer tax stamps or funds therefor, if required pursuant to paragraph G of this Section 2.2.4.

B. If, on the record date for any annual meeting of stockholders, the number of shares of Class B Common Stock then outstanding is less than 10% of the aggregate number of shares of Class B Common Stock and Class A Common Stock then outstanding, as determined by the Secretary of the Corporation, each share of Class B Common Stock then issued or outstanding shall thereupon be converted automatically into one (1) fully paid and nonassessable share of Class A Common Stock (subject to adjustment as set forth in paragraph E of this Section 2.2.4), and each share of Class B Common Stock then authorized but unissued shall thereupon automatically be deemed an authorized but unissued share of Class A Common Stock (subject to adjustment as set forth in paragraph E of this Section 2.2.4). Upon making such determination, the Secretary of the Corporation shall promptly request from each holder of record of shares of Class B Common Stock that each such holder promptly deliver, and such holder shall promptly deliver, certificates representing all shares of Class B Common Stock held by such holder to the Corporation for conversion hereunder, together with instruments of transfer, in form satisfactory to the Corporation and Transfer Agent, duly executed by such holder or such holder’s duly authorized attorney, and together with transfer tax stamps of funds therefor, if required pursuant to paragraph G of this Section 2.2.4.

C. If the beneficial ownership (as determined under Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934) of any share or any interest in any share of Class B Common Stock changes, voluntarily or involuntarily, such that each new beneficial owner of such share of Class B Common Stock is not a “Permitted Transferee” (as defined in Section 2.2.3(A) hereof) of the beneficial owner of such share of Class B Common Stock immediately prior to such change in beneficial ownership, then each such share of Class B Common Stock shall thereupon be converted automatically into one (1) fully paid and nonassessable share of Class A Common Stock (subject to adjustment as set forth in paragraph E of this Section 2.2.4). A determination by the Secretary of the Corporation that a change in beneficial ownership requires conversion under this paragraph shall be conclusive. Upon making such determination, the Secretary of the Corporation shall promptly request from the holder of record of each such share of Class B Common Stock that each such holder promptly deliver, and each such holder shall promptly deliver, the certificate representing each such share of Class B Common Stock to the Corporation for conversion hereunder, together with instruments of transfer, in form satisfactory to the Corporation and Transfer Agent, duly executed by such holder or such holder’s duly authorized attorney, and together with transfer tax stamps or funds therefor, if required pursuant to paragraph G of this Section 2.2.4.

D. As promptly as practicable following the surrender for conversion of a certificate representing shares of Class B Common Stock in the manner provided in paragraphs A, B or C, as applicable, of this Section 2.2.4 and the payment in cash of any amount required by the provisions of paragraphs A, B, C and G of this Section 2.2.4,

the Corporation will deliver or cause to be delivered at the office of the Transfer Agent to or upon the written order of the holder of such certificate, a certificate or certificates representing the number of full shares of Class A Common Stock issuable upon such conversion, issued in such name or names as such holder may direct. In the case of a conversion under paragraph A of this Section 2.2.4, such conversion shall be deemed to have been made immediately prior to the close of business on the date of the surrender of the certificate representing shares of Class B Common Stock. In the case of a conversion under paragraph B of this Section 2.2.4, such conversion shall be deemed to have occurred on the record date for such annual meeting on which the condition set forth in paragraph B is determined by the Secretary of the Corporation to have been met. In the case of a conversion under paragraph C of this Section 2.2.4, such conversion shall be deemed to have been made on the date that the beneficial ownership of such share has changed as set forth in paragraph C. Upon the date any conversion under paragraph A of this Section 2.2.4 is made, and all rights of the holder of such shares as such holder shall cease at such time, and the person or persons in whose name or names the certificate or certificates representing the shares of Class A Common Stock are to be issued shall be treated for all purposes as having become the record holder or holders of such shares of Class A Common Stock at such time; provided, however, that any such surrender and payment on any date when the stock transfer books of the Corporation shall be closed shall constitute the person or persons in whose name or names the certificate or certificates representing shares of Class A Common Stock are to be issued as the record holder or holders thereof for all purposes immediately prior to the close of business on the next succeeding day on which stock transfer books are open. Upon the date any conversion under paragraph B of this Section 2.2.4 is made, all rights of the holders of shares of Class B Common Stock shall cease, and such holders shall be treated for all purposes as having become the record holders of such shares of Class A Common Stock at such time. Upon the date any conversion under paragraph C of this Section 2.2.4 is made, all rights of the holder of such share as such holder shall cease at such time, and new beneficial owner or owners of such shares shall be treated for all purposes as having become the record holder or holders of such shares of Class A Common Stock at such time.

E. In the event that the Corporation shall issue shares of Class A Common Stock to the holders of Class A Common Stock as a stock dividend or stock split, or in the event that the Corporation reduces the number of outstanding shares of Class A Common Stock in a reserve stock split or stock combination, then the number of shares of Class A Common Stock issuable upon conversion of a share of Class B Common Stock shall be adjusted such that the holder of the shares of Class B Common Stock shall receive the number of shares of Class A Common Stock that such holder would have received if such conversion had occurred immediately prior to the record date for the first such stock split, stock dividend, reverse stock split or stock combination of the Class A Common Stock, as the case may be. In the event that the Corporation shall issue shares of Class B Common Stock to the holders of Class B Common Stock as a stock dividend or stock split, or in the event that the Corporation reduces the number of outstanding shares of Class B Common Stock in a reverse stock split or stock combination, then the number of shares of Class A Common Stock issuable upon conversion of a share of Class B Common Stock shall be adjusted such that the holder of shares of Class B Common Stock shall receive the number of shares of Class A Common Stock that such holder would have received if such conversion had occurred immediately prior to the record date for the first such stock split, stock dividend, reverse stock split or stock combination of the Class B Common Stock, as the case may be. No adjustment in respect of dividends (other than stock dividends) shall be made upon the conversion of any share of Class B Common Stock, provided, however, that if a share shall be converted subsequent to the record date for the payment of a dividend (other than a stock dividend) or other distribution on shares of Class B Common Stock but prior to such payment, then the registered holder of such share at the close of business on such record date shall be entitled to receive the dividend (other than a stock dividend) or other distribution payable on such share on such date notwithstanding the conversion thereof or the Corporation’s default in payment of the dividend (other than a stock dividend) due on such date.

F. The Corporation covenants that it will at all times reserve and keep available, solely for the purpose of issue upon conversion of the outstanding shares of Class B Common Stock, such number of shares of Class A Common Stock as shall be issuable upon the conversion of all such outstanding shares of Class B Common Stock, provided that nothing contained herein shall be construed to preclude the Corporation from satisfying its obligations in respect of the conversion of the outstanding shares of Class B Common Stock by delivery of purchased shares of Class A Common Stock which are held in the treasury of the Corporation. The Corporation covenants that if any shares of Class A Common Stock required to be reserved for purposes of conversion hereunder require registration with or approval of any governmental authority under any federal or state law before such shares of Class A Common Stock may be issued upon conversion, the Corporation will cause such shares to be duly registered or approved, as the case may be. The Corporation will endeavor to list the shares of Class A Common Stock required to be delivered upon conversion prior to such delivery upon each national securities exchange upon which the outstanding Class A Common Stock is listed at the time of such delivery. The Corporation covenants that all shares of Class A Common Stock which shall be issued upon conversion of the shares of fully paid and nonassessable Class B Common Stock, will, upon issue, be fully paid and nonassessable and not subject to any preemptive rights.

G. The issuance of certificates for shares of Class A Common Stock upon conversion of shares of Class B Common Stock shall be made without charge for any stamp or other similar tax in respect of such issuance. However, if any such certificate is to be issued in a name other than that of the holder of the share or shares of Class B Common Stock converted, then the person or persons requesting the issuance thereof shall pay to the Corporation the amount of any tax which may be payable in respect of any transfer involved in such issuance or shall establish to the satisfaction of the Corporation that such tax has been paid.

SECTION 2.2.5 Liquidation, Dissolution or Winding Up. In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation, the holders of each series of Preferred Stock shall be entitled to receive, out of the net assets of the Corporation, an amount for each share of such series of Preferred Stock equal to the amount fixed and determined by the Board in any resolution or resolutions provided for the issuance of such series, plus an amount equal to all dividends accrued and unpaid on shares of such series to the date fixed for distribution, before any of the assets of the Corporation shall be distributed or paid over to the holders of Class B Common Stock or Class A Common Stock. After payment in full of said amounts to the holders of Preferred Stock of all series, the remaining assets of the Corporation shall be divided among and paid ratably to the holders of Class B Common Stock and Class A Common Stock.

SECTION 2.2.6 No Redemption. The shares of Class B Common Stock shall not be redeemable. Notwithstanding the foregoing, the Corporation may acquire shares of Class B Common Stock in any other manner permitted by law or this Certificate of Incorporation.

SECTION 2.2.7 Issuances of Class B Common Stock. Notwithstanding anything herein to the contrary, the Corporation shall not issue or reissue any shares of Class B Common Stock (other than pursuant to a contractual obligation of the Corporation to The Biltrite Corporation, a Delaware corporation, which contractual obligation exists as of the Record Date (as defined in Section 2.2.3 hereof) or pursuant to a stock split, stock combination or stock dividend) without the prior affirmative vote of the holders of at least 85% of the outstanding shares of Class B Common Stock and the holders of at least a majority of the outstanding shares of Class A Common Stock.

SECTION 2.2.8 Amendment. This Certificate of Incorporation shall not be amended in any manner that would materially and adversely alter or change the powers or special rights of the Class B Common Stock without the affirmative vote of the holders of at least 85% of the outstanding shares of Class B Common Stock.

SECTION 3. Preferred Stock. The Board of Directors of the Corporation may authorize the issuance of shares of Preferred Stock from time to time in one or more series. Shares of Preferred Stock that are redeemed, purchased or otherwise acquired by the Corporation may be reissued except as otherwise provided by law. The Board is hereby authorized to fix or alter the designations, powers and preferences, and relative, participating, optional or other rights, if any, and qualifications, limitations or restrictions thereof, including, without limitation, dividend rights (and whether dividends are cumulative), conversion rights, if any, voting rights (including the number of votes, if any, per share, as well as the number of members, if any, or the Board or the percentage of members, if any, of the Board each class or series of Preferred Stock may be entitled to elect), rights and terms of redemption (including sinking fund provisions, if any), redemption price and liquidation preferences of any wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, and to increase or decrease the number of shares of such series subsequent to the issuance of shares of such series, but not below the number of shares of such series then outstanding. Notwithstanding the foregoing, the Board shall have no power to alter the rights of any shares of Preferred Stock then outstanding.

SECTION 4. Distributions Upon Liquidation. In the event of any dissolution, liquidation or winding up of the affairs of the Corporation in accordance with applicable law, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation, the holders of each series of Preferred Stock shall be entitled to receive, out of the net assets of the Corporation, an amount for each share of such series of Preferred Stock equal to the amount fixed and determined by the Board in the resolution or resolutions creating such series and providing for the issuance of such shares, plus an amount equal to all dividends accrued and unpaid on shares of such series to the date fixed for distribution, and no more, before any of the assets of the Corporation shall be distributed or paid over to the holders of Common Stock. After payment in full of said amounts to the holders of Preferred Stock of all series, the remaining assets and funds of the Corporation shall be divided among and paid to the holders of shares of each class or series of Common Stock and shares of Common Stock without class or series in accordance with the resolution or resolutions of the Board creating such classes and series and providing for the issuance of such shares. If, upon such dissolution, liquidation or winding up, the assets of the Corporation distributable as aforesaid among the holders of Preferred Stock of all series shall be insufficient to permit full payment

to them of said preferential amounts, then such assets shall be distributed ratably among such holders of Preferred Stock in proportion to the respective total amounts which they shall be entitled to receive as provided in this Section 4.

ARTICLE VI: Annual Meetings of Stockholders

The annual meeting of stockholders shall be held at such time, on such date and at such place (within or without the State of Delaware) as provided in the Bylaws of the Corporation. Subject to any requirement of applicable law, the books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the Board or in the Bylaws of the Corporation. Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide.

ARTICLE VII: Call of Special Meetings of Stockholders

Special meetings of stockholders of the Corporation for any purpose or purposes may be called at any time by the Chairman of the Board, the President or a majority of the members of the Board. Special meetings of stockholders of the Corporation may not be called by any other person or persons or in any other manner.

ARTICLE VIII: Number of Directors

The number of directors that shall constitute the whole Board shall be as specified in Section 3.2 of the Bylaws of the Corporation, as the same may be amended from time to time, but in no event shall such number be less than three (3) nor greater than twenty (20). Notwithstanding the foregoing, during any period in which the holders of any one or more series of Preferred Stock, voting as a class, shall be entitled to elect a specified number of directors by reason of dividend arrearages or other contingencies giving them the right to do so, then and during such time as such right continues, (A) the then otherwise authorized number of directors shall be increased by such specified number of directors and the holders of shares of such series of Preferred Stock, voting as a class, shall be entitled to elect such specified number of directors in accordance with the procedure set forth in the resolution or resolutions of the Board creating such series and providing for the issuance of such shares and (B) each such additional director shall serve until his or her successor shall be elected and shall qualify, or until his or her right to hold such office terminates pursuant to the resolution or resolutions of the Board creating such series of Preferred Stock and providing for the issuance of shares of such series, whichever occurs earlier. Whenever the holders of shares of such series of Preferred Stock are divested of such right to elect directors pursuant to the resolution or resolutions of the Board creating such series and providing for the issuance of such shares, the terms of office of all directors elected by the holders of such series of Preferred Stock pursuant to such rights, or elected to fill any vacancies resulting from the death, resignation or removal of directors so elected by the holders of such series, shall forthwith terminate and the authorized number of directors shall be reduced accordingly.

ARTICLE IX: Stockholder Action by Written Consent

Any election of directors or other action by the stockholders of the Corporation may be effected at an annual or special meeting of stockholders or by written consent in lieu of such a meeting. The record date with respect to the determination of stockholders entitled to consent in writing to any action shall be the first date on which a signed written consent setting forth the action to be taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Any action by written consent shall be deemed effective as of the first day on which written consents signed by a sufficient number of holders to take such action are delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Any delivery under this Article IX to the Corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested.

ARTICLE X: Election of Directors

SECTION 1. Term of Office. At each annual meeting of stockholders of the Company, directors shall be elected to hold office until the next annual meeting. Each director shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal.

SECTION 2. Stockholder Nominees. Nominations by stockholders of persons for election to the Board shall be made only in accordance with the procedures set forth in the Bylaws of the Corporation.

ARTICLE XI: Liability and Indemnification

To the fullest extent permitted by the Delaware General Corporation Law, as the same exists or may hereafter be amended (provided that the effect of any such amendment shall be prospective only) (the “Delaware law”), a director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as director. The Corporation shall indemnify, in the manner and to the fullest extent permitted by the Delaware Law (but in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), any person (or the estate of any person) who is or was a party to, or is threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, whether or not by or in the right of the Corporation, and whether civil, criminal, administrative, investigative or otherwise, by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The Corporation may, to the fullest extent permitted by the Delaware Law, purchase and maintain insurance on behalf of any such person against any liability which may be asserted against such person. The Corporation may create a trust fund, grant a security interest or use other means (including without limitation a letter of credit) to ensure the payment of such sums as may become necessary to effect the indemnification as provided herein. To the fullest extent permitted by the Delaware Law, the indemnification provided herein shall include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement and any such expenses shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding. The indemnification provided herein shall not be deemed to limit the right of the Corporation to indemnify any other person for any such expenses to the fullest extent permitted by the Delaware Law, nor shall it be deemed exclusive of any other rights to which any person seeking indemnification from the Corporation may be entitled under any agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office.

ARTICLE XII: Amendment of Corporate Documents

SECTION 1. Certificate of Incorporation. In addition to any affirmative vote required by applicable law or any other provision of this Certificate of Incorporation or specified in any agreement, and in addition to any voting rights granted to or held by the holders of any series of Common Stock or Preferred Stock, any alteration, amendment, repeal or rescission (any “Change”) of any provision of this Certificate of Incorporation (other than any Change that relates solely to Articles I, III or VI hereof) must be approved by a majority of the directors of the Corporation then in office and by the affirmative vote of at least 66-2/3% of the Voting Power. Subject to the foregoing, the Corporation reserves the right to alter, amend, repeal or rescind any provision contained in this Certificate of Incorporation in any manner now or hereafter prescribed by law.

SECTION 2. Bylaws. In addition to any affirmative vote required by applicable law and any voting rights granted to or held by the holders of any series of Common Stock or Preferred Stock, any Change to Section 2.3, 2.8, 2.9, 3.1, 3.2, 3.3, 3.5, 3.6, 4.4, 7.1 or 8.3 of the Bylaws of the Corporation which Change is not unanimously approved by the directors of the Corporation then in office must be approved by the affirmative vote of at least 66-2/3% of the Voting Power. Subject to the foregoing, the Board shall have the power to make, alter, amend, repeal or rescind the Bylaws of the Corporation.

ARTICLE XIII: Certain Supermajority Provisions

So long as any shares of Class B Common Stock are outstanding, in addition to any affirmative vote required by applicable law or any other provision of this Certificate of Incorporation or specified in any agreement, and in addition to any voting rights granted to or held by the holders of any series of Common Stock or Preferred Stock, the following matters must be approved by the affirmative vote of 80% of the Voting Power: (i) any Change in any provision of this Certificate of Incorporation (other than any Change that relates solely to Articles I, III or VI hereof); (ii) any Change to Section 2.3, 2.8, 2.9, 3.1, 3.2, 3.3, 3.5, 3.6, 3.10, 3.11, 3.13, 4.4, 7.1 or 8.3 of the Bylaws of the Corporation which change is not unanimously approved by the directors of the Corporation then in office; and (iii) any Sale of the Corporation. So long as any shares of Class B Common Stock are outstanding, in addition to any affirmative vote required by applicable law or any other provision of this Certificate of Incorporation or specified in any agreement, and in addition to any voting rights granted to or held by the holders of any series of Common Stock or Preferred Stock, the Corporation shall not issue shares of any class or series of Preferred Stock having voting rights in excess of one vote per share without the approval of all of the directors of the Corporation.

EX-99.1 4 dex991.htm CEO/CFO CERTIFICATION/SARBANES OAXLEY ACT 2002 CEO/CFO Certification/Sarbanes Oaxley Act 2002

EXHIBIT 99.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned hereby certifies, in his capacity as an officer of K-Swiss Inc. (the “Company”), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

•

The Quarterly Report of the Company on Form 10-Q for the period ended September 30, 2002 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

•

The information contained in such report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Dated: October 23, 2002


By:		/s/ STEVEN NICHOLS
Name:		Steven Nichols
Title:		President and Chief Executive Officer


By:		/s/ GEORGE POWLICK
Name:		George Powlick
Title:		Vice President of Finance and Chief Financial Officer

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